Opinion
11369-16 23895-16 24113-16 7434-17 14691-17 14692-17 3429-19
04-12-2024
CD LISTENING BAR, INC., ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
The first phase of trial of these "micro-captive" insurance cases was held from April 17-20, 2023, and the second phase from October 10-20, 2023, in Phoenix, Arizona. Currently before the Court is respondent's Motion for Relief under Rule 91(e) and To Conform Pleadings to the Proof (Motion), filed March 15, 2024. Petitioners responded to the Motion on April 2, 2024. We will grant it.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
In paragraph #1 of its Petition filed at docket No. 11369-16, petitioner CD Listening Bar, Inc. (CDL), alleged that, when its Petition was filed in May 2016, its principal place of business (PPOB) was in Kentucky. Respondent filed an Answer in which he denied this allegation "for lack of sufficient knowledge or information." CDL filed subsequent Petitions at docket Nos. 7434-17 and 3429-19, again alleging that its PPOB was in Kentucky when those Petitions were filed (in April 2017 and February 2019, respectively). Respondent filed Answers to the latter Petitions, this time admitting to CDL's allegations regarding its PPOB.
On November 18, 2022, the parties filed a First Stipulation of Facts (Stipulation). Paragraph #5 of the Stipulation states that CDL had its PPOB in California from June 2012 through June 2014, but that, "[a]s of December 2014, CD Listening's principal place of business was in Kentucky." The parties accordingly stipulated that, "[a]t the time the petitions were filed, . . . CD Listening's principal place of business was in Kentucky." The parties were still in the process of completing discovery when they submitted this Stipulation.
On March 15, 2024, respondent filed the Motion, seeking relief from the Stipulation insofar as it reflects an agreement that CDL's PPOB was in Kentucky during 2016-2019. As respondent observes, the location of CDL's PPOB is pertinent in identifying the proper venue for purposes of appeal. See § 7482(b)(1)(B). It could also be pertinent in determining the applicable law relating to one or more contested issues in these cases. See Golsen v. Commissioner, 54 T.C. 742 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Respondent represents that he received new information in March 2023 (four months after the Stipulation was filed) suggesting that CDL's PPOB may have been in Florida at the relevant times. Respondent notes that CDL in late 2013 acquired Alliance Entertainment, a much larger company, which had its corporate office in Sunrise, Florida. Respondent represents that he contacted petitioners' counsel in early 2023 and expressed his concern about CDL's PPOB, but the parties could not resolve their disagreement before the trial began.
Petitioners' counsel alluded to the existence of this dispute at the outset of the trial. During the first phase of the trial the parties presented evidence bearing on the question of CDL's PPOB during 2016-2019. During their case in chief petitioners presented testimony about CDL's operations and the percentage of its workforce employed at various locations, including a warehouse in Kentucky and a corporate office in Florida. According to respondent, the trial evidence establishes that CDL's chief operating officer, chief financial officer, and chief technology officer (among other important employees) worked in the Sunrise, Florida, office. According to respondent, CDL after 2014 consistently used the Sunrise, Florida, address as its mailing address, listed that address as its "corporate office" in SEC filings, and showed that address on its 2014 Federal income tax return filed in March 2015. Some of this evidence is arguably in tension with the stipulation that CDL's PPOB during 2016-2019 was in Kentucky, where its principal warehouse was located.
This Court generally treats a stipulation of fact as a conclusive admission by each party. See Rule 91; Stamos v. Commissioner, 87 T.C. 1451, 1454 (1986). Although stipulations are not to be set aside lightly, we have broad discretion to determine whether it is appropriate to set aside a stipulation, which we may do "if justice requires." Rule 91(e); see Blohm v. Commissioner, 994 F.2d 1542, 1553 (11th Cir. 1993), aff'g T.C. Memo. 1991-636; Estate of Eddy v. Commissioner, 115 T.C. 135, 137 n.4 (2000). We are not bound by stipulations of fact that appear contrary to the facts disclosed by the record. Estate of Eddy, 115 T.C. at 137 n.4
Rule 41(b)(1) allows a party to amend its pleadings to raise an issue that has been "tried by express or implied consent of the parties." See Bhattacharyya v. Commissioner, T.C. Memo. 2007-19, at *5. Whether to grant a motion to amend pleadings is within the sound discretion of the Court. Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998). If the opposing party is prejudiced or unfairly surprised, then the motion should be denied. See id. at 178-80; Hardy v. Commissioner, T.C. Memo. 2017-16, at *10. Prejudice results if the addition of a novel issue by later amendment, rather than by inclusion in the initial pleading, unfairly disadvantages the other party. See Ax v. Commissioner, 146 T.C. 153, 168-69 (2016).
After carefully considering the parties' positions, we think it appropriate to relieve respondent of his stipulation as to CDL's PPOB and permit him to amend his Answers accordingly. Petitioners were on notice before the trial began that a dispute existed on this point. Statements by petitioner's counsel during the trial reflect awareness of this dispute. During the first phase of the trial petitioners presented evidence about the situs of CDL's operations and employees during 2016-2019. Petitioners adduced additional evidence on this question during the second phase of the trial through the direct examinations of Bruce Ogilvie. For these reasons we conclude that the question of CDL's PPOB during 2016-2019 was "tried by express or implied consent of the parties." Rule 41(b)(1).
We likewise conclude that "justice requires" that we relieve respondent of his stipulation under Rule 91(e). Proper identification of CDL's PPOB may be important in determining both the governing law and the venue for appeal. These are important elements in any Tax Court litigation, and they should not be governed by a stipulation if it is contrary to the actual facts established at trial. And because the facts regarding CDL's operations and employees were adduced at trial, allowing respondent to amend his pleadings at this juncture will not work "an unfair disadvantage" on petitioners. Ax, 146 T.C. at 168-69. We will accordingly decide the location of CDL's PPOB on the basis of the trial evidence and the parties' post-trial briefs.
The parties filed Simultaneous Opening Briefs on March 25, 2024. In his Opening Brief respondent elaborates on his position that CDL's PPOB was in Florida when its Petitions were filed. Petitioners did not address this issue in their Opening Brief. They note that respondent filed his Motion "ten days before Opening Briefs were due," leaving them "inadequate time . . . to address this issue [in their] brief." In light of petitioners' representation, we will allow them to file a supplemental opening brief addressed solely to the question of CDL's PPOB. And we will extend the due dates for submission of the parties' answering briefs accordingly.
Upon due consideration, it is
ORDERED that respondent's Motion, filed March 15, 2024, is granted insofar as he requests relief from his stipulation as to CDL's principal place of business during 2016-2019 and insofar as he requests leave to amend his Answers in docket Nos. 11369-16, 7434-17, and 3429-19 to set forth his allegations regarding that question. It is further
ORDERED that respondent may file, on or before April 26, 2024, amendments to answer in docket Nos. 11369-16, 7434-17, and 3429-19 that are consistent with the preceding paragraph. It is further
ORDERED that petitioners may file, on or before May 27, 2024, a supplement to their Simultaneous Opening Brief setting forth proposed findings of fact and legal argument concerning CDL's PPOB during 2016-2019. It is further
ORDERED that the time within which the parties are to file their Simultaneous Answering Briefs is extended from June 3, 2024, to July 15, 2024.