In cases in which there are several grounds to support the determined deficiency, it is necessary for the respondent to allege affirmative facts to place before the court all issues not raised in the statutory notice, even though the burden of proof is not placed upon the respondent. The failure to do so may result in the case being decided for the petitioner due to the failure of the respondent to raise a good defense to the petitioner’s contention. This may be illustrated by the following example: In the statutory notice of deficiency a travel expense deduction was disallowed on the basis that the amount claimed was not substantiated; in the petition only the issue of substantiation was raised. If the Field attorney believes there is also an issue as to whether the petitioner was in travel status when the expenses were incurred, it would be necessary to allege affirmatively in the answer that the petitioner was not in travel status and, therefore, the expense, even if substantiated, is not allowable as a matter of law.

Any additional defense, in fact or in law, discovered after filing the answer, must be promptly pled by amendment to the answer, accompanied by a motion for leave to amend where the court’s permission is required under T.C. Rule 41(a).

If the statutory notice of deficiency is based upon a joint return of husband and wife and either spouse denies that a joint return was filed, the respondent should assert, in the alternative, a claim for an increased deficiency against the spouse who clearly filed the return. If the court should hold as to noncommunity income that a joint return was not in fact filed, the court should determine the entire deficiency against the party filing the return. A different problem exists with respect to community income since, if the court should hold that a joint return was not in fact filed, only half of the community income would be taxable to the spouse filing the return. In such instances a question may arise as to the validity of the statutory notice as to the spouse who was not a party to the return and whether under such circumstance a new statutory notice against such party may be issued. Thus, for protective purposes there should be alleged in the answer, in the alternative, that if the court should hold that joint returns were not in fact filed, separate deficiencies should be determined against each spouse, and a claim should be made, in the alternative, for a separate deficiency against the spouse who denies filing a joint return based on half of the community income. Care should be exercised in disposition of the case so that the court does not tax one spouse with only half of the community income and determines no deficiency as to the other spouse.

The section 6673(a)(1) penalty should be claimed in all cases where the principal arguments being made by the petitioner are those already deemed frivolous and without merit by the courts, in certain cases where the petitioner (or a related party) has already litigated the same issue in an earlier case and lost, and in other cases where circumstances warrant. CCDM 35.10.2

Although the penalty can be claimed at any time prior to entry of decision, as a rule, the claim should be affirmatively pled at the earliest possible time. The claim may be raised in the answer, by amendment to the answer or by oral or written dispositive motion, such as a motion for summary judgment or a motion to dismiss for failure to prosecute.

In every case, the factual basis upon which the penalty is claimed must be affirmatively pled. In a case where the penalty is claimed in the answer or amendment to the answer, the Service’s position is that T.C. Rule 37 requires the petitioner to file a reply. Where a reply is not filed by the petitioner, respondent should file a motion under T.C. Rule 37(c) requesting an order that the undenied affirmative allegations in the answer be deemed admitted.

For years prior to 1990 and for the fraud delinquency penalty after 1989, it is only necessary to establish that part of the underpayment of tax was due to fraud. If it is initially alleged that the entire deficiency is due to fraud and the petitioner files a motion for a better answer with respect thereto, it may not be possible to allege in an amended answer that only a part of the deficiency is due to fraud and thereby avoid alleging detailed facts as to all the adjustments giving rise to the asserted deficiency. Therefore, the ultimate allegation should always be phrased as all or part of the underpayment is due to fraud.

For years after 1989, the fraud penalty is only imposed on the portion of the underpayment attributable to fraud. If, however, the Service establishes that a portion of the underpayment is attributable to fraud, the entire underpayment will be presumed to be attributable to fraud, unless the taxpayer proves otherwise. Therefore, the ultimate allegation should still state that all or part of the underpayment is due to fraud, in cases involving tax years after 1989.

The initial answer should allege fraud only with respect to the particular adjustments which will be relied upon and proved at the trial to establish fraud. In cases having criminal aspects, the initial answer should be consistent with the allegations of fraud to be relied upon for criminal purposes in the absence of unusual circumstances. Generally, it should be easier to sustain the fraud or fraud delinquency penalty by applying the same theory as the criminal case, even though the theory of the criminal case may be inconsistent with the civil determination. This could occur in situations in which various civil items have been conceded for purposes of presenting the criminal case. If the case is one in which it is more desirable to employ the civil adjustments in support of a fraud or fraud delinquency penalty, the criminal theory could then be alleged as evidence of fraudulent intent.

Section 6663 (for years after 1989) provides for the fraud penalty if any part of any underpayment (as defined in subsection(c)) of tax required to be shown on a return is due to fraud. Once the respondent has established that a portion of the underpayment is due to fraud, the entire underpayment is presumed to be attributable to fraud unless the petitioner rebuts the presumption by presenting evidence that some part of the underpayment is not attributable to fraud. The elements necessary to establish the penalty are (1) an underpayment of tax, and (2) some part of the underpayment being due to fraud. Fraud has been defined as an intentional wrongdoing motivated by a specific purpose to evade tax known or believed to be owing. Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968), Hebrank v. Commissioner, 81 T.C. 640 (1983). These elements must be present within the allegations of the fraud answer. There is no specific format for the allegation of these elements that will suffice in all cases. The form and substance will, of necessity, depend upon the peculiar facts of each case.

Ordinarily, the determination of the correct taxable income is based upon the use of several methods of determining taxable income; i.e., specific items, bank deposit method, or the net worth and expenditures method. The specific items method is based upon direct evidence pertaining to specific items of omitted or incorrectly reported income or claimed deductions which are unallowable, in whole or in part. On the other hand, the bank deposit method or the net worth and expenditures method involves proof of the correct taxable income by indirect or circumstantial evidence which establishes, without reference to specific items of income or deductions, that the correct taxable income exceeds that reported. Whichever method is used, it has one purpose ( the determination of the correct taxable income. In appropriate cases two methods may be used in determining the correct taxable income; however, one method should be pleaded as the primary position of the respondent, and the other as the alternative. The alternative method will be reached by the court only in the event it fails to sustain the respondent on the primary method. In this event the court will decide which is the proper method of computation and determine the correct taxable income under that method. In cases in which indirect methods are used, however, specific items of income included in such computation may be pleaded in support of the fraud penalty to show the requisite fraudulent intent and a taxable source for the income.

Where a deficiency is determined from the omission of items of income, disallowed claimed expenses, or other specific adjustments, the answer should set forth allegations of fact which impute fraud to some portion of the specific adjustments. See Exhibit 35.11.1–20. In many cases the specific adjustments in the statutory notice can be classified as fraudulent and nonfraudulent adjustments. It is inadvisable to impute fraud to a specific adjustment which is clearly not fraudulent.

The correct taxable income is frequently determined by resorting to one of the methods of circumstantial evidence when the taxpayer has concealed sources of income, or has no books or records, or where the books or records maintained by the taxpayer or made available to the examining agents are inadequate to permit adjustments to specific items of recorded or reported income or deductions. In these instances, it is preferable to plead and prove those facts which in the particular case warrant resort to a method of circumstantial evidence to establish correct taxable income. Direct proof of specific errors or omissions in the books or records is not a condition precedent to utilization of circumstantial evidence to establish correct taxable income; where direct evidence is unavailable, the circumstantial evidence, buttressed by other evidence of the taxpayer’s financial history, may itself independently demonstrate the inadequacy or inaccuracy of the books or records. Holland v. United States, 348 U.S. 121 (1954). Where correct income is determined under the bank deposit or net worth and expenditures method, it is necessary to adduce additional evidence to support the inference that the income thus established was derived from a taxable source and was currently taxable in the particular year involved, or to negate any inference that the income thus established was derived from nontaxable sources.

If a method of circumstantial evidence was used in the determination of the deficiency, but specific items of omitted income are also known to respondent, such specific items of omitted income should be specifically alleged in the answer to provide a basis for proof of source to establish the taxable character of the funds involved in the excess accretion of net worth or otherwise unexplained bank deposits.

The reconstruction of income under the bank deposit method requires analysis of all bank deposits and all expenditures, both by cash and by check. An analysis of deposits and comparison with the records and reported receipts may demonstrate that some of the taxable receipts have been deposited without being recorded on the taxpayer’s records or, where reported receipts are in agreement with the bank deposits, that some receipts have been withheld from deposit. The withheld deposits may be linked to assets purchased or disbursements made. Gross receipts under this method consist of bank deposits plus undeposited receipts. The gross bank deposits must be adjusted to eliminate deposits of a non-income nature, such as transfers, loans deposited, or other such items. Undeposited receipts usually are shown by cash expenditures or accumulations not traceable to withdrawals of deposited funds and not accounted for by undeposited nontaxable receipts. Taxable income is derived by subtracting from such gross receipts the deductible expenses determined from an analysis of cancelled checks and cash expenditures, including any noncash deduction, such as depreciation. The records and testimony of the taxpayer and third parties may establish the deductible expenses as well as establish receipts not recorded, deposited, or reported by the taxpayer. The facts in each case must be analyzed, and the method or combination of methods used in the computation of taxable income must be followed in setting out the fraud allegations. In identifying the bank deposits the allegations should name the bank or banks and the amount or amounts of deposits representing receipts for the periods covered. The amounts of receipts which are alleged to have been withheld from deposit must be identified in some reasonable manner. Each factual element of the bank deposit reconstruction of correct taxable income must be alleged to show the court the facts upon which the respondent will rely to prove that the underpayment of tax is due, in whole or in part, to fraud. See Exhibit 35.11.1–18.

The net worth and expenditures method of determining the correct taxable income requires proof of the assets and liabilities of the taxpayer as of the beginning and the end of each year during the period involved, from which there is established the annual increase or decrease in net worth for each year by comparison of the beginning net worth and the ending net worth. The taxpayer’s nondeductible expenditures during the year, including personal living expenses, federal income taxes paid, and other such items which are not reflected in the increase or decrease of net worth for such year are added to the net worth figure. There is then deducted from such total for each year the amount of any nontaxable items received during the year. The resultant figure is the corrected taxable income for such year. The reported taxable income is subtracted from such corrected taxable income and the excess, if any, is alleged as the unreported taxable income for the year.

The Tax Court requires the respondent’s answer to show in detail the assets and liabilities at the beginning and end of each taxable year, and clearly to identify each item on the net the worth schedule and in the adjustments thereto in determining the correct taxable income. For example, the details required with respect to categories of assets and liabilities include: as to bank accounts-the name of each account and bank with which it is carried, and the amounts on deposit in each account at the starting point and end of each year involved, adjusted for outstanding checks, if any; securities-identify each security by name and the cost of each held as of the beginning and end of each year; real estate-identify each parcel and cost of each, etc.; personal property-describe each item with sufficient detail to permit its identification, together with its cost, etc.; liabilities-identify each mortgage, note, or other item and the amount thereof, etc.; and nondeductible expenditures, such as living expenses, taxes, etc., must be identified or explained sufficiently to permit responsive pleading by petitioner. The net worth schedule may be either alleged in the answer proper, or attached to the answer as an exhibit, or both. See Exhibit 35.11.1–19. If the net worth schedule is attached as an exhibit without the contents thereof being fully alleged in the answer proper, the body of the answer must contain specific allegations that the taxpayer did in fact have the assets, liabilities and other items as set forth on the attached schedule as of the date or dates shown thereon, and that the petitioner did make the nondeductible expenditures listed on the exhibit and added thereon to the increase in the net worth for each year. An allegation in the answer that the attached schedule merely shows the method of computation of taxable income is not an acceptable allegation; the facts as to specific expenditures and existence of specific assets and liabilities are required to be alleged.

A specific allegation should be included in the answer to the effect that the accretion in net worth, or the bank deposits in question, for the year or years involved did not include, or result from, any items of nontaxable income. If, however, a reduction was made for specifically identified nontaxable items in the computation of correct taxable income under the net worth or bank deposits method in the determination of the deficiency, such reduction shall be alleged and the further allegation made that no other nontaxable items were received during the pertinent year or years.

Section 6901 sets forth summary procedures under which the Service may assess and collect taxes, penalties, and interest owed by a transferor from the transferee, or from the transferee of a transferee. This statutory provision, however, does not create substantive transferee liability. The existence of, or the extent of, a transferee’s liability at law or in equity is to be determined by the applicable state or federal substantive law. Commissioner v. Stern, 357 U.S. 39 (1958). See section 6324 for an example of federal substantive liability.

In proceedings before the Tax Court, the respondent has the burden of proof to show that the petitioner (transferee) is liable as a transferee of property of the petitioner (transferor) but not to show that the petitioner was liable for the tax. Section 6902(a). Thus, the respondent must plead and prove all the essential elements of transferee liability. See Exhibit 35.11.1–23.

A fiduciary liability case is a case involving the personal liability of the petitioner under the provisions of 31 U.S.C. § 3713 for income, estate, or gift taxes due from the estate of the petitioner, the decedent, or the donor, as the case may be. Section 6901(a)(1)(B) makes the summary procedures for the assessment and collection of such taxes from the fiduciary the same as in the transferee cases. The controlling substantive law with respect to fiduciary liability cases, however, is the federal body of substantive law and not the state substantive law, as in transferee cases.

In transferee and fiduciary liability cases, the terms used to designate the fiduciary capacity of the petitioner in the answer should be the same as in the statutory notice. For example, if the statutory notice uses the term transferee, transferee and trustee, fiduciary, executor, administrator, trustee, insurance beneficiary and trustee, donee, or transferee and donee, etc., the same terminology should be used in the pleadings, stipulation, and other documents filed with the court. In gift cases, the transferor is usually referred to as the donor but in some instances the statutory notice will use the term transferor or donor and transferor, in which event the same terminology will be used in documents to be filed with the court.

In the handling and processing of a transferee case the Field attorney must observe the distinction between a transferee case and a deficiency case. The various types of statutory notices that are issued by the Service and the statutory notice of liability are important not only in pleading but also in the disposition of the case by a settlement stipulation or a T.C. Rule 155 computation.

The items that generally make up the amount of the transferee liability are: any unpaid tax reported on original or amended returns; deficiency in tax and penalty due from the transferor; statutory interest on the unpaid tax and on the deficiency from the due date of the tax to the date of the transfer of assets to the transferee (if the liability at law or in equity is based upon the transfer); and statutory interest on the penalty from the date of the notice and demand to the date of the transfer of the assets.

While it may be necessary to break down in the statutory notice of deficiency or in the answer the transferor’s liability for tax, penalty, and interest for the years involved, the amount of the transferee liability is always a single total amount. In setting forth the amount of the transferee liability it is generally advisable to set forth separately the deficiency in tax from the amount of the unpaid original tax, the total of which make up, in whole or in part, the transferee liability. Normally, the statutory notice does not include transferor interest as part of the transferee liability. Thus, in unlimited cases the single total amount of the transferee liability will be the total liability of the transferor for all taxes and all penalties for all years involved due from the transferor, together with the applicable interest thereon. In limited liability cases the single total transferee liability is the value of the assets transferred. In any case in which the transferee liability is incorrectly or improperly determined in the statutory notice, such determination must be modified in the answer and the total amount of the transferee liability correctly alleged.

For the purpose of pleading and trial, the transferee liability is a single amount, based upon the value of assets received by the transferee to be applied, in whole or in part, to the unpaid original tax, deficiency tax, penalty, and interest due from the transferor for all years before the court. The reason for this procedure is to avoid, particularly in limited liability cases, a reduction in the transferee liability below the value of the transferred assets due to the court’s holding that a part of the tax or penalties determined against the transferor is erroneous.

Interest is an essential element in every transferee case and must be pleaded in the answer, set forth in the settlement stipulation or Rule 155 computation, and a proper determination with respect thereto must be included in the Tax Court’s decision. Strictly speaking, there are two types of interest involved in every transferee case. "Transferor interest " is a part of the transferee liability, even if it is omitted from the statutory notice. "Transferee interest" is the interest due from the transferee on the amount of the transferee liability whether the case involves limited or unlimited transferee liability.

In every transferee answer, the specific amount of the transferee liability must be alleged, plus interest as provided by law. It is preferable that the answer allege specifically the date on which interest on the transferee liability begins to run. When this is not possible, the words "plus interest as provided by law" should follow the allegation of the amount of the transferee liability.

For cases in which the amount of the deficiency in tax due from the transferor is reduced by an operating loss or credit carryback or carryforward, either in the statutory notice or in the court’s redetermination of the amount of tax due from the transferor, care must be exercised in pleading or in determining the interest due from the transferor or the transferee on the deficiency in tax prior to such reduction.

In any case in which the fraud or fraud delinquency penalty is involved in determining the amount of the transferee liability, the burden of alleging and proving fraud of the transferor is upon the respondent to the same extent as it is in any other fraud case. Thus, in any transferee case in which the fraud or fraud delinquency penalty has been determined against the transferor, affirmative allegations showing fraud or fraudulent failure to file must be made in addition to the required affirmative allegations of transferee liability. Also, if there are matters of the statute of limitations, affirmative defense, alternative positions, etc., they must be affirmatively pleaded and proved to the same extent as in any other case.

The general elements which must be pleaded in every transferee case are set forth below. The particular elements will vary from case to case, and not all of these elements are involved in every transferee case. In addition there are generally specific and necessary elements under state law which must be pleaded and proved. These general elements are:

Particular care must be exercised in pleading with respect to cases in which the determination is made against the successor of merged corporations, or in other situations in which the petitioner is an assignee of property by operation of law. These are not true transferee cases; however, there may be situations in which as a result of an apparent merger a true transferee liability is involved. If the statutory notice was issued as a notice of transferee liability, even though incorrect, it is generally advisable to plead, process, and close the case as a transferee case. If the petitioner questions the transferee determination or there are other problems involved which necessitate a different treatment, appropriate action should be taken to protect the government’s interest in accord with the particular facts and circumstances.

31 U.S.C. § 3713, provides for the priority of debts due the United States and makes fiduciaries who distribute assets without paying a prior debt due the United States personally liable for the debt. Furthermore, this fiduciary liability is subject to the assessment and collection procedures of section 6901(a)(1)(B). Unlike transferee liability cases under section 6901, however, it is the Service’s position that in fiduciary liability cases, petitioners have the burden of proof except as may be otherwise provided under other statutory provisions, such as section 7491. See Bank of the West v. Commissioner, 93 T.C. 462, 467 (1989); McCourt v. Commissioner, 15 T.C. 734, 737 (1950). Some of the essential elements of fiduciary liability are that the fiduciary had actual or constructive notice of the tax claims of the government prior to the distribution of the assets and that the estate or donor was insolvent or was made insolvent by such distribution. Thus, once the Service has made a prima facie showing of fiduciary liability, petitioners will generally seek to provide either that they had no knowledge of the government’s claim or that the estate or donor was not insolvent during the relevant time period.

Sections 531 through 537 govern the imposition of an accumulated earnings tax on corporations deemed to have engaged in unreasonable (i.e., excessive) accumulations of earnings and profits for tax avoidance purposes, including the insulation of shareholders against income taxes which they would have had to pay if the corporations had paid out (more of) their incomes in dividends.

Section 534 provides that the burden of proof in the Tax Court with respect to an allegation that all or any part of earnings and profits have been permitted to accumulate beyond the reasonable needs of the business shall: If a notification with respect thereto has not been timely sent, be on the Service; or if a statement has been timely submitted by the petitioner in response to such notification, be on the Service with respect to those grounds set forth in such statement in accordance with the statutory provisions. Any determination imposing the accumulated earnings tax is necessarily based on some sort of allegation that earnings have been accumulated beyond the reasonable needs of the business inasmuch as the interrelationship of the accumulated earnings credit, including an allowance for current earnings retained for the reasonable needs of the business, would otherwise eliminate the accumulated taxable income. Therefore, placement of the burden of proof concerning reasonable business needs must be considered in every Tax Court case involving the accumulated earnings tax.

In defending accumulated earnings tax cases, the government is not under any requirement or duty to allege or prove the amount of tax saved by any stockholder in consequence of the purported unreasonable accumulation of corporate earnings. In any given case, however, the Field attorney may adopt that tactic to strengthen the government’s position. A stockholder’s return can be used as evidence. Even though disclosure of the returns is permissible for that purpose, it is preferable to limit disclosure as much as possible and proceed through stipulation whenever feasible.

In order to avoid or to limit the burden of proof with respect to the reasonable needs of the business, the Service must timely send by registered or certified mail a notification informing the petitioner that a proposed assertion of tax or addition to tax includes imposition of the accumulated earnings tax. To be timely, such notification must be sent prior to the issuance of the 90-day letter.

If a timely notification has been sent, the petitioner must timely submit a valid statement in response thereto in order to shift to the Service the burden of proof as to the grounds (supported by facts to show the basis thereof) set forth in such statement to establish that earnings were not accumulated beyond the reasonable needs of the business. To be timely, petitioner’s statement must be submitted within 60 days (with a 30-day extension available) after the mailing of the notification. To be properly submitted the statement must be sent to the Internal Revenue Service office which issued the notification of the proposed assertion of the accumulated earnings tax. In determining the acceptability of a statement the Field attorney must consider whether it was submitted to the proper Internal Revenue Service office within the time permitted.

If a notification has been timely sent and the petitioner has timely submitted an acceptable statement in response, the Service has a burden of proof, but only with respect to the ground or grounds which are:

The Field attorney should never voluntarily assume a greater burden than that imposed by statute. The burden of proof remains upon the petitioner with respect to any grounds set forth therein in an unacceptable manner (e.g., without supporting facts); or any grounds not included in petitioner’s statement, which it may nevertheless try to introduce. For example: If petitioner’s statement addresses itself exclusively to a need for a new factory building to justify accumulations, and in subsequent Tax Court proceedings the petitioner seeks to have the court consider the need for a source of funds for internal financing of credit sales, the petitioner has the burden to prove that the accumulations were made for, and justified by, a reasonable business need to finance credit sales. Similarly, if petitioner in its statement asserted that its business needs required the accumulation of $500,000 to acquire a new building, the petitioner must bear the burden of proof that any accumulations in excess of $500,000 were warranted by the need for the new building.

The form of the answer filed in an accumulated earnings tax case varies depending upon whether the Service and the petitioner followed the procedures outlined above. See Exhibits 35.11.1–24 through 35.11.1–26.

Prior to preparing an answer in a declaratory judgment case, the Field attorney should ascertain that the Tax Court has jurisdiction. One of the most important jurisdictional prerequisites is the exhaustion of administrative remedies. See Thompson v. Commissioner, 71 T.C. 327 (1978).

In some cases a petition will be filed because the Service has failed to make a timely final determination. In these cases, coordination with the Division Counsel/Associate Chief Counsel (TEGE) will be necessary, so that all grounds supporting a determination adverse to the petitioner can be raised in the answer. If no determination has been requested, a motion to dismiss for lack of jurisdiction should be filed.

The answer in a declaratory judgment action will differ in one important respect from that filed in a deficiency case: it must contain a complete index to the administrative record as defined in T.C. Rule 210(b)(12). See Exhibit 35.11.1–27. This index generally will not have been prepared during the administrative processing of the case and the Field attorney must personally prepare a complete and accurate index. The task of preparing or verifying the index may be time consuming and should be commenced at an early stage in the preparation of the answer. It should never be delegated to support staff. Particular care should be take to assure that the index contains only the material described in Rule 210(b)(12) does not include internal Service documents containing the mental impressions, conclusions, and reasoning of Service personnel.

Pursuant to T.C. Rule 212, in a revocation case there shall be filed with the answer a statement setting forth the date on which it is anticipated the case will be ready for submission to the court.

T.C. Rule 213(a)(2) permits facts, other than jurisdictional facts and facts involved in a revocation, to be admitted by respondent for purposes of the pending action for declaratory judgment only, and answers should be so drafted. This should be done in retirement plan declaratory judgment answers. The facts admitted should be limited to those contained in the administrative record. See Exhibits 35.11.1–27 and 35.11.1–28. Where facts alleged in the petition were never presented to the Service in support of the request for the determination and are not, therefore, contained in the administrative record, the answer should be neither admits nor denies on the grounds that the allegations are not a part of the administrative record and thus not cognizable by the court. In some instances, consideration should be given to filing a motion to strike pursuant to T.C. Rule 52, although the better practice almost always is to answer rather than move with respect to the petition. If a petition alludes to material not part of the administrative record, the answer should state that respondent denies for lack of knowledge, and that the referenced material cannot be considered by the court because the material is not part of the administrative record. Under T.C. Rule 217(a), facts outside the administrative record will not be considered by the court except under limited and unusual circumstances. See Houston Lawyer Referral Service, Inc. v. Commissioner, 69 T.C. 570 (1978).

Declaratory judgment cases should be handled very carefully. Even though they are nondeficiency cases, they have wide-ranging application and in many instances, enormous economic impact for affected persons, organizations, and the U.S. Treasury. Field attorneys should not hesitate to seek assistance from the appropriate Associate office if they have questions not answered by this section.

It is essential that any additional grounds supporting the determination or revocation be raised in the answer. Immediately upon receipt of a declaratory judgment action, an examination of the case should be made to determine whether there are additional grounds supporting respondent’s determination to be raised in the answer. Assistance and advice from the Division Counsel/Associate Chief Counsel (TEGE) may be needed to determine the existence of any additional grounds. Many of these cases will involve unfamiliar, difficult and novel issues which will require substantial time to review. Some issues will require extensive coordination with the Labor Department through its national office. To facilitate this coordination, examination of the administrative file should not be put off until the end of the answer period. This is important because if new grounds are raised in the answer, respondent may assume the burden of proof for those grounds. This should pose no problem in the usual case, in which a new issue is purely legal and the relevant information is already in the administrative record. See BBS Associates, Inc v. Commissioner , 74 T.C. 1118, 1121–1122 (1980). As the court’s review of any determination letter case is limited to the existing administrative record, there must be existing factual support in the record for any new ground raised in the answer.

Under T.C. Rule 213(b), a reply is required in every declaratory judgment action and when a reply is not filed, affirmative allegations in the answer will be deemed admitted. As the administrative record is due 30 days after the answer and the mandatory reply is due 60 days after the answer, a motion to extend the time within which to file the administrative record may be appropriate.

For purposes of the declaratory judgment action, the Service will accept as true the facts presented by the organization during the administrative determination procedure. Generally, therefore, there will be no need for a stipulation conference to determine which documents are part of the administrative record. The administrative record is composed of items contained in the administrative file only, and only those items exchanged between the parties are to be included in the administrative record. Only documents that are a part of the record (and the facts derived from. those documents) are subject to stipulation. Objection should be made to the admission of any document which is not part of the administrative record and the finding of any fact which is not supported by that record. In those cases in which grounds supporting the Commissioners’ determination or revocation are alleged for the first time in the answer, petitioner will be permitted to introduce evidence not already in the record to supports its position that the Commissioner’s determination is in error. In most instances, it will be possible to stipulate to those additional documents.

Stipulation of the administrative record should occur within 30 days after service of the answer. See Exhibit 35.11.1–27. If an agreement has been reached but the stipulation is not ready for filing within the 30-day period prescribed by T.C. Rule 217(b), a motion to extend the time for submission must be filed. See Exhibit 35.11.1–68. When the answer is filed, the Field attorney should consider forwarding a copy of a proposed stipulation to petitioner so that any disagreements can be worked out before the expiration of the 30-day period. If the parties are unable to file a stipulated administrative record, the Service must file the entire record with a Notice of Filing of the Administrative Record and a Commissioner’s Certificate as to the Genuineness of the Entire Administrative Record between 30 and 45 days after the service of the answer. Accordingly the entire administrative record must be segregated from the remainder of the administrative file and kept available for inspection (and copying if necessary). See CCDM 35.4.7.6(3) for guidance on preparing and assembling the administrative record.

The administrative record in both initial qualification and revocation cases is defined in T.C. Rule 210(b)(12) to comprise all documents submitted to the Service by petitioner in support of its request for determination, all written correspondence between the Service and petitioner, all pertinent returns and notices of determination. The administrative record closes at the moment the final adverse determination letter or revocation letter is mailed. Where a petition is filed by an employer, plan administrator, or interested party prior to the issuance of a final letter, the administrative record closes on the date the petition is filed.

If either the petitioner or the respondent moves for a stay before the answer is filed, the motion or response, as appropriate, should include a request that respondent be allowed a full 60 days following termination of the stay within which to file the answer.

When declaratory judgment petitions involving exempt status are served on the Chief Counsel, those cases in which determination or revocation letters have been issued will be assigned to the appropriate Counsel office. Those cases in which final adverse determination letters have been issued by the Commissioner (TEGE) will be assigned to the Division Counsel/Associate Chief Counsel (TEGE). See CCDM 35.2.1.1.15.2(3), (4). The outside cover of the legal file jacket will contain the permanent stamped designation, Declaratory Judgment Case.

Immediately upon receipt of a declaratory judgment case, a request for the complete administrative file should be addressed to the office that issued the determination, revocation, or ruling letter. Upon receipt of the file, the Field attorney should immediately examine the petition and file to determine whether there are jurisdictional questions which should be raised by motion.

If the petition arises from a revocation for a year for which a deficiency could be assessed, the Field attorney should ensure that consents for extending the statute of limitations are obtained. The declaratory judgment is limited to the issue of qualification or classification. Tax liability will never be an issue in a declaratory judgment action. The three-year statute of limitation generally starts to run at the time an organization, believing in good faith that it is exempt, files a return or, if the return was filed before due, then the due date.

The petition must be filed before the 91st day after the date of certified mailing of the final adverse determination letter. Section 7428(b)(3). If the petition is untimely, a motion to dismiss for lack of jurisdiction should be filed. Pursuant to T.C. Rule 211(b), every petition shall be entitled Petition for Declaratory Judgment (Exempt Organization). The petition shall contain all of the items enumerated in T.C. Rule 211(g). If the petition does not contain a copy of the final adverse determination letter, respondent’s answer should contain an appropriate allegation and a copy of the letter should be attached. Similarly, where the petition does not allege exhaustion of administrative remedies, respondent’s answer should contain such an allegation, if appropriate.

It is essential that any additional grounds supporting the determination, revocation, or ruling be raised in the answer. Immediately upon receipt of a declaratory judgment action, an examination of the case should be made to determine whether there are additional grounds supporting respondent’s determination which should be raised in the answer. Assistance and advice from the Exempt Organizations Division of the Division Counsel/Associate Chief Counsel (TEGE) may be needed to determine the existence of any additional grounds. Many of these cases will involve unfamiliar, difficult, and novel issues which will require substantial time to review. To facilitate this coordination, examination of the file should not be put off until the end of the answer period. This is important because if new grounds are raised in the answer, respondent may assume the burden of proof as to those grounds. This should pose no problem in the usual case where the new issue is purely legal and the relevant factual data is already in the administrative record. Under T.C. Rule 213(b), a reply is required in every declaratory judgment action and, when a reply is not filed, affirmative allegations in the answer will be deemed admitted.

In some cases a petition will be filed because the Service has failed to reach a determination. In these cases, coordination with the Exempt Organizations Division of the Division Counsel/Associate Chief Counsel (TEGE) will be necessary so that all grounds supporting a determination adverse to the petitioner can be affirmatively raised in the answer. If no ruling has been requested, a motion to dismiss for lack of jurisdiction is proper.

Pursuant to T.C. Rule 212, in a revocation case there shall be filed with the answer a statement setting forth the date on which it is anticipated the case will be ready for submission to the Court.

In initial qualification or classification cases, frequently a petition will allege facts not contained in the administrative record or will attempt to argue the legal effect of facts whether or not contained in the administrative record. In such instances, a motion to strike the allegations on the ground of not being contained in the administrative record or as being argumentative in nature, as the case may be, may be considered. In most situations, however, and particularly where the organization is not represented by counsel, the better practice is for respondent to answer, rather than move, in the following manner as required by the allegations of the petition: