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petitioners assert, respondent’s disguised dividend theory
constituted a new matter, raised for the first time in
respondent’s trial memorandum, and surprised and prejudiced
petitioners.31
Respondent, on the other hand, contends that the language in
the notice of deficiency, though stated with “brevity”, permitted
respondent to rely on all theories consistent with “the Code
section under which the deficiency * * * [was] determined.”
According to respondent, the phrase “unreasonable and excessive”
clearly implies section 162(a)(1). Respondent points to the
petition’s description of Mr. Menard’s compensation as “an
ordinary and necessary business expenditure” as evidence that
Menards knew the notice implicated section 162(a)(1).
In addition, respondent cites Nor-Cal Adjusters v.
Commissioner, 503 F.2d 359 (9th Cir. 1974), affg. T.C. Memo.
1971-200, in which the taxpayer raised a similar argument. In
Nor-Cal Adjusters, the notice of deficiency stated that the
31A theory constitutes a new matter if it alters the
original deficiency or requires the presentation of different
evidence. Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507
(1989). A new theory that merely clarifies or develops the
original determination is not a new matter and does not shift the
burden of proof to the Commissioner. Id.; see also Shea v.
Commissioner, 112 T.C. 183 (1999); Achiro v. Commissioner, 77
T.C. 881, 890 (1981). If the Commissioner fails to notify the
taxpayer in the notice of deficiency, or the pleadings, with
respect to a particular theory and causes harm or prejudice to
the taxpayer in the preparation of his case, the Commissioner may
not rely on that theory. William Bryen Co. v. Commissioner, 89
T.C. 689, 707 (1987).
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