John D. Shea v. Commissioner , 112 T.C. No. 14 ( 1999 )

112 T.C. No. 14
UNITED STATES TAX COURT
JOHN D. SHEA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 10841-95, 23549-96. Filed April 1, 1999.
P and his wife filed joint returns for 1990 and
1991. P submitted a delinquent return for 1992 that
was filed as a joint return. R determined that P
underreported business receipts for 1990, 1991, and
1992 based on deposits to P's bank accounts and also
disallowed business deductions claimed on P's returns.
In the notice of deficiency for 1992, R determined that
P's proper filing status for 1992 was married filing
separately.
Even though P and his wife remained married
throughout 1992, R did not allocate one-half of P's
income for 1992 to P's wife pursuant to California
community property law. Sec. 66(b), I.R.C., authorizes
R to disallow the benefits of any community property
law to P if P acted as if he were solely entitled to
the income in question and failed to notify his wife of
the nature and amount of such income. On brief, R
relies exclusively on sec. 66(b), I.R.C., as
justification for denying the benefits of community
property law to P. However, R's notice of deficiency
contained no reference to sec. 66(b), I.R.C., nor did
it refer to any facts that would support a sec. 66(b),
- 2 -
I.R.C., determination. A determination of whether or
not sec. 66(b), I.R.C., applies requires the
presentation of different evidence than that necessary
to decide the matters described in the notice of
deficiency.
Held: R's determinations of additional gross
receipts and disallowance of deductions are, with
certain modifications, upheld.
Held, further: Sec. 7522, I.R.C., requires that a
notice of deficiency contain a description of the basis
for the Commissioner's tax determination. Where R
relies on a basis that was not described in the notice
of deficiency that requires the presentation of
different evidence, it is "new matter" within the
meaning of Rule 142(a), Tax Court Rules of Practice and
Procedure. If the new matter is allowed to be raised,
Rule 142(a), Tax Court Rules of Practice and Procedure,
requires that R bear the burden of proof. The burden
of proof regarding application of sec. 66(b), I.R.C.,
is on R. R failed to meet this burden; therefore, P is
entitled to the benefits of California's community
property law for the taxable year 1992.
David M. Kirsch, for petitioner.
Dale A. Zusi, for respondent.
OPINION
RUWE, Judge: Respondent determined deficiencies in
petitioner's Federal income taxes, an addition to tax, and
accuracy-related penalties as follows:
Addition to Tax Accuracy-related Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1990 $155,096 -- $31,019
1991 165,529 -- 33,106
1992 138,529 $34,632 27,706
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Respondent determined that petitioner substantially
underreported gross receipts during the years in issue based on
deposits made to petitioner's bank accounts. After concessions,
the issues for decision are whether petitioner has substantiated
business deductions claimed on his 1990, 1991, and 1992 Federal
income tax returns and whether petitioner is entitled to the
benefit of California's community property law in calculating his
1992 income tax liability.1 In order to decide the second issue,
we must determine whether respondent's reliance on section 66(b)2
to disregard the community property law of California raises a
"new matter" on which respondent bears the burden of proof and,
if so, whether respondent has met that burden.
Some of the facts have been stipulated and are so found.
The first, second, third, and fourth stipulations of fact are
incorporated herein by this reference. Petitioner's legal
residence was in Campbell, California, at the time he filed his
petitions. For convenience, we will combine our findings of fact
with our opinion.
1
Petitioner does not dispute that the addition to tax and
accuracy-related penalties apply to the deficiencies that result
from this opinion.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
- 4 -
In each of the years in issue, petitioner was married to
Flor Shea. Petitioner and Mrs. Shea were divorced in 1993.
Petitioner filed timely joint returns with Mrs. Shea in 1990 and
1991. Petitioner's 1992 return was filed on March 31, 1995, as a
joint return. In the notice of deficiency for 1992, respondent
determined that petitioner's correct filing status was married
filing separately. The notice also contains various
consequential adjustments. The parties now agree that married
filing separately is the correct 1992 filing status for
petitioner.
In each of the years in issue, petitioner was the owner and
operator of an unincorporated consulting business known as Shea
Technology Group, hereafter referred to as STG. Petitioner
reported income and deductions from this business on Schedule C,
Profit or Loss From Business, in each of the years in issue. The
parties now agree that petitioner underreported STG's gross
business receipts by $216,143 in 1990, $208,134 in 1991, and
$272,902 in 1992.3
3
Respondent proposed that we find these unreported gross
receipt figures, and petitioner indicated that he did not object.
In respondent's reply brief, he states that the total amount of
unreported gross receipts for 1992 is $274,902. We will use the
lower figure to which the parties have agreed.
- 5 -
Petitioner also bought, sold, and traded military
memorabilia. Petitioner did not report this activity on his
1990, 1991, or 1992 returns.
A. Schedule C Deductions
In the notices of deficiency for the years 1990, 1991, and
1992, respondent disallowed all petitioner's Schedule C
deductions. Respondent now concedes certain of these
deductions.4 We must decide which, if any, of the remaining
deductions claimed by petitioner are allowable.
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving that they are entitled to any
deductions claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934). Taxpayers are required to maintain
sufficient records to enable the Commissioner to determine their
correct tax liability. Sec. 6001.
Section 162 generally allows a deduction for all the
ordinary and necessary expenses paid or incurred during the
4
Respondent concedes: Air phone charges of $89 in 1990,
$247 in 1991, and $1,808 in 1992; office rent of $25,050 in 1990
and $25,000 in 1991; postage and secretarial services of $1,880
in both 1990 and 1991; office expenses of $951.34 in 1990; and
printing expenses of $20,595 in 1990 and $5,424 in 1991. The
total deductions conceded by respondent are $48,565.34 in 1990,
$32,551.00 in 1991, and $1,808.00 in 1992.
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taxable year in carrying on any trade or business. Such expenses
must be directly connected with or pertain to the taxpayer's
trade or business. Sec. 1.162-1(a), Income Tax Regs. The
determination of whether an expenditure satisfies the
requirements of section 162 is a question of fact. Commissioner
v. Heininger, 320 U.S. 467, 475 (1943).
Section 162(a)(2) allows a deduction for all the ordinary
and necessary traveling expenses, including meals, paid by a
taxpayer during the taxable year while traveling away from home
in the pursuit of a trade or business. A travel or entertainment
deduction is disallowed if the taxpayer does not satisfy the
substantiation requirements of section 274(d)5 through either
5
Sec. 274(d) provides:
(d)Substantiation Required.--No deduction or
credit shall be allowed--
(1) under section 162 or 212 for any
traveling expense (including meals and lodging
while away from home),
(2) for any item with respect to an activity
which is of a type generally considered to
constitute entertainment, amusement, or
recreation, or with respect to a facility used in
connection with such an activity,
(3) for any expense for gifts, or
(4) with respect to any listed property (as
defined in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records
(continued...)
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adequate records or the taxpayer's own detailed statement that is
corroborated by sufficient evidence. Section 274(d) also applies
to listed property, which includes any passenger automobile.
Secs. 274(d)(4), 280F(d)(4)(A)(i). At a minimum, the taxpayer
must substantiate: (1) The amount of the expense, (2) the time
and place such expense was incurred, (3) the business purpose of
the expense, and (4) the business relationship to the taxpayer of
persons entertained. Sec. 274(d).
The regulations further clarify the stringent substantiation
requirements of section 274. A taxpayer generally must
substantiate each expenditure by producing (1) adequate records
or (2) sufficient evidence to corroborate his or her own
statement. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50
Fed. Reg. 46016-46017 (Nov. 6, 1985). The "adequate records"
standard requires that a taxpayer maintain an account book,
5
(...continued)
or by sufficient evidence corroborating the taxpayer's
own statement (A) the amount of such expense or other
item, (B) the time and place of the travel,
entertainment, amusement, recreation, or use of the
facility or property, or the date and description of
the gift, (C) the business purpose of the expense or
other item, and (D) the business relationship to the
taxpayer of persons entertained, using the facility or
property, or receiving the gift. The Secretary may by
regulations provide that some or all of the
requirements of the preceding sentence shall not apply
in the case of an expense which does not exceed an
amount prescribed pursuant to such regulations. This
subsection shall not apply to any qualified nonpersonal
use vehicle (as defined in subsection (i)).
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diary, log, statement of expense, or other similar record in
which entries of expenditures are recorded at or near the time of
the expenditure. In addition, a taxpayer must supply documentary
evidence, such as receipts or paid bills. Sec. 1.274-5T(c)(2)(i)
to (iii), Temporary Income Tax Regs., 50 Fed. Reg. 46017-46020
(Nov. 6, 1985). Alternatively, taxpayers who are unable to
satisfy the adequate records requirement are still entitled to a
deduction for expenses that they can substantiate with other
corroborative evidence. Sec. 1.274-5T(c)(3), Temporary Income
Tax Regs., 50 Fed. Reg. 46020-46021 (Nov. 6, 1985).
For expenses other than those covered by the provisions of
section 274(d), if the taxpayer failed to keep adequate records
but the Court is convinced that deductible expenditures were
incurred, the Court "should make as close an approximation as it
can, bearing heavily if it chooses upon the taxpayer whose
inexactitude is of his own making." Cohan v. Commissioner, 39
F.2d 540, 544 (2d Cir. 1930). However, we must have some
rational basis on which an estimate may be made. Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985).
Petitioner deducted Schedule C business expenses totaling
$162,278 in 1990, $192,516 in 1991, and $211,709 in 1992.6 These
deductions fall into two categories. One category must meet the
6
See appendix.
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substantial and stringent requirements of section 274(d). The
other category consists of all the other claimed deductions.
Regarding the deductions governed by section 274, respondent
has conceded some items of expense, and petitioner has conceded
that the air travel expenses in all the years in issue cannot be
adequately substantiated. Petitioner has put forward no
believable explanation for the absence of required records;
consequently, the burden of his inexactitude must fall on him.
Petitioner did not produce any witnesses to corroborate when and
where he traveled on business. Mrs. Shea could testify only to
the fact that petitioner was not home and that petitioner said he
was traveling on business. While it is likely that some of
petitioner's travel was business related, we have insufficient
information to allow any deductions given the strict standards
set by section 274. Petitioner's claims for deductions relating
to meals away from home and lodging expenses fail for the same
reasons that the airline travel expenses fail. The other claimed
deductions subject to section 274(d), including passenger auto
expense and entertainment, are likewise unsubstantiated.
Petitioner did not keep a contemporaneous trip diary to record
business miles traveled in his personal vehicle and did not
maintain a record of the parties entertained or the business
purpose. We, consequently, uphold respondent's disallowance of
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these items as not complying with the statutory requirements of
section 274.
As to the remaining items, we find that petitioner paid and
is entitled to a deduction for telephone expenses in the amounts
of $7,735 for 1990 and $6,616 for 1991, in addition to the items
respondent has conceded. With respect to the other claimed
deductions, the only documents presented to substantiate
petitioner's claimed business expenses were credit card
summaries, charge slips showing various purchases, and a crude
ledger for 1990, which appears to have been prepared from
canceled checks. These credit card summaries contain personal
expenses,7 what appears to be military memorabilia-related
expenses, and what purports to be business expenses. Other than
the credit card summaries and petitioner's less then credible,
vague, and self-serving testimony, there is no corroborative
evidence of the business purpose of these expenses. As we have
stated many times before, this Court is not bound to accept a
taxpayer's self-serving, unverified, and undocumented testimony.
Tokarski v. Commissioner 87 T.C. 74, 77 (1986). While there are
undoubtedly business expenses contained within the credit card
7
For example, airfares for family members and third parties
not employees of STG, a limousine rental for petitioner's
daughter who was not an employee, items noted as apparel and
accessories, leather goods and accessories, fine art and frames,
and jewelry and gifts.
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summaries, we cannot in most instances determine which expenses
relate to the military memorabilia activity,8 are personal
expenses, or are truly business expenses. Except as noted above,
petitioner has produced insufficient evidence to persuade us that
respondent's disallowance of the deductions reported in Schedules
C of the returns is in error. Consequently, with the exceptions
noted above, we uphold respondent's disallowance of deductions.
Based on the foregoing, we find that the net profit from
petitioner's consulting business was $336,231.66 in 1990,
$356,394.00 in 1991, and $443,172.00 in 1992.9
8
We are unable to determine the exact magnitude of
petitioner's military memorabilia activity, but it appears to be
quite extensive. During the examination, petitioner or his agent
provided a document in the form of a ledger. The ledger appears
to show six transactions in 1990 for amounts of $46,836, $4,400,
$27,755, $8,084, $64,874, and $20,100 that relate to petitioner's
military memorabilia activity.
9
The net profit was calculated as follows:
1990 1991 1992
Reported receipts $176,389.00 $187,427.00 $172,078.00
Unreported receipts 216,143.00 208,134.00 272,902.00
(continued...)
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B. Application of Community Property Law in 1992
Petitioner's 1992 return was filed as a joint return. In
the notice of deficiency, respondent changed petitioner's filing
status from married filing jointly to married filing separately.
Nevertheless, respondent determined petitioner's unreported
income without making any adjustment for California's community
property law. The notice of deficiency does not refer to
California community property law, any exceptions to such law, or
any facts that might support such exceptions.
Married persons who reside in a community property State are
generally each required to report one-half of their community
income for Federal income tax purposes. United States v.
Mitchell, 403 U.S. 190 (1971); Drummer v. Commissioner, T.C.
Memo. 1994-214, affd. without published opinion 68 F.3d 472 (5th
Cir. 1995). Petitioner contends that under California law, the
1992 income generated by petitioner's consulting business is
community income and that he is required to report and be taxed
9
(...continued)
Less:
Conceded deductions 48,565.34 32,551.00 1,808.00
Additional allowable
deductions 7,735.00 6,616.00 0.00
Net profit 336,231.66 356,394.00 443,172.00
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on only one-half of that community income for Federal tax
purposes.
Respondent now recognizes that all of STG's income is
community income under California law. Respondent also
stipulated that $119,204 of STG's net profit for 1992, the amount
which was transferred to petitioner's and Mrs. Shea's household
checking account in 1992, was community income reportable by each
spouse in the amount of $59,602. The parties dispute whether
STG's 1992 net profit in excess of $119,204 should all be
attributed to petitioner, regardless of community property law.
On brief, respondent relies solely on the provisions of section
66(b) to deny petitioner the income-splitting benefits of
California's community property law. Section 66(b) provides:
The Secretary may disallow the benefits of any
community property law to any taxpayer with respect to
any income if such taxpayer acted as if solely entitled
to such income and failed to notify the taxpayer's
spouse before the due date (including extensions) for
filing the return for the taxable year in which the
income was derived of the nature and amount of such
income.
Petitioner acknowledges that section 66(b) authorizes the
Commissioner to disallow the benefits of any community property
law to a taxpayer with respect to any income if (1) the taxpayer
acted as if he were solely entitled to such income, and (2) the
taxpayer failed to notify the taxpayer's spouse of the nature and
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amount of such income before the due date for filing the return.
See Mischel v. Commissioner, T.C. Memo. 1997-350; Schramm v.
Commissioner, T.C. Memo. 1991-523, affd. without published
opinion 988 F.2d 121 (9th Cir. 1993). However, petitioner
contends that respondent made no determination in the notice of
deficiency to disallow the benefits of community property law
pursuant to section 66(b), that respondent's reliance on section
66(b) is a "new matter" within the meaning of Rule 142(a),10 and
that respondent must bear the burden of proving that section
66(b) applies.11
When the Commissioner attempts to rely on a basis that is
beyond the scope of the original deficiency determination, the
Commissioner must generally assume the burden of proof as to the
new matter. A substantial body of case law has developed in this
10
Rule 142 provides:
(a) General: The burden of proof shall be upon
the petitioner, except as otherwise provided by statute
or determined by the Court; and except that, in respect
of any new matter, increases in deficiency, and
affirmative defenses, pleaded in the answer, it shall
be upon the respondent. As to affirmative defenses,
see Rule 39.
11
Petitioner does not contend that respondent should be
precluded from relying on sec. 66(b). Petitioner was on notice
before trial that respondent would rely on sec. 66(b). The sec.
66(b) issue was tried by consent of the parties and is properly
before the Court. See Rule 41(b). Petitioner's only requested
relief is that respondent bear the burden of proof regarding this
issue.
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Court setting forth criteria for determining when the
Commissioner is raising a "new matter". A synopsis of these
criteria is as follows:
A new theory that is presented to sustain a
deficiency is treated as a new matter when it either
alters the original deficiency or requires the
presentation of different evidence. * * * A new
theory which merely clarifies or develops the original
determination is not a new matter in respect of which
respondent bears the burden of proof. * * * [Wayne
Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507
(1989); citations omitted.12]
Here, the relevant issues raised by respondent's notice of
deficiency are the total amount of business gross receipts and
whether petitioner is entitled to deductions that he claimed were
incurred in his business during 1992. The only explanation
stated in the notice of deficiency for increasing 1992 gross
receipts is that the adjustment was based on bank deposits. All
these deposits were to the business account used for petitioner's
consulting business. The only reason for disallowing business
deductions was that petitioner had not substantiated their
deductibility.
12
See also Colonnade Condominium, Inc. v. Commissioner, 91
T.C. 793, 795 n.3 (1988); Achiro v. Commissioner, 77 T.C. 881,
890-891 (1981); Estate of Jayne v. Commissioner, 61 T.C. 744,
748-749 (1974); McSpadden v. Commissioner, 50 T.C. 478, 492-493
(1968).
- 16 -
Respondent now acknowledges that petitioner is entitled to
the benefits of community property law, unless those benefits can
be disallowed pursuant to section 66(b). Respondent argues that
invocation of section 66(b) is necessarily implicit in the notice
of deficiency. We disagree. The notice of deficiency makes
absolutely no mention of community property law, section 66(b),
or facts which would allow respondent to invoke section 66(b).
In the notice of deficiency, respondent determined that all of
Mrs. Shea's 1992 wage income was her separate income without
regard to community property law. Respondent also treated
interest on petitioner's and Mrs. Shea's joint bank account as
the separate income of petitioner without regard to community
property law. And, as previously mentioned, the notice of
deficiency contains no adjustment for the $119,204 that was
transferred from the business account to petitioner's and Mrs.
Shea's household checking account during 1992.13
Respondent failed to offer any evidence that indicated that
respondent considered the application of community property law
or section 66(b) in making his determination.14 In short, it
13
As previously noted, respondent now acknowledges that
petitioner is entitled to the benefits of community property law
with respect to $119,204 of the 1992 STG net profit, regardless
of whether sec. 66(b) is otherwise applicable.
14
Attached to petitioner's Motion to Shift Burden of Proof
is what purports to be a copy of the revenue agent's report for
(continued...)
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appears to us that respondent gave no thought to community
property law or section 66(b) when the notice of deficiency was
prepared.15 Respondent's apparent failure to even consider
community property law, or section 66(b) in making his deficiency
determination supports our conclusion that section 66(b) was not
implicit in the notice of deficiency. However, even if
respondent's agents had considered such matters, it does not
follow that they were "necessarily implicit" in the notice of
deficiency. The objective language in the notice of deficiency
remains the controlling factor. As indicated in the preceding
paragraph, there is nothing in the notice of deficiency that
makes section 66(b) "necessarily implicit".
The factual basis required to establish whether STG's income
was understated is different from the factual basis necessary to
establish whether community property law or section 66(b)
applies. The facts necessary for a determination of income
14
(...continued)
petitioner's 1992 taxable year. Petitioner alleged, and the
attached revenue agent's report shows, that the revenue agent
computed the 1992 deficiency based on joint filing status as
opposed to the married filing separate status used in the notice
of deficiency. We also note that the notice of deficiency for
1992 was addressed to "John D. and Flora [sic] M. Shea," even
though the attached schedules reflect tax liability for only John
D. Shea.
15
At trial, respondent's counsel could not clarify this
point other than to state: "I think it was done pursuant to
66(b), although 66(b) I concede is not mentioned in the stat
notice."
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pursuant to a bank deposits analysis would require evidence of
deposits and an identification of which deposits should be
excluded from income. Business deductions are allowed or
disallowed based on whether they can be substantiated.
Generally, the only evidence necessary to establish that
income is community income is that the income was received by
either spouse during the marriage while domiciled in a community
property State. As we have recently stated:
The term "community property", pursuant to California
law, is generally defined as "property acquired by
husband and wife, or either, during marriage, when not
acquired as the separate property of either." Under
California law, absent a contrary agreement, each
spouse has the right to one half of all community
income from the moment it is acquired and therefore is
liable for the Federal income tax on one half of such
amount.
The character of property as separate or community
is determined at the time of acquisition. Property
acquired by purchase after marriage is presumed to be
community property. Furthermore, earnings of a husband
acquired during marriage are presumed to be community
property. With respect to unearned income, where the
source property is presumed to be community property,
and no evidence is introduced to rebut such
presumption, then the income from such property is
presumed community income. Under California law, the
burden of proving that property is separate rests on
the party making such assertion. [Webb v.
Commissioner, T.C. Memo. 1996-550; citations omitted.]
On the other hand, whether respondent may apply section
66(b) and disregard community property law in determining
petitioner's income requires evidence of whether petitioner acted
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as if he were solely entitled to the income and whether he failed
to notify his wife of the nature and amount of that income. See
Mischel v. Commissioner, T.C. Memo. 1997-350. Based on our
previously articulated test for determining whether respondent's
reliance on section 66(b) is new matter, we would hold that it is
and that the burden of proof as to that issue should be on
respondent.
However, on brief respondent relies on Abatti v.
Commissioner, 644 F.2d 1385 (9th Cir. 1981), revg. T.C. Memo.
1978-392.16 Based on Abatti, respondent argues that the proper
test for determining whether respondent has introduced a "new
matter" on which he bears the burden of proof depends on whether
the basis for the deficiency advanced at trial or in an amended
answer is "inconsistent" with the language contained in the
notice of deficiency. Based on Abatti, respondent asserts that
if a notice of deficiency is broadly worded and the Commissioner
later advances a theory that is "not inconsistent" with that
language, the theory does not constitute a new matter, and the
burden of proof remains with the taxpayer.
In Abatti v. Commissioner, supra, the Court of Appeals for
the Ninth Circuit characterized the notice of deficiency as a
notice that "informed the taxpayers that there were deficiencies
16
The Court of Appeals for the Ninth Circuit is the court to
which this case is appealable.
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and the amount of them but contained no explanation". Id. at
1389. The Court of Appeals for the Ninth Circuit then stated:
This type of notice is sufficient to raise the
presumption of correctness and to place the burden of
proof on the taxpayer. Barnes v. CIR, 408 F.2d 65 (7th
Cir.), cert. denied, 396 U.S. 836, 90 S. Ct. 94, 24
L. Ed. 2d 86 (1969). Judge Hand, in Olsen v. Helvering,
supra, stated, "the notice is only to advise the person
who is to pay the deficiency that the Commissioner
means to assess him; anything that does this
unequivocally is good enough." [Id. at 1389-1390
citation omitted.]
The court went on to state:
In fact, if a deficiency notice is broadly worded and
the Commissioner later advances a theory not
inconsistent with that language, the theory does not
constitute new matter, and the burden of proof remains
with the taxpayer. [Id. at 1390.]
We have recognized that the above-quoted language from Abatti v.
Commissioner, supra, may represent a standard for determining
what constitutes a "new matter" that is at variance with the
current standard articulated by this Court. See Achiro v.
Commissioner, 77 T.C. 881, 890-891 (1981);17 Yamaha Motor Corp.,
17
In Achiro v. Commissioner, 77 T.C. at 891, we stated:
if respondent does not indicate in the notice of
deficiency that he is relying on section 482, but
alerts the taxpayer of his reliance on section 482
formally in pleadings far enough in advance of trial so
as not to prejudice the taxpayer or take him by
surprise at trial, then the burden of proof shifts to
(continued...)
- 21 -
U.S.A. v. Commissioner, T.C. Memo. 1992-110; National
Semiconductor Corp. & Consol. Subs. v. Commissioner, T.C. Memo.
1991-81; Perryman v. Commissioner, T.C. Memo. 1988-378, affd.
without published opinion 920 F.2d 936 (9th Cir. 1990).18
Petitioner acknowledges that the Court of Appeals' opinion
in Abatti v. Commissioner, supra, contains broad language but
argues that the subsequent enactment of section 7522 abrogated
that broad language by requiring specificity in respondent's
notices of deficiency. Section 7522, which was applicable to the
notice of deficiency in this case,19 provides:
SEC. 7522. CONTENT OF TAX DUE, DEFICIENCY, AND OTHER
NOTICES.
17
(...continued)
respondent to establish all the elements necessary to
support his allocation under section 482. See Rubin v.
Commissioner, 56 T.C. 1155, 1162-1164 (1971), affd. 460
F.2d 1216 (2d Cir. 1972); Rule 142(a), Tax Court Rules
of Practice and Procedure. But see Abatti v.
Commissioner, 644 F.2d 1385 (9th Cir. 1981), revg. a
Memorandum Opinion of this Court.
18
In Perryman v. Commissioner, supra, appellate venue was in
the Ninth Circuit Court of Appeals which had decided Abatti v.
Commissioner, 644 F.2d 1385 (9th Cir. 1981), revg. T.C. Memo.
1978-392. In Perryman, we held:
Despite our holding in Achiro, however, we will follow
the precedent established in the court to which an
appeal would lie. See Golsen v. Commissioner, 54 T.C.
742 (1970), affd. 445 F.2d 985 (10th Cir. 1974).
Appeal in this case would lie in the Ninth Circuit.
19
Sec. 7522 is applicable to notices of deficiency issued
after Jan. 1, 1990.
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(a) General Rule.--Any notice to which this
section applies shall describe the basis for, and
identify the amounts (if any) of, the tax due,
interest, additional amounts, additions to the tax, and
assessable penalties included in such notice. An
inadequate description under the preceding sentence
shall not invalidate such notice.
(b) Notices to Which Section Applies.--This
section shall apply to--
(1) any tax due notice or deficiency notice
described in section 6155, 6212, or 6303,
(2) any notice generated out of any
information return matching program, and
(3) the 1st letter of proposed deficiency
which allows the taxpayer an opportunity for
administrative review in the Internal Revenue
Service Office of Appeals. [Emphasis added.]
Congress enacted section 7522 with the expectation that the IRS
would "make every effort to improve the clarity of all notices
* * * that are sent to taxpayers." H. Conf. Rept. 100-1104, at
219 (1988), 1988-3 C.B. 473, 709. Petitioner argues that
respondent's failure to state specifically that petitioner was
being denied the benefits of community property law or to
describe a basis for denying petitioner the benefits of community
property law violates section 7522 and warrants treating the
section 66(b) issue as a new matter on which respondent bears the
burden of proof.
Respondent argues that there was no violation of section
7522 because reliance on section 66 was "implicit" in the notice
- 23 -
of deficiency. As we have previously indicated, we do not
believe that section 66(b) was implicit or even considered in
making the adjustments contained in the notice of deficiency. It
is a closer call to say whether reliance on section 66(b) is
"inconsistent" with the language in the notice of deficiency. In
the final analysis, we think that section 7522 makes the question
of whether reliance on section 66(b) is, or is not,
"inconsistent" with the notice of deficiency irrelevant, if the
basis on which respondent relies was not described in the notice
of deficiency and requires different evidence.
Section 7522, which was enacted after the Abatti decision,
requires that a notice of deficiency "describe the basis" for the
tax deficiency.20 Section 7522 makes no exception for a basis
20
Sec. 7522 does not articulate specific standards for
determining whether the description of the Commissioner's basis
is adequate, nor does it provide any statutory remedy or
sanction. The only reference in sec. 7522(a) to a failure to
abide by its provisions provides: "An inadequate description
under the preceding sentence shall not invalidate such notice."
We view this provision as referring only to the "validity" of the
notice of deficiency for jurisdictional purposes. As the Court
of Appeals for the Ninth Circuit has stated:
The Tax Court has jurisdiction only when the
Commissioner issues a valid deficiency notice, and the
taxpayer files a timely petition for redetermination.
"A valid petition is the basis of the Tax Court's
jurisdiction. To be valid, a petition must be filed
from a valid statutory notice." Stamm International
Corp. v. Commissioner, 84 T.C. 248, 252 (1985). See
Midland Mortgage Co. v. Commissioner, 73 T.C. 902, 907
(continued...)
- 24 -
that is "not inconsistent" with the language in the notice of
deficiency. Indeed, were such an exception available, the
Commissioner would be free to raise new theories that would
require different evidence so long as the new theories were not
inconsistent with the language in the notice of deficiency. Such
a result would significantly dilute the legislative mandate of
section 7522.
Generally, the Commissioner's determination in a notice of
deficiency is presumed correct. The purpose of section 7522 is
to give the taxpayer notice of the Commissioner's basis for
determining a deficiency. A taxpayer is given 90 days from the
day the notice of deficiency is mailed in which to file a
petition with the Tax Court. Sec. 6213(a). Rule 34(b) sets
forth what is required to be included in a petition. Among its
requirements are that the petition shall contain:
(4) Clear and concise assignments of each and
every error which the petitioner alleges to have been
committed by the Commissioner in the determination of
the deficiency or liability. The assignments of error
shall include issues in respect of which the burden of
proof is on the Commissioner. Any issue not raised in
the assignment of error shall be deemed to be conceded.
Each assignment of error shall be separately lettered.
20
(...continued)
(1980). [Scar v. Commissioner, 814 F.2d 1363, 1366
(9th Cir. 1987), revg. on other grounds 81 T.C. 855(1983); emphasis added.]
- 25 -
(5) Clear and concise lettered statements of the
facts on which petitioner bases the assignments of
error, except with respect to those assignments of
error as to which the burden of proof is on the
Commissioner. [Rule 34(b).]
Without notice of the Commissioner's basis for a determination of
deficiency, it would be difficult, if not impossible, to comply
with Rule 34(b).
We have previously held that new matter is raised when the
basis or theory on which the Commissioner relies was not stated
or described in the notice of deficiency and the new theory or
basis requires the presentation of different evidence. Wayne
Bolt & Nut Co. v. Commissioner, 93 T.C. at 507. This rule for
determining whether a new matter has been raised by the
Commissioner is consistent with, and supported by, the statutory
requirement that the notice of deficiency "describe the basis"
for the Commissioner's determination. This rule also provides a
reasonable method for enforcing the requirements of section
7522.21
In the instant case, the notice of deficiency does not
describe section 66(b) as respondent's basis for disallowing the
21
On brief, respondent declined to address what the
consequences, if any, would be if we were to find that respondent
was attempting to rely on a basis that he failed to describe in
the notice of deficiency as required by sec. 7522. However, in
Straight v. Commissioner, T.C. Memo. 1997-569, respondent
conceded that placing the burden of proof on respondent may be
proper where the notice of deficiency violates sec. 7522.
- 26 -
benefits of community property law to petitioner, and different
evidence will be necessary to resolve the section 66(b) issue.
Under these circumstances, treating the section 66(b) issue as a
new matter upon which respondent has the burden of proof is both
consistent with our prior practice and supported by the statutory
requirements of section 7522.22 We, therefore, hold that where
a notice of deficiency fails to describe the basis on which the
Commissioner relies to support a deficiency determination and
that basis requires the presentation of evidence that is
different than that which would be necessary to resolve the
determinations that were described in the notice of deficiency,
the Commissioner will bear the burden of proof regarding the new
basis. To hold otherwise would ignore the mandate of section
7522 and Rule 142(a). Respondent must therefore bear the burden
of proof regarding application of section 66(b).
Respondent argues that he has met that burden and that the
following facts demonstrate that petitioner treated the income as
if he were solely entitled to it: (a) Gross receipts were
22
Placement of the burden of proof affects only the
obligation to prove facts. If a new theory or basis is
completely dependent upon the same evidence required by the basis
described in the notice of deficiency, there would normally be
little practical reason to shift the burden of proof. The
taxpayer would not suffer from lack of notice concerning what
facts must be established. Indeed, in that situation, the new
theory would be a purely legal as opposed to a factual issue.
The burden of proof does not affect the Court's determination of
what the law is.
- 27 -
separately deposited into an account styled in the business name;
(b) not all the net business income was deposited into the joint
household account; (c) Mrs. Shea did not have signing authority,
access, or knowledge of the specific transactions in the business
account; and (d) Mrs. Shea did not involve herself in the
business and did not know the extent of the gross income or the
extent of the unreported income of the business.
The facts on which respondent relies, either taken alone or
taken together, do not justify the conclusion that petitioner
acted as if he were solely entitled to business income. The fact
that business gross receipts are deposited into a business
account is in accordance with normal business practice. Mrs.
Shea was clearly aware of the existence of petitioner's business
and its bank account. The fact that not all the business income
was deposited into the household account is, of itself,
unremarkable. We would not find it at all unusual if less than
the net profit was so deposited. The fact that Mrs. Shea did not
have signing authority over the business account is likewise
unremarkable given the fact that she had little day-to-day
involvement in the operation of the business. Finally, the fact
that Mrs. Shea did not know the extent of business income is not
proof that petitioner was acting as if he were solely entitled to
the income. Without more, it does not support respondent's
allegation that the income was "hidden" from her.
- 28 -
Respondent now concedes that some of the business profits
were used to support the Shea family and that in excess of
$119,000 was deposited into the "household account". Respondent
disallowed deductions for some expenditures from the business
account because he determined that these expenditures were
personal expenses of the Shea family not properly deductible as
business expenses. But this position supports petitioner's
argument that profits were used to pay community debts.
Respondent points out in arguing for disallowance of claimed
business deductions that Mrs. Shea directly benefited from some
of these expenditures. Indeed, our findings which sustain
respondent's disallowance of claimed business deductions were in
part based on respondent's analysis indicating that some of the
expenditures from that business account, which were claimed as
business deductions, were apparently spent for personal expenses
of the Shea family. Examples of such expenditures from the
business account in 1992 include the purchase of airline tickets
for Mrs. Shea, B. Alvarez, Margreite Alvarez, and Trudy Daly.23
Also, in disallowing petitioner's claimed business deductions for
1992, we noted the possibility that some of them might have been
23
The Shea family took a vacation cruise on the Regal
Princess from Dec. 29, 1991, to Jan. 4, 1992. On Dec. 28, 1991,
petitioner stayed in Fort Lauderdale, Florida. Mrs. Shea's
airline ticket from San Jose to Fort Lauderdale purchased on Dec.
27, 1991, was deducted as a business expense.
- 29 -
business expenditures for which petitioner failed to provide
adequate substantiation. But the fact that petitioner failed to
meet his burden of proof regarding the deductibility of these
expenses is not sufficient to justify a finding that respondent
has met his burden of proving that petitioner treated the income
deposited in the business bank account as if he were solely
entitled to it.
The facts on which respondent relies establish only that
Mrs. Shea had little meaningful involvement in petitioner's
business activities and that petitioner underreported the income
of that business. These facts are insufficient to prove that
petitioner acted as if he were solely entitled to STG's 1992
income. As a result, there is no factual basis to justify
respondent's invocation of section 66(b). We, therefore, hold
that petitioner is entitled to the benefits of California
community property law with respect to the net income of his
consulting business as redetermined.
Decision will be entered
under Rule 155.
Reviewed by the Court.
COHEN, JACOBS, GERBER, PARR, WELLS, COLVIN, BEGHE, LARO,
FOLEY, VASQUEZ, and GALE, JJ., agree with this majority opinion.
THORNTON and MARVEL, JJ., concur in the result only.
- 30 -
Appendix
Expense Items Claimed on Schedule C
1990 1991 1992
Expenses subject to sec. 274(d):
Car and truck expenses $2,615 $2,870 --
1
Air travel 29,760 59,785 $104,340
2
Meals away from home 5,743 2,890 12,481
Entertainment 2,634 462 --
Lodging 15,131 12,366 --
Other expenses:
Car rental3 11,941 13,136 --
Depreciation 5,314 5,806 6,652
Insurance 9,904 9,433 --
Office expense 4,198 11,120 15,696
Legal and professional services 1,400 5,964 10,772
Rent or lease
a. vehicles, machinery, and equipment 26,200 11,200 --
b. other business property -- -- 14,325
Repairs and maintenance 2,064 4,903 --
Trade shows 841 3,460 3,690
Research 5,118 22,287 4,701
Parking 415 420 --
Telcon [sic] 9,061 7,544 19,733
Professional services (other) 8,934 9,218 --
Dues and publications 410 865 --
Software -- 759 8,678
Courier -- -- 4,041
Charity contribution -- -- 2,860
Printing 20,595 5,424 --
Commission and fees -- -- 3,740
4
Total 162,278 189,912 211,709
1
For the taxable year 1992, air travel also includes lodging.
2
For the taxable year 1992, meals away from home combined meals
and entertainment.
3
Some items in this category would have been subject to sec. 274.
Since none of the expenses were substantiated under sec. 162, it was
unnecessary to subdivide the category further.
4
For the taxable year 1991, petitioner inexplicably reported
total expenses of $192,516 on line 28 of Schedule C.
- 31 -
HALPERN, J., concurring in result: I agree with the result
reached by the majority. However, I write separately because I
disagree with the following steps taken by the majority in
reaching that result: one, incorporating a requirement of
section 7522 into the definition of the term "new matter" and,
two, suggesting that respondent's intent in drafting the notice
of deficiency is relevant to the determination of whether a new
theory is new matter with respect to such notice.
The Term “New Matter”
Rule 142(a) provides:
(a) General: The burden of proof shall be upon
the petitioner, except as otherwise provided by statute
or determined by the Court; and except that, in respect
of any new matter, increases in deficiency, and
affirmative defenses, pleaded in the answer, it shall
be upon the respondent. * * *
The majority recognizes that "[a] substantial body of case
law has developed in this Court setting forth criteria for
determining when the Commissioner is raising a 'new matter'."
Majority op. pp. 14-15. An examination of that case law reveals
a disjunctive test to determine whether a new theory raised in
respondent's answer is new matter for purposes of Rule 142(a).
In Achiro v. Commissioner, 77 T.C. 881, 890 (1981), we stated:
The assertion of a new theory which merely
clarifies or develops the original determination
without being inconsistent or increasing the amount of
the deficiency is not a new matter requiring the
shifting of the burden of proof. * * * However, if
- 32 -
the assertion in the amended answer either alters the
original deficiency or requires the presentation of
different evidence, then respondent has introduced a
new matter. * * *
A new theory may or may not constitute new matter. A new
theory in the answer is new matter if either (1) the new theory
is inconsistent with the notice (the inconsistency alternative),
or (2) it requires the presentation of different evidence, i.e.,
evidence different from that necessary to prove a well-pleaded
assignment of error (the different evidence alternative). It is
illogical, and defies common sense, to believe that, in the case
of a disjunctive test such as our test for new matter, the
failure to satisfy one alternative precludes the possibility of
satisfying the other. For instance, it does not follow from
Achiro that, if a new theory is consistent with the notice, then
it cannot be new matter. A finding that a new theory is
consistent with the notice simply leads to the conclusion that
the new theory is not new matter pursuant to the inconsistency
alternative; it does not foreclose the possibility that the new
theory could be new matter pursuant to the different evidence
alternative.
Golsen Doctrine
The majority finds, and I agree, that "[b]ased on our
previously articulated test for determining whether respondent's
reliance on section 66(b) is new matter, we would hold that it is
- 33 -
and that the burden of proof as to that issue should be on
respondent." Majority op. p. 19. The majority's hesitation to
make such a holding is based on the opinion of the Court of
Appeals for the Ninth Circuit (Ninth Circuit) in Abatti v.
Commissioner, 644 F.2d 1385 (9th Cir. 1981), revg. T.C. Memo.
1978-392. Respondent argues, and the majority appears to
believe, that Abatti holds that, if a new theory is not
inconsistent with the determination in the notice, then it is not
new matter. See majority op. pp. 19-20. Respondent’s argument
ignores the disjunctive nature of our traditional interpretation:
a new theory is new matter under either the inconsistency
alternative or the different evidence alternative. Nevertheless,
if Abatti means that the Ninth Circuit’s interpretation of the
term “new matter” is inconsistent with our interpretation, then
the doctrine established by Golsen v. Commissioner, 54 T.C. 742(1970), affd. 445 F.2d 985 (10th Cir. 1971), comes into play.
The Golsen doctrine is that, notwithstanding that we are a
national court and have the authority to render a decision
inconsistent with any Court of Appeals, where a reversal would
appear inevitable due to the clearly established position of the
Court of Appeals to which an appeal would lie, we shall not
insist on our view, but shall follow the Court of Appeals
decision on point. Id. at 757; accord Lardas v. Commissioner, 99
T.C. 490, 494-495 (1992).
- 34 -
Jurisprudence of the Ninth Circuit
An examination of Abatti and subsequent Ninth Circuit
authority leads me to believe that the Golsen doctrine does not
bar us from applying our traditional interpretation. In Abatti,
the Ninth Circuit was reviewing our application of our Rule
142(a). The Ninth Circuit relied on our opinion in Sorin v.
Commissioner, 29 T.C. 959 (1958), affd. per curiam 271 F.2d 741(2d Cir. 1959), for an interpretation of the term "new matter".
Abatti v. Commissioner, supra at 1390. In Sorin, we stated that,
when a:
determination is not broad enough to include the new
ground, its presumptive correctness does not then
extend to such new matter, which he [the Commissioner]
is required to raise affirmatively in his answer.
Under the Tax Court rules, the burden of proof as to it
is expressly placed upon respondent. * * *
But when the determination is made in indefinite
and general terms, and is not inconsistent with some
position necessarily implicit in the determination
itself, the situation is quite different. * * *
29 T.C. at 969. In Sorin, the different evidence alternative was
not under consideration. We held that the burden of proof should
remain on the taxpayer because, contrary to the taxpayer's
contention, the Commissioner had not taken a position
inconsistent with the notice. The Ninth Circuit reached a
similar result in Abatti. There, too, the taxpayer did not
- 35 -
raise, nor did the Ninth Circuit address, the different evidence
alternative.
Stewart v. Commissioner, 714 F.2d 977 (9th Cir. 1983), affg.
T.C. Memo. 1982-209, is a post-Abatti case that also required the
Ninth Circuit to interpret Rule 142(a)’s use of the term “new
matter”. The Ninth Circuit concluded: "It is well settled that
the assertion of a new theory that merely clarifies the original
determination, without requiring the presentation of different
evidence, does not shift the burden of proof." Id. at 990
(citing Achiro v. Commissioner, 77 T.C. at 890). Again, the
Ninth Circuit stated an interpretation of the term “new matter”
that, if considered in isolation, could be misunderstood to
exclude alternative interpretations and would imply that, in
every instance, a new theory that does not require different
evidence is not new matter. I do not believe we must infer that,
in going from Abatti to Stewart, the Ninth Circuit replaced one
singular interpretation of the term “new matter”, i.e.,
inconsistency, with another, i.e., different evidence. Clearly
the Ninth Circuit has adopted both alternatives of our
disjunctive test. Although the Ninth Circuit has stated each
alternative in exclusive terms at different times, I think that
those statements can be harmonized. If, however, either test
preempts the other in the Ninth Circuit, we must conclude that
- 36 -
the different evidence alternative preempts the inconsistency
alternative because Stewart postdates Abatti.
I agree with the majority that, pursuant to the different
evidence alternative, respondent's reliance on section 66(b) is
new matter within the meaning of Rule 142(a). Majority op. p.
19. The Golsen doctrine is no bar to that conclusion. For the
reasons stated, I do not believe that respondent’s argument, to
wit, if a new theory is not inconsistent with the determination
in the notice, then it is not new matter, would necessarily
succeed in the Ninth Circuit. Therefore, I conclude that, under
Golsen, we need not alter our disposition of the instant case on
account of the jurisprudence of the Ninth Circuit.
Why Section 7522?
Instead of holding that respondent's reliance on section
66(b) is new matter pursuant to our case law, and in accord with
the Ninth Circuit's opinion in Stewart, the majority makes
various analytical errors, which I feel compelled to address.
First, the majority incorporates the legislative mandate of
section 7522, that the notice of deficiency shall describe an
adequate basis, into the definition of “new matter”. Imposition
of the burden of proof is, in the absence of a legislative
directive, a judicial function. The majority seems to believe
that section 7522 should influence the Ninth Circuit in
determining what constitutes new matter. See majority op. p. 23.
- 37 -
Indeed, the majority's holding appears to require our
consideration of a section 7522 requirement in determining what
is new matter. I have difficulty understanding why the majority
concludes that section 7522 affects the allocation of the burden
of proof. Section 7522 makes no mention of the burden of proof.
The majority has not persuaded me that, on account of a violation
of section 7522, Congress intended a particular remedy (i.e.,
allocating the burden of proof to the Commissioner as opposed to,
for instance, extending a period of limitations, if it operates
against the taxpayer, or awarding attorney's fees).1 Further,
assume the Commissioner issues a valid but inadequately
descriptive notice, in violation of section 7522. If the
Commissioner introduces no new theory, would the majority remedy
the Commissioner's violation of section 7522 by placing the
burden of proof upon him?2
1
The only remedy that we can assuredly conclude is not
within the purview of sec. 7522 is an invalidation of such
inadequate notice. See sec. 7522.
2
In that vein, consider Judge Beghe's concern:
that a vaguely broad notice that does no more than
state an intention to assess a deficiency in a
specified amount is not just a valid notice. It's an
empty bottle that can be filled and made specific with
any theory and won't thereby be considered an
inconsistent theory or as requiring different evidence
so as to justify the shifting of the burden of proof to
the Commissioner.
(continued...)
- 38 -
The majority, however, has convinced itself that a
reasonable method for enforcing the requirement of section 7522
is to allocate the burden of proof to the Commissioner with
regard to any new theory that both (1) was not stated or
described in the notice of deficiency and (2) requires the
presentation of different evidence. Majority op. pp. 23, 25. I
do not understand the cumulative aspect of such a test. Clearly,
any new theory that requires the presentation of different
evidence, thus satisfying the second prong, could not have been
stated or described in the notice and, thus, will always satisfy
the first prong. Adding the first prong, however, is a
rhetorical device that serves only to import the section 7522
requirement into the new matter inquiry. The majority merely
couples one of our traditional disjunctive alternatives, which
has been explicitly adopted by the Ninth Circuit, to a
restatement of the section 7522 requirement, to opine on what is
2
(...continued)
Beghe, J., concurring p. 42. Witness the case at bar, where the
majority has found that, under the different evidence
alternative, respondent raised new matter relative to his vaguely
broad notice by trying, with consent, the sec. 66(b) issue. It
seems a sufficient and appropriate response to Judge Beghe’s
concern to say that, if a new theory is both not inconsistent
with a notice of deficiency and does not require different
evidence, petitioner has not been prejudiced by such new theory.
Therefore, notwithstanding that the notice may be an "empty
bottle", there is no harm requiring redress.
- 39 -
a proper means of enforcement for section 7522. Such holding is
both unnecessary and inappropriate on the facts before us.
Looking Beyond the Notice of Deficiency
My second concern with the majority's analysis is its
suggestion that there may be a case in which the Commissioner's
intent in drafting the notice of deficiency will determine
whether a new theory is new matter under either the inconsistency
or different evidence alternatives. The majority states:
“Respondent failed to offer any evidence that indicated that
respondent considered the application of community property law
or section 66(b) in making his determination." Majority op. p.
16. The majority then finds: "[R]espondent gave no thought to
community property law or section 66(b) when the notice of
deficiency was prepared." Id. at 17. That finding, the majority
continues, “supports our conclusion that section 66(b) was not
implicit in the notice of deficiency.” Id. Although the
majority makes obeisance to the determining force of the notice’s
language (“The objective language in the notice of deficiency
remains the controlling factor.” Id.), the fact that the majority
finds “support” in respondent’s failure to consider section 66(b)
suggests that intent has some role in determining whether a new
theory is a new matter. If intent plays some role, then there is
the possibility that, in a close case, intent (or lack thereof)
could tip the balance. I disagree, and think that the majority
- 40 -
should make it clear that there is no connection between the
Commissioner’s intent and whether a new theory is implicit in a
notice of deficiency.
Consider two taxpayers, each with unreported income, each
married and filing separately, and each residing in a community
property jurisdiction. Each receives an identical notice
determining a deficiency in income tax on account of the omission
of $100 in gross income. The notices do not mention section
66(b). Each taxpayer concedes receipt of the $100 and its
taxable nature. Each pleads, nevertheless, that, as the receipt
was community property, he is taxable only on one-half. In one
case, in determining the deficiency, it was the Commissioner's
intention (unexpressed in the notice) to disallow the benefits of
community property under section 66(b). In the second case, the
Commissioner was unaware that the receipt was community property.
He becomes aware only after his right to amend the answer without
leave of Court has expired. See Rule 41(a). The Commissioner’s
awareness may be a factor in determining whether, under Rule
41(a), the Court should give leave to amend the answer to
incorporate the new theory. Assuming leave to amend is given,
the question of whether the new theory constitutes new matter
under Rule 142(a) involves different considerations, viz, whether
the new theory is inconsistent with the notice or requires
different evidence. Simply stated, it would violate principles
- 41 -
of horizontal equity to place the burden of proof on the taxpayer
in the first case and on the Commissioner in the second case,
when both taxpayers have identical tax attributes and received
identical notices.
Conclusion
I fail to see what the majority's analysis adds to the
jurisprudence of this Court, when attention to Golsen v.
Commissioner, supra, would allow us to dispose of this issue
without discussing section 7522 or respondent's intent. The
Court is always free to place the burden of proof on respondent
pursuant to the first sentence of Rule 142(a), which provides:
"The burden of proof shall be upon the petitioner, except as
otherwise * * * determined by the Court".3 Placing the burden on
respondent because section 7522 makes something "new matter",
which otherwise is not, obfuscates not only our interpretation of
the Ninth Circuit's jurisprudence, but our own jurisprudence as
well. For the foregoing reasons, I respectfully concur in
result.
CHABOT, WHALEN, and CHIECHI, JJ., agree with this concurring
in result opinion.
3
That portion of the rule would support the result that
Judge Beghe would accomplish, and satisfy his pragmatic concern,
without doing violence to the term "new matter".
- 42 -
BEGHE, J., concurring: More than 4 years ago Judge Raum
made the suggestion that bears fruit today, that section 7522(a)
provides a justification for shifting the burden of proof to
respondent as a sanction for vague notices of deficiency. See
Ludwig v. Commissioner, T.C. Memo. 1994-518.
I write on to respond to some of the objections to the
majority opinion expressed in Judge Halpern's concurrence.
Judge Halpern's normative explication of the disjunctive
tests for new matter--inconsistency and different evidence--is
impeccable so far as it goes. But he pays inadequate attention
to another strand in the Tax Court's jurisprudence on this
subject, exemplified by Sorin v. Commissioner, 29 T.C. 959(1958), affd. per curiam 271 F.2d 741 (2d Cir. 1959), that the
Court of Appeals for the Ninth Circuit relied upon, along with
Judge Learned Hand's opinion in Olsen v. Helvering, 88 F.2d 650,
651 (2d Cir. 1937), to reverse us for our shifting of the burden
of proof in Abatti v. Commissioner, 644 F.2d 1385 (9th Cir.
1981), revg. T.C. Memo. 1978-392. That strand is to the effect
that a vaguely broad notice that does no more than state an
intention to assess a deficiency in a specified amount is not
just a valid notice. It's an empty bottle that can be filled and
made specific with any theory and won't thereby be considered an
inconsistent theory or as requiring different evidence so as to
justify the shifting of the burden of proof to the Commissioner.
- 43 -
Our jurisprudence and that of the Ninth Circuit is
sufficiently murky on this issue to justify using section 7522(a)
to clarify the situation and set ourselves and our litigants on
the right path for the future.
In so using section 7522(a), I frankly am impelled by
pragmatic considerations. Commentators have suggested that the
present situation is unsatisfactory because it encourages--even
rewards--vagueness and imprecision in the Commissioner's
deficiency notices and discourages the specificity that tells
taxpayers the points they must put in issue in their petitions
and prove at trial. It's appropriate to use section 7522(a) as
the device for repudiating the line of cases represented by Sorin
v. Commissioner, supra.
There's a theoretical as well as a pragmatic justification
for so using section 7522(a) that answers the questions posed in
Judge Halpern's concurrence, pp. 36-37. Judge Halpern follows up
the general question--Just what is section 7522(a) supposed to
accomplish?--by asking what justifies our decision to sanction a
vague notice by shifting the burden of proof when the
Commissioner's theory is finally put forth, as opposed to
applying some other sanction, such as extending the period of
limitations or awarding attorney's fees. The answer, I submit,
is that shifting the burden on the ground that the theory, once
stated by the Commissioner, constitutes "new matter" is an
- 44 -
appropriate, proportionate, and specifically directed response to
the vagueness and inadequacy of the notice in failing to set
forth any matter other than to express the intent to assess a
specified amount of a particular tax.
Section 7522(a) was a signal from Congress that vague
notices would thenceforth be disfavored. Shifting the burden of
proof to the Commissioner under section 7522(a) is an appropriate
way to implement the not too clearly expressed intent of
Congress. In this regard, the "imaginative reconstruction"
applied by Judge Learned Hand in other contexts, see, e.g.,
Lehigh Valley Coal Co. v. Yensavage, 218 F. 547, 553 (2d Cir.
1914)("Such statutes are partial * * * they should be construed,
not as theorems of Euclid, but with some imagination of the
purposes which lie behind them."), and espoused by Judge Posner,
as well as by our own Judge Raum, points the direction in which
we and the courts of appeals should go. See Posner, Statutory
Interpretation--in the Classroom and in the Courtroom, 50 U. Chi.
L. Rev. 800, 817 (1983).