Yesterday, I wrote about a case in which the IRS was stuck with a concession even though its proof showed that the concession allowed a deduction it should not have allowed. In the discussion of the Demuth case in that post I wrote about other times in which the Court did or did not allow changes. In TBL Licensing v. Commissioner, TC Memo 2022-71 the court refuses to allow a petitioner to amend the petition six and one half years after the filing of the petition and after, in February of this year, it had rendered a precedential decision in the case, 158 T.C. No. 1 (2022).
One could ask why a case was still pending in the Tax Court six and one half years after the filing of the petition. I have pointed out in enough previous blog posts how slow the Tax Court can be in rendering opinions. I looked at the docket sheet here to obtain a sense of the case. The parties have been active as has the court. Based on an earlier opinion of the court, the case involves over $500 million in tax. With that amount at issue, it is not surprising to see a long docket sheet with lots of activity. The case involves an issue of corporate reorganization and resulted in a precedential opinion issued in November 2021, withdrawn shortly thereafter and reissued in February 2022.
A couple things struck me as unusual from the docket sheet. Petitioners sent the IRS five separate requests for admission. That doesn’t happen very often. The second thing is after the precedential opinion, petitioner moves to amend its petition for the second time in the case. Why would you amend you petition after losing the case? Generally, a party would do that after an opinion where the opinion did not cover all of the issues in the case but to find out exactly when, it’s necessary to read the memo opinion.
In the summary of the case, the court quickly answers my question regarding why petitioner would move the amend the petition after losing the case. My original guess was wrong. The precedential opinion did fully resolve the case; however, petitioner had by this point found another issue which might reduce its liability. Here’s how the court describes it:
P and R each moved for summary judgment on issues regarding the application of I.R.C. § 367(d), which they presented as the sole issues in the case requiring resolution. The Court resolved those issues in TBL Licensing LLC & Subs. v. Commissioner, No. 21146-15, 158 T.C. (Jan. 31, 2022). In March 2022, more than 6½ years after filing its Petition, P moved for leave to amend its Petition to assert a claim for a research credit under I.R.C. § 41. R opposes P’s Motion.
Keep in mind that when you try a Tax Court case the resolution of the case ends the tax year. After the case neither party can go back and try to change the tax result for the year(s) before the court. The decision acts as a form of closing agreement ending any further consideration of the year.
To its credit, petitioner here comes in quickly after losing the case and does not try to obtain a result in a separate proceeding; however, the timing is terrible in general since the case has by this time been pending for over six years with lots of activity and many attorneys representing petitioner. The memo opinion lists seven attorneys of record for petitioner at the time of its issuance. So, this is not a case in which an attorney suddenly comes into the picture to assist a previously unrepresented taxpayer. This is a case with numerous attorneys on both sides and lots of time to uncover issues relating to the 2011 fiscal year.
There was other post-decision action occurring into which petitioner’s motion to amend its petition fits:
On March 4, 2022, respondent filed a Motion asking us to vacate the February 9th Order and Decision and replace it with one that states the amount of the upheld deficiency (rather than simply cross-referencing the notice of deficiency). Petitioner opposed respondent’s Motion to Vacate, alleging that the deficiency should be reduced by a research credit petitioner claimed under section 41 in an amended return petitioner apparently filed in June 2015, after respondent had issued the notice of deficiency but before petitioner had petitioned this Court for redetermination of the deficiency. Petitioner had not made any claim to a research credit for the taxable year in issue in its Petition
or at any other time before March 8, 2022, when petitioner responded to respondent’s Motion to Vacate.
So, not only were lots of attorneys involved for petitioner but the research credit it now wants to add to the case by amending the petition was known to petitioner since before the filing of its initial petition yet it had never raised this issue in its pleadings.
The court granted the IRS motion but held off issuing a new order in order to give petitioner the opportunity to make an appropriate motion. It did by filing a motion for leave to amend. In deciding whether to allow the requested amendment the court said:
“[D]etermining the justice of a proposed amendment” requires an “examin[ation 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). Among the circumstances considered are “whether an excuse for the delay [in raising the issue] exists and whether the opposing party would suffer unfair surprise, disadvantage, or prejudice if the motion to amend were granted.” Id. We also take into account whether the issue sought to be raised would require the consideration of “stale evidence,” the availability of relevant witnesses or documents, the time passed since the party’s initial pleading, the “remoteness in time of
[the] taxable years involved in the underlying dispute, or [the] 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).
Petitioner argued that the court must allow it to amend the pleadings unless the amendment would prejudice the IRS. Here, it alleged that no prejudice would exist and justice would best be served by allowing the amendment. Petitioner argues that the IRS would not be surprised because it knew about the credit argument for seven years since the filing of the amended return. The IRS has apparently allowed the same credit in other years.
The IRS objected to the amendment pointing out that petitioner offered no explanation for its failure to place this issue before the court at an earlier and more appropriate time. It says petitioner abandoned the issue by its inaction. The IRS also pointed to a conversation between counsel in 2015 in which petitioner’s counsel advised the IRS counsel that it had no plans to amend its petition to add this issue. The IRS did not explain how raising the issue at this point would make it more difficult that if petitioner had raised the issue at the outset.
The court looks at an earlier opinion in which it said that a motion for leave to amend can be denied when absence of excuse and prejudice exists. But the court distinguished that opinion and held the either the absence of excuse or the existence of prejudice, alone, can justify denial of a motion to amend the pleadings. Here, the additional factor hurting petitioner is its apparent statement early in the case that it did not intend to raise this issue:
Petitioner’s efforts to elevate prejudice or substantial inconvenience as the sole dispositive factor, coupled with its repeated failures to provide any explanation for its delay in raising before the
Court its claim to a research credit for 2011, convince us that petitioner has no good excuse for its delay. In respondent’s unrefuted telling of the procedural history, petitioner’s failure to have raised the research credit issue reflects a conscious decision not to pursue the issue.
Similar to the Demuth case the denial here of the amendment to the petition probably leaves the petitioner paying more tax than it should. In Demuth the court stated flatly that the concession gave petitioners a windfall. A similar statement was not made in TBL Licensing but the implication of the treatment of the credit in earlier years leaves the impression that if timely raised the credit would have been allowed here. In both cases the court goes for finality over finding the precise right answer.
The Court injected a new consideration into the equation – the impact of the motion on the Court: “Consideration of petitioner’s claim could impose a significant burden on both the Court and respondent.” (emphasis added) The Court explains in some detail the burdens reopening the case would place on the IRS. It does not explain the burden it would place on the Court but does reference judicial economy and the burden that will be placed on the Court – “a burden likely to be greater than it would have been had petitioner raised the issue in the petition it filed more than 6½ years ago.” The addition of the burden to the Court, while certainly present in any case in which a party seeks to have a second bite at the apple, has not regularly been a basis for denial of a motion such as this.
I am not troubled by the need for finality and allowing that need to overcome arguments that might get to a more perfect tax answer. Both parties have a need to bring the issues to the court in a timely fashion. The failure to do so has consequences as both cases point out.