Tax Court in Brief | TBL Licensing LLC et al v. Commissioner | Amending Pleadings in the Tax Court

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The Tax Court in Brief – July 11th – July 15th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of July 11th, 2022, through July 15th, 2022

TBL Licensing LLC f.k.a. The Timberland Company, and Subsidiaries (A Consolidated Group), v. Comm’r, T.C. Memorandum 2022-71| July 12, 2022 | Halpern, J. | Dkt. Nos. 21146-15.

Short SummaryThis case discusses whether the Court should have granted a motion for leave to amend a pleading filed after 6 ½ years after the filing of a petition. This opinion supplements a prior opinion TBL Licensing LLC & Subs. v. Commissioner, No. 21146-15, 158 T.C. (Jan. 31, 2022) that adjudicated a $504,691,690 tax deficiency determination.

In this case, the case was decided on Motions for Summary Judgment and the Tax Court entered an Order and Decision (see TBL Licensing LLC & Subs. v. Commissioner, No. 21146-15, 158 T.C. (Jan. 31, 2022)) on February 9, 2022. After such decision, respondent filed a Motion to Vacate the decision to state the amount of the upheld deficiency (to not simply refer to the notice of deficiency (NOD)). Petitioner opposed such motion arguing that the deficiency should be reduced with a research credit that was claimed in an amended return filed after the issuance of the NOD.

The Court vacated the previous Order and Decision and before entering a new one, allowed petitioner to submit an “appropriate motion”. Petitioner filed a Motion for Leave to amend its petition, to include its claim to a research credit.

The Court denied petitioner’s Motion for Leave stating that the petitioner failed to offer an explanation for its lengthy delay to raise its research credit claim. In this case, justice did not require granting the motion.

Key Issues: Whether justice requires granting a motion for leave to amend a pleading under Rule 41(a) depends on the facts and circumstances of the case? Is the presence or absence of prejudice to the nonmoving party determinative?

Primary Holdings: The granting of a motion for leave to amend a pleading under Rule 41(a) depends on facts and circumstances of the case. Moreover, existence or absence of prejudice is not determinative to grant the motion.

Key Points of Law:

Under Rule 41(a), a party can amend its pleadings as follows: (i) as a matter of right before service of a responsive pleading, (ii) if there has been service of the responsive pleading, and the opposing party agrees to the amendment, the amendment of pleadings is allowed, (iii) if the opposing party does not consent to the amendment, the amendment requires leave of the Court. Leave shall be given freely when justice so requires. Rule 41(a) Tax Court Rules.

“Justice” is determined upon “examination of the particular circumstances in the case”. Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998), supplemented by 110 T.C. 440 (1998). Various circumstances are considered, including:

The Court summarized petitioner’s main arguments as follows:

In this case, after analyzing the arguments of petitioner, determined that it did not offer an explanation for the delay in raising the claim for the research credit. The Court rejected that “prejudice” was the dispositive factor in this case and concluded that no good excuse for delay was provided, thus motion was denied.

Here, petitioner argued that even if the resolution of the research credit is difficult, it would not be more difficult at this point in the litigation than it would have been if the claim had been raised in the beginning of the litigation. In other words, there would not be an “increment” to solve the case, or in the words of Ax “would make the case harder or more expensive for the other party than a pleading that lacks those issues,”, but the same Court clarified the core of the incremental analysis: “whether the addition of those new issues by a later amendment, rather than by inclusion in the initial pleading, works an unfair disadvantage to the other party.” Ax, 146 T.C. at 166.

Although incremental analysis can be helpful to determine the existence of prejudice, the absolute burden on the nonmoving party should always be considered. “Of key importance in evaluating the existence of prejudice,” “is the amount of surprise and the need for additional evidence on behalf of the party in opposition to the new position.”, which is especially true “where there was no trial and the facts were fixed by agreement.”. Leahy v. Commissioner, 87 T.C. 56, 65 (1986).

Insight:  This case provides an excellent map to understand how to amend pleadings in the Tax Court. As clarified by the Court, the existence of either factor (absence of excuse for delay and prejudice) is sufficient to deny a motion for leave to amend. Additionally, even if the incremental analysis is a helpful tool, the absolute burden imposed on the nonmoving party and the Court shall always be considered. This case presents a day-to-day issue in tax litigation: raise all the claims at the outset of the process, especially considering the limited jurisdiction of the Tax Court. However, if the amendment is required (maybe because there is an additional claim not yet raised), it would be better to raise the claim as soon as possible in the process rather than delaying it until a later stage. If there is a phrase summarizing this case, here it is: Do not leave for tomorrow what you can do today.