The opinion
T.C. Memo. 1999-175
UNITED STATES TAX COURT
WIN H. EMERT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 9817-96. Filed May 24, 1999.
David M. Kirsch, for petitioner.
Steven Walker, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
VASQUEZ, Judge: The controversy before us arises out of
*
On August 6, 1998, the Court issued its opinion on the
merits (T.C. Memo. 1998-289), which we incorporate herein. We
sustained respondent's determination that (1) the method of
accounting used by petitioner's wholly owned S corporation (AEI)
did not clearly reflect income, and (2) AEI must change its
method of accounting from the cash method to the accrual method
for its tax years ending on October 31, 1992 and 1993. The Court
directed that "Decisions will be entered under Rule 155." Our
prior opinion regarded two consolidated cases. Only the
computation for docket No. 9817-96 is at issue herein.
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differing computations filed pursuant to Rule 155.1 Respondent's
computation contained a section 481 adjustment for AEI's 1992
taxable year. Petitioner's computation did not. Petitioner
objects to this adjustment.2
Rule 155 is the mechanism whereby the Court is enabled to
enter a decision for the dollar amounts owed resulting from the
disposition of issues involved in a case where those amounts
cannot readily be determined. See Cloes v. Commissioner, 79 T.C.
933, 935 (1982). Rule 155(c) provides:
(c) Limit on Argument: Any argument under this
Rule will be confined strictly to consideration of the
correct computation of the deficiency, liability, or
overpayment resulting from the findings and conclusions
made by the Court, and no argument will be heard upon
or consideration given to the issues or matters
disposed of by the Court's findings and conclusions or
to any new issues. This Rule is not to be regarded as
affording an opportunity for retrial or
reconsideration.
We have stated time and again that a Rule 155 proceeding may not
be used to raise a new issue. See Home Group, Inc. v.
Commissioner, 91 T.C. 265, 268-269 (1988), affd. 875 F.2d 377 (2d
Cir. 1989); Cloes v. Commissioner, supra. Purely mathematically
generated computational items, however, are proper for
1
All Rule references are to the Tax Court Rules of
Practice and Procedure, and all section references are to the
Internal Revenue Code in effect for the years in issue.
2
Petitioner has no objection to respondent's computation
for AEI's 1993 taxable year.
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consideration in Rule 155 proceedings. See Home Group, Inc. v.
Commissioner, supra at 269, 271.
Petitioner contends that a section 481 adjustment is
improper in this case. Petitioner argues that the first mention
of section 481 in this case was in respondent's brief; therefore,
section 481 is a new issue, and it is inappropriate for
consideration in a Rule 155 computation.
Respondent counters that the section 481 adjustment is not a
new issue; it is a mathematical or mechanical adjustment that is
patent from the statute. Respondent argues that once respondent
raised the issue of change in the method of accounting it
automatically triggered a section 481 adjustment.
Section 481 provides that in order to prevent income from
escaping taxation due to a change in the method of accounting,
the Commissioner may make an adjustment by including the omitted
income in the year of change. See Graff Chevrolet Co. v.
Campbell, 343 F.2d 568, 570 (5th Cir. 1965). Section 481 applies
only if there is a change in the "method of accounting". See id.
Section 481 includes a change in the accounting treatment of a
material item as well as a change from one overall system of
accounting to another as from the cash method to the accrual
method. See id.; Primo Pants Co. v. Commissioner, 78 T.C. 705,
721 (1982). Section 481 is applicable herein because respondent
has determined, and we have sustained, a change in method of
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accounting. See Hitachi Sales Corp. of Am. v. Commissioner, T.C.
Memo. 1994-159, supplemented by T.C. Memo. 1995-84.
"If there has been a change in method of accounting, then
section 481 comes into operation and adjustments necessary to
prevent an omission of taxable income must be made." Primo Pants
Co. v. Commissioner, supra at 720 (emphasis added). Once the
Commissioner changes the taxpayer's method of accounting in
regard to inventories, "that change of accounting method triggers
the adjustments of section 481. If any amounts are omitted from
taxable income because of a change in method of accounting, then
section 481 mandates adjustments to prevent these omissions."
Id. at 726 (emphasis added).
Where the statutory notice and pleadings are sufficient to
raise the issue of change in accounting method, the application
of section 481 is patent. See sec. 481(a); Primo Pants Co. v.
Commissioner, supra; Hitachi Sales Corp. of Am. v. Commissioner,
supra. Here, the statutory notice raised the issue of change in
accounting method;3 therefore, section 481 was triggered.4 See
3
The statutory notice contained the following language:
"Your gross income has been increased because of a change in
accounting method from the cash basis to accrual method."
4
Our recent Court-reviewed opinion in Shea v.
Commissioner, 112 T.C. ___ (1999), is distinguishable from the
case at bar. In Shea, we rejected the Commissioner's argument
that the Commissioner's basis was implicit in the notice of
deficiency and held that the notice of deficiency failed to
(continued...)
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Primo Pants Co. v. Commissioner, supra; Hitachi Sales Corp. of
Am. v. Commissioner, supra.
Accordingly, we hold that a section 481 adjustment is a
proper matter for Rule 155 consideration.
To reflect the foregoing,
An appropriate order will
be issued.
4
(...continued)
describe the basis on which the Commissioner relied to support
the Commissioner's deficiency determination. See also sec. 7522.
In the case at bar, however, sec. 481 is more than implicit in
the notice; it is patent.