The opinion
TUTTLE, Circuit Judge
(dissenting).
I respectfully dissent.
I am of the opinion that in order to prevail in this case the taxpayer was required to prove not only that he would have enjoyed a legal right of subrogation to the claims of the bank over and against G & W Corporation, but that such right had value as well, in short, that G & W Corporation had some economic substance. Since taxpayer introduced no evidence on the question of value, I would affirm the decision of the Tax Court.
It is, of course, well-established that, with a few' exceptions, the burden of proof in tax eases is on the taxpayer. This general principle has been incorporated into the Tax Court Rules, specifically Rule 32 which provides that “(t)he burden of proof shall be upon the petitioner, except as otherwise provided by statute, and except that in respect of any new matter pleaded in his answer, it shall be upon the respondent.” This burden is ordinarily placed on the taxpayer because any original deficiency determination by the Commissioner of Internal Revenue carries a presumption of correctness, Commissioner of Internal Revenue v. Smith, 285 F.2d 91 (C.A. 5 1960) and such a determination is deemed to be prima facie evidence of the amount due as taxes, establishing a prima facie case of liability against the taxpayer. To overcome this presumption the taxpayer must introduce evidence sufficient to make a prima facie showing that the Commissioner has erred; such a showing must cover all elements necessary to establish the allegations in the taxpayer’s petition. See, e. g., Standard Marine Insurance Co., Ltd., 4 B.T.A. 853 . The problem then, where sufficiency of proof is at issue, becomes one of identifying exactly what elements the taxpayer must prove in order to defeat the presumption of correctness which attaches to the Commissioner’s original deficiency determination. That is the problem in the ease before us.
The taxpayer here was called upon to establish that he did not retain an economic interest in the production payments sold to G & W Corporation. 1 Under the law pertaining to ABC transactions, as detailed in the majority opinion, he was required to prove that he did not look solely to oil production for a return of his investment or otherwise *144 stated, that he did not bear the ultimate risk of loss should oil production fail. This necessarily entailed a showing that the taxpayer had a source other than oil production from which he could recoup his investment and that such other source had economic substance. That proof of economic substance was an indispensable element to taxpayer’s case should be obvious. In tax matters it is repeatedly emphasized that the courts are obliged to concern themselves with economic reality and to disregard mere form.
In this case the taxpayer has proven only that he would have had a legal right of subrogation over and against G & W Corporation in the event that he had been called upon to make good on his takeout letter to the bank. This, it seems to me, establishes only that he had an alternate source, but not that he could realistically look to the source for an actual return of the money used to pay off the bank. The relevant legal test for determining who holds the economic interest in oil in place (which necessarily corresponds to the taxpayer’s burden of proof) has two elements, i. e., that (1) the taxpayer have a source other than oil production (2) to which he can look for a return of his capital. Conceding that the taxpayer has adequately established the first element, it is nonetheless clear that he has failed to prove the second. The second could be established only by a showing that G & W Corporation had economic substance and that, as a consequence, looking to it for a return of capital was meaningful in a financial sense.
That proof of economic substance in G & W Corporation was a necessary element in taxpayer’s proof is made even clearer when viewed from the opposite perspective, that is, did taxpayer bear the ultimate risk of loss? It is to be noted that a naked legal right of sub-rogation has no intrinsic value. Here such a right would have value only to the extent that G & W Corporation had economic substance. If the debt created by the right were uncollectible because G & W Corporation lacked financial substance, then the taxpayer here would indeed have borne the risk of loss had he been forced to take up G & W Corporation’s note. Thus to establish that he did not bear the risk of loss (and with it the economic interest) taxpayer must demonstrate that his right of sub-rogation was more than a naked legal right, in short that the right was valuable because G & W Corporation was a viable corporate enterprise. That was the taxpayer’s burden and he has failed to carry it.
The majority’s reliance on Estate of Ben Stone, SO T.C. 113 (1968) in support of the proposition that the burden was on the Commissioner to prove that G & W Corporation lacked substance, is, I submit, misplaced. It is true, of course, that in the Ben Stone case the burden of proving lack of substance was on the Commissioner, but only because the Commissioner raised the issue for the first time in his responsive pleading. This is a specific exception to the general rule, i. e., the burden of proof is on the taxpayer “except that in respect of any new matter pleaded in his answer, it shall be upon the respondent.” (Tax Court Rule 32). This exception is grafted on to the general rule because the presumption of correctness attaches only to the original deficiency determination and thus if the Commissioner chooses to plead new matter in his answer, that new matter does not carry a presumption of correctness and the Commissioner must therefore bear the burden of proving it. The “new matter” exception, of course, cannot apply here because nothing new was pleaded in the Commissioner’s answer. Thus the Commissioner enjoyed his customary presumption of correctness, and the taxpayer was required to prove the existence of some source, having value, to which the taxpayer could look for the return of his capital investment.
Moreover, requiring the taxpayer to prove substance in G & W Corporation is not, as the majority suggests, a matter of forcing him to prove a negative propo *145 sition, i. e., that the transaction was not a sham. Rather proof of substance is an affirmative element of the taxpayers case, to wit, that he had a valuable source, other than oil production, to which he could look for a return of his investment.2
Particularly where ABC transactions are concerned, we should be quick to slice through form to find the economic realities. In failing to prove that the right of subrogation was financially meaningful, taxpayer has also failed to establish that the economic interest in the production payments was effectively transferred to G & W Corporation.
For the foregoing reasons I would affirm the decision of the tax court.
. The majority recognizes that the burden of proof, in the first instance, had to be carried by the taxpayer; however, they contend that this burden was fully met by proof of the potential right of subrogation.