Respondent also argues for the first time on brief that Mr. Rogers received $100,000 of the Multicred fee paid by PPI in 2005 and seeks to characterize it as a shareholder distribution taxable to the extent provided by application of the S corporation rules. The taxation of the $100,000 distribution is a new issue not properly raised before trial, and we will not consider it here. Dirico v. Commissioner, 139 T.C. 396, 416 (2012). With respect to the SRI deposit, SRI deducted the $710,366 as consulting fees.See infra Appendix D.
Because there are no facts to be found, only issues of law as applied to undisputed facts, it is unnecessary to assign burden of proof in this case. See, e.g., Dirico v. Commissioner, 139 T.C. 396, 402 (2012). II. Applicable Law
Although it is most appropriate for the Commissioner to assert his legal theories in the notice of deficiency, the answer, or his amended answer, the Commissioner is not necessarily barred from relying on new legal theories advanced later during the pendency of the proceedings. See Stewart v. Commissioner, 714 F.2d 977, 986 (9th Cir. 1983), aff'g T.C. Memo. 1982-209; Dirico v. Commissioner, 139 T.C. 396, 415-417 (2012); Ware v. Commissioner, 92 T.C. at 1269. Moreover, this Court has inherent authority to decide cases on grounds not raised in the notice of deficiency.
To the contrary, "it is always open to [the Tax] Court to apply the correct law to the facts before it." Dirico v. Comm'r, 139 T.C. 396, 416 (2012). Courts have allowed the Commissioner to raise new theories when the parties were already well into Tax Court proceedings. See Ware v. Comm'r, 906 F.2d 62, 66 (2d Cir. 1990) (declining "to adopt an ironclad rule that any legal theory surfacing in post-trial briefs may not be considered by the Tax Court"); Stewart v. Comm'r, 714 F.2d 977, 986 (9th Cir. 1983) (stating that it is preferable for the Commissioner to inform a taxpayer of legal theories in the notice of deficiency and the Tax Court answer, but the failure to do so does not necessarily result in forfeiture); Comm'r v. Transp. Mfg. & Equip. Co., 478 F.2d 731, 736 (8th Cir. 1973) (same as Stewart); see also Moore v. Comm'r, 106 T.C.M. (CCH) 483, at *5 (2013) (citing Stewart); Dirico, 139 T.C. at 415-16 (considering argument first raised in the briefs).
We will not allow respondent to raise the active participation requirement as a new issue posttrial because it would unduly prejudice petitioners. See Dirico v. Commissioner, 139 T.C. 396, 415-17 (2012). Accordingly, we treat petitioners as actively participating in their rental activities and hold that they may deduct $25,000 in real estate losses for 2013, 2015, and 2016, subject to the phaseout and threshold rules of section 469(i) as determined in the Rule 155 computation.
In any event, the Court is always free to apply the correct law to the facts before it. See Dirico v. Commissioner, 139 T.C. 396, 416-17 (2012).
However, we will not generally preclude him from advancing a new matter during the proceeding of the case unless the new matter would cause petitioner to experience unfair prejudice or surprise. Dirico v. Commissioner, 139 T.C. 396, 415-417 (2012); Ware v. Commissioner, 92 TC. 1267, 1269 (1989).
Petitioners are unfairly surprised and prejudiced by respondent's new position on brief to require JFLP to change to the accrual method of accounting. See Dirico v. Commissioner, 139 T.C. 396, 415-417 (2012); Ware v. Commissioner, 92 T.C. 1267, 1269 (1989), aff'd, 906 F.2d 62 (2d Cir. 1990). Accordingly, we find that respondent cannot now assert his authority under section 446 to change JFLP to the accrual method.
While it is most appropriate for the Commissioner to assert his legal theories in the deficiency notice or in his pleadings, he is generally not precluded from advancing a new matter during the proceeding of the case unless it would cause taxpayers to suffer unfair prejudice or surprise. Dirico v. Commissioner, 139 T.C. 396, 415-417 (2012); Ware v. Commissioner, 92 TC. 1267, 1269 (1989), aff'd, 906 F.2d 62 (2d Cir. 1990). The Pudlos were not unduly prejudiced or surprised by the argument that Watchman is a sham.
Because there are no facts to be found, only issues of law as applied to undisputed facts, it is unnecessary to assign burden of proof in this case. See, e.g., Dirico v. Commissioner, 139 T.C. 396, 402 (2012). II.