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 
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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 
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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 
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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." 
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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. 
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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" 
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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 
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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 
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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. 
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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) 
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("[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, premerger, 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."). 

 5 This is true even though the Commissioner's adoption of the 

Bello report reduced the Cavallaros' alleged deficiency by roughly 

one-third. 
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 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. 
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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. 
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 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. 
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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. 
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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. 
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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 
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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 
- 19 - 

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. 
- 20 - 

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 
- 21 - 

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 
- 22 - 

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. 
- 23 - 

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."). 
- 24 - 

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. 
- 25 - 

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.