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petitions, which are substantially identical, was respondent’s
failure to permit consistent treatment of service warranty income
and associated insurance expense. As phrased in the petitions,
“The narrow issue involved herein is the consistent treatment of
the service warranty income and the offsetting premium expense”.
There were no claims of overpayments. No amendments of the
pleadings have been sought or granted. The parties agreed to
submit these cases fully stipulated in accordance with Rule 122.
Approximately 2 weeks before submission of the cases, petitioners
served a trial memorandum upon respondent in which they listed
the sole issue in the cases as: “What is the proper tax period
for deducting amounts paid by a retail auto dealer in connection
with its obligations to its customers under extended warranty
agreements?”.8
We believe respondent justifiably concluded that petitioners
were not contesting the inclusion in their income of amounts paid
to Western General. We further find that respondent would be
prejudiced if petitioners were permitted to raise this issue for
the first time on brief in fully stipulated cases. “‘Of key
importance in evaluating the existence of prejudice is the amount
8 Although in the analysis section of their trial memorandum
petitioners at one point characterize the amounts they paid to
Western General as “phantom income” in which they have “no
interest”, we do not believe this single reference in an extended
discussion constitutes adequate notice that petitioners intended
to raise “claim of right” or income attribution issues.
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