Shea v. Commissioner

Halpern, J., concurring in the 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. p. 191. 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 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 “[biased 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.” Majority op. p. 193. 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. p. 193. 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).

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 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 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. 194. 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. pp. 195-196. 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

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. 196, 197. 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 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. 192. The majority then finds: “[Respondent 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. at 10. 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 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 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 the result.

Chabot, Whalen, and Chiechi, JJ., agree with this concurring in the result opinion. 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.

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.

Beghe, J., concurring p. 208. 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.

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”.