Opinion
12980-22
10-19-2023
ECONFINA RESOURCES, LLC, ECONFINA CORPORATION, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth Crewson Paris Judge
This case is one of five related but not consolidated cases. This case was initially set for trial on the Court's January 30, 2023, Birmingham, Alabama calendar. On November 9, 2022, the parties filed a Joint Motion for Continuance of Trial, docket entry 19. On December 8, 2022, the Court granted the Joint Motion for Continuance of Trial and this Division of the Court retained jurisdiction of this case, docket entry 21. To date, the parties in this case have filed a stipulation of facts and have been engaged in active discovery and motion practice. Discovery in this case is ongoing.
The five cases are McKinley Brooks, LLC v. Commissioner, Docket No. 26125-21; Econfina Resources, LLC v. Commissioner, Docket No. 12980-22; Silver Moss Properties, LLC v. Commissioner, Docket No. 10646-21; Sydney Roads, LLC v. Commissioner, Docket No. 30287-21; and Joint Star Properties, LLC v. Commissioner, Docket No. 30289-21. The first two cases are assigned to this Division of the Court. The last three are assigned to Judge Pugh. The common element between these cases is that the conservation easements at issue came from subdivided parcels of the same tract of land.
On July 3, 2023, respondent filed a Motion for Leave to File Amendment to Answer, docket entry 39, and lodged a First Amendment to Answer, docket entry 40. On August 4, 2023, petitioner filed a Response in Opposition to Respondent's Motion for Leave to File Amendment to Answer, docket entry 51, along with a supporting Declaration of Gregory P. Rhodes, docket entry 52.
Rule 41(a) provides that leave to amend a pleading "will be given freely when justice so requires." Whether leave will be granted is a question falling within the sound discretion of the Court. See Zenith Radio Corp. v. Hazeltine Rsch., Inc., 401 U.S. 321, 330 (1971); Foman, 371 U.S. at 182; Young v. Commissioner, 926 F.2d at 1087; Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998), supplemented by 110 T.C. 440 (1998).
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
Rule 41(a) is similar to Rule 15(a) of the Federal Rules of Civil Procedure in that both rules state that leave to amend is to be freely given when justice so requires. See Kramer v. Commissioner, 89 T.C. 1081, 1084-85 (1987). In interpreting this language, the Supreme Court has held that "[i]n the absence of any apparent or declared reason-such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.- the leave sought should, as the rules require, be 'freely given.'" Foman v. Davis, 371 U.S. 178, 182 (1962); see also Young v. Commissioner, 926 F.2d 1083, 1087 (11th Cir. 1991), aff'g T.C. Memo. 1988-440, and Cohen v. Commissioner, T.C. Memo. 1988-525; Rose v. Commissioner, 311 Fed.Appx. 196, 202 (11th Cir. 2008) (remanding because the Court did not address the Foman factors in denying petitioners' motion for leave to amend their pleadings), aff'g in part, rev'g in part, and remanding T.C. Memo. 2006-36.
Petitioner alleged in its Petition that its principal place of business is in Florida, an allegation that respondent did not admit to in his Answer. Section 7482(b)(1)(E) provides that appellate venue in this case is the circuit in which the partnership's principal place of business is located. For purposes of this Order, the Court assumes without deciding that an appeal in this case would lie in the U.S. Court of Appeals for the Eleventh Circuit. Therefore, the Court will follow that court's precedent. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971); see also § 7482(b)(1)(E).
An important factor in deciding whether to grant leave to amend is prejudice to the opposing party. See Zenith Radio Corp., 401 U.S. at 330-31 (stating that the district court was required to consider prejudice in considering a motion for leave to amend the answer); Estate of Quick, 110 T.C. at 178. In considering prejudice under Rule 41(a), the question is not simply whether an amended pleading that includes the proposed new issues would make the case harder or more expensive for the other party, because that is likely to occur in any amendment to the pleadings, but whether it would create an unfair disadvantage to the other party. Ax v. Commissioner, 146 T.C. 153, 168 (2016). Where the non-moving party has adequate time to respond to an amended pleading, there either is no prejudice, or any prejudice is cured. Id. at 169 (citing Church of Scientology of Cal. v. Commissioner, 83 T.C. 381, 469 (1984)); see also Campbell v. Emory Clinic, 166 F.3d 1157, 1162 n.18 (11th Cir. 1999).
As to futility, the Court considers whether the moving party could prevail on the merits. See Russo v. Commissioner, 98 T.C. 28, 31 (1992) (denying taxpayer's motion for leave to amend the petition where she could not have prevailed on her claim if the motion was granted).
In any case involving allegations of fraud, respondent bears the burden of proving the alleged fraud "by clear and convincing evidence." Rule 142(b); see also § 7454(a); Henson v. Commissioner, 887 F.2d 1520, 1525 (11th Cir. 1989), aff'g T.C. Memo. 1988-275.
Respondent seeks leave of the Court to amend his Answer to assert the section 6663 civil fraud penalty against petitioner. Respondent's First Amendment to Answer, as lodged, asserts that petitioner is liable for a civil fraud penalty under section 6663(a) with respect to an underpayment of federal income tax for 2017. Respondent's position would increase the section 6662 accuracy-related penalty from 20% to 75% of the underpayment. See § 6663(a).
Respondent's Motion states that indicia of fraud exist in this case based on petitioner's representation that property it purchased for $3,521,980.82 could be worth $102,160,000.00 days after purchase. Respondent contends that the additional allegation should be allowed because he only recently discovered additional facts which clearly and convincingly establish that fraud exists in this case. Respondent's Motion indicates that he discovered these new facts upon review of files located on a flash drive petitioner mailed to respondent on June 16, 2023. The additional facts alleged by respondent include that the partnership's managers knew that the prior landowner of the property at issue had previously determined that the partnership's asserted highest and best use of the property (limestone mining) was not feasible due to inadequate rail access to the property.
Respondent puts forth three reasons why the Court should grant him leave to amend his Answer. First, the amendment will not unfairly surprise petitioner, since the facts that justify the assertion of the civil fraud penalty are entirely within petitioner's knowledge and control. Second, the amendment will not prejudice petitioner, as no trial date has been set and discovery is ongoing. Finally, the notice of final partnership administrative adjustment, on which this case is based, already asserts accuracy-related penalties under section 6662; any evidence petitioner introduces to rebut the accuracy-related penalties should prove to be the same or substantially similar to evidence petitioner might introduce in defense of the fraud penalty.
Petitioner counters that the Motion is made in bad faith and lacks transparency. Petitioner takes issue with respondent not explaining which specific documents provide the factual basis for his Motion. Petitioner believes that respondent needs to supplement his Motion with citations to documents so that it can determine whether respondent based his Motion on documents discovered years ago (which might support an argument of undue delay) or those produced in June 2023. Further, petitioner argues that it will be prejudiced by the amendment because the assertion of the civil fraud penalty will lead to added expense, additional time to prepare for trial, and a more complicated and lengthy trial. Finally, petitioner contends that respondent's First Amendment to Answer is futile because respondent will not be able to prevail on the civil fraud penalty.
After a thorough review of the record and the parties' filings, the Court concludes there is nothing in the record to support a finding that petitioner would suffer undue delay, prejudice, or other substantial harm as a result of respondent's amendment. The Court's Rule 41(a)'s liberal standard (and the Supreme Court's mandate in Foman) that leave be given freely. Viewed against that same backdrop, and given the procedural posture of this case, petitioner's "evidence" of bad faith is unconvincing. Further, this case is not currently set for trial and petitioner will have ample time to prepare for respondent's additional allegation. And finally, respondent's First Amendment to Answer, as lodged with the Court, docket entry 40, alleges sufficient facts such that, if proven, the evidence to establish potential badges of fraud would be before the Court. Accordingly, the amendment is not futile. Although the Court will allow respondent to amend his Answer, it is not suggesting any view on the merits of such a penalty in this case, and petitioner is also free to use the same evidence in regard to its valuation arguments.
Considering that the burden of proof and production with respect to respondent's additional allegation will fall squarely on respondent at trial, see Rule 142(b); see also § 7454(a); Henson v. Commissioner, 887 F.2d at 1525, and given Rule 41(a)'s liberal standard for leave to amend a pleading, the circumstances here do not meet the requisite prejudice or delay to justify denial of respondent's Motion, see Young v. Commissioner, 926 F.2d at 1087; Ax, 146 T.C. at 169; Estate of Quick, 110 T.C. at 180.
To reflect the foregoing, it is hereby
ORDERED that respondent's Motion for Leave to File Amendment to Answer, filed July 3, 2023, docket entry 39, is granted, and the Clerk of the Court shall file respondent's First Amendment to Answer, lodged July 3, 2023, docket entry 40, as of the date of this Order.