Shang v. Comm'r , 95 T.C.M. 1256 ( 2008 )

T.C. Memo. 2008-69
UNITED STATES TAX COURT
WADE V. SHANG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20910-06. Filed March 18, 2008.
Wade V. Shang, pro se.
Margaret Burow, for respondent.
MEMORANDUM OPINION
HAINES, Judge: This case is before the Court on
respondent’s motion for leave to file amendment to answer under
Rule 41(a).1
1
Unless otherwise indicated, section references are to the
Internal Revenue Code as amended. Rule references are to the Tax
Court Rules of Practice and Procedure. Amounts are rounded to
(continued...)
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Background
Petitioner resided in California at the time the petition
was filed.
On August 1, 2006, respondent issued petitioner a notice of
deficiency based on petitioner’s criminal tax evasion convictions
in the U.S. District Court for the Northern District of
California for the years 1996, 1998, and 1999.2 Respondent
determined deficiencies in petitioner’s Federal income tax
totaling $66,828 and civil fraud penalties under section 6663
totaling $50,121. Petitioner filed a timely petition to this
Court on October 16, 2006. On December 5, 2006, respondent
timely filed his answer.
Respondent’s answer states in relevant part:
FURTHER ANSWERING the petition in respect to
respondent’s determination that the petitioner is
liable for the civil fraud penalty pursuant to I.R.C.
section 6663 for taxable years 1996, 1998, and 1999,
respondent affirmatively relies upon the doctrine of
collateral estoppel, and alleges:
The answer goes on to allege facts regarding petitioner’s
criminal conviction which would tend to support the application
of collateral estoppel. Petitioner did not file a reply.
On March 28, 2007, 113 days after the filing of the original
answer, respondent filed a motion for leave to file amendment to
1
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the nearest dollar.
2
Petitioner’s conviction for 1999 was reversed by the U.S.
Court of Appeals for the Ninth Circuit. United States v. Shang,
114 Fed. Appx. 813 (9th Cir. 2004).
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answer. Respondent seeks to set forth facts regarding the
determination of the civil fraud penalties without reliance on
collateral estoppel. On May 31, 2007, petitioner filed his
objection to respondent’s motion for leave to file amendment to
answer. On October 15, 2007, hearing was held on the motion in
San Francisco, California.
Discussion
Rule 41 governs amended and supplemental pleadings. Rule
41(a) covers amendments generally and provides in effect that
after a responsive pleading is served or after 30 days if no
responsive pleading is permitted, “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.”
Rule 41(a) reflects “a liberal attitude toward amendment of
pleadings.” 60 T.C. 1089 (explanatory note accompanying
promulgation of Rule 41). Because the parties have framed this
issue as though leave were necessary for respondent to amend his
answer, we will assume arguendo that it is.
Whether leave will be granted to file an amendment to answer
is a question falling within the sound discretion of the Court,
and the disposition of such a motion turns largely on whether the
matter is raised timely so as not to prejudice the taxpayer.
Waterman v. Commissioner, 91 T.C. 344, 349-350 (1988); Ross Glove
Co. v. Commissioner, 60 T.C. 569, 595 (1973).
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Petitioner’s objections to the motion fall into three
categories. Petitioner argues: (1) Respondent is in violation
of the Court’s Rules, (2) respondent failed to exercise due
diligence, and (3) if the motion is granted, petitioner will be
unduly prejudiced in presenting his case.
Whether Respondent Has Complied With the Court’s Rules
Petitioner argues that respondent is in violation of Rule
39, which requires that a party set forth in his pleading special
matters, including fraud and collateral estoppel. Petitioner
argues that respondent pleaded collateral estoppel, but not
fraud, in his original answer. However, the answer specifically
states: “petitioner is liable for the civil fraud penalty
pursuant to I.R.C. section 6663 for taxable years 1996, 1998, and
1999”. In his answer, respondent relies on collateral estoppel.
In his motion for leave to file amendment to answer, respondent
merely seeks to include the facts necessary for a finding of
fraud without reliance on collateral estoppel. As respondent
alleged fraud in his answer, he has complied with Rule 39.
Petitioner alleges that respondent did not set forth the
reasons for the amendment as required by Rule 41(a). However,
the motion states that respondent seeks to set forth allegations
of facts surrounding the imposition of the civil fraud penalty
under section 6663. This is sufficient to comply with Rule
41(a).
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Whether Respondent Failed To Exercise Due Diligence
In Chanik v. Commissioner, T.C. Memo. 1972-174, affd. 492
F.2d 1181 (6th Cir. 1974), the Court denied the Commissioner’s
motion to amend his answer to allege fraud rather than negligence
for the taxpayer’s 1961 tax year. The Court found that the
Commissioner failed to exercise due diligence in alleging fraud
because he investigated the taxpayer’s 1961 tax year for 6 years
before the issuance of a notice of deficiency, he issued a notice
of deficiency for 1958, 1959, and 1960 which alleged fraud for
those years shortly after issuing the 1961 notice, and the motion
to amend was made at the time of trial. Id.
In Commissioner v. Estate of Long, 304 F.2d 136 (9th Cir.
1962), the court denied a motion to amend the answer to assert
additional deficiencies in excess of the amounts determined in
the notice of deficiency. The Court found that the Commissioner
took no action for over 4 years, from the time of filing the
original answer until 2 days before the date of a hearing on an
order to show cause why the Court should not enter decisions when
the taxpayer consented to decisions based on the amounts
determined in the notice of deficiency. Id. at 143.
Respondent is not asserting additional deficiencies or
penalties as the Commissioner did in Chanik and Estate of Long.
Respondent affirmatively alleged fraud in his answer, and the
motion was made less than 4 months after the original answer was
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filed and before the case was set for trial. The Court,
therefore, finds that respondent was not dilatory in moving to
amend the answer.
Petitioner further argues “that respondent is bound by the
doctrine of ‘abundant notice’ of any alleged facts of fraud and
self-acknowledged privity with the prior criminal proceedings,
wherein fraud allegations were made.” The Court is not aware of
a “doctrine of abundant notice”. Whatever notice respondent had
of the criminal proceedings is irrelevant to the issue of whether
respondent’s motion for leave should be granted.
Whether Petitioner Would Be Unduly Prejudiced
Petitioner argues that the motion should be denied because
the proposed amendment seeks to raise factual issues that would
require substantial preparation and trial time, whereas
collateral estoppel is a legal issue requiring fewer resources.
In Wyman-Gordon Co. v. Commissioner, T.C. Memo. 1985-433, the
Court denied the Commissioner’s motion for leave to amend his
answer to raise a new factual issue, finding that the amendment
prejudiced “petitioners’ efforts to obtain a resolution of the
other issues that were raised by respondent in a timely manner.”
Id.
In Wyman Gordon Co., the Commissioner filed his motion for
leave 4 days after calendar call and 11 months after filing his
answer. As discussed above, this case has not been set for trial
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and respondent filed his motion for leave less than 4 months
after filing his answer. Furthermore, petitioner presumably
prepared a defense in his criminal case which would require the
presentation of much of the same evidence as the civil case
before this Court.
Conclusion
Put simply, respondent’s motion for leave to file amendment
to answer has been submitted without undue delay, respondent has
complied with the Court’s Rules, and petitioner will not be
prejudiced by the granting of respondent’s motion.
To reflect the foregoing,
An appropriate order will be
issued granting respondent’s motion
for leave to file amendment to
answer.