Judge Cary Douglas Pugh punts on this one, because IRS’ position that a new accounting method (a change from the old) is in play without Section 446(e) approval is not an ambush, but inherently factual, so no summary J, either for IRS or for BRC Operating Company LLC, Bluescape Resources Company, LLC, Tax Matters Partner, et al., Docket No. 12922-16, filed 4/11/24.

Y’all may recollect Bluescapers’ previous appearance in this my blog. If not, check out my blogpost “Cost of Goods Not Sold,” 5/12/21. But all that happened there was to rule out COGS, not Section 162 ordinary-and-necessary, which card the Bluescapers now play.

So IRS now ripostes “Bluescape cannot change its method of accounting to deduct the Estimated Drilling Costs under section 162 or capitalize them under section 263(a) without first obtaining approval of the Secretary as required under section 446(e).” Order, at p. 3.

Bluescapers claim this is an ambush; they need new evidence, and the discovery and expert witnesses clocks have run.

But that falls short of what Bluescapers need to preclude IRS from putting in that defense on the trial.

“They do not expressly claim that respondent’s accounting method defense is a ‘new matter’ under Rule 142(a) rather than an alternative legal theory. Nor do they identify what new or additional evidence would be required at trial to respond to the accounting method defense different from the evidence they intend to present in their affirmative case.” Order, at p. 3. (Footnote omitted but see below).

Judge Pugh cites the cases that Bluescapers missed; except they really aren’t squarely on point. One didn’t consider whether the change-in-method (not mentioned in the pleadings) was either new matter or new issue; the other called a Section 481 argument a “new theory” and shifted BoP to IRS per Rule 142(a). Order, at p. 4, footnote 3.

Bluescapers didn’t put in details why the change-in-method argument ambushed them. Anyhow, they should have known from their previous kerfuffle over COGS that IRS was arguing their accounting method didn’t adequately reflect income.

“…both parties ask that we address application of the economic performance prong of the all events test in section 461(h), an inherently factual inquiry not appropriate for summary adjudication on the record before us. And we would not reach petitioners’ argument that the economic performance requirement does not apply to items of gross income governed by section 451 if we conclude that the estimated drilling costs can be deducted under section 162.” Order, at p. 4.

So go try the case, and save your legal arguments for your briefs.