Opinion
30894-21 30896-21
05-07-2024
MARLIN WOODS CAPITAL, LLC, ORNSTEIN-SCHULER, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Patrick J. Urda Judge
In these consolidated cases, petitioner Ornstein-Schuler, LLC challenges two IRS notices that, inter alia, recharacterized certain income received by Marlin Woods Capital, LLC (Marlin Woods) from long-term capital gains to ordinary income for taxable years 2016 and 2017. [Doc. 1 at 24; Docket No. 30896-21, Doc. 1 at 18. Pending before the Court is the Commissioner's motion for leave to file his first amended answer. [Doc. 25.] We will grant the Commissioner's motion.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times and Rule references are to the Tax Court Rules of Practice and Procedure. "Doc." references are to the documents in the lead case, Docket No. 30894-21, (unless otherwise indicated) as compiled by the Clerk of the Court, using .pdf pagination.
Background
During 2016 and 2017, Marlin Woods acquired either a 98 or 99% interest in three limited liability companies that each owned a sizeable tract of land in Polk County, Florida. [Doc. 1 at 8-13; Docket No. 30896-21, Doc. 1 at 8-13.] After acquisition of these interests, Marlin Woods proceeded to divide the respective properties into separate parcels, each owned by an associated limited liability company. [Doc. 1 at 8-13; Docket No. 30896-21, Doc. 1 at 8-13.] Marlin Woods then sold its ownership interests in these limited liability companies (in whole or in part) to various other entities over the course of 2016 and 2017. [Doc. 1 at 8-13; Docket No. 30896-21, Doc. 1 at 8-13.]
Marlin Woods reported the bulk of the income received from these sales ($34,859,578 in 2016 and $20,656,481 in 2017) as long-term capital gain on its 2016 and 2017 federal income tax returns. [Doc. 1 at 14; Docket No. 30896-21, Doc. 1 at 13.] The IRS subsequently issued notices of final partnership administrative adjustment (FPAA) with respect to each year, which concluded that, under section 751, the sales of the LLC interests by Marlin Woods resulted in ordinary income, rather than capital gain. [Doc. 1 at 23-24; Docket No. 30896-21, Doc. 1 at 24.]
Petitions for redetermination were filed on November 17, 2021, which the Commissioner answered on January 14, 2022. [Docs. 1, 5; Docket No. 30896-21, Docs. 1, 5.] By mutual agreement of the parties in February 2022, these cases were referred to the IRS Independent Office of Appeals for settlement discussions. [Doc. 13 at 5; Doc. 22 at 2-3.] The settlement discussions failed to bear fruit, and the parties restarted their trial preparations in the summer of 2023. [Doc. 22 at 2-3.]
In late September 2023, petitioner signaled its intent to file a motion for summary judgment. [Doc. 19 at 5.] On March 11, 2024, the Commissioner filed a motion for leave to file first amended answer, in which he sought to add "an alternative ground for the adjustments . . . relating to the recharacterization of Marlin Woods' income as ordinary business income." [Doc. 25 at 4.] Specifically, the Commissioner asserts that "section 1221 requires Marlin Woods to characterize the gain on the sales of LLC interests as ordinary income because it held the LLC interests primarily for sale to customers in the ordinary course of a trade or business during 2016." [Id.] In opposition, petitioner argues that the Commissioner "has not carried his burden of demonstrating why he should be granted leave to amend his answers more than two years into litigation when the 'new issue' . . . is one that he knew about years before the FPAAs were issued." [Doc. 29 at 10.]
Discussion
Generally, leave to amend a pleading is "given freely" when justice requires, based on the facts and circumstances viewed in light of sound reason and fairness. Rule 41(a); see also Law v. Commissioner, 84 T.C. 985, 990 (1985). When evaluating a motion for leave to amend, we consider factors including the timeliness of the motion, the reasons for the delay, and whether the moving party had sufficient prior opportunity to allege the matter contained in the requested amendment. Derksen v. Commissioner, 84 T.C. 355, 358 n.7 (1985); Watkins v. Commissioner, T.C. Memo. 2014-197, at *11-12; Estate of Lee v. Commissioner, T.C. Memo. 2009-303, 2009 WL 4981328, at *3. Leave to amend may be withheld when there is undue delay, bad faith, prejudice resulting from the amendment, or a dilatory motive of the movant. See, e.g., Foman v. Davis, 371 U.S. 178, 182 (1962); Russo v. Commissioner, 98 T.C. 28, 31 (1992); Ho v. Commissioner, T.C. Memo. 2006-41, 2006 WL 626254, at *6. Leave to amend should not be granted where a movant seeks to raise a futile argument. See Block v. Commissioner, 120 T.C. 62, 64 (2003); Russo, 98 T.C. at 31.
We will grant the Commissioner's motion for leave to amend. We first note that the Commissioner's motion does not reflect undue delay or a dilatory motive. Although the Commissioner seeks to amend his answers more than two years after they had been filed, the parties jointly agreed to consideration before the Office of Appeals in February 2022, shortly after the filing of the Commissioner's answers. [Doc. 13 at 5.] The Office of Appeals did not return the cases for trial preparation until June 2023, approximately 15 months later. [Doc. 22 at 3.] Thus, a significant portion of the total time between the filing of the original answers and the motion for leave to amend was spent pursuing Office of Appeals review. While the Commissioner might have filed his motion earlier, we do not believe that he tarried too long after the Office of Appeals process ended and the parties resumed their trial preparation efforts.
Nor do we believe that amendment at this stage would unfairly prejudice petitioner. These cases have not been calendared for trial, and the parties have not begun discovery. [Doc. 25 at 8.] Further softening any prejudice to petitioner, the parties apparently discussed this issue before the issuance of the FPAAs. [Id.; Doc. 29 at 8.] Given the relatively early stage of the litigation work and the advance notice of this issue, petitioner has an adequate opportunity to fully develop its response to the new allegations. See Ax v. Commissioner, 146 T.C. 153, 169 (2016) ("[W]here . . . the non-moving party is given adequate time . . . to respond to the new pleading, there is no prejudice."); CurrSpec Partners LP v. Commissioner, T.C. Memo. 2007-289, 2007 WL 2768784, at *5 ("We also note that the instant case was not scheduled for trial when [taxpayer] filed its motion [to amend].").
Petitioner argues, however, that amendment would work a particular prejudice because it has been preparing a motion for summary judgment since September 2023, as well as a supporting stipulation of facts, that it had planned to finalize over the next few weeks. [Doc. 29 at 5, 8.] Petitioner further contends that the Commissioner seeks to raise a futile argument. [Id. at 9-10.]
Neither point justifies denying the relief requested. Petitioner is not facing any deadline with respect to the filing of a motion for summary judgment and, up to this point, petitioner has not seemed in any particular rush to file it. We see no reason to restrict the Commissioner's opportunity to amend his pleadings to better fit petitioner's desired pace of play. And, at first blush, the Commissioner's amendment does not appear to introduce a plainly futile argument. Should the Commissioner's alternative ground be as weak as petitioner suggests, we recommend that petitioner address the point with dispatch in a dispositive motion.
Given the paucity of information before us, we will not rule at this stage on which party bears the burden of proof as to the new allegations, which depends in large part on the characterization of the amendment as a new matter or a new theory. See Hurst v. Commissioner, 124 T.C. 16, 30 (2005); Heinbockel v. Commissioner, T.C. Memo. 2013-125, 2013 WL 1953732, at *7.
It is therefore
ORDERED that the Commissioner's motion for leave to file out of time first amended answer, filed March 11, 2024, is granted in these cases, and the Clerk of the Court is directed to file the lodged first amended answers as of the date of service of this Order.