The Tax Court in Brief – July 11th – July 15th, 2022
Tax Litigation: The Week of July 11th, 2022, through July 15th, 2022
- Colbert v Commissioner, T.C. Memo. 2022-74 | July 13, 2022 |Wells, J.| Dkt. No. 8395-16.
- Knight v. Comm’r, T.C. Memo. 2022-76| July 14, 2022 | Lauber, A. | Dkt. No. 11719-20L
- Kelly v. Comm’r, No. 13353-21L, T.C. Memo 2022-73 | July 13, 2022 | Lauber |
- Larochelle v. Commissioner, T.C. Summary Opinion 2022-12 | July 12, 2022 | Leyden | Dkt. 10416-20S
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 Summary: This 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:
- Whether an excuse for delay exists and whether opposing party would suffer unfair surprise, disadvantage, or prejudice if the motion to amend were granted.
- Whether the issue being raised requires consideration of “stale evidence”, availability of relevant witnesses or documents, time passed since the party’s initial pleading, remoteness in time of taxable years involved in the underlying dispute, completion of discovery and/or trial. Scar v. Commissioner, 81 T.C. 855, 867 (1983) (Swift, J., concurring), rev’d on other grounds, 814 F.2d 1363 (9th Cir. 1987).
The Court summarized petitioner’s main arguments as follows:
- Undue delay in raising an issue cannot by itself be ground to deny the motion for leave to amend and the motion can be denied only if the nonmoving party would be prejudiced. The Court ruled that prejudice is only one factor to disallow the motion. Moreover, the Court clarified that when the absence of excuse and prejudice factors are present the motion can be denied, but this does not mean the reverse: that the motion must be granted unless the two factors are present. Nolte v. Commissioner, 1995 WL 37631, at *2–3. The Court relied on the language of Foman to clarify that the existence of either factor is sufficient to deny the motion by itself. Foman v. Davis, [*8] 371 U.S. 178, 182 (1962). Accordingly, if both factors exist, it is more than clear that a motion for leave to amend can be denied.
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.
- Prejudice to the nonmoving party is measured on an incremental basis. Despite that the mere lack of good excuse could be reason enough to deny the motion, the Court went ahead and ruled that the claim being raised by petitioner would impose significant burden on the Court and the IRS, considering the fact intensive nature of the claims for research credits. Little Sandy Coal Co. v. Commissioner, T.C. Memo. 2021-15, at *20.
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).
- Respondent would not bear incremental burden in this case because the credit claim by petitioner was independent from the issues addressed in the prior Opinion. The court reasoned that the resolution of the research credit claim would be more difficult at this point in the process and allowing the amendment would impose a significant burden on the IRS for a taxable year that ended more than 10 years ago. Given the factual nature of the research credit, even if the credits were allowed in previous years, those different facts would raise different legal considerations.
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.