Deficiency notices must be specific.

• Author: Stein, Ronald A.
• Position: Tax deficiency

As a general rule, a taxpayer bears the burden of proof with respect to the items reported on his tax return. This long-standing rule reflects the practical recognition that a taxpayer (rather than the Service) ordinarily possesses the relevant facts. In Tax Court litigation, Tax Court Rule 142(a), however, carves out a notable exception to the general burden-of-proof rule, which provides that the IRS bear the burden of proof for any "new matter" that it raises before the court.

Shifting the burden of proof to the IRS for new matters may have little practical significance if a new matter embodies a purely legal issue. On the other hand, shifting the burden of proof may prove decisive when a new factual dispute is presented and evidence must be produced. The tactical objective in Tax Court litigation is to shift to the Service the burden of proof on any issue that later arises. The Tax Court can bar the IRS from raising a new matter if it is advanced so late as to prejudice the taxpayer's defense; see Achiro, 77 TC 881 (1981), or Stewart, TC Memo 1982-202 (holding that fair notice is required, and that the test is whether the party is surprised and disadvantaged).

Neither Rule 142(a) nor its underlying commentary defines the term "new matter." Instead, case law provides for a clearer understanding. A new adjustment qualifies; see Carter, TC Memo 1957-65, aff'd in part and rev'd in part on another issue, 257 F2d 595 (5th Cir. 1958) (to the extent that the new adjustment has the effect of increasing the deficiency asserted in the deficiency notice, Rule 142(a) specifically provides that the IRS bears the burden of proving that increase). Similarly, a new legal theory to support an existing adjustment may constitute a new matter; see Weaver, 32 TC 411 (1959). However, a long line of cases, has held that a new legal theory is not a new matter if it is not inconsistent with the language of the deficiency notice (the inconsistency test); see Sorin, 29 TC 959 (1958), aff'd per curiam, 271 F2d 741 (2d Cir. 1959); Abatti, 634 F2d 1385 (9th Cir. 1985); Reese, 615 F2d 226 (5th Cir. 1980); Spangler, 278 F2d 665 (4th Cir. 1960); Bailey, 90 TC 558 (1988), aff'd in part and rev'd and rem'd in part on other issues, 912 F2d 44 (2d Cir. 1990); Barbourville Bank Co., 37 TC 7 (1961); and Barton, TC Memo 1992-481.

The inconsistency test has encouraged the Service to write broadly worded notices (e.g., "You have not established your right to the claimed deduction...