35.2.2  Answers

Manual Transmittal

April 11, 2013

Purpose

(1) This transmits revised CCDM 35.2.2, Petition and Answer; Answers.

Material Changes

(1) CCDM 35.2.2.11 was revised to amend previous provisions, add information regarding how to handle cases in which the IRC § 6651(a)(2) addition to tax is determined on the basis of a return made under IRC § 6020(b), and describe how to obtain documents that constitute an IRC § 6020(b) return.

(2) Minor editorial changes were made to comply with current IRM guidelines.

Effect on Other Documents

CCDM 35.2.2 dated September 24, 2012 is superseded. This revision incorporates and updates procedures contained in Chief Counsel Notice CC-2007-005 and Chief Counsel Notice CC-2007-014.

Audience

Chief Counsel

Effective Date

(04-11-2013)

Deborah A. Butler
Associate Chief Counsel
(Procedure & Administration)

35.2.2.1  (08-11-2004)
General Requirements for Answers

  1. The following subsections address requirements that are applicable to all answers. As a general rule, answers should be mailed to the Tax Court no later than five working days before the due date to ensure timely filing.

35.2.2.1.1  (08-12-2010)
Adequate Answer Required

  1. An adequate answer must be filed in all cases. An adequate answer includes appropriate admissions, qualifications, and denials of each material fact alleged in the petition; presents all defenses available to the respondent; requests any affirmative relief to which the respondent is entitled; and alleges facts in sufficient detail to support any issue upon which the respondent has the burden of proof. An adequate answer may be one in which detailed facts are alleged, or one in which the minimum required facts are alleged, depending upon the facts and circumstances of each case. In determining the amount of detail to be alleged, consideration must be given to the result to be accomplished by such allegations and particularly whether the answer with minimum allegations can be defended as adequate under the court's rules if petitioner files a motion with respect thereto. These are general guidelines on the overall policy of the Office of Chief Counsel with respect to answers. Particular points and problems to consider in answering a case are discussed in subsequent sections.

  2. In those cases in which the statutory notice refers to other documents, such as the 30−day letter, or the explanation and basis for the adjustment is not adequately set forth in the statement accompanying the notice, the answer should allege the nature and basis for the adjustments in controversy. Affirmative allegations as to the basis of the adjustments are necessary to inform the court and the petitioner of the adjustments in controversy and the position of the respondent thereon.

  3. In answering petitions, Counsel personnel generally must rely on the information contained in the administrative file. In certain cases, however, an answer can be filed without the administrative file if there is sufficient information to answer the case (e.g., information is secured from the notice or from the petitioner). When an answer is filed in such a case, the file should document the steps taken to secure the administrative file and the source of the information.

  4. Further, a case may be answered without the administrative file if the attorney and manager have determined that affirmative allegations in the answer are not required or a review of the petition and other information in Counsel’s possession indicate that there are no issues raised in the petition that requires a review of the administrative file in order to properly answer the case. The answer should be amended once the administrative file is received if necessary or appropriate under the circumstances. When it is determined that review of the administrative file is necessary in order to properly answer the case, a Motion to Extend the Time In Which to Answer should be filed. See CCDM 35.2.2.2.8(3)-(5).

  5. T.C. Rule 33(b) imposes upon counsel (as well as pro se petitioners) the duty to make reasonable inquiry as to both the facts and the law prior to the filing of any pleading. The signature of counsel constitutes a certification that counsel has read the pleading and, that after reasonable inquiry, has determined that it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification or reversal of existing law. If the court determines that a pleading has been filed in violation of this rule, sanctions may be imposed. See CCDM 35.10.2.2, Miscellaneous Sanctions and Costs Provisions.

  6. Fed. R. Civ. P. 11, upon which T.C. Rule 33(b) is based, expands the inherent powers of United States District Courts to award expenses, including reasonable attorney’s fees, to a litigant whose opponent acts in bad faith in instituting and conducting litigation. This rule stresses the need for some prefiling inquiry into both the facts and law to satisfy the affirmative duty imposed by the rule. The objective standard is reasonableness under the circumstances, which is a more stringent standard than one of good faith. Fed. R. Civ. P. 11, Advisory Committee’s Note.

  7. It is clear that T.C. Rule 33(b) imposes an affirmative duty upon counsel to investigate the facts of the case and the relevant law prior to filing an answer or other pleading. A good faith belief that the case is well grounded in fact and law is not sufficient. Reasonable inquiry is a more stringent standard than good faith. What constitutes a reasonable inquiry may depend on such factors as:

    • How much time for investigation was available to the signer of the answer or motion

    • Whether the signer had to rely on a client for information as to the facts underlying the pleading, motion, or other paper

    • Whether the pleading, motion, or other paper was based on a plausible view of the law

    • Whether the signer depended on forwarding counsel or another member of the bar

  8. As stated above, one of the factors the court will consider in determining whether the reasonable inquiry standard has been met is whether the attorney had to rely upon a client for information. The reasonable inquiry standard should be met in the first instance by the periodic attempts to obtain the administrative file. These periodic attempts to obtain the administrative file are necessary even in those offices where automatic or continuing requests for an administrative file are in place.

  9. Tax Court Rule 173(b) as amended now requires answers to be filed in all "S" cases. The amendment is effective for all petitions filed after March 13, 2007. This change will assist petitioners and low−income taxpayer clinics in contacting the attorney assigned to the case and result in the earlier consideration of small tax cases. The principles and procedures described elsewhere in this section are equally applicable to the answers filed in small tax cases. Pursuant to Rule 173(c), no reply to an answer shall be filed unless otherwise directed by the court and any affirmative allegations contained therein shall be deemed denied. Should it be determined that a reply is necessary, a Motion to Require Petitioner to File Reply should be filed. The case is considered at issue upon the filing of the answer pursuant to Rule 38 unless a reply is directed to be filed by the court.

  10. Upon receipt, each new small tax case petition should be reviewed to determine whether the small tax case election is allowable or otherwise appropriate, such as cases with potential precedential value or those presenting novel issues resulting from changes in the tax law. This consideration should also continue during the preparation of the case for trial or other disposition, to reduce the instances of dilatory procedural and jurisdictional motions that are sometimes filed in these cases.

35.2.2.1.2  (08-11-2004)
Admit Facts Known to Be True

  1. T. C. Rule 36 requires the specific admission or denial of each material allegation in the petition. Therefore, the attorney, in the preparation of the answer, must ascertain what facts alleged in the petition are known by the respondent to be true. The attorney usually determines this from a complete examination of the administrative file. The attorney is normally not required to conduct further investigation to determine the accuracy of alleged facts prior to answering the petition. If an alleged fact would be stipulated on the basis of the investigative reports and other information contained in the respondent’s file, it should be admitted in the answer. The court’s rules do not require the admission of immaterial facts, facts colored by the petitioner’s pleading, allegations representing half-truths, arguments, or conclusions, but care should be exercised in denying facts not in dispute merely because of the manner in which they are alleged. For allegations of fact in the foregoing categories it may be advisable to deny the fact as alleged but follow it with a correct allegation of the fact.

  2. Responses to factual allegations of the petition need not be restricted to simple admissions or denials. This is especially true in substance versus form situations, where a fact, while literally true, may be misleading. Qualified admissions or denials will permit the admission of those facts literally true while making clear at the same time respondent’s position as to substance. Such pleading also avoids the risk that an unduly restrictive attitude of the court toward the amendment of the answer or the admission of evidence may prevent respondent from making his full position clear on the record.

    EXAMPLE 1 :
    Allegation of Petition: § 5(e). On July 1, 2001, a certificate of dissolution of the petitioner was filed with the Secretary of State of the State of ___, and on July 5, 2001, the petitioner was duly liquidated.

    Responsive Answer: § 5(e). Admits that on or about July 1, 2001, a document purporting to be a certificate of dissolution was filed with the Secretary of the State of ___, and that on or about July 5, 2001, the petitioner purported to be liquidated. Denies that the said document constituted in truth and substance a certificate of dissolution, or was filed with the intention or purpose that petitioner would be dissolved and/or liquidated. Further denies that the said transaction or occurrence which took place on or about July 5, 2001, constituted a liquidation of petitioner in substance. Denies all remaining allegations of paragraph 5(e) of the Petition.

    EXAMPLE 2 :
    Allegation of Petition: § 5(d)(1). On June 20, 2002, the petitioner and ABC, Inc., entered into an Agreement of Sale of the business and assets of petitioner. A true and correct copy of said Agreement of Sale is attached to the petition and marked as Exhibit B.

    Responsive Answer: § 5(d)(1). Admits that Exhibit B attached to the petition is a true and correct copy of a document which bears the title Agreement of Sale. Denies that said title is consistent with the true nature and substance of the transaction as actually contemplated and carried out by the parties. Denies for lack of sufficient information the date upon which the said document was signed or executed, the genuineness of the signatures, or the true identity of the signers.

35.2.2.1.3  (08-11-2004)
Admission of Facts Inconsistent with Statutory Notice

  1. Facts which are known to be true should be admitted in the answer even though this would require the concession, in whole or in part, of an issue.

35.2.2.1.4  (08-11-2004)
Filing Amended Answers

  1. Pleadings should be completed as soon as possible. Every effort should be made in the preparation of the original answer to include all allegations which are necessary for the trial and disposition of the case. If facts become known which necessitate the filing of an amended answer, it should be done as soon as possible, and in any event in sufficient time to avoid a continuance of the trial. Amended answers raising affirmative issues, and particularly claims for increased deficiencies, should not be filed on the mere hope that evidence can be obtained to sustain the affirmative issues. See CCDM 35.2.2.4.9.

  2. To the extent that respondent raises an issue which was not included in the original notice of deficiency or in the pleadings, and which either increases the amount of the original deficiency, requires the presentation of different evidence, or is inconsistent with the original deficiency notice, the court may consider the issue a new matter. The burden of proof with respect to new matters is placed on respondent in accordance with T.C. Rule 142(a). Before the respondent may obtain leave of the court to present a new matter, however, respondent may be required to satisfy the court that petitioner was given fair warning of the issue. Fair warning means that respondent’s failure to notify petitioner in the notice of deficiency or in the pleadings of the intention to rely on a particular theory did not prejudice petitioner’s ability to prepare for the case. Of key importance in evaluating the existence of prejudice is the degree of surprise and the need of the party opposed to the new position to obtain additional evidence. Pagel, Inc. v. Commissioner, 91 T.C. 200, 211–212 (1988). Once respondent realizes that a new matter must be raised, it is critical that the new matter be asserted as soon as possible. The closer in time to the scheduled trial date, the less likely the court is to allow the filing of an amended answer. While the petitioner should have to show that he or she has been prejudiced, the court, when faced with a motion for leave to file an amended answer close to the trial date, may simply make a conclusory finding that the petitioner has been prejudiced, although the court’s failure to articulate the basis of such a finding may constitute appealable error.

  3. T.C. Rule 41(b)(1) generally provides that when issues not raised by the pleadings are tried by express or implied consent of the parties they shall be treated in all respects as though raised in the pleadings, and that failure to amend will not affect the result. T.C. Rule 41(b)(1) is silent as to whether petitioner’s failure to object to respondent’s evidence constitutes consent to the trial of the new issue. Accordingly, an amended answer should be filed to clearly state any new issue not previously raised. Respondent’s failure to object to petitioner’s submission of evidence might be deemed to constitute consent to the trial of a new issue. Respondent should make timely objections on the record to such evidence when appropriate, or move to restrict its use to the issues framed by the pleadings. If the court permits petitioner to amend, respondent should, if necessary, immediately request that the record be kept open to afford respondent adequate opportunity to investigate fully and to amend respondent’s pleadings to the extent necessary.

35.2.2.2  (08-11-2004)
Form of Answers

  1. This subsection addresses the format and basic structure of answers.

35.2.2.2.1  (08-11-2004)
Format for Answers

  1. The form of an answer will follow the general form of all Tax Court documents. The parts are the caption, the title, the body, the closing paragraph or prayer, the signature, and of Counsel. An answer, however, does not contain any endorsement of petitioner, or petitioner’s counsel. An endorsement of No Objection to respondent’s filing an amended answer is always made on the motion for leave to file the amended answer and not on the amended answer itself.

  2. The body of an answer includes the introductory paragraph, the responsive paragraphs to petitioner’s pleading, a general denial, and affirmative allegations (when applicable). After the introductory paragraph, the responsive paragraphs in the body of the answer shall be numbered to correspond with those of the petition to which they relate. See T.C. Rule 36. Thus, if the petition uses Arabic numbers, such numbers will be used in the answer; if the petition uses Roman numerals in numbering the paragraphs, Roman numerals will be used in the answer. The type of numbering used in the responsive paragraphs will be carried through and used in sequence with respect to the general denial paragraph and the affirmative allegations. Unnumbered pleading paragraphs in the petition shall be specifically identified and an appropriate response made thereto. Unnumbered paragraphs should not be considered as part of a preceding or subsequent numbered paragraph. The prayer, however, is not an unnumbered paragraph.

35.2.2.2.2  (08-11-2004)
Title of Answer

  1. The answer shall contain a heading or title indicating the type of answer being filed. Usually, the first answer filed in the case is titled Answer. Other headings which should be used, when appropriate, are: Answer to Petition, as Amended; Answer to Amended Petition; Amended Answer; Amendment to Answer; or Second Amended Answer; etc., or a combination of these types of answers, such as Amended Answer to Petition, as Amended.

  2. If the petition is amended by the filing of an "amendment to the petition" prior to the filing of the original answer, the title of the document would be Answer to Petition, as Amended. The due date of this pleading is computed from the date the amendment to the petition is served. This title would be applicable unless a complete "amended petition" was filed. In such case the heading would be Answer to Amended Petition. Care must be exercised to title the document to specifically identify the particular petition, original or as amended, which is being answered. The Tax Court’s web site (www.ustaxcourt.gov) may be consulted to determine how the court has designated a particular pleading.

35.2.2.2.3  (08-11-2004)
Amendment to Answer vs. Amended Answer

  1. If, in fraud, transferee, or other cases in which the answer contains affirmative allegations, it is necessary to amend the answer, consideration should be given to whether an entire amended answer, or just an amendment to the answer, should be filed. If an amended answer is filed, the petitioner’s admissions or denials in the reply to the affirmative allegations in the original answer may be nullified. Thus, if similar allegations are used in an amended answer to those in the original answer, but the petitioner’s reply to such allegations in the amended answer is different than his reply to such allegations in the original answer, doubt will exist as to the facts established by the pleadings. Accordingly, judgment should be used in determining the type of amendment to be filed.

35.2.2.2.4  (08-11-2004)
Introductory Paragraph

  1. The introductory paragraph of an answer should be in the following form: "THE RESPONDENT, in answer to the petition filed in this case, admits and denies as follows:"

  2. The introductory paragraph should be revised in accord with the type of answer being filed. Thus, it may be necessary to substitute for the words "in answer" in this paragraph the words for "amended answer," or for "amendment to the answer," etc. Also, for the word "petition" substitute the words "amended petition," or "amendment to the petition," etc., as applicable. Whenever there are affirmative allegations in the answer, the words "admits and denies" will be changed to read "admits, denies and alleges."

35.2.2.2.5  (09-24-2012)
Responsive Paragraphs - Admissions and Denials

  1. The responsive paragraphs of an answer contain the specific admissions and denials of each assignment of error and each material allegation of fact in the petition. The answer shall be drafted so that it will advise the petitioner and the court of the nature of the respondent’s defense and the facts on which it is founded. See T.C. Rule 36(b). Material allegations in the petition not expressly admitted or denied in the answer shall be deemed admitted. See T.C. Rule 36(c). Therefore, the attorney must be sure to respond to each assignment of error and each material allegation of fact in the petition. The admissions and denials must be drafted so that there is no ambiguity as to the scope of each admission or denial.

  2. In instances in which the entire paragraph or subparagraph in the petition is to be admitted or denied, the responsive paragraph may be in the following language: "5(a). Admits (or denies)" as appropriate. See Exhibit 35.11.1-9, Answer — Petitioner’s Burden of Proof: Complete Admissions and Denials.

  3. Exceptional care should be exercised by both the attorney and the reviewer with respect to partial admissions or partial denials. If the Service has no knowledge or information sufficient to form a belief as to the truth of an allegation, the answer must so state and the statement will have the effect of a denial. If the Service intends to qualify or to deny only a part of an allegation, he shall specify what is true and deny the remainder. See T.C. Rule 36(b). Any partial admission with denial of the remainder operates in itself as a qualification of the pleading.

  4. Whenever it would appear to raise an ambiguity by making a partial admission or partial denial, it may be appropriate to allege lack of information or knowledge sufficient to form a belief as to the truth of an allegation in the petition. This choice of pleading may also be appropriate when the administrative file has not been received in sufficient time to prepare a fully responsive pleading. If the latter situation occurs, the answer should be amended, or a motion for leave to file an amendment or amended answer should be sent the court as expeditiously as possible upon receipt of the administrative file.

  5. It is not necessary to be totally formal and legalistic when pleading partial admissions or denials. See Exhibit 35.11.1-10, Answer — Petitioner’s Burden of Proof: Qualified Admissions and Denials. If partial admissions and partial denials are used, the following samples are acceptable assuming specific admissions or denials correspond to the paragraph numbering in the petition:

    1. Denies, except admits that (stating the specific portion of the paragraph (or subparagraph) which is to be admitted)

    2. Admits, except denies that (stating the specific portion of the paragraph (or subparagraph) which is to be denied)

    3. Denies, except admits the second and third sentences

    4. Admits, except denies the first, fifth, and sixth sentences

    5. Denies for lack of sufficient information

  6. If the petition contains both numbered and unnumbered paragraphs, the following samples are acceptable (see Exhibit 35.11.1-11, Answer — Petitioner’s Burden of Proof: Unnumbered and/or Unlettered Paragraphs):

    1. First unnumbered paragraph following paragraph 5. Admits

    2. Second unnumbered paragraph following paragraph 5. Admits, except denies the first sentence

    3. Third unnumbered paragraph following paragraph 5. Admits, except denies that (stating the specific portion of the paragraph which is to be denied)

    4. Fourth unnumbered paragraph following paragraph 5. Denies, except admits that (stating the specific portion of the paragraph which is to be admitted)

    5. First unnumbered paragraph following paragraph 5. Denies for lack of sufficient information

  7. The attorney or person signing the pleading should be aware of the responsibilities imposed by T.C. Rule 33(b). See CCDM 35.2.2.1.1.

35.2.2.2.6  (09-24-2012)
Responsive Paragraphs - Affirmative Allegations of Fact

  1. Normally, affirmative allegations by the respondent in the nature of a defense to the petitioner’s allegations, or with respect to affirmative relief, or to sustain any issue with respect to which the respondent has the burden of proof, are made in the affirmative "further answering" portion of the answer after a response has been made to the allegations in the petition. There are instances, however, in which affirmative allegations are so closely tied to the allegations in the petition that it is appropriate to allege affirmative facts in the same paragraph in which a response is made to the petitioner’s allegations. This course of pleading is particularly applicable with respect to petitioner’s allegations as to party petitioners, tax, years, and amounts in controversy, filing of the return or returns involved or the lack of filing thereof, jurisdictional facts establishing the jurisdiction of the Tax Court, etc. For example, if the allegation in the petition sets forth the incorrect date of the issuance of the statutory notice or the incorrect amount or kind of tax or year involved in the case and these allegations are denied in the responsive paragraph of the answer, affirmative allegations should follow such denials setting forth the correct facts. This may be illustrated as follows:

    1. Denies; alleges that the deficiencies determined by the Commissioner are in income tax for the taxable year 2000 in the amount of $50,000.00.

    2. Admits; except denies that the return for the period here involved was filed with the Director, Memphis Service Center; alleges that the income tax return for the taxable year 2000, which is involved in this case, was filed with the Director, Andover Service Center. See Exhibit 35.11.1-10, Answer — Petitioner’s Burden of Proof: Qualified Admissions and Denials.

35.2.2.2.7  (08-11-2004)
General Denial

  1. Every answer must contain a general denial paragraph bearing the next number following the last numbered responsive paragraph of the petition. This general denial paragraph is an additional precaution to assure that each allegation contained in the petition is either admitted or denied, and to prevent any allegation in the petition from being deemed admitted under T.C. Rule 36(c). The usual form of the general denial paragraph is as follows: Denies generally each and every allegation of the petition (or amended petition, or petition, as amended, etc.) not herein before specifically admitted, qualified or denied.

35.2.2.2.8  (08-12-2010)
Affirmative Allegations

  1. The answer must contain affirmative allegations of any facts upon which the respondent relies for defense or for affirmative relief or to sustain any issue with respect to which the burden of proof is on the respondent. These allegations should follow immediately after the general denial paragraph and be numbered consecutively beginning with the number following that given to the general denial paragraph. The first paragraph of each statement of facts with respect to which respondent is required to plead affirmatively should be a short introductory paragraph to inform the court and the petitioner of the nature of the respondent’s defense or the form of relief requested or with respect to the issue of fraud or transferee liability, etc., which should be covered in the allegations to follow. Each further defense and the allegations with respect to each issue upon which the respondent has the burden of proof will be separately and consecutively numbered with the detailed allegations of supporting facts. See Exhibits 35.11.1-12 through 35.11.1-16.

  2. It is generally advisable to avoid getting into the second and third alphabet in the lettering of subparagraphs of affirmative allegations. This may be avoided in a number of different ways. For example, if there are a number of years involved with respect to which allegations are made in support of the fraud penalty, the first of the lettered subparagraphs may allege facts which are applicable to all or most of the years involved, followed by lettered paragraphs containing separate allegations which pertain to the years individually.

  3. If a case requires affirmative allegations by respondent or a review of the petition and other information indicates that a review of the administrative file is necessary to properly answer the case and the administrative file cannot be secured in time to answer, a Motion to Extend the Time In Which to Answer should be filed. The motion should explain the circumstances as to why the motion is necessary, ask for ample time to a date certain in which to file an answer, and should contain a statement pursuant to T.C. Rule 50(a) as to whether petitioners object to the granting of the motion.

  4. Attempts to plead affirmative allegations and making uninformed responses without the benefit of the administrative file may result in sanctions under T.C. Rule 33(b), and may also raise pleading and proof problems. Affirmative allegations, for example, that are made without the benefit of the administrative file tend to be very general in nature and invite petitioners’ motion for judgment on the pleadings. These motions for judgment on the pleadings may be scheduled for hearing fairly quickly. The administrative file will be needed to respond to the motion.

  5. In instances in which affirmative allegations are called for but the administrative file cannot be located after a reasonable number of requests, the attorney should inform the appropriate management officials in order to determine how next to proceed.

35.2.2.2.9  (08-11-2004)
Prayer

  1. Each answer concludes with a prayer for relief. The standard form of the prayer is to be used in all cases in which there are no issues on which the respondent has the burden of proof. If the case contains issues as to which the respondent has the burden of proof (including increased deficiencies) or as to which respondent has taken alternative positions, the prayer should contain a request as to each such item. The answers in the exhibits set forth the types of prayers to be used in various circumstances.

35.2.2.3  (08-11-2004)
Response to Petitioner’s Allegations

  1. This subsection discusses the response to the petitioner’s allegations.

35.2.2.3.1  (08-11-2004)
Address of Petitioner

  1. In considering whether to admit or deny an allegation as to petitioner’s principal place of residence, the requirement that the statutory notice of deficiency must be mailed to the petitioner’s last known address should be considered and care must be taken to avoid an unintended admission on the allegation that might be incorrect and prejudicial. For venue purposes on appeal, petitioner’s legal residence as of the date the petition was filed with the Tax Court should be established in the case of a petitioner other than a corporation. In the case of a corporate petitioner, the location of its principal place of business or principal office or agency as of the date the petition was filed with the Tax Court should be established. Any allegation that venue on appeal would lie in a particular circuit should be denied as a conclusion of law.

35.2.2.3.2  (08-11-2004)
Admission or Denial of Allegations Concerning Statutory Notice of Deficiency

  1. It is important that the pleadings establish whether the copy of the statutory notice of deficiency which is attached to the petition is correct. If the statutory notice attached to the petition is correct in all respects except with respect to the date issued or other minor error that does not affect the court’s jurisdiction, such error may be corrected by a partial denial and an affirmative allegation in response to the petitioner’s allegation. If the petition alleges the attachment of the statutory notice and an incomplete copy of that document (usually only the face page) is attached, the answer should deny the allegation and allege affirmatively that a complete copy of the statutory notice is attached as an exhibit to the answer.

35.2.2.3.3  (08-11-2004)
Allegations Concerning Tax Returns

  1. If the petitioner is a corporation that has no principal place of business or principal office or agency in any judicial district, the Area Director’s office where its tax return was filed determines venue on appeal. In such cases, the pleading should establish in which Area Director’s office or service center campus the return was filed. Reference is always made to the principal office of the Area Director and not a suboffice within the area even though the return may have been handled or mailed to a suboffice.

  2. Before either admitting or alleging the filing of a return for the tax and period involved, the attorney should examine such return and determine whether it fulfills the statutory requirements of a return. A document on the appropriate return form which does not fulfill the statutory requirements, such as the statutory requirement for execution, is not a return, and any allegation in the petition that a return was filed should be denied. The filing of a statutory return is essential, not only to establish venue in certain instances, but also to determine whether any statutory deficiency exists, any overpayment of tax is barred by the statute of limitations, as well as whether the statute of limitations has started to run on the assessment and collection of the deficiency or liability. For statute of limitations purposes it is also essential that the filing date of a statutory return be established.

  3. The attorney should also examine each return involved to determine that it was timely filed. See IRC §§ 6501(b) and 6513(a) for the presumptive date of the filing of returns. Ordinarily, calendar year income tax returns are not stamped with the received date if such returns are timely filed but are stamped if filed after the due date. To admit the filing date of the return or returns involved, as alleged by petitioner, the allegation as to such date must always be either the actual date of filing, if the return in fact bears the receipt date, or the presumptive date of filing, as applicable. If the petitioner’s allegation as to the date of filing is incorrect, such allegation must be denied and the correct date of filing alleged.

  4. Since the date of filing a return is an essential element with respect to an issue raised by the petitioner on the timeliness of the issuance of the statutory notice, care must be exercised in the admission of this fact. The rule is that the filing date alleged in the petition, if correct, should be admitted, except for compelling reasons under the particular facts of the case.

35.2.2.3.4  (08-11-2004)
Amount in Dispute

  1. Care should be taken in admitting the amount of taxes in controversy. The amount alleged in the petition should not be admitted unless it is clearly correct. As a general rule, the amount of taxes in dispute as alleged in the petition should be the amount of taxes of the kind and for the years determined in the statutory notice (and which are placed in controversy in the petition) plus any increased deficiency or liability claimed in the answer. If not all of the adjustments in the statutory notice are placed in controversy in the petition, it is advisable in the answer to show the court the amount of the deficiency and penalty as determined in the statutory notice, and the fact that not all of said deficiency and penalty are in dispute. This is necessary since the court’s decision must determine the full deficiency, or full liability in transferee cases, even though part of such deficiency is not contested. If the petitioner claims an overpayment of tax, an admission should be made that such claimed overpayment is in dispute, but the correctness of the amount claimed should be denied. The reason for this is that it is difficult to determine without a recomputation whether the amount claimed as an overpayment by the petitioner is correct even if the issue will be decided in petitioner’s favor.

35.2.2.3.5  (08-11-2004)
Assignments of Error

  1. The assignments of error in the petition should be compared with the adjustments shown in the statutory notice. If all of the adjustments are not covered by assignments, this is an indication that part of the tax asserted in the notice is admitted to be due. In this instance, the decision will need to be filed under T.C. Rule 155 if any of the assignments of error are decided favorably to the petitioner since some tax would still be due. If the assignments of error cover not only all adjustments in the statutory notice but also some other items, this is an indication that the petitioner is seeking an overpayment of tax even though not specifically stated in the petition. If any of the assignments of error do not pertain to adjustments for determining the correct tax liability, a motion to strike may be proper prior to the preparation of the answer. Such improper allegations of error in most instances, however, may be adequately handled by a denial without the filing of a motion to strike.

  2. Some of the reasons for possible admissions of error are: the statutory notice when issued was contrary to the Service’s position; facts established after issuance of the notice may not support the factual or legal conclusion which was the basis for the statutory determination; changes in statutory law, regulations or rulings; change in Service position caused by announced acquiescence in a Tax Court case, acceptance of district court or appellate court case, or decision by the Supreme Court after the statutory notice; or an alternative determination to be alleged in the answer requires abandonment of the statutory notice position.

  3. If an adjustment in the statutory notice to which an error is assigned is consistent with Service position but the attorney is of the opinion that the case should not be presented under the circumstances, no concession of such issue, in whole or in part, shall be made without first obtaining approval from the appropriate Division Counsel and Associate offices.

35.2.2.3.6  (08-11-2004)
Petitioner’s Allegations of Fact

  1. The petitioner’s allegations of fact should be with respect to the assignments of error. As such, the portion of the answer dealing therewith usually contains an admission or denial of the facts alleged in the petition. To correct or to complete the facts alleged in the petition, it may be necessary to allege affirmative facts in this portion of the answer. Respondent’s affirmative case, however, should not be alleged in the responsive paragraphs to petitioner’s allegations.

35.2.2.3.7  (04-13-2012)
Claim for Attorney’s Fees

  1. For a general discussion of claims for attorney’s fees, see CCDM 35.10.1, Awards of Litigation and Administration Costs and Fees.

  2. When a petition, other than a petition for administrative costs pursuant to T.C. Rule 271, requests an award of litigation or administrative costs, the following procedure will be employed. A motion to strike under T.C. Rule 52 shall not be filed even though T.C. Rule 34 provides that a claim for reasonable litigation costs shall not be included in the petition. The answer should contain the following appropriate responses:

    • A general denial that petitioner is entitled to an award for reasonable litigation or administrative expenses

    • An allegation that the request is premature since T.C. Rule 34 provides that such claims shall not be included in the petition

    • If the petition requests the award of litigation or administrative costs in the prayer, respondent should add to the prayer in the answer a statement to the effect that the petitioner is not entitled to litigation or administrative costs and that such a request, in any event, is premature

  3. If the petition is filed under IRC § 7430(f)(2) as an appeal from an administrative denial (in whole or in part) of an award of administrative costs, an answer in conformity with T.C. Rule 272 must be filed. Such answers must be submitted to the Associate Chief Counsel (P&A), Branch 5, for review. see CCDM 35.10.1, Awards of Litigation and Administration Costs and Fees.

35.2.2.3.8  (08-11-2004)
Shift in Burden of Proof - Section 7491

  1. IRC § 7491(a) places the burden of proof on the Service in any court proceeding involving a factual issue if an eligible petitioner introduces credible evidence with respect to the factual issue relevant to ascertaining the petitioner’s tax liability and meets certain requirements. Allegations in the petition that the burden of proof is on the Service under IRC § 7491(a) are premature. Hence, attorneys need not respond to a IRC § 7491(a) pleading with affirmative allegations. The allegation may be denied if it is clear that the petitioner has failed to meet any requirement of the statute. Sample answer paragraphs are shown below. Attorneys should not file answers in "S" cases merely because the petition alleges that IRC § 7491(a) applies.

  2. IRC § 7491(b) places the burden of proof on the Service in any court proceeding where the Service reconstructs a petitioner’s income solely through the use of statistical information of unrelated taxpayers. IRC § 7491(b) does not apply where Bureau of Labor Statistics or Consumer Price Index data merely supplements information regarding the petitioner’s income. If the administrative file shows that the determination of income was not based solely on statistics from third parties, the attorney should deny that the respondent has the burden of proof under IRC § 7491(b) in the answer.

  3. IRC § 7491(c) provides that the Service shall have the burden of production in any court proceeding relating to the appropriateness of applying penalties, additions to tax and additional amounts imposed by the Code to the petitioner. Since IRC § 7491(c) does not place the burden of proof as to penalties on the respondent, no affirmative allegations are required in the answer. Note that IRC § 7491(c) by its terms applies only to an individual petitioner.

  4. Set forth below are some sample answer paragraphs responding to IRC § 7491 allegations:

    1. If petition alleges generally that IRC § 7491(a) applies:
      "Neither admits or denies; a determination of the application of I.R.C. § 7491(a) is premature based upon the pleadings."

    2. Where IRC § 7491(a) does not apply due to the date the examination commenced:
      "Denies; alleges that the examination commenced on [date], which date precedes July 22, 1998, the effective date of I.R.C. § 7491(a)."

    3. Where IRC § 7491(a) does not apply because the issue is a legal issue:
      "Denies; alleges that [describe issue] is a legal issue, not a factual issue and, therefore, I.R.C. § 7491(a) is not applicable."

    4. Where the Service relied on BLS or CPI data as a component for a net worth construction of income:
      "Denies; alleges that the determination was not based solely on third party statistics because Bureau of Labor Statistics figures were used only as a component of the net worth construction of petitioner’s income."

    5. Where the petitioner is a corporation that does not meet the net worth requirements:
      "Denies; alleges that the petitioner’s net worth is in excess of $7,000,000.00 [or has more than 700 employees]."

    6. Where the petition asserts that the Service bears the burden of proof on a penalty, addition to tax or additional amount:
      "Denies; admits that pursuant to I.R.C. § 7491(c), the Commissioner bears the burden of producing evidence to support the application of the [penalty, addition to tax or additional amount]; alleges that the petitioner bears the burden of proof with respect to all defenses to the application of the [penalty, addition to tax or additional amount]."

35.2.2.3.9  (08-11-2004)
Affirmative (New) Issues

  1. For docketed cases the term affirmative issue or new issue, as used herein, may be defined as an issue raised in the answer or amended answer which was not one of the adjustments in the statutory notice. An affirmative issue also includes all issues which result in increased deficiencies as well as alternative issues or positions conflicting with the adjustments set forth in the statutory notice. It does not include: affirmative pleadings required for issues upon which the burden of proof is placed by statute upon the Service; matters alleged for affirmative defense, such as exceptions to the statute of limitations, res judicata, and estoppel; or most matters of further defense such as additional grounds in support of the statutory adjustments, or further defense to positions, theories, or qualifications of fact alleged by the petitioner. See CCDM 35.4.1.2, Raising New Issues in Tax Court Cases, for a discussion of when it is appropriate to raise a new issue.

  2. Upon review of the statutory notices, preparation of pleadings, and litigating positions of the office, the attorney has the responsibility to bring to the supervisor’s attention any affirmative issue necessary for a proper determination of the tax liability of the transactions involved in accord with the current Service position, whether or not such issue or position or theory was previously considered by the revenue agent or by Appeals.

35.2.2.4  (08-11-2004)
Affirmative Allegations

  1. The respondent must plead affirmatively as to any issue upon which the Service has the burden of proof at the trial, or as to facts which will be relied upon for defense of the statutory determination or for affirmative relief. Some of the matters upon which the answer must contain affirmative allegations are:

    • Issues upon which the respondent has the statutory burden of proof, such as fraud (including fraud delinquency), transferee liability, and corporate accumulated earnings tax (IRC § 534)

    • Affirmative relief issues, such as claim for an increased deficiency or liability, new issues or matters not included within the scope of the statutory notice, alternative positions, correction of errors of commission, or corrections of omissions in the statutory notice requiring the presentation of different evidence

    • Affirmative defenses such as exceptions to the statute of limitations, res judicata and estoppel

    • Additional grounds or further defenses in support of the statutory notice adjustments or qualification of facts alleged by petitioner

  2. If a petitioner has not assigned error to a fraud or transferee issue (normally requiring affirmative allegations), the attorney should not make affirmative allegations with respect to those issues. Before answering, however, the attorney should consider contacting petitioner or petitioner’s counsel if there is any question whether the failure to assign error was intentional. If not intentional, petitioner’s counsel should be requested to immediately file an amended petition. If petitioner’s counsel does not thereafter amend within a reasonable time, the attorney should consider filing a motion for partial summary judgment or proposing a stipulation as to the undisputed issue. The motion cannot be filed until at least 30 days after the case is at issue. Also in the amount in dispute paragraph, respondent should affirmatively allege that petitioner is not contesting or has conceded the issue. The prayer should include the undisputed penalty (or transferee liability).

  3. T.C. Rule 40 requires that the respondent must plead every defense to claims for relief set forth in a pleading, which would include matters and facts which support the statutory determination but are not set forth in the statutory notice. This situation may be illustrated as follows: The statutory notice sets forth one ground for the adjustment in the determination. A second or third ground is also to be urged in support of the same determination at the trial. Before the court can consider the other grounds in deciding the issues, respondent must first plead such other grounds or otherwise satisfy the requirements of the court’s rules for considering issues not raised by the pleadings. See T.C. Rule 41(b).

35.2.2.4.1  (04-11-2013)
Manner of Alleging Affirmative Facts

  1. Affirmative facts, particularly in fraud and transferee cases, must be alleged in a proper manner. Many facts in respondent’s case are susceptible of admission by the petitioner if properly alleged. Thus, as a general rule, each single fact should be alleged in a separate subparagraph in a concise and straightforward manner without coloring and without interpretation. This will permit the petitioner’s reply to admit such facts without committing the petitioner to the conclusion to be drawn therefrom. Ultimate facts, conclusions, and allegations of fraudulent elements of intent to evade tax must be set forth in separate paragraphs from allegations of facts upon which such conclusion is based. If multiple allegations of facts are combined in one paragraph, or are combined with allegations of fraud, intent to evade, ultimate facts, or conclusions, the reply most likely will deny such allegations due solely to the manner by which uncontested facts are alleged. In such instance, any motion contesting the adequacy of the reply will generally be ineffective.

  2. The only facts established by the statutory notice of deficiency are the deficiency or liability determined and the basis upon which it was determined. Therefore, attaching a copy of the statutory notice does not relieve the respondent from pleading the required affirmative facts in the answer.

  3. Exhibits attached to the answer, such as net worth schedules, may, if appropriately incorporated as part of the answer proper, be used in appropriate instances in lieu of separate allegations. If, however, there are particular items in the schedules to which a definite and specific reply is sought in the petitioner’s reply, it is the better practice to allege specifically in the answer proper the facts with respect to such item or items; otherwise, difficulties may be encountered in the filing of a motion directed to petitioner’s reply for a specific admission, qualification, or denial with respect to the alleged assets or liabilities involved. When schedules attached to the answer are to be used, in whole or in part, as allegations of specific assets or liabilities or other matters, care must be used in the wording in the answer proper with respect to such schedules. A common error is to allege that the schedule attached hereto as Exhibit A shows the net worth computation of the petitioner for the period [date] to [date2]. This is not an allegation that the petitioner did in fact have the assets and liabilities or other matters included on such schedule, but is simply an allegation as to the method of computation, and is not an allegation of the specific facts involved.

    1. The proper form for this type of allegation would be in language similar to the following:
      "There is attached as Exhibit A, which is incorporated by reference and made a part hereof, a net worth statement of the assets and liabilities of the petitioner for the period [date] to [date2]; that the petitioner did in fact on the dates specified in Exhibit A have the specific items of assets and liabilities in the various amounts as set forth therein."

35.2.2.4.2  (09-24-2012)
Statute of Limitations

  1. Affirmative pleadings with respect to the statute of limitations need not be included in the answer unless the petition raises the statute of limitations as a bar to the assessment and collection of the deficiency or liability. If the petition, directly or indirectly, raises the statute of limitations issue, the answer must contain affirmative allegations with respect thereto. See IRC §§ 6501 to 6504 for statutory limitations on assessment and collection.

  2. The defense of the exception to the usual three-year statute of limitations may be based upon any or a combination of the following:

    • Valid waivers (agreements extending the statutory period) have been secured (see Exhibit 35.11.1-15, Answer — Affirmative Allegations: Statute of Limitations — Waivers or Consents as Defense, and Exhibit 35.11.1-16, Answer — Affirmative Allegations: Statute of Limitations — Waivers or Forms 872A as Defense)

    • Facts falling within IRC § 6501(e) (see Exhibit 35.11.1-13, Answer — Affirmative Allegations: Statute of Limitations — 25% Omission as Defense)

    • Facts showing no valid return was filed, (see Exhibit 35.11.1-14, Answer – Affirmative Allegations: Statute of Limitations — Delinquency as Defense)

    • Facts showing fraud (see Exhibit 35.11.1-12, Answer — Affirmative Allegations: Statute of Limitations — Fraud as Defense)

    • Facts which bring the case within any other section of the Code which provides for the extension or suspension of the running of the statute of limitations

  3. If more than one exception exists with respect to the running of the statute of limitations, all defenses should be pleaded and all facts necessary to sustain each exception relied upon must be fully pleaded. If fraud is an exception to be relied upon, facts evidencing fraud must be specifically pleaded in defense of the statute of limitations as well as to support the fraud penalty. The necessary detailed allegations required in this portion of the answer may be made by incorporating by reference the allegations with respect to the fraud penalty.

  4. When petitioner raises a statute of limitations issue and respondent answers that no valid return was filed, respondent should obtain a Form 4340, Certificate of Assessments and Payments (transcript of account), and Certificate of Non-Filing to submit as evidence that respondent has no record of having received petitioner’s return. See Bruder v. Commissioner, T.C. Memo, 1989–328; see also Buttke v. United States, 13 Cl. Ct. 191 (1987). Note that additional proof may be required in jurisdictions which recognize the common law mailbox rule. In particular, the court may require a showing by respondent that the Service did not lose the return between the time of its receipt and the time it would have been recorded as received.

35.2.2.4.3  (08-11-2004)
Collateral Estoppel and Res Judicata

  1. [Reserved]

35.2.2.4.4  (08-12-2010)
Collateral Estoppel in Fraud Cases with Prior Criminal Conviction

  1. In general, the case should be carefully evaluated to determine whether collateral estoppel may be pleaded as to any year pending in the Tax Court if for the same year a judgment of conviction for criminal tax evasion of the same tax has been entered against the petitioner, or the officers of a corporation for the criminal tax evasion of the same tax of a corporate petitioner.

35.2.2.4.4.1  (09-24-2012)
Elements of Civil and Criminal Fraud and General Rules

  1. Collateral estoppel should not be pleaded if the judgment of conviction is based upon a nolo contendere plea. Blohm v. Commissioner, 994 F.2d 1542, 1554 (11th Cir. 1993); Yarbrough Oldsmobile Cadillac, Inc. v. Commissioner, T.C. Memo. 1993-20. A "nolo" plea and resulting conviction can be used for impeachment purposes, however. Fed. R. Crim. Proc. 11(f); Fed. R. Evid. 410; Hicks v. Commissioner, 56 T.C. 982, 1027, aff’d, 470 F.2d 87 (1st Cir. 1972). For the purposes of applying collateral estoppel, a conviction can be based either upon a trial on the merits or a guilty plea. Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir. 1983); Moore v. Commissioner, T.C. Memo. 2001-77. Collateral estoppel is not applicable with respect to the petitioner's individual tax liability, if the petitioner is an individual who has been convicted for evasion of a corporate tax only. If it is concluded that collateral estoppel should be pleaded, the supporting facts should be pleaded in the answer in support of the civil fraud penalty.

  2. To support collateral estoppel, there should be a showing that a court of competent jurisdiction has entered a final judgment of conviction, other than one based upon a nolo contendere plea, in a case between parties who are the same as, or in privity with, the parties to the Tax Court case, and that the facts or issues were either presented and actually determined in the prior criminal case, or were essential to support the judgment entered therein. See Exhibit 35.11.1-17, Answer — Collateral Estoppel — General. Collateral estoppel applies to establish liability for the addition to tax for fraud, and to establish any other facts or issues actually determined in the criminal case or essential to support the judgment therein, such as the existence of an understatement of tax which is due to fraud. Collateral estoppel is premised upon the judgment entered in the other case. The judgment of conviction, as well as the indictment or information, should be either set forth verbatim in the answer or a copy thereof attached as an exhibit to the answer.

  3. It is well established that a conviction for criminal tax evasion under IRC § 7201 after a trial on the merits (or a guilty plea) collaterally estops the convicted taxpayer from subsequently denying the specific intent requirement of civil fraud under IRC § 6663. See Amos v. Commissioner, 43 T.C. 50 (1964). Because a criminal conviction under IRC § 7201 does not require the determination of an exact tax liability (see Moore v. United States, 360 F.2d 353, 356-57 (4th Cir. 1965); Wapnick v. Commissioner, T.C. Memo. 1997-133), the petitioner is not estopped from disputing the amount of the underpayment. A conviction under IRC § 7201 based on failure to file a return will constitute collateral estoppel for the fraud delinquency penalty provided by IRC § 6651(f). Madge v. Commissioner, T.C. Memo. 2000-370, aff’d by unpub. opin., 23 Fed Appx. 604 (8th Cir. 2001); Unger v. Commissioner, T.C. Memo. 2000-267; Wallace v. Commissioner, T.C. Memo. 2000-49.

  4. A conviction under IRC § 7203 for willfully failing to file tax returns may be used to prevent a petitioner from challenging the addition to tax under IRC § 6651(a)(1) for failure to file. See Kotmair v. Commissioner, 86 T.C. 1253 (1986). A conviction under IRC § 7203 does not, however, constitute collateral estoppel as to the fraud delinquency penalty under IRC § 6651(f). Wilkinson v. Commissioner, T.C. Memo. 1997-410. If the taxpayer has been convicted under IRC § 7203, collateral estoppel and summary judgment procedures similar to those described below with respect to IRC § 7206(1) convictions should be followed to narrow the issues in a Tax Court case involving the fraud delinquency penalty.

  5. For a conviction under IRC § 7206(1), the government must prove that the taxpayer: (1) filed a return, statement, or other document that was false as to a material matter; (2) signed the return, statement, or other document under penalty of perjury; (3) did not believe the return, statement, or other document was true as to every material matter; and (4) willfully subscribed to the false return with the specific intent to violate the law. United States v. Hanson, 2 F.3d 942, 945 (9th Cir. 1993). A criminal conviction under IRC § 7206(1) for willfully filing a false return does not estop the petitioner from challenging a civil fraud penalty in the year of the conviction. See Wright v. Commissioner, 84 T.C. 636 (1985). The holding in Wright is based on the fact that the element of intent to evade tax is present in IRC § 6663, but not in IRC § 7206(1). Although not conclusive as to fraud, the conviction is admissible as evidence of fraud. Wright at 643-44. The conviction does estop the petitioner from denying that petitioner willfully filed false income tax returns.

    Note:

    The issue in Wright involved former IRC § 6653(b), the predecessor to IRC § 6663.

    Note:

    The term "intent to evade tax" is synonymous with "fraud." See Mitchell v. Commissioner, 118 F.2d 308, 310 (5th Cir. 1941) ("Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing." ).

35.2.2.4.4.2  (09-24-2012)
Pleading Collateral Estoppel

  1. Collateral estoppel is an affirmative defense that must be pled in the answer. Because the respondent bears the burden of proof with respect to fraud, affirmative allegations supporting fraud must also be pled in the answer. Thus, for cases involving both conviction and nonconviction years, it is essential to plead adequately all facts supporting the fraud penalty for the nonconviction years. Even though collateral estoppel applies to the conviction years, the factual evidence of fraud in the year or years covered by estoppel is admissible for the purpose of establishing a pattern consistent with the arguments for the years not covered by collateral estoppel. Thus, in that type of case, and particularly in cases involving net worth determinations or cases in which it is necessary to show a pattern of tax omission, the facts evidencing fraud should be pleaded for all years. See Exhibit 35.11.1-17, Answer — Collateral Estoppel — General, and Exhibit 35.11.1-22, Answer — Affirmative Allegations: Fraud — Collateral Estoppel as to Tax Year; Williams v. Commissioner, T.C. Memo. 1991-521.

  2. If the original answer is filed prior to the indictment or disposition of the related criminal case, an amended answer, together with a motion for leave to file, should be filed in order to plead the facts as may be appropriate as a result of the disposition of the related criminal case.

35.2.2.4.4.3  (09-24-2012)
Narrowing the Issues for Trial — Pleadings Based on a Section 7206(1) Conviction

  1. If a taxpayer is convicted under IRC § 7206(1) for willfully misstating a matter on a return that affects the computation of the tax owed, the conviction may be used to narrow the issues for trial in the Tax Court. If the willful misstatement was a willful underreporting of income, collateral estoppel should be pled to establish the fact that the petitioner willfully underreported income. Once that fact is established, the petitioner may not defend against a finding of fraud by contending that he did not willfully underreport income. Miller v. Commissioner, T.C. Memo. 1989-461. Furthermore, it may be argued that the obvious purpose and the result of willfully underreporting income is to intentionally avoid paying tax known to be due on the omitted income.

  2. If the basis of a conviction under IRC § 7206(1) was overstated deductions or some other factual basis with a direct nexus to the petitioner’s tax liability, an analogous analysis applies. Collateral estoppel should be pled to establish the factual basis — e.g., the overstatement of deductions — and thereby preclude the petitioner from arguing facts that are inconsistent with the factual basis of the IRC § 7206(1) conviction.

  3. The criminal case will have collateral estoppel effect in the civil case only with respect to the facts that were necessary to support the criminal conviction as charged in the indictment or information. For example, if the petitioner had been convicted of violating IRC § 7206(1) by filing a false return that understated income, the conviction would not collaterally estop the petitioner from claiming that disallowed deductions were not willfully overstated or that some portion of unreported income was not willfully underreported. Accordingly, case analysis and development should establish whether the civil case involves disputes over types of income, deductions, or other tax items that were not necessarily decided in the criminal case.

  4. Collateral estoppel should be pled in the answer, and should include that the petitioner is collaterally estopped from claiming not to have known at the time the return was filed that the return understated income, overstated deductions, or included or excluded some other tax item, as appropriate based on the petitioner’s conviction. See Exhibit 35.11.1-233, Answer — Affirmative Allegations: Civil Fraud Penalty — Collateral Estoppel of Certain Issues After a Criminal Conviction under IRC 7206(1).

  5. A copy of the indictment (or bill of information), the judgment and conviction (or plea agreement), the closing statements, the jury charges, and the jury verdicts from the criminal case should be obtained. The indictment and judgment and conviction should be set forth verbatim in the answer or attached as an exhibit to the answer. If the criminal case was appealed, a citation to the appellate opinion should also be included in the answer.

35.2.2.4.4.4  (08-12-2010)
Motions for Summary Judgment

  1. The fact that the petitioner intended to evade tax will need to be established by clear and convincing evidence. The fact that the petitioner knowingly and willfully understated income (or overstated deductions, etc.) should be in the record. This fact would have been established during the criminal proceedings, and the petitioner will be collaterally estopped from denying this fact in the Tax Court proceeding.

  2. The link between the petitioner’s understatement of income (or overstatement of deductions, etc.) and the petitioner’s knowledge that an understatement of income (or overstatement of deductions, etc.) on the return would results in an underreporting of tax liability must be established.

  3. The petitioner’s tax and financial background, educational level, and general business sophistication must be established through stipulations, admissions, interrogatories, and other discovery methods. The more educated, knowledgeable, experienced, and sophisticated a petitioner is, the less likely the petitioner failed to understand the link between understatement of income (or overstatement of deductions) and underreporting of tax.

  4. Once sufficient facts are established to show that the petitioner knew the willfully false statement on the tax return would result in an underpayment of tax and, therefore, intended to avoid or evade tax at the time the false statement was made, a motion for summary judgment, or partial summary judgment, as appropriate, should be filed. The motion for summary judgment should include the following general arguments: First, the petitioner knowingly understated income. Second, Facts A, B, and C, established by joint stipulations, admissions, etc., show that the understated income that was the basis of the false return in the petitioner’s criminal case is the same as the understated income leading to the underreporting of tax liability in this Tax Court case. Third, Facts X, Y, and Z, established by joint stipulations, admissions, etc., show that the petitioner knew at the time the return was filed that an understatement of income would result in an underreporting of tax liability. Fourth, a prima facie showing of fraud under IRC § 6663 is established. Therefore, unless the petitioner can come forward with evidence to rebut the prima facie showing, the requisite intent to evade tax exists, and the court should find the petitioner liable for the IRC § 6663 fraud penalty.

35.2.2.4.5  (08-11-2004)
Alternative Pleading Shifting Items or Bases of Determination

  1. Where there are two or more years before the Tax Court, petitioner’s allegations may shift income from one year to another year, or may claim a deduction in one year which has been allowed in another year. For example, a salary included in an earlier year in the statutory notice on a constructive receipt basis is claimed to be taxable in the later year of actual receipt.

  2. In some instances the statutory notice is determined upon either a factual or legal basis which results in the greatest taxable income, but the government is also contending for a deficiency or liability upon alternative facts or upon an alternative legal basis. It is necessary in these instances to plead affirmatively the alternative positions of the respondent. This may be illustrated by a situation in which in the statutory notice of deficiency an item was capitalized and depreciation allowed thereon; in the petition this item is claimed as an expense deduction in full. Thus, there must be pleaded in the alternative that if the petitioner is correct and the item should be expensed, then the depreciation deduction allowed in the statutory notice should be disallowed.

  3. In many instances the facts which formed the basis for the shifting of income or deductions or the shifting of the basis of a determination which results in the necessity for alternative pleadings, are not developed when the statutory notice is petitioned. Because of the relevance limitation in the Tax Court’s discovery rules, a petitioner may attempt to limit the possible alternative positions that the government might pursue through discovery that are not set forth in the pleadings. Therefore, the attorney should be alert to cases where there is the necessity of pleading in the alternative particularly where it is necessary to factually develop the issue through discovery.

35.2.2.4.6  (09-24-2012)
Pleading Negligence or Delinquency as Alternative to Fraud

  1. Under IRC § 6662(b) (for years after 1989), the negligence penalty and other accuracy-related penalties may not be imposed on any portion of an underpayment to which the fraud penalty applies. Furthermore, no accuracy-related penalty or fraud penalty may be imposed where the taxpayer has not filed a return (other than the fraudulent failure to file penalty). IRC § 6664(b). For years after 1989, the delinquency penalty may be imposed in addition to the fraud or accuracy-related penalty if the taxpayer files his return late and on his late-filed return there is an underpayment attributable to fraud, negligence, or other penalized conduct. Also, if the taxpayer failed to file a tax return, the delinquency penalty may be asserted as an alternative to the IRC § 6651(f) fraudulent failure to file penalty. See Exhibit 35.11.1-21, Answer — Affirmative Allegations: Fraud — Alternative Negligence and Delinquency Penalties.

35.2.2.4.7  (08-11-2004)
Pleading Delinquency as a New Issue

  1. It is the general policy of the Office of Chief Counsel not to raise the delinquency penalty as a new issue after the case is pending in the Tax Court in instances in which the prescribed tax return form, accompanied by proper payment of tax, was timely filed, even though the return form does not legally constitute a return due to a failure to sign or properly execute the return form and the facts clearly negate either willful intent to disobey the statute or gross negligence. Raising a delinquency penalty as a new issue may be necessary, however, if the defect on the return is to be relied upon as a defense to the statute of limitations, for example, on the basis that the period of limitations did not begin because a valid return had not been filed.


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