## Facts

- Members of the Abatti family conducted California farming operations through three related entities using the cash method: a partnership (calendar year) and two S corporations with different fiscal year ends.
- The entities engaged in frequent intercompany transfers for services, sales proceeds, and loans, but maintained no contemporaneous documentation explaining the transfers and used year-end adjustments to close intercompany accounts.
- After auditing tax years 1971–1973, the IRS concluded the entities’ intercompany dealings did not clearly reflect income and proposed reallocations of income and deductions among the entities under I.R.C. § 482.
- Revenue agents’ reports provided to the entities and their counsel identified § 482 as the basis for the proposed adjustments.
- The IRS issued statutory notices of deficiency for 1971–1973 (and later 1974) that did not cite § 482 and did not expressly allege fraud.
- The taxpayers petitioned the Tax Court challenging the deficiencies and referred to § 482 as the basis for the IRS’s determination.
- Shortly before trial, new taxpayer counsel requested clarification of the government’s theory; the government confirmed it would rely on § 482.
- The Tax Court barred reliance on § 482 as a “new matter,” shifted the burden of proof to the Commissioner on core deficiency issues (treating the case as effectively alleging fraud), and entered judgment for the taxpayers after the Commissioner rested.
- The Commissioner appealed.

## Issues

1. Whether the Commissioner’s reliance on I.R.C. § 482 was an impermissible “new matter” because the notices of deficiency did not cite § 482, thereby justifying exclusion of the theory or shifting the burden of proof.
2. Whether the Tax Court erred by shifting the burden of proof to the Commissioner on the deficiency issues by characterizing the Commissioner’s position as an implicit fraud allegation absent a fraud charge in the deficiency notices.

## Decision

- The Ninth Circuit reversed the Tax Court and remanded for further proceedings.
- The court held that § 482 was not a “new matter” inconsistent with the notices of deficiency and could be litigated without shifting the burden of proof to the Commissioner.
- The court held the Tax Court improperly shifted the burden of proof based on an implied-fraud rationale where fraud was not charged in the deficiency notices.
- The Commissioner was permitted on remand to proceed on the § 482 reallocation theory under the ordinary burden-of-proof rules.

## Legal Principles

- A notice of deficiency need not cite specific Code sections if it sufficiently describes the basis for the Commissioner’s determination to inform the taxpayer of the nature of the adjustments.
- Under Tax Court Rule 142(a), a theory constitutes a “new matter” (shifting the burden to the Commissioner) only if it is inconsistent with the notice of deficiency or requires different evidence than the notice’s determinations.
- When the deficiency amounts and underlying factual determinations remain the same, the Commissioner’s invocation of a particular statutory provision (including § 482) typically is not a new matter merely because the provision was not named in the notice.
- Discrepancies supporting a § 482 allocation do not transform the Commissioner’s deficiency determination into a fraud case; burden shifting based on fraud requires an actual fraud allegation, not an inference drawn by the court.

## Conclusion

The Ninth Circuit ruled that the Commissioner could litigate § 482 reallocations even though the deficiency notices did not cite § 482, because the adjustments described were consistent with a reallocation theory and the taxpayers had adequate notice; it also rejected burden shifting based on an implied allegation of fraud and remanded for proceedings under ordinary evidentiary burdens.


Abatti v. Commissioner, 644 F.2d 1385 (9th Cir. 1981)