Opinion
7696-19 10421-21
06-05-2023
THOMAS J. ORT & DEANNE R. ORT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth Crewson Paris, Judge
The consolidated case at Docket No. 7696-19 has previously been calendared for trial (before consolidation), and the consolidated case at Docket No. 10421-21 has not been set for trial. To date, the parties have engaged in informal discovery, have filed multiple Stipulations of Settled Issues, and are working toward filing a Stipulation of Facts.
Respondent's notice of deficiency in the case at Docket No. 7696-19 determined that the fraud penalty under section 6663(a) was applicable for tax years 2012 and 2013. Respondent's notice of deficiency in the case at Docket No. 10421-21, however, did not include such a determination for tax years 2014, 2015, or 2016.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
On April 7, 2023, respondent filed a Motion for Leave to File First Amendment to Answer, docket entries 56 and 25 in Docket Nos. 7696-19 and 10421-21, respectively, and lodged a First Amendment to Answer, docket entries 57 and 26 in Docket Nos. 7696-19 and 10421-21, respectively, to allege a section 6663 fraud penalty for 2014, 2015, and 2016. On May 4, 2023, at docket entries 58 and 29 in Docket Nos. 7696-19 and 10421-21, respectively, petitioners filed an Objection to respondent's Motion.
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. Justice does not require such leave when the amending party has delayed the motion for tactical reasons or when the non-moving party is prejudiced in his ability to oppose the amended position.
Respondent's Amendment to Answer, as lodged, asserts the determination that petitioners' underpayments of federal income tax for 2014, 2015, and 2016 were due to fraud within the meaning of section 6663(b). Respondent's positions would increase the section 6662 accuracy-related penalty from 20% to 75% of the underpayment in each tax year. See § 6663(a). Respondent asserts that the additional argument should be allowed because, if respondent establishes the section 6663 penalty for 2012 and 2013 (primarily related to petitioners' claimed net operating loss carryforward), respondent will have necessarily also established the fraud penalty for 2014, 2015, and 2016. Respondent bears the burden of proving the fraud alleged in those years "by clear and convincing evidence." Rule 142(b); see also § 7454(a).
Petitioners assert that they have already been affected by respondent's frequent reassignment of attorneys working on these cases. They also assert that they have entered into agreements and stipulations, including multiple Stipulations of Settled Issues, based on the then-current posture of respondent's filings. Petitioners do not, however, allege that they would suffer unfair surprise or prejudice from the granting of respondent's Motion.
These consolidated cases are not currently set for trial and petitioners will have ample time to prepare for respondent's additional allegations. These allegations involve substantially similar issues in consecutive tax years and will require nearly identical evidence to be presented. Further, the burden of proof and production with respect to the additional allegations will fall squarely on respondent at trial. Given the liberality of the above-described standard, the circumstances here do not meet the requisite prejudice or delay to justify denial of respondent's Motion. See Estate of Quick v. Commissioner, 110 T.C. at 180.
To reflect the foregoing, it is hereby
ORDERED that respondent's Motion for Leave to File First Amendment to Answer, filed April 7, 2023, docket entries 56 and 25 in Docket Nos. 7696-19 and 10421-21, respectively, is granted, and the Clerk of the Court shall file respondent's First Amendment to Answer, lodged April 7, 2023, docket entries 57 and 26 in Docket Nos. 7696-19 and 10421-21, respectively, as of the date of this Order. It is further
ORDERED that, on or before July 17, 2023, petitioners shall file a reply to respondent's First Amendment to Answer, as required by Rule 37.