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B. Lack of Prejudice to Respondent in Addressing Actual or
Constructive Receipt
A party may rely on a theory only if it provides the
opposing party fair warning so that the opposing party is not
prejudiced in its ability to prepare its case. See Pagel, Inc.
v. Commissioner, 91 T.C. 200, 211 (1988), affd. 905 F.2d 1190
(8th Cir. 1990). Accordingly, a party may not raise an issue for
the first time on brief where surprise and prejudice are found to
exist. See Seligman v. Commissioner, 84 T.C. 191, 198-199
(1985), affd. 796 F.2d 116 (5th Cir. 1986). The general rule
against raising new issues on brief is not absolute, being
“founded upon the exercise of judicial discretion in determining
whether considerations of surprise and prejudice require that a
party be protected from having to face a belated confrontation
which precludes or limits that party’s opportunity to present
pertinent evidence.” Ware v. Commissioner, 92 T.C. 1267, 1268
(1989), affd. 906 F.2d 62 (2d Cir. 1990).
Respondent does not contend that he has been prejudiced in
developing or presenting evidence regarding petitioners’
alternative argument. In respondent’s reply brief, respondent’s
response to motion by petitioners to supplement brief, and
respondent’s supplemental reply brief, the only prejudice that
respondent suggests would arise from our consideration of
petitioners’ alternative argument relates to respondent’s failure
to determine a deficiency for petitioners’ 1995 taxable year. If
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