Well, the same thing happened in a pending conservation easement case, Buckelew Farm LLC et. al. v. Commissioner, No. 14273-17. In Buckelew Farm, the petitioner filed a Tax Court petition in June 2017 and after the IRS filed its answer, the court ordered discovery. In February 2021, after months of contentious discovery disputes, the IRS filed a motion to amend its answer alleging, for the first time, that the understatement of tax on one of the tax returns at issue was due to fraud under IRC Section 6663(a). The IRS motion said that during discovery, it determined that the manager of the managing member limited liability company fraudulently overstated the value of the donated easement at issue and took steps to conceal its true value. The petitioner objected to the IRS motion for leave arguing that the IRS had ample opportunity to develop the case during the examination and that petitioner would suffer unfair surprise and/or prejudice as a result of the amendment. The petitioner also noted that the IRS was raising the civil fraud claim almost four years since the original petition was filed and after the parties had conducted substantial and expensive discovery. The Tax Court did not agree with any of the petitioner’s objections, granted the motion for leave and denied petitioner’s motion for immediate appeal of the ruling.
What is not addressed in the order is the application of IRC Section 6751(b)(1). Readers will recall that pursuant to Section 6751(b)(1), certain penalties, including the civil fraud penalty, must be “personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” In Wegbreit, the parties stipulated that the IRS had obtained the written penalty approval required by Section 6751(b)(1). I will have to do some more digging to determine if the parties similarly stipulated in Buckelew. A review of the docket sheet shows the parties sparring on almost every issue, so I would be surprised to see any agreement regarding Section 6751(b)(1). I am also interested to know how a supervisor’s timely penalty approval is obtained four years after the petitioner files a Tax Court petition.
The lesson from Wegbreit and Buckelew is that an IRS Notice of Deficiency does not foreclose the IRS from raising new issues in a Tax Court case. Filing a petition in the Tax Court allows the IRS an opportunity to propose new substantive issues involving tax or penalties. If the IRS does so, it will bear the burden of proof on those issues; however, the IRS has the burden of proving civil fraud whether it is initially proposed in the Notice of Deficiency or raised in a subsequent answer.
For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or firstname.lastname@example.org.