Opinion
23354-21
11-30-2022
NAT S. HARTY AND APRIL D. HARTY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Kathleen Kerrigan Chief Judge.
This case is currently set to be heard at the Court's Los Angeles, California trial session commencing on December 19, 2022. On October 20, 2022, respondent moved for leave to file out of time first amendment to answer. On October 26, 2022, petitioners filed an opposition to respondent's motion. On November 21, 2022, respondent filed a reply to petitioners' opposition.
Rule 41(a) provides that "a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires." Whether leave to amend the answer will be granted is a question falling within the sound discretion of the Court. Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998). An important factor in deciding whether leave will be granted is prejudice to the opposing party. Id. at 178-80. Prejudice can occur if the opposing party was required to engage in substantial new preparation at a late stage in the proceedings, necessitating added time and expense. TBL Licensing LLC v. Commissioner, T.C. Memo. 2022-71, at *11.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent's first amendment to answer asserts the codified economic substance doctrine under section 7701(o)(1)(A) and an accuracy-related penalty under section 6662(b)(6). Respondent's positions would increase the section 6662 accuracy-related penalty from 20% to 40%. § 6662(i)(1). Respondent asserts that the additional argument should be allowed because it did not receive approval to assert it until October 5, 2022.
Petitioners argue that respondent's motion would cause them to suffer substantial delay and prejudice. They assert that respondent had ample opportunity to put forth this argument and doing so two months before trial is unfair to them. There is nothing in the amended answer that would support a finding that petitioners "will suffer unfair surprise or prejudice" as a result of our granting respondent's motion. Estate of Quick v. Commissioner, 110 T.C. at 180. In fact they have been aware of respondent's potential argument since the deficiency notice was issued and the issue was raised during a conference call on September 9, 2022. Respondent informed petitioner that the Deputy Chief Counsel approved the assertion of the codified economic substance doctrine and explained that respondent was waiting for approval from the National Office.
Petitioners became specifically aware of the codified economic substance doctrine argument on September 9, 2022, when respondent's counsel informed petitioners that the IRS Deputy Chief Counsel had approved assertion of the new argument. With a December 19, 2022, trial date in place, petitioners were given more than three months to adjust their strategy to account for the new argument. That is ample time to prepare.
Given the liberality of the above-described standard, the circumstances of this proceeding do not meet the requisite prejudice or delay to justify denial of respondent's motion.
To reflect the foregoing, it is hereby
ORDERED that respondent's motion for leave to file first amendment to answer filed October 20, 2022, is granted, and the Clerk of the Court shall file respondent's first amendment to answer, lodged October 20, 2022, as of the date of this order.