In Uncategorized on 08/17/2011 at 17:59

That’s the message Judge Haines delivers to the IRS, via a footnote, in Luis Bulas, 2011 T.C. Memo. 201, released 8/18/11.

My readers (bless you all) will remember my posting of 4/7/11, fetchingly entitled “Don’t Ambush the Indians”, where I discussed Judge Morrison’s rebuke to IRS, when IRS first raised an issue in its pre-trial memorandum. There, IRS didn’t give fair notice to the taxpayer via pleadings, so Judge Morrison, citing Rule 31(a), refused to let IRS try the issue. Judge Morrison had no occasion to invoke Rule 41(b)(1), the “implied consent” rule, that states whenever an issue is raised, even at trial, it can be tried by the parties if there is no unfair surprise, or if no party objects to trying the issue then and there.

But Lulu does object when IRS claims he double-counted his insurance deductions. The case arises out of disallowed business deductions, home office being the lead (and Lulu gets a partial win here); but IRS claims at trial that Lulu’s Schedule C deductions for insurance also appear in his deductions for car and truck expenses.

No fair, says Judge Haines, but in more refined language, and in a footnote. Footnotes are worth reading.

Judge Haines: “At trial respondent alleged that petitioner had double-counted car insurance expenses on Schedule C by including them in both car and truck expenses and insurance expenses. This issue was not raised in the pleadings. Rule 41(b)(1) provides that in appropriate circumstances, an issue that was not expressly pleaded but was tried by express or implied consent of the parties may be treated in all respects as if raised in the pleadings. LeFever v. Commissioner, 103 T.C. 525, 538-539 (1994), affd. 100 F.3d 778 (10th Cir. 1996). This Court, in deciding whether to apply the principle of implied consent, has considered whether the consent results in unfair surprise or prejudice to the consenting party and prevents that party from presenting evidence that might have been introduced if the issue had been timely raised. See WB Acquisition, Inc. & Subs. v. Commissioner, T.C. Memo. 2011-36; Krist v. Commissioner, T.C. Memo. 2001-140; McGee v. Commissioner, T.C. Memo. 2000-308.

“Petitioner testified that he did not know whether the insurance expense claimed for his accounting business was for car insurance or another form of insurance and that he needed time to investigate. Because respondent raised this issue for the first time at trial, we find that petitioner would be unfairly prejudiced if we were to consider this issue without petitioner’s having the opportunity to conduct an investigation of his 2007 insurance records. Accordingly, we do not find implied consent pursuant to Rule 41(b)(1), and the Court will not consider whether petitioner double-counted car insurance expenses.” 2011 T.C. Mem. 201, at p. 2, footnote 2.

Lulu is an ex-IRS employee, both as a revenue agent and as an Appeals Officer, now self-employed as an accountant and tax preparer (although apparently neither a CPA nor an EA). He wins this skirmish with his old employer, but only in part. His other deductions take a beating.

But the principle is the same–don’t ambush the Indians–or the accountants.


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