Joseph D. & Elizabeth M. Dunne - Page 16

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          Commissioner, T.C. Memo. 2003-39; Nichols v. Commissioner, T.C.             
          Memo. 2003-24, affd. 79 Fed. Appx. 282 (9th Cir. 2003).                     
               Petitioners raised the issue of whether section 7491(a)                
          applies for the first time in their posttrial brief.  Respondent            
          argues that he would be prejudiced if we were to allow                      
          petitioners to raise the section 7491(a)(2) requirements issue              
          for the first time on brief because had they raised the issue               
          earlier, respondent could have presented evidence showing that              
          petitioners have not satisfied the requirements.  We agree with             
          respondent.  See Smith v. Commissioner, T.C. Memo. 2007-368;                
          Deihl v. Commissioner, T.C. Memo. 2005-287.  Furthermore, other             
          than the testimony of the examining agent that petitioners                  
          provided her with a lot of information, the record contains no              
          specific evidence that petitioners have complied with all of the            
          substantiation and record maintenance requirements or cooperated            
          with respondent’s information requests.  Therefore, the record is           
          insufficient for us to find that petitioners have satisfied the             
          requirements of section 7491(a)(2), and we conclude a shift of              
          the burden of proof is not appropriate in this case.                        
          II.  Whether Petitioners Must Pay Income Tax on FRC’s Income for            
               Petitioners argue that they are not required to pay income             
          tax on any of FRC’s income or loss for 1997 because collateral              
          estoppel prevents respondent from taxing petitioners in an amount           
          in excess of what they received from the arbitration award and              

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