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Practice and Procedure 8-42 (2d ed. 1991), we follow the lead of
the parties and address these arguments under separate
subheadings.
a. Respondent’s Asserted Failure To Follow Reopening
Procedures
Respondent’s procedural rules for reopening cases closed
after examination to make an adjustment unfavorable to the
taxpayer are set forth in the latest of a long line of revenue
procedures, Rev. Proc. 94-68, 1994-2 C.B. 803, and in section
4023 of the Manual.
The Service’s policy is not to reopen a closed case to make
an adjustment unfavorable to the taxpayer unless
(1) there is evidence of fraud, malfeasance,
collusion, concealment, or misrepresentation of a
material fact;
(2) the prior closing involved a clearly defined
substantial error based on an established Service
position existing at the time of the previous
examination; or
(3) other circumstances exist that indicate
failure to reopen would be a serious administrative
omission. [1 Audit, Internal Revenue Manual (CCH),
sec. 4023.2 (Reopening Requirements), at 7063-7064.]5
The revenue procedure and the Manual clarify the reopening
procedures. The closing of a case by the Service is evidenced,
among other things, by issuance of a no change letter to the
taxpayer. See Rev. Proc. 94-68, sec. 4.01(1), 1994-2 C.B. 803; 1
5 Rev. Proc. 94-68, sec. 5.01 (Policy), 1994-2 C.B. at 804,
is virtually identical.
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