DocketNumber: Docket No. 2674-88.
Citation Numbers: 63 T.C.M. 2176, 1992 Tax Ct. Memo LEXIS 131, 1992 T.C. Memo. 110
Judges: NIMS
Filed Date: 2/24/1992
Status: Non-Precedential
Modified Date: 11/20/2020
NIMS,
Unless otherwise indicated, section references are to the Internal Revenue Code as in effect for the taxable years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
During the years in issue, Yamaha Motor Corporation, U.S.A. (YMUS), which was organized and has its principal place of business in California, purchased tangible property for resale from its Japanese parent, Yomaha Motor Co., Ltd. (YMC). Petitioners YMUS and subsidiaries joined in filing consolidated Federal income tax returns.
Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows:
Addition to Tax | ||
12/31/77 | $ 354,834 | -- |
4/30/78 | 134,824 | -- |
4/30/79 | 6,247,043 | -- |
4/30/80 | 10,875,509 | -- |
4/30/81 | 35,893,094 | -- |
4/30/82 | 27,265,515 | -- |
4/30/83 | 26,044,004 | $6,511,001 |
4/30/84 | 26,168,942 | 6,542,236 |
1992 Tax Ct. Memo LEXIS 131">*132 A reference hereinafter to "1980", for example, is to the taxable year ended April 30, 1980.
In his notice of deficiency, respondent included the following explanation under the heading "Gross Income from Sales of Tangible Property":
It is determined that during the taxable years ended April 30, 1981 and April 30, 1982, you purchased tangible property for resale from Yamaha Motor Co., Ltd., a corporation by which you are controlled, at prices other than arm's length priices. In order to clearly reflect income, gross income from the sales of the tangible property purchased for resale at other than arm's length prices is increased, as provided ro in
An explanation paragraph for the following years, 1983 and 1984, was worded substantially the same except for the dates and amounts.
An explanation paragraph for the preceding years, 1979 and 1980, was 1992 Tax Ct. Memo LEXIS 131">*133 also worded substantially the same. This, however, was an alternative adjustment by respondent for these earlier years. His primary adjustment was the disallowance of net operating loss carrybacks from 1982 and 1983 because of his adjustments, including
In their petition, petitioners alleged that respondent erred in not recognizing that the prices YMUS paid to YMC for tangible property were equal to arm's-length prices. For facts relied upon, petitioners further alleged:
Respondent has based his determination of an arm's length price on the resale price method. * * * In this case, respondent has used * * * [comparative resale transactions] that involve functions and circumstances of sale that are materially different from petitioner's resales, and 1992 Tax Ct. Memo LEXIS 131">*134 respondent has failed to make any attempt to adjust for those differences.
Respondent formally answered this paragraph as follows:
Denies that respondent's determination is necessarily based on a resale price method; alleges respondent based his adjustment on the best available evidence due to petitioner's failure and refusal to provide requested information and documentation; alleges respondent's economist determined an arm's length price by comparing petitioner to comparable wholesale distributors of imported durable goods; * * * denies the * * * [last] sentence.
On August 16, 1991, respondent filed a motion for leave to file an amendment to his answer, in which motion he stated that the lodged amendment would not result in an increased deficiency for any relevant year. On September 30, 1991, the Court granted respondent's motion and filed his amendment to answer, which states in part that YMUS incurred sizable advertising and sales promotion expenses in 1980 through 1984, at least a substantial portion of which was "in connection with marketing or other services performed on behalf of YMC, or performed for the joint benefit of YMC and YMUS." Respondent further alleged that these1992 Tax Ct. Memo LEXIS 131">*135 services were an "integral part of YMUS's business" and that YMUS performed them for less than arm's-length compensation. Citing
Respondent alternatively alleged in his amendment to answer, for 1982 through 1984, that YMUS maintained substantial excess inventory and thereby incurred substantial additional expenses, again as services performed on behalf of YMC or for the joint benefit of YMC and YMUS, and again at less than arm's-length compensation. Citing
On October 29, 1991, petitioners filed a motion concerning the burden of proof for matters raised in respondent's amendment to answer and, as permitted by Rule 54, a joined motion to strike and motion for more definite statement. Respondent filed notices of objection, and petitioners filed responses to respondent's objections.
Petitioners' Motion Concerning the Burden of Proof
Rule 142(a) provides that although the burden of proof normally rests with the taxpayer, it rests with respondent for "any new matter * * * pleased in the answer". In defining "new matter" within the meaning of Rule 142(a), petitioners refer to the following language in
The assertion of a new theory which merely clarifies or develops the original determination without being inconsistent or increasing the amount of the deficiency is not a new matter requiring the shifting of the burden of proof. However, if the assertion in the amended answer either alters the original deficiency or requires the presentation of different evidence, then respondent has introduced a new matter. * * * [Citations 1992 Tax Ct. Memo LEXIS 131">*137 omitted.]
Petitioners contend that the so-called services theories in respondent's amendment to answer alter the original deficiencies and require the presentation of different evidence, thereby causing respondent to bear the burden of proof for all matters in the amendment to answer.
Respondent counters that the controlling principle is stated in
Despite the parties' differing views, we need not here decide whether, or the extent to which, Achiro is inconsistent with Abatti. Our disposition of petitioner's motion concerning the burden of proof is inconsistent with1992 Tax Ct. Memo LEXIS 131">*138 neither.
As recognized by both parties, our consideration of the "new matter" issue centers upon the deficiency notice, which states that respondent relied upon
Contrary to respondent's position that the deficiency notice does not implicate any particular regulation1992 Tax Ct. Memo LEXIS 131">*139 provision corresponding to
Petitioners are certainly correct that the performance of services (the subject matter of
Under the comparable uncontrolled price method, the arm's-length price of a controlled sale is equal to the price paid in comparable uncontrolled sales, as adjusted.
Under the resale price method, the arm's-length price of a controlled sale is equal to the applicable resale price reduced by an appropriate markup percentage, with adjustments.
In the determination of an arm's-length price under the resale price method, adjustments should reflect material differences between the uncontrolled transactions used to calculate the appropriate markup percentage and the resale following the controlled sale.
that have a definite and reasonably ascertainable effect on price.
Under the cost plus method, the arm's-length price of a controlled sale is the cost of producing the property, as increased by the appropriate gross profit percentage, plus or minus adjustments.
When the most similar sales used to derive the appropriate gross profit percentage differ in any material respect from the controlled sale, the arm's-length price must be adjusted to reflect the differences.
In his amendment to answer, respondent alleged that the described services performed by YMUS were connected with its purchases of tangible property from YMC. As is apparent from the regulations, the performance of services relating to sales of tangible property can be a factor in the application of the specific allocation methods. In particular, in the evaluation of whether uncontrolled transactions are similar enough to the controlled sale in question, the resale price method looks to the "functions performed by the reseller with respect to the property", including advertising and maintenance of inventory.
Petitioners argue, however, that they need not establish any "services" facts in order to carry their burden of proof relating to the transfer pricing issue. According to petitioners, they will establish at trial the arm's-length nature of the prices paid to YMC, with reliance on the three detailed allocation methods in
Merely because petitioners disagree with respondent, however, about how to apply the regulations underlying the deficiency notice does not mean that petitioners may unilaterally define the evidence required for purposes of the "new matter" analysis. Stated another way, petitioners cannot rest on the most straightforward application1992 Tax Ct. Memo LEXIS 131">*145 of the regulations, when the deficiency notice is not so limited, to establish the evidence required. Petitioners here, like taxpayers in other cases involving
In the above regard, we note that the parties filed memoranda, pursuant to Court order, both before and after a pretrial conference on February 21, 1991. In respondent's memorandum filed February 8, 1991, he stated that whatever pricing method under
Consequently, except as discussed below in connection with respondent's concession, we do not believe that the evidence required to be presented for the services theories warrants the assignment of the burden of proof to respondent. Similar in principle is
Petitioners' other principal attack on the amendment to answer is that respondent has decreased the amounts of the deficiencies appearing in the deficiency notice. Although the amendment to answer does not specify the deficiency amounts relating to the services theories, respondent has acknowledged in his filed objection to1992 Tax Ct. Memo LEXIS 131">*147 petitioners' motion that the amounts are indeed less. In support of their position that a decrease in the deficiency amount constitutes a new matter, petitioners point to language in this Court's opinions that if an assertion in an amended answer "alters" the original deficiency, then respondent has introduced a new matter. See, e.g.,
The statutory notice of deficiency is presumed to be correct, and the petitioner must bear the burden of overcoming this presumption. But where, as here, the respondent departs from the grounds upon which he based his original determination of deficiency, and in an amended answer relies, by way of an affirmative plea, upon other grounds resulting in decreased deficiencies by which he agrees to be bound, we deem him to have abandoned his original determination. Consequently, he must assume the burden of proof with respect1992 Tax Ct. Memo LEXIS 131">*148 to the new grounds for his claim. [Citations omitted.]
Petitioners' cited authority is distinguishable. None of the cases, including
As a final point on this motion, respondent concedes that he has the burden of proof for some of the assertions in his amendment to answer, namely paragraphs 7(h), 7(j)(2), and 8(g)(2). Paragraph 7(h) states in part that "The services performed by YMUS in connection with advertising and selling product may be considered an integral part of YMUS's business." This statement, in the context of the paragraph as a whole, corresponds to
In attempting to limit his concession, respondent maintains that he bears the burden of proof only to establish that the advertising, promotion, and inventory activities were integral parts of the business of YMUS under the regulations, and to establish the appropriate profit elements or markups (over costs and expenses) that an arm's-length service provider would have received. The foundation for this argument is that the burden of proof for respondent's costs-and-expenses theory rests with petitioners, and with this we agree. (Although the amendment to answer refers to "costs and expenses", which differs at least in wording from the "costs or deductions" standard in the regulations, petitioners have not raised the point, and we do not deem it significant.) Also according to respondent, however, to the extent his specific allegations in the amendment to answer support his costs-and-expenses approach as well as his integral part approach, petitioners' burden of proof on costs and expenses relieves respondent from the burden of proof for the same allegations as applicable to his integral-part1992 Tax Ct. Memo LEXIS 131">*151 approach.
We agree with petitioners that respondent's attempt to limit his concession in this way is inappropriate, in part because the regulations do not describe the integral-part allocation method in specific terms as a costs-and-expenses method plus a profit markup. See
Except for respondent's concession and our modification thereof, petitioners' motion concerning the burden of proof will be denied.
Pursuant to Rule 52, petitioners moved to strike portions of respondent's amendment to answer, namely (1) statements relating to 1980, 1981, and 1982, and (2) statements that the services theories "further support" the deficiency notice. Rule 52 permits the Court to strike from a pleading "any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter." Generally, motions1992 Tax Ct. Memo LEXIS 131">*152 to strike are disfavored and should not be granted unless the objectionable allegations have no possible relation to the subject matter of the litigation and unless the moving party makes a showing of prejudice.
Concerning respondent's references to 1980, 1981, and 1982 in his amendment to answer, petitioners' summary of the applicable legal principles is that --
the allegations in an answer or amendment to answer
For 1980, petitioners contend that respondent failed even to examine that taxable year prior to expiration of the normal limitations period in section 6501. As already noted, respondent's primary position for 1980 in the deficiency notice is that petitioners are not entitled to net operating1992 Tax Ct. Memo LEXIS 131">*153 loss carrybacks from other years; the
For 1981 and 1982, petitioners do not deny that respondent made a timely examination. Instead, they maintain that respondent's factual investigation and analysis of those years had nothing to do with
On the matter of prejudice, petitioners argue that respondent will now1992 Tax Ct. Memo LEXIS 131">*154 abuse the Court's discovery procedures by conducting a belated audit and examination of the 3 years in question and that petitioners' necessary presentation of evidence at trial will expand considerably.
It is well established that, in the absence of specific exceptional circumstances, this Court will not look behind the notice of deficiency to question respondent's motives and procedures.
In relying upon the rationale of the Court of Appeals in
Furthermore, as the Tax Court has since pointed1992 Tax Ct. Memo LEXIS 131">*156 out,
In the instant case, petitioners have directed us to nothing on the face of the deficiency notice, and we see nothing, that reveals respondent's failure to make a determination. Moreover, unlike the taxpayers in
Petitioners contend that even if respondent made valid determinations under the
Petitioners press onward, arguing that there is precedent in the
As applied to
Apart from references to the years 1980, 1981, and 1982, petitioners ask us to strike from the amendment to answer statements that the services theories "further support" the deficiency notice. Petitioners' grounds are that (1) respondent's dollar adjustments under his services theories, although not specified, must amount to substantially less than the amounts in the deficiency notice, and (2) the alleged services are different in nature than the purchases of tangible property mentioned in the deficiency notice.
In spite of petitioners' detailed arguments, we fail to see what petitioners hope to gain by the striking of this language. Respondent used the "further support" language only in preambles in the amendment to answer, presumably to avoid the inference that he was raising new matters within the meaning of Rule 142(a). Petitioners are in effect rearguing two points raised in their motion concerning the burden of proof. In our analysis of that motion, we accepted both points as true but discounted their importance. Accordingly, even if we were to strike this language, petitioners' battle won would not affect the war lost. Nonetheless, because we see no reason to strike1992 Tax Ct. Memo LEXIS 131">*160 the challenged language, we decline to do so.
As to petitioners' prejudice arguments, we have already considered the expanded evidence question in our analysis of petitioners' motion concerning the burden of proof. See also
In connection with the motion to strike, the parties have each presented a detailed version of the information available to respondent, and relied upon by him, in arriving at the adjustments in his deficiency notice. Further, respondent has defended his lack of precision in the deficiency notice and amendment to answer as the result of uncooperative petitioners during the information-gathering processes of examination and, more recently, discovery. Petitioners, not surprisingly, deny any such lack of cooperation. Our disposition of the motion to strike, for the reasons stated above, forecloses our consideration of1992 Tax Ct. Memo LEXIS 131">*161 these matters.
Petitioners' motion to strike will be denied.
Pursuant to Rule 51(a), petitioners moved for a more definite statement from respondent than appears in his amendment to answer. Petitioners request that respondent disclose the following relating to his services theories: (1) The amounts of the adjustments and arm's-length charges, and the method of computation; and (2) the provisions of
Respondent's amendment to answer does indeed lack specific dollar amounts for adjustments and arm's-length charges. The only dollar amounts listed are advertising and sales promotion expenses allegedly incurred by YMUS during 1980 through 1984 and totaling over $ 186 million. The amendment to answer also does not refer explicitly to any subparagraphs or subdivisions within paragraph (b) of
The "fair notice" requirement for pleadings, set forth in Rule 31(a), serves as the basic standard for consideration of Rule 51(a) motions.
(a) General: If a pleading to which a responsive pleading is permitted or required is so vague or ambiguous that a party cannot reasonably be required to frame a responsive pleading, then the party may move for a more definite statement before interposing a responsive pleading. The motion shall point out the defects complained of and the details desired. * * *
A motion for more definite statement must be denied if a responsive pleading can be framed.
We observe at the outset that
To satisfy Rule 37(b), petitioners' formal1992 Tax Ct. Memo LEXIS 131">*163 reply should contain a specific admission or denial, or a statement about lack of sufficient knowledge or information, in response to each material allegation in the amendment to answer on which respondent has the burden of proof. In this regard, petitioners' motion is itself vague because petitioners have not directed us to any allegations or supporting facts in the amendment to answer that they cannot respond to in one of these ways. Merely because respondent does not specify arm's-length amounts, as an example, does not mean that all related assertions are impermissibly vague or ambiguous. Petitioners presumably can fashion responses to statements like "YMUS did not receive arm's length compensation in return for performing [specified] services", even without being informed by respondent as to precisely what that arm's length compensation would be. Also apparently susceptible to a response is respondent's allegation that he is entitled to allocate income to YMUS in amounts that an independent party would have received at arm's length for similar activities, even without respondent's specifying the amount of his income adjustment. Some of the allegations are surely less precise1992 Tax Ct. Memo LEXIS 131">*164 than petitioners or the Court might prefer, but they are not "so vague or ambiguous that a party cannot reasonably be required to frame" a reply within the meaning of Rule 51(a).
Petitioners rely upon four cases for the proposition that respondent has a duty to provide fair notice in his deficiency notice or pleadings of the specific amounts and matters in controversy and the specific basis for his position. None of these cases, however, arose in our present procedural setting, and petitioners have greatly exaggerated their relevance.
Both
With a scheduled trial over 9 months after the filing of respondent's amendment to answer, no such surprise or prejudice is present here. Indeed, respondent first apprised petitioners of a services theory, with express reference to
A motion for a more definite statement under Rule 51(a) is not appropriate "merely to obtain a statement of the Commissioner's grounds or the facts or theories upon which he relies."
Petitioners' motion for more definite statement will be denied.
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