We all know that once you petition Tax Court for a given year, everything is on the table. In case anyone tuned in late, see my blogpost “Agree With Thine Adversary Whilst Thou Art In The Way”, 8/24/13.

Well, Illinois Tool Works, Inc., and Subsidiaries, Docket No. 10418-14, filed 12/2/14, tried to get around the principles CTSJ Panuthos enunciated in my blogpost abovecited, and doesn’t succeed; Judge Lauber, that distinguished alum of Clare College Cambridge U., lets IRS up the ante by a whopping $14 million.

The Illini were fighting over a payment from one of The Illini’s offshore subsidiaries to The Illini. The Illini claimed it was return of capital; IRS claimed it was a dividend and handed The Illini a $70 million deficiency.

IRS never mentioned a Section 6662 penalty, neither accuracy nor substantial understatement, in the SNOD, but sought to raise it in their answer. The Illini claim they’re being hit with understatement (Section 6662(d)), but IRS’s answer says accuracy (Section 6662(a)).

Whichever, The Illini claim that the Administrative Procedures Act, Chenery and Mayo Clinic don’t permit this.

Quick recap- For Chenery, see my blogpost “Chen-Chenery”, 8/21/14. For Mayo Clinic, see my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11.

The Illini want Judge Lauber to strike the penalty portion of the answer, claiming “…such assertion would be inconsistent with what petitioner describes as a prior ‘determination’ by respondent [IRS] not to assert that penalty. As such, the delayed assertion of the penalty would supposedly be analogous to a disfavored ‘post hoc rationalization’ by the agency.” Order, at pp. 2-3 (Citation omitted).

The Illini get a Taishoff “Good Try, Second Class”, but get a Judge Lauber “fuggedaboutit”, and he’s the decider.

In the first place, Tax Court won’t strike if the allegation has any cognizable legal basis. And this one has plenty.

Judge Lauber: “This argument clearly proves too much. Our Rules explicitly permit respondent to assert an increased deficiency or ‘new matter’ in his answer, Tax Court Rule 142(a), and Congress has specifically granted this Court jurisdiction to hear such claims. Section 6214(a) provides the Court with jurisdiction to redetermine a deficiency greater than that set forth in the notice of deficiency, ‘and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or rehearing.’ On petitioner’s theory, such a determination would be impermissible because it would be inconsistent with a supposed prior ‘determination’ by respondent–embodied in the notice of deficiency–that a smaller deficiency was correct or that the new matter should not be asserted. That is clearly not the law. In this and in other respects, the specific procedures that Congress has ordained for this Court in the Internal Revenue Code may differ from the more general rules embodied in the APA.” Order, at p.3.

Lest IRS’s team slap themselves a premature “high five” at this point, Judge Lauber has a caution for them.

“This is not to say that respondent can delay with impunity in asserting a new matter or an increased deficiency. When respondent does so, our Rules require that the burden of proof be shifted from petitioner to respondent concerning the increased deficiency or new matter. Tax Court Rule 142(a)(1). That, rather than striking respondent’s pleading, is the ‘sanction’ imposed by our Rules. To the extent that petitioner’s motion advances other arguments, the thrust of which is that the penalty should not be imposed, petitioner is free to advance those contentions at trial and on brief.” Order, at p. 4 (Footnote omitted, but it says that IRS’s answer is clear enough, so IRS need not provide a more definite statement).

Takeaway–See my first-cited blogpost; if you can settle, settle.