During the course of litigating a tax matter, the IRS may increase the amount of tax, penalties, and interest that it alleges the taxpayer owes. The IRS is typically allowed to do this. If it does, the IRS may have a harder time prevailing on this type of issue. This “new matter” rule was recently addressed in Dynamo Holdings LP v. Commissioner, T.C. Memo. 2018-61.
The Facts & Procedural History
There are a number of facts that are omitted here as the case addressed several tax and accounting issues (and is well worth reading for the substantive tax issues). But for purposes of the limited issue addressed in this article, the relevant facts are as follows:
The IRS issued a notice of deficiency. Six months before trial, the IRS filed a motion to amend its answer to increase the amount of tax, penalties, and interest due. The increases were due to the IRS increasing the values for property transferred from a U.S. company to its foreign parent–thereby increasing the withholding tax due on the transfer. The court granted the motion.
The IRS then conceded several issues that were included in the original notice of deficiency. After the tax, penalties, and interest were reduced for these concessions, the amounts were all lower than the amounts included in the IRS’s notice of deficiency.
The Burden of Proof
When the courts are faced with a close call, they will often decide the case in favor of the party that does not have the burden of proof.
The taxpayer generally has the burden of proof when litigating civil tax disputes. This is usually stated in terms of the IRS’s notice of deficiency being presumed correct.
This presumption is overcome and the burden shifts to the IRS in certain circumstances when the taxpayer introduces credible evidence for a factual issue that has bearing on their tax liability. These rules are found in Tax Court Rule 142(a) and Section 7491.
Tax Court Rule 142(a) also provides that the IRS has the burden for “any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer.”
New Matter vs. Increase in Deficiency
The IRS took the position that it did not have the burden of proof given that the tax, penalties, and interest were less than the total amount included in the original notice of deficiency given the concessions it made on other issues. Put another way, the IRS took the position that there was no increase in the deficiency.
The court noted that the IRS raised a new matter. Thus, the court looked to the “new matter” langage and not the “increase in deficiency” langage in Rule 142(a). As a result, the IRS had the burden of proof for the new matters included in its amended answer.
What is a New Matter?
The general rule is that a “new matter” is one that would require the taxpayer to present different evidence. There is a distinction between a new matter and a new theory:
The Commissioner is allowed the latitude to amend his pleadings and even adopt entirely new theories supporting assessed deficiencies without triggering Rule 142’s shift in burden, so long as the new theory is not inconsistent with the original allegation, does not require new evidence in its support, nor increases the amount of the deficiency. See, e.g., Friedman v. Comm’r, 216 F.3d 537, 543 (6th Cir.2000) (“A new position taken by Commissioner is not necessarily a `new matter’ if it merely clarifies or develops Commissioner’s original determination without requiring the presentation of different evidence, being inconsistent with Commissioner’s original determination, or increasing the amount of the deficiency.”); Abatti v. Comm’r, 644 F.2d 1385, 1390 (9th Cir.1981) (same); Achiro v. Comm’r, 77 T.C. 881, 890, 1981 WL 11333 (1981) (same).
Estate of Kanter v. Commissioner, 337 F.3d 833, 851 (7th Cir. 2003).
In this case, the court noted that the taxpayer would have to present different valuation reports given the IRS’s change to its answer. Thus, the IRS had raised a new matter and, therefore, it had the burden for the new matter it raised. For several of these issues, the IRS failed to present any evidence and the taxpayer presented very minimal evidence. The court accepted the taxpayer’s evidence, which included the amounts listed in the taxpayer’s general ledgers, given that the IRS did not meet its burden.