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). In addition, when the Commissioner raises a new theory, courts have required taxpayers to demonstrate surprise and disadvantage.
A taxpayer's gross income normally does not include money paid into escrow because the taxpayer lacks “complete dominion” over the sum. Ware v. Comm'r, 906 F.2d 62, 65 (2d Cir. 1990). The total penalty would be $6,850,195 if the Court deducted the money paid into Account 96655.
Id. (quoting Ware v. Comm'r, 906 F.2d 62, 65 (2d Cir. 1990)). But this principle does not come into play because "Tarpey did not maintain a true escrow arrangement," as he "exercised 'complete dominion' over Account 6655, as evidenced by the comingling of funds from multiple donors and frequent bulk transfers."
It is true that income is generally not taxable if the taxpayer has no dominion or control over the proceeds — for example, where (as here) the proceeds are held in escrow. Comm'r v. Indianapolis Power Light Co., 493 U.S. 203, 209, 110 S.Ct. 589, 107 L.Ed.2d 591 (1990); Ware v. Comm'r, 906 F.2d 62, 65 (2d Cir. 1990). But the principle is one of deferment, not of exemption.
While early notice of the Commissioner's legal theory is certainly preferable to late, "the Commissioner does not necessarily forfeit his right to rely on a theory by failing to raise it at the preferred times." Ware v. Comm'r, 906 F.2d 62, 65 (2d Cir. 1990). The question is whether the timing of the argument specifically prejudices the taxpayer.
These principles apply to issues of fact. For matters of legal theory, the underlying rules appear in substance the same; although there is no pleading to be amended, the key constraint is still avoidance of prejudice to the adversary. Normally the Tax Court will not consider arguments raised for the first time in a post-trial brief, see, e.g., Sundstrand Corp. v. Commissioner, 96 T.C. 226, 347-49, 1991 WL 18180 (1991), and it is reversible error for it to do so where the opposing party is prejudiced. Baird v. Commissioner, 438 F.2d 490, 493 (3rd Cir. 1971); cf. Centel Communications Co. v. Commissioner, 920 F.2d 1335, 1340 (7th Cir. 1990) (noting that Tax Court "consistently has refused to consider issues first raised in the parties' post-trial brief when surprise and prejudice are found to exist"); Ware v. Commissioner, 906 F.2d 62, 65 (2nd Cir. 1990) (Tax Court may rely on a theory not raised until post-trial briefs "unless [the] theory is precluded by the pleadings, or its late introduction specifically prejudices the opposing party in presenting its case"). NALU argues that the Commissioner's last-minute offer of her new contention or theory was indeed prejudicial.
The Court deferred initial review as to the claims asserted on Steven's behalf as well as those asserted on Plaintiff's own behalf because the claims are intertwined and to some extent derivative, and the Second Circuit has instructed that no issues concerning litigation brought on an incompetent's behalf should be decided until the counsel issue is resolved. See Cheung, 906 F.2d 62. Plaintiff has filed a motion for the appointment of counsel so that he may pursue the litigation on behalf of Steven.
Where a taxpayer's would-be income is deposited in an escrow account beyond that taxpayer's reach, it generally should not be included in his taxable income. See, e.g., Indianapolis Power Light Co., 493 U.S. 203, 211 n. 7 (1990) (acknowledging Commissioner's concession that security deposits held by power company "would not be taxable if they were placed in escrow"); Ware v. C.I.R., 906 F.2d 62, 65 n. 2 (2d Cir. 1990) (fee not actually or constructively received by firm for tax purposes so long as held in escrow beyond firm's control); and Reed v.Comm'r, 723 F.2d 138, 149 (1st Cir. 1983) (taxpayer not required to report income held in bona fide escrow for payment in later tax period and from which no other present beneficial interest is derived). The United States argues, however, that "[t]he mere fact that the sale proceeds were paid into an escrow account that was held for the benefit of Grand Carting did not prevent . . . Grand Carting . . . from recognizing income from the sale in 1998."
Robert cannot have suffered any unfair prejudice or surprise from respondent's reliance on the same theory he disclosed before trial. See Ware v. Commissioner, 92 T.C. 1267 (1989), supplementing T.C. Memo. 1989-165, aff'd, 906 F.2d 62 (2d Cir. 1990). In any event, the Court is always free to apply the correct law to the facts before it.
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.