          United States Court of Appeals
                        For the First Circuit
Nos. 15-1368
     15-1376


               WILLIAM CAVALLARO AND PATRICIA CAVALLARO,
                                Donors,

                       Petitioners, Appellants,

                                  v.


                   COMMISSIONER OF INTERNAL REVENUE,

                         Respondent, Appellee.


               APPEALS FROM THE UNITED STATES TAX COURT

          [Hon. David Gustafson, U.S. Tax Court Judge]


                                Before

                         Howard, Chief Judge,
                  Lynch and Kayatta, Circuit Judges.


     Andrew H. Good, with whom Philip G. Cormier, Good Schneider
Cormier, Edward DeFranceschi, DeFranceschi & Klemm, P.C., Jack W.
Pirozzolo, Joseph R. Guerra, Matthew Lerner, and Sidley Austin LLP
were on brief, for appellants.
     Caroline D. Ciraolo, Acting Assistant Attorney General, with
whom Bruce R. Ellisen, Attorney, Tax Division, U.S. Department of
Justice, and Ivan C. Dale, Attorney, Tax Division, U.S. Department
of Justice, were on brief, for appellee.


                           November 18, 2016
          HOWARD, Chief Judge.         William Cavallaro and his wife

Patricia Cavallaro (together, "the Cavallaros") appeal from a Tax

Court decision affirming a determination by the Internal Revenue

Service ("IRS") Commissioner that they owed gift taxes on a

$29,670,000 gift to their sons.        After careful consideration, we

affirm in part, reverse in part, and remand to the Tax Court for

further proceedings consistent with this opinion.



                               I. BACKGROUND

          In     1979,   the   Cavallaros       started    Knight     Tool   Co.

("Knight"), a contract manufacturing company that made custom

tools and machine parts.         William Cavallaro -- whose principal

work was making and selling the business's products -- owned 49%

of Knight's stock, while Patricia Cavallaro -- who acted as an

administrator and bookkeeper -- owned 51%.           The Cavallaros' three

sons Ken, Paul, and James eventually joined the family business.

          In 1982, Knight deviated from its traditional business

and developed a liquid-dispensing system for adhesives called

"CAM/ALOT."    Although Knight invested substantial resources in

CAM/ALOT's development, the product had significant flaws, and

profits failed to outpace production costs.                As a result, the

Cavallaros decided to refocus on their core business.

          Ken,    however,     continued   to    believe   in   the    CAM/ALOT

technology and asked his parents if he and his brothers could


                                   - 2 -
organize a new corporation, Camelot Systems, Inc. ("Camelot"), to

further develop it.     The Cavallaros assented.          After Camelot's

incorporation, Ken worked with William Cavallaro and other Knight

personnel to change CAM/ALOT's design in order to meet customers'

needs.   Knight manufactured the CAM/ALOT systems, while Camelot

sold and distributed them to third parties.

          Everyone who worked on CAM/ALOT systems after Camelot's

incorporation, including Ken, remained on the Knight payroll and

received all their wages from Knight.             Knight's and Camelot's

financial affairs overlapped in other ways as well.          For instance,

Camelot did not have its own bank accounts; with minor exceptions,

Camelot's bills were paid using Knight's funds.           And, as a result

of how Knight billed Camelot, Knight effectively immunized Camelot

from risk of non-payment for CAM/ALOT systems.

          In   1994,   the   Cavallaros   hired    both   accountants   and

lawyers to review their estate plan.              There was significant

friction between these two groups of advisers.            Essentially, the

lawyers wanted the Cavallaros to claim that the value of the

CAM/ALOT technology inhered in Camelot -- and so was already owned

by Ken, Paul, and James -- whereas the accountants objected to

this proposal because it was at odds with the overwhelming evidence

that Knight owned the technology and always had.           Attorney Louis

Hamel argued in a letter to accountant Kevin McGillivray: "History

does not formulate itself, the historian has to give it form


                                 - 3 -
without being discouraged by having to squeeze a few embarrassing

facts into the suitcase by force."1                     As a result of Hamel's

persuasive efforts, the lawyers' view prevailed.                  Both the lawyers

and accountants came to endorse Hamel's suggestion that a 1987

transfer of the CAM/ALOT technology be memorialized in affidavits

and a confirmatory bill of sale.               Members of the Cavallaro family

signed these documents in May 1995.2

                 Knight and Camelot subsequently prepared to merge.                  As

part       of   their       preparations,    the    Cavallaros   hired    accountant

Timothy         Maio   to    determine   the   respective    values      of   the   two

companies. Using a market-based approach, Maio valued the proposed

combined entity at $70-$75 million and valued Knight's portion at

just $13-$15 million (or 19%).               Notably, Maio assumed that Camelot

owned the CAM/ALOT technology and that Knight was a contractor for

Camelot.

                 On December 31, 1995, Knight and Camelot merged in a

tax-free merger that left Camelot as the surviving corporation.

William Cavallaro received 18 shares of stock in the merged

company; Patricia Cavallaro received 20 shares; Ken, Paul, and




       1
       This letter was cc'd to the Cavallaros and their three sons,
as well as to other advisers.
     2 The affidavits executed by William and Ken averred that

Knight transferred "the original dispensing product" to Camelot
when the latter was formed in 1987, that Knight received no
compensation for this gift transfer, and that the gift had "no
ascertainable value."


                                            - 4 -
James received 54 shares each. The relative value of each company,

as determined by Maio, informed the distribution of shares.   Seven

months later, Cookson America, Inc. purchased Camelot for $57

million in cash.   On the basis of stock ownership, the Cavallaros

received a total of $10,830,000, and each son received $15,390,000.

           In 1998, the IRS opened an examination of Knight's and

Camelot's 1994 and 1995 income tax returns.   During the income tax

examination, the IRS identified a possible gift tax issue in

connection with the 1995 merger and opened a gift tax examination

as well.    That examination resulted in litigation before this

court.   See Cavallaro v. United States (Cavallaro I), 284 F.3d 236

(1st Cir. 2002) (affirming denial of taxpayers' motion to quash a

third-party recordkeeper summons).

           Ultimately, the IRS issued notices of deficiency to the

Cavallaros for tax year 1995.   The IRS determined -- without first

having obtained an appraisal -- that Camelot had a pre-merger value

of $0. Thus, when Knight merged with Camelot, William and Patricia

Cavallaro each made a taxable gift of $23,085,000 to their sons.3

As a result, each of the Cavallaros incurred an increase in tax

liability in the amount of $12,696,750.   The notices of deficiency

also imposed additions to tax for failure to file and fraud,




     3 The Commissioner initially determined equal $23,085,000 gift
amounts for both William and Patricia Cavallaro but later revised
the amounts to reflect the actual division of ownership in Knight.


                                - 5 -
pursuant to Internal Revenue Code §§ 6651(a)(1) and 6663(a),

respectively.



                     II. THE TAX COURT PROCEEDINGS

           The Cavallaros filed a petition for review with the Tax

Court.   During discovery, the Commissioner disclosed that -- after

the notices of deficiency were issued -- he directed accountant

Marc Bello to appraise the value of both Knight and Camelot at the

time of the merger.       Working under the assumption that Knight

rather than Camelot owned the CAM/ALOT technology, Bello valued

the combined entities at approximately $64.5 million.                 Bello

concluded that Camelot was worth $22.6 million.        The deficiencies

would, therefore, be lower than those set forth in the original

notices, which assumed that Camelot had no value.

           The Cavallaros interpreted the Bello report to mean that

the Commissioner had changed his theory of liability.                  More

specifically, they surmised that the Commissioner was no longer

pursuing   his    original   theory   --   that   Camelot   was   a   shell

corporation formed to disguise a gift transfer from the Cavallaros

to their sons -- in favor of a new theory that Knight was merely

undervalued.     Prior to trial, the Cavallaros used the Bello report

as the basis for their argument that the original notices of

deficiency were arbitrary and excessive, or, in the alternative,

that the Commissioner's new theory of liability was a "new matter"


                                  - 6 -
within   the    meaning       of    Tax    Court      Rule    142.        They    moved

unsuccessfully to shift the burden of proof to the Commissioner.

          During       the    eight-day       bench    trial,       the   Commissioner

introduced the Bello valuation into evidence to support his revised

deficiency. The Cavallaros introduced both the 1995 Maio valuation

and a valuation by John Murphy of Atlantic Management Company,

which was consistent with the Maio valuation.                      Like Maio, Murphy

assumed that Camelot owned the CAM/ALOT technology.                       Ownership of

the CAM/ALOT-related technology was a central focus of the trial.

The Tax Court ultimately concluded that Knight owned all of it.

          The Tax Court denied the Cavallaros' renewed motion to

shift the burden of proof to the Commissioner.                     While noting that

it was "evidently true that the Commissioner did not obtain an

appraisal before issuing the notices" of deficiency, the Tax Court

found that there was a sufficient basis for issuing the notices

and, thus, that they were not arbitrary.                Further, the court found

unpersuasive    the Cavallaros' argument that the Commissioner's

litigating     position      was   a   "new    matter"       and    stated    that    the

Commissioner's     "partial        concessions     as    to       Camelot's    non-zero

value" did not require a new theory or change the issues for trial.

          The Tax Court ultimately concluded that the Cavallaros

were deficient in paying the gift tax due for calendar year 1995:

William Cavallaro owed $7,652,980 and Patricia Cavallaro owed

$8,009,020.      The    court      also    determined        --    favorably     to   the


                                          - 7 -
Cavallaros -- that no penalties for underpayment were due under

I.R.C. § 6662(a), § 6662(h), or § 6663(a), and there were no

additions to tax due under I.R.C. § 6651(a)(1) for failure to file

a gift tax return.

            This appeal timely followed.



                       III. STANDARD OF REVIEW

            "We review decisions of the [T]ax [C]ourt 'in the same

manner and to the same extent as decisions of the district courts

in civil actions tried without a jury.'"    Interex, Inc. v. Comm'r,

321 F.3d 55, 58 (1st Cir. 2003) (quoting 26 U.S.C. § 7482(a)(1)).

Thus, we review the Tax Court's legal conclusions de novo and its

factual findings for clear error.    Id.   We have the authority "to

affirm or, if the decision of the Tax Court is not in accordance

with law, to modify or to reverse the decision of the Tax Court,

with or without remanding the case for a rehearing, as justice may

require."    I.R.C. § 7482(c)(1).



                        IV. CLAIMS ON APPEAL

            On appeal, the Cavallaros renew their claim that the Tax

Court erred by failing to shift the burden of proof to the

Commissioner for two independent reasons: because (1) the original

notices of deficiency were arbitrary and excessive, and (2) the

Commissioner relied on a new theory of liability.     They make two



                                - 8 -
additional arguments.       First, they claim that the Tax Court

improperly concluded that Knight owned all of the CAM/ALOT-related

technology.     Second, they contend that the Tax Court erred by

misstating their burden of proof and subsequently failing to

consider alleged flaws in Bello's valuation of the two companies.

          We consider these claims in turn.


A. Burden Shifting

          A rebuttable presumption of correctness cloaks an IRS

notice of deficiency.4    See, e.g., Bull v. United States, 295 U.S.

247, 259-60 (1935); Delaney v. Comm'r, 99 F.3d 20, 23 (1st Cir.

1996); Tax Ct. R. 142(a); see also United States v. Rexach, 482

F.2d 10, 16 (1st Cir. 1973) (explaining rationales for this

presumption).    Thus, the taxpayer typically bears the burden of

proving by a preponderance of the evidence that the Commissioner's

tax assessment is erroneous.      Helvering v. Taylor, 293 U.S. 507,

511 (1935); Delaney, 99 F.3d at 23. In some limited circumstances,

however, the Commissioner bears the burden of proving a tax

deficiency.      See,    e.g.,   Tax   Ct.   R.   142(a)(1)   (outlining

circumstances that require burden shifting).



     4 At trial, the Cavallaros pointed out that the rule applying
a presumption of correctness was substantially changed by the
Internal Revenue Service Restructuring and Reform Act of 1998.
See 26 U.S.C. § 7491. However, those changes are not applicable
here because the examination at issue began before the effective
date of the statute.


                                  - 9 -
              The Cavallaros argue that the Tax Court erred by refusing

to shift the burden of proof to the Commissioner.          We review their

claim de novo.      See Estate of Abraham v. Comm'r, 408 F.3d 26, 35

(1st Cir. 2005).



        1.   For An Excessive and Arbitrary Deficiency Notice

              Burden-shifting    for       an      excessive-and-arbitrary

deficiency notice is a fairly narrow doctrine.           See United States

v. Janis, 428 U.S. 433, 441-42 (1976).            It involves "a challenge

to the deficiency assessment itself on the basis that it bears no

factual relationship to the taxpayer's liability, not a challenge

to any proof offered by the Commissioner at trial before the Tax

Court."      Zuhone v. Comm'r, 883 F.2d 1317, 1325 (7th Cir. 1989).

Where an assessment is shown to be "naked" or utterly without

foundation, we remand the case for further action to determine the

amount that might lawfully be taxed.            See Janis, 428 U.S. at 442

(citing Rexach, 482 F.2d at 16–17 & n.3).                In this limited

circumstance, the presumption of correctness is overcome, and the

burden shifts to the Commissioner.         See id.

              The threshold question, then, is whether the Cavallaros

have carried their burden of producing evidence from which it can

be concluded that their deficiency assessments utterly lacked

rational foundation.      The Cavallaros' challenge falls short of the

mark.     Cf. Pittman v. Comm'r, 100 F.3d 1308, 1313 (7th Cir. 1996)


                                  - 10 -
("[C]ourts     commonly    find    this     showing    [that     a    deficiency

assessment lacks a rational foundation] to be made when the

Commissioner makes no evidentiary showing at all.").

           The   original      deficiency    notices    assumed       that,    pre-

merger, Camelot had no value.            According to the Cavallaros, the

Commissioner's     later      realignment    with     the     Bello       valuation

conclusively established that the Commissioner "used no formula at

all" and lacked "any support at all" for that initial $0 valuation.

Thus, they allege, the Commissioner's assessment was "without

rational foundation and excessive."          Taylor, 293 U.S. at 514.

           Without more, however, the fact that the Commissioner

later conceded a portion of the original deficiency does not compel

a   conclusion   that   the    initial    assessments       lacked    a   rational

foundation.5     Cf. McMurty v. Comm'r, 203 F.2d 659, 665–666 (1st

Cir. 1953) (declining to shift burden where Commissioner reduced

the amount of the claimed deficiency); Silverman v. Comm'r, 538

F.2d 927, 931 (2d Cir. 1976) ("The taxpayer does not carry his

burden of showing the determination invalid simply by pointing to

the fact that the Commissioner has reduced his original deficiency

claim prior to trial.").




      5This is true even though the Commissioner's adoption of the
Bello report reduced the Cavallaros' alleged deficiency by roughly
one-third.


                                   - 11 -
             Here,   the    Commissioner    had   discovered   --   prior    to

issuing the original notices of deficiency -- that the Cavallaros

had followed the advice of an estate-planning lawyer, Hamel, who

advocated "squeez[ing] a few embarrassing facts into the suitcase

by force" in order to memorialize technology transfers financially

advantageous to the Cavallaro family.             See Cavallaro v. Comm'r

(Cavallaro II), T.C. Memo 2014-189, at *18.            This, together with

associated documents, was a sufficient basis for concluding that

Camelot's value was de minimis.            Cf. Silverman, 538 F.2d at 933

("Valuation is . . . necessarily an approximation." (alteration in

original) (citation omitted)).             For us to require more would

violate the general rule that courts will not look behind a

deficiency    notice   to    question   the   Commissioner's   motives      and

procedures.    Clapp v. Comm'r, 875 F.2d 1396, 1401 (9th Cir. 1989).

We need go no further.6

             The original deficiency notices were not arbitrary and

excessive, and thus, no burden shifting was warranted.


     6 The two circuit cases cited by the Cavallaros do not persuade
us otherwise. In Caracci v. Commissioner, 456 F.3d 444, 447, 456
(5th Cir. 2006), the Commissioner expressly conceded that the
excise tax deficiency, which was grounded on a "brief, intermediate
internal [valuation] analysis," was "excessive and erroneous." No
such concession exists here, nor are we convinced on this record
that the Bello report, standing alone, compels one. In Estate of
Mitchell v. Comm'r, 250 F.3d 696, 702 (9th Cir. 2001), the estate
tax deficiency notice rested on a stock valuation that the
appraiser    had   altered    according   to   the    Commissioner's
instructions, and that the IRS expert disavowed. The circumstances
in the instant case are not analogous.


                                   - 12 -
      2. For a "New Matter"

             Rule 142(a)(1) of the Tax Court's Rules of Practice and

Procedure states: "The burden of proof shall be upon the petitioner

. . . except that, in respect of any new matter, . . . it shall be

upon the respondent."         Under the "new matter" exception, if the

Commissioner "seeks to establish the deficiency on a basis not

described in the Notice, the burden shifts to the Commissioner on

that new basis."         Estate of Abraham, 408 F.3d at 35 (citing Shea

v. Comm'r, 112 T.C. 183, 197 (1999)).            A new theory presented to

support a deficiency is "treated as a new matter when it either

alters the original deficiency or requires the presentation of

different evidence."        Id. (quoting Wayne Bolt & Nut Co. v. Comm'r,

93   T.C.   500,   507    (1989)).    If,     however,   the   theory   "merely

clarifies or develops the original determination," it is not a new

matter.     Id.

             The Cavallaros argue that the Commissioner relied on a

new theory of liability at trial.                Their claim is that the

Commissioner abandoned his initial theory that Camelot was a

worthless sham and then adopted a wholly new theory -- based on

Bello's valuation -- that Camelot was overvalued by the Cavallaros.

Therefore, the Cavallaros argue, the burden of proof with respect

to this "new matter" should have been placed on the Commissioner.




                                     - 13 -
          The   original   deficiency    notices   do   not   allege   that

Camelot was a sham company.7    Rather, they explain:

     [U]nder IRC Section 2511[,] donor's merger of Knight Tool Co.
     into Camelot Systems, Inc. in return for 19% of the stock of
     Camelot Systems, Inc. resulted in a gift of $23,085,000.00 to
     the other shareholders of Camelot Systems, Inc. Accordingly,
     taxable gifts are increased $23,085,000.00.8

The clear implication was that, because Knight was undervalued,

the Knight-Camelot merger allowed for a disguised gift transfer

from the Cavallaros to their three sons.

           The Commissioner's subsequent adoption of the Bello

report was simply a refinement of that original theory (i.e., a

clarification of the extent to which Knight was undervalued).           We

have previously said that "if a deficiency notice is broadly worded

and the Commissioner later advances a theory not inconsistent with

that language, the theory does not constitute new matter, and the

burden of proof remains with the taxpayer."         Estate of Abraham,

408 F.3d at 36 (citing Abatti v. Comm'r, 644 F.2d 1385, 1390 (9th




     7  Although the Commissioner's Answers -- filed in response to
the Cavallaros' Petition for Re-determination -- do refer to
Camelot as a "shell" or "virtual shell" in several instances, these
references cannot bear the weight that the Cavallaros place on
them.    The Answers' overriding message is that the Cavallaros'
share of the merged company was not "an accurate reflection of the
value of Knight before the merger." This is not in tension with
the Bello report.
      8 This language, quoted from the notice of deficiency issued

to Patricia Cavallaro, does not appear in the notice of deficiency
issued to William Cavallaro. The Tax Court deemed this omission
inadvertent and non-prejudicial, and the Cavallaros do not
challenge this determination on appeal.


                                - 14 -
Cir. 1981)).    The original deficiency notices were more than

adequate to put the Cavallaros on notice that the Commissioner was

challenging the value of Knight as transferred within the merger.

Cf. Kikalos v. Comm'r, 434 F.3d 977, 983 (7th Cir. 2006) (holding

that the Commissioner's change in the method of calculation for

the income shortage was not a "new matter" and that the deficiency

notice clearly put the taxpayers on notice of the liability theory

underlying the new calculation).     Indeed, the Cavallaros' Petition

for Re-determination makes it clear that they were aware all along

that the value of Knight, to the extent that it exceeded the value

of the stock they received at the time of the merger, would be

integral to determining their tax liability.9

          As   neither   of   the   Cavallaros'   two   burden-shifting

theories succeed, we affirm the Tax Court's determination that the

Cavallaros had the burden of proof.



B. CAM/ALOT Technology

          The Cavallaros also challenge the Tax Court's finding

that Knight owned all of the CAM/ALOT technology.        Specifically,

they complain that the Tax Court's treatment of the "different



     9  Further showing the importance of Knight's value, in
Cavallaro I, we stated: "The IRS suspected that the parties might
have undervalued the Cavallaros' Knight company and overvalued the
sons' Camelot company to disguise a gift to the sons in the form
of post-merger stock." 284 F.3d at 239.


                                - 15 -
types of technology . . . as a single, undivided whole" was overly

simplistic.     The record, however, amply supports the Tax Court's

determinations.    See McMurray v. Comm'r, 985 F.2d 36, 40 (1st Cir.

1993) ("The tax court's ruling . . . is a factual finding that we

must affirm unless it is clearly erroneous.").

           As detailed above, Knight created the first CAM/ALOT

system, and, even after Camelot's incorporation, the companies'

financial affairs overlapped significantly.         Further, "[t]he few

public registrations of intellectual property were all owned by

Knight."   Cavallaro II, T.C. Memo 2014-189, at *8.        The CAM/ALOT

trademark was registered to Knight until December 31, 1995, and

four   patent   applications,   each   filed   by   William   Cavallaro,

identified Knight -- not Camelot -- as his assignee.      Id.   In 1992,

before the instant controversy arose, the Cavallaros' accountants

"determined that a portion of the work . . . done in prior years

by Knight's engineers could be characterized as [research and

development ("R&D")] costs eligible for [a Section 41 R&D] tax

credit."   Id. at *9.     In light of that study, the accountants

prepared amended tax returns for Knight for 1990 to 1993.            Id.

Only after the involvement of the Cavallaros' estate-planning

attorneys did the accountants prepare another set of amended

returns for both Knight and Camelot, this time disclaiming the R&D

credits previously taken by Knight and claiming them for Camelot.

Id.


                                - 16 -
             The Cavallaros, the Tax Court concluded, "manifestly

gave no thought in 1987 to the question of which entity would own

what intangibles."     Id. at *19.        The Tax Court rejected attorney

Hamel's position that a transfer of CAM/ALOT technology occurred

in November 1987.      That month, the Cavallaros attended a meeting

at   which   Ken,   Paul,   and   James    signed   Camelot's   articles    of

incorporation.      During the meeting, the lawyer started to hand

Camelot's corporate minute book to William Cavallaro, but William

deflected the suggestion that Camelot was his and immediately

handed the minute book to Ken, saying, "[t]ake it; it's yours."

Although Hamel testified at trial that he construed this as a

symbolic handoff of the CAM/ALOT technology, the court found no

documentation to support such a transfer.            Id. at *9 n.13.       The

court reasonably interpreted the 1995 affidavits and confirmatory

bill of sale as evidence of a view -- shared by the Cavallaro

family and their various advisers -- that the contemporaneous

document trail showed that Knight, not Camelot, owned the CAM/ALOT

technology and, therefore, supplemental documents were necessary

to counter that impression.        Id. at *19.

             Analyzing the ownership question through the lens of a

hypothetical bona fide purchaser at the time of the merger, see 26

C.F.R. §§ 25.2511-1(g)(1), 25.2512-8, the Tax Court concluded:

      If Camelot had offered itself to the market for acquisition
      claiming ownership of the CAM/ALOT technology, it is
      inconceivable that a hypothetical acquirer would do anything


                                   - 17 -
      other than demand to see documentation of Camelot's ownership
      interest--documentation that we have found does not exist.

Id.   It further found:

      [I]f Knight were dealing with an unrelated party which sold
      machines that had been manufactured at Knight's risk by Knight
      employees on Knight premises using technology developed by
      Knight personnel, where Knight had owned the only public
      registrations of [IP] and had claimed ownership of the
      technology in prior tax filings, it defies belief to suggest
      that Knight would have simply disclaimed the technology and
      allowed the unrelated party to take it.

Id.

            Against this backdrop, the Cavallaros complain that the

Tax Court erroneously treated CAM/ALOT as a "monolithic property

interest," rather than seeing it for its discrete proprietary

components.      They contend that the Tax Court should have ruled

that Camelot owned two crucial property rights at the time of the

merger:   the    trade    secrets   embodied   in   Camelot's     mechanical

drawings and the copyrighted CAM/ALOT operating software.                We

disagree.

            At   trial,    the   Tax   Court   suggested   that    assessing

potentially discrete proprietary components of CAM/ALOT might be

a better approach.        It invited the parties to consider such an

approach only insofar as it was helpful to framing the case and

clearly warned that such an approach might not "survive the expert




                                    - 18 -
testimony."10   The Cavallaros continued to press their views that

(1) Knight fully abandoned the CAM/ALOT enterprise in 1987, (2)

Camelot subsequently designed an entirely new machine through

Ken's innovation, and (3) Camelot paid Knight in full for using

its resources and original technology.   In brief, their position

was that no gift transfer occurred in 1995.     Accordingly, their

present appeal for a piecemeal approach to the ownership question,

as a belated alternative to avoid gift tax liability, is waived.

Cf. Ahern v. Shinseki, 629 F.3d 49, 58 (1st Cir. 2010) ("An

appellant cannot change horses in mid-stream, arguing one theory

below and a quite different theory on appeal.").11




     10 The subsequent expert testimony -- by both Bello and Murphy
-- showed that their valuations were premised on CAM/ALOT
technology being a single asset.
     11 In any event, the Cavallaros' argument that the Tax Court

missed or misevaluated the legal import of the software notices
and the legends for the mechanical drawings lacks merit.        The
record shows that the Tax Court carefully considered the gravitas
of the Camelot name stamp and other proprietary claims from the
viewpoint of an unrelated purchaser. See Culbertson, 337 U.S. at
746. While these few pieces of evidence do not fit neatly with
the rest of the evidence suggesting that Knight owned the CAM/ALOT
technology and that Camelot merely sold it, they are not enough to
leave us "with the definite and firm conviction that a mistake has
been committed" by the Tax Court. Schussel v. Werfel, 758 F.3d
82, 87 (1st Cir. 2014) (quoting Interex, 321 F.3d at 58).
     Attempting to secure a foothold in this uphill climb, the
Cavallaros contend that the Tax Court's evaluation of the
technology evidence rests on "an inaccurate appraisal of
controlling legal principles." This argument does not convince us
that the Tax Court committed a reversible error.



                              - 19 -
              We   find    the   Cavallaros'        remaining   claims     similarly

unavailing and dispense with them briefly. First, the record shows

that the Tax Court did not myopically focus on Knight's original

ownership of the CAM/ALOT technology; instead, it focused on

ownership at the time of the Knight-Camelot merger.                     Second, the

Tax   Court    viewed      the   lack   of    any    document    memorializing     a

technology transfer between Knight and Camelot as material to the

overall inquiry, not as dispositive.                Third, the Tax Court did not

improperly         defer    to    the        accountants'       property      rights

determination; rather, it saw their determination as indicative of

the family's contemporaneous belief that Knight owned the CAM/ALOT

technology.

              The Cavallaros have advanced no argument that would

warrant overturning the Tax Court's finding that Knight owned all

of the CAM/ALOT technology at the time of the merger.                      Where, as

here, "there are two permissible views of the evidence, the

factfinder's choice between them cannot be clearly erroneous."

Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574 (1985);

see also Crowley v. Comm'r, 962 F.2d 1077, 1080 (1st Cir. 1992).



C. The Bello Valuation

              In   challenging    the    valuation      provided   by    Bello   and

relied upon by the Tax Court, the Cavallaros argue that the Tax

Court again erred with respect to the burden of proof.                      The Tax


                                        - 20 -
Court stated that the Cavallaros had "the burden of proof to show

the proper amount of their tax liability," but the Cavallaros argue

that their burden was actually to establish "that the alleged

deficiencies were erroneous." They contend that this "legal error"

by the Tax Court led to another: the court refused to consider

their evidence that the Bello valuation was "fatally flawed."

             Accordingly, our inquiry proceeds in two steps: first,

we determine whether the Tax Court misstated the burden of proof;

second, we consider whether the court erred in adopting Bello's

valuation without considering its alleged defects.



       1. Burden of Proof

             Although the Tax Court did not misallocate the burden of

proof at trial, we agree with the Cavallaros that the Tax Court

misstated     the   content    of    that   burden.       The   Commissioner's

deficiency notices enjoyed a presumption of correctness, and the

Cavallaros had the burden of proving by a preponderance of the

evidence that they were erroneous.             See Rexach, 482 F.2d at 16

n.3;   see   also   Delaney,    99   F.3d     at   23   ("[A]   tax   deficiency

assessment is subject to reversal if the taxpayer establishes by

a preponderance of the evidence that it was erroneous.").

             The Tax Court reasoned that "[i]t is the Cavallaros who

have the burden of proof to show the proper amount of their tax

liability," but that they could not meet that burden because



                                     - 21 -
neither of their valuations (i.e., neither Maio's nor Murphy's)

remained standing in light of the Tax Court's finding that Knight,

rather than Camelot, owned all of the CAM/ALOT-related technology.

Therefore,         the   Tax    Court    adopted    the    Commissioner's   Bello

valuation in full, even while remarking on its "arguably flawed

analysis."

              But this statement on the Cavallaros' burden of proof is

mistaken as a matter of law.             In Taylor, the Supreme Court made it

clear       that     once      the    taxpayer     shows     the   Commissioner's

determination to be "arbitrary and excessive," the taxpayer cannot

be made to pay the amount assessed against him -- even if he fails

to prove the correct amount of liability he owes.                    293 U.S. at

515; see also Rexach, 482 F.2d at 16 n.3 ("[O]nce a taxpayer

.   .   .   has     borne      his   burden   of   proving   the   Commissioner's

determination invalid, he has no further obligation to show . . .

how much" money is owed.).



        2. Criticisms of The Bello Valuation

              The Cavallaros attempted to show that the Commissioner's

valuation was "arbitrary and excessive" by challenging Bello's

methodology, but the Tax Court refused to hear those challenges on

the grounds that, even if the Cavallaros were right, they could

not show the correct amount of their tax liability.                    This runs

squarely against the Supreme Court's holding in Taylor.



                                         - 22 -
                The Cavallaros should have had the opportunity to rebut

the Bello report and to show that the Commissioner's assessment

was "arbitrary and excessive."12            If they succeeded in doing so,

the Tax Court should have then determined for itself the correct

amount        of   tax   liability     rather   than   simply   adopting   the

Commissioner's position.         See Taylor, 293 U.S. at 515–16 (stating

that     upon      determining   the     Commissioner's   valuation   to    be

arbitrary, the Board of Tax Appeals should have conducted a

"further hearing" in which it "heard evidence to show whether a

fair apportionment might be made and, if so, the correct amount of

the tax"); see also Worcester Cty. Tr. Co. v. Comm'r, 134 F.2d

578, 580–81 (1st Cir. 1943) (upon finding the Board's determination

of value of a stock to be "arbitrary and excessive," remanding for

"further action" on the correct value); Taylor v. Comm'r, 445 F.2d

455, 460 (1st Cir. 1971) ("[Under Taylor,] if a taxpayer proves

that a deficiency asserted by the Commissioner is wrong but fails

to prove there was no deficiency or the correct figure, the Tax

Court        cannot   accept   the   Commissioner's    admittedly   erroneous


        12
        Although, for reasons discussed at length above, the
Commissioner's present action is not a "naked" assessment of tax,
we grant the possibility that his method of arriving at the
$29,670,000 valuation for the gift may nonetheless have been
incorrect. Cf. Estate of Todisco, 757 F.2d at 5 ("[G]ranting for
the sake of argument that the Commissioner's method of arriving at
a ten percent gross profit margin was arbitrary . . ., it is clear
nonetheless that Todisco earned bookmaking income in 1972 and 1973.
The Commissioner's present action is thus not a naked assessment
of tax.").


                                       - 23 -
figure. Instead it must hold a hearing to determine what the

correct figure is.").

          In accordance with those cases, we remand so that the

Tax Court can evaluate the Cavallaros' arguments that the Bello

valuation had methodological flaws that made it arbitrary and

excessive.13   If the Tax Court determines that the Commissioner's

assessment was arbitrary, then it must determine the proper amount

of tax liability for itself.14    "The court need not, in making this

determination, be able to precisely establish the correct figures;

reasonable approximations may be employed, provided the findings

disclose the method used in calculating the deficiency."      Miller


     13 The Cavallaros' brief explains the bases on which they
argue that the Bello valuation was without foundation and
excessive. The Commissioner suggests that those arguments are
meritless in light of the Tax Court's factual findings. But it
seems unwise for us to attempt to determine ourselves whether the
Cavallaros have valid criticisms that make the Bello valuation
arbitrary. Instead, the Tax Court ought to make that determination
in the first instance.
     14 Estate of Elkins v. Commissioner, 767 F.3d 443 (5th Cir.

2014), which the Commissioner cites in opposition, is not to the
contrary. There, the Fifth Circuit held that the Tax Court had
erred in rejecting the taxpayer's evidence of fractional-ownership
discounts for the purpose of artwork valuation, where nothing in
the Commissioner's expert testimony, briefing, or oral argument
"detract[ed] from or call[ed] into question" the taxpayer's
evidence. Id. at 452. This case is entirely different because the
Commissioner's valuation, although the last one standing, is not
"uncontradicted, unimpeached, and eminently credible." Id. at 451.
Rather, the Cavallaros offered serious criticism of the
Commissioner's evidence.
     Even if Elkins were correct, the Commissioner seems to concede
that Elkins spoke too broadly in prohibiting the Tax Court from
conducting its own valuation once the party with the burden of
proof is shown to be erroneous.


                                 - 24 -
v. United States, 296 F.2d 457, 460 (7th Cir. 1961).   The court is

free to accept in whole or in part, or reject entirely, the expert

opinions presented by the parties on the subject.   See Silverman,

538 F.2d at 933; see also Helvering v. Nat'l Grocery Co., 304 U.S.

282, 295 (1938).     Further, the court may take new evidence,

including a new expert valuation.



                           V. CONCLUSION

          For the above-stated reasons, we affirm the Tax Court's

determination that the burden of proof was on the taxpayers and

its finding that Knight owned the CAM/ALOT-related technology at

the time of the Knight-Camelot merger.     However, insofar as the

court misstated the nature of the Cavallaros' burden of proof, we

reverse and remand the case for further proceedings in keeping

with this opinion.   The extent of any further briefing, hearings,

or evidence is left to the Tax Court's sound discretion.

     Affirmed in part, reversed in part, and remanded.




                              - 25 -
