into a checking account at Farmers & Merchants Bank in Dublin, Georgia. By three separate letters, dated December 18, 1994, December 21, 1994, and January 2, 1995, petitioner identified to Lewis as replacement properties three parcels of land (the replacement properties), ownership of each of which was transferred directly to petitioner by warranty deed from the respective owners as follows: 1 The parties have stipulated that the land contained 316.82 acres, although the letter to Lewis states that the property contains 312 acres. To the extent there is a discrepancy, it is immaterial to the result reached herein. The replacement properties are all within 30 miles of the 95 acres. When petitioner acquired these replacement properties, they all contained standing timber that accounted for a significant part of their value. The purchase of these three replacement properties exhausted all but $205.45 of the escrow funds. By check dated May 9, 1995, Lewis paid petitioner the $205.45 bal ance. Petitioners are cash basis taxpayers. On their joint 1994 Federal income tax return, filed on or about April 15, 1995, they characterized the subject transaction as a like-kind exchange of "Timber" for "Timber and Land", giving rise to $496,076 realized gain, all of which they treated as deferred gain pursuant to section 1031. In the notice of deficiency, dated December 4, 1997, respondent determined that petitioners realized gain of $489,935, instead of $496,076, from their 1994 timber sale.2 The notice of deficiency states that "the realized gain from the sale of the timber is to be fully recognized [in 1994] because it has not been established that the requirements of section 1031 of the Internal Revenue Code have been met." 2 The parties have stipulated that petitioner's basis in the timber conveyed to Rayonier was $3,200. On brief, respondent contends that after subtracting this basis, the amount of petitioners' realized gain is $486,735. A. The Parties' Contentions OPINION 1. The Like-Kind Exchange Requirement Petitioners argue that to continue petitioner's timber investment, he exchanged standing timber for standing timber that necessarily had to have land attached. Petitioners argue that under applicable Georgia law, both the relinquished property and the the replacement property are characterized as real property interests, and that under Commissioner v. Crichton, 122 F.2d 181 (5th Cir. 1941), affg. 42 B.T.A. 490 (1940), the subject transaction qualifies as a tax-deferred like-kind exchange within the meaning of section 1031. Respondent argues that under Georgia law, the 2-year timber cutting contract was personal property and thus not of like kind to the replacement real property. In addition, relying on Oregon Lumber Co. v. Commissioner, 20 T.C. 192 (1953), respondent argues that regardless of how the property interests may be characterized under State law, the property relinquished and the properties received differ so intrinsically that they are not of like kind within the meaning of section 1031.3 2. Petitioners' Alternative Argument: Lack of Actual or Constructive Receipt in 1994 On brief, petitioners raise an alternative argument that regardless of whether the subject transaction qualifies as a like-kind exchange, respondent has erroneously determined that they realized income from the transaction in 1994. Relying on section 1.1031(k)-1(g)(3) and (j), Income Tax Regs., petitioners argue that they realized no gain in 1994 because they had no actual or constructive receipt of property in 1994. 3 Respondent does not dispute that petitioners have met all other requirements for a nontaxable exchange of property held for productive use in a trade or business or for investment within the meaning of sec. 1031. In particular, respondent does not dispute that petitioner's transaction with Rayonier constituted an "exchange" within the meaning of sec. 1031 or that petitioners have satisfied the requirements of sec. 1031(a)(3), which in the case of a nonsimultaneous exchange generally requires that the replacement property be identified no more than 45 days after, and the exchange be completed no more than 180 days after, the transfer of the relinquished property. Respondent contends that petitioners have improperly raised this issue for the first time on brief. Respondent alleges, and petitioners do not dispute, that the 3-year limitations period for respondent to assess tax for taxable year 1995 ran shortly after the trial date of this case and shortly before the date respondent received a copy of petitioners' brief. Respondent contends that because of this circumstance, he is "especially prejudiced" by petitioners' delay in raising their alternative arguments. In a memorandum filed with the Court in response to respondent's arguments on reply brief, petitioners argue that they raised what they characterize as the "receipt issue" frequently before and during trial. In their memorandum, petitioners catalog various references in their petition, their trial memorandum, the parties' stipulations of facts, and statements at trial to arguments or facts or circumstances in support of arguments that in 1994 petitioner never received or had access to or control over any moneys incident to the exchange in question. 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, respond ent'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 such prejudice exists, it is of respondent's own making. Any such prejudice, however, is speculative, premised as it is on the supposed tax consequences in a year not before us of a legal determination that we decline to reach. The only year before us is 1994, and we confine our determinations to that year. See Christensen v. Commissioner, T.C. Memo. 1996–254, affd. without published opinion 142 F.3d 442 (9th Cir. 1998). Moreover, petitioners' receipt argument is based on the application of section 1031 and respondent's regulations thereunder-the same section upon which the parties have based their positions from the outset. See Ware v. Commissioner, supra. In invoking the application of these mandatory provisions of the section 1031 regulations, petitioners appeal to the correct application of the law on the basis of the record presented. Neither party has suggested that the record contains insufficient facts to permit us to dispose of the case on the grounds of petitioners' alternative argument. We conclude that the record is sufficient for this purpose and that we may properly decide this case on the grounds raised in petitioners' alternative argument.4 4 We are mindful that in Chase v. Commissioner, 92 T.C. 874, 883 (1989), this Court rejected the taxpayers' alternative argument, raised for the first time on brief, that if sec. 1031(a) were inapplicable to the transaction in question, then they should be allowed to elect installment sale treatment under former sec. 453. The Court based its holding partly on the ground that the taxpayers had raised the issue for the first time on brief. The Court cited Seligman v. Commissioner, 84 T.C. 191 (1985), affd. 796 F.2d 116 (5th Cir. 1986), and Markwardt v. Commissioner, 64 T.C. 989 (1975). As germane here, each of these cases stands for the general proposition that this Court will not consider issues first raised in the parties' briefs where prejudice and surprise are found to exist. Accordingly, we infer that the Court in Chase concluded that a holding for the taxpayers on their alternative argument would prejudice the Commissioner. In any event, the Court in Chase concluded that the taxpayers were the wrong parties to claim the election under former sec. 453. The election could be made only by the partnership in which they were partners. By contrast, as applicable to the years in issue here, the provisions of sec. 453 are not elective but rather are generally mandatory; the taxpayer must elect out to avoid reporting gain or loss on the installment method. See sec. 453(d). Moreover, the sec. 1031 regulations applicable to the year in issue in Chase v. Commissioner, supra, unlike the sec. 1031 regulations applicable here, contained no explicit coordination with the installment sale provisions of sec. 453. Accordingly, the taxpayers' alternative argument in Chase, unlike petitioners' alternative argument here, did not necessarily appeal to the correct application of the law pertaining to sec. 1031 but instead was predicated on other elective statutory provisions invoked for the first time on brief. C. Coordination of Section 1031 Regulations and Section 453 The section 1031 regulations state: "Except as otherwise provided, the amount of gain or loss recognized *** in a deferred exchange is determined by applying the rules of section 1031 and the regulations thereunder." Sec. 1.1031(k)– 1(j)(1), Income Tax Regs. The section 1031 regulations contain special rules for coordinating the determination of gain or loss under section 1031 and under section 453, which generally requires, subject to a host of qualifications not in issue here, that where a taxpayer disposes of property and is to receive one or more payments in a later year, the taxpayer's profit on the sale is to be included in income as the payments are received. For purposes of section 453, payments include amounts actually or constructively received in the taxable year. See sec. 15A.453-1(b)(3)(i), Temporary Income Tax Regs., 46 Fed. Reg. 48920 (Oct. 5, 1981). In the context of a deferred exchange where cash or a cash equivalent provides security for the transfer of replacement property and is held in an escrow account or trust, the question arises whether, for purposes of applying the installment sale rules of section 453, the taxpayer has actually or constructively received property at the commencement of the deferred exchange. To answer this question, the section 453 regulations cross-reference rules contained in section 1.1031(k)−1(j)(2), Income Tax Regs. See id. These section 1031 regulations generally provide that the determination of whether the taxpayer has received payment for purposes of section 453 will be made without regard to the fact that the transferee's obligation to convey replacement property to the taxpayer is secured by cash or cash equivalent, if the cash or cash equivalent is held in a "qualified escrow account" or "qualified trust" as defined in section 1.1031(k)—1(g)(3), Income Tax Regs., provided the taxpayer had a bona fide intent to enter into a deferred exchange of like-kind property at the beginning of the exchange. See sec. 1.1031(k)-1(j)(2)(i), (iv), Income Tax Regs.5 Accordingly, in 5 The sec. 1031 regulations provide that, as a general rule: The taxpayer is in constructive receipt of money or property at the time the money or property is credited to the taxpayer's account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time or so that the taxpayer can draw upon it if notice of intention to draw is given. *** [Sec. 1.1031(k)–1(f)(2), Income Tax Regs.] Strictly construed and without any further refinement, the principles expressed in these regu |