Opinion
9152-21
10-20-2023
TOP ROCK BBS, LLC, BARNETT PROPERTIES, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Patrick J. Urda Judge.
This case involves the Commissioner's decision in a final partnership administrative adjustment (FPAA) to deny a charitable contribution deduction claimed by Top Rock BBS, LLC (Top Rock) for the donation of a conservation easement. [Doc. 1 at 37. In lieu of a trial in this case, the parties filed a stipulation to be bound by Docket No. 9145-21. [Doc. 42.]
"Doc." references are to the documents in the record compiled by the Clerk of the U.S. Tax Court, utilizing .pdf pagination. Unless otherwise indicated, statutory references are to the Internal Revenue Code (Code), Title 26 U.S.C. (I.R.C.), in effect at all relevant times, all Rule references are to the Tax Court Rules of Practice and Procedure, and regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times. All monetary amounts are rounded to the nearest dollar.
On August 31, 2023, the Commissioner filed a motion for leave to file first amendment to answer, seeking to allege (1) "disguised sales of Top Rock's property, upon which Top Rock's conservation easement was placed," and (2) "that the transfer of property by Hill Creek LLC to Top Rock was not, in substance, a bona fide transfer, failing to transfer the benefits and burdens of ownership." [Doc. 45 at 4-5.] The Commissioner also seeks to assert penalties related to these new allegations. [Id. at 6.] We will deny the Commissioner's motion.
Background
This case arises out of Top Rock's 2017 donation to the Oconee River Land Trust, Inc. of a conservation easement over certain property in Meriwether County, Georgia. [Doc. 1 at 5, 7.] On its 2017 tax return, Top Rock reported a charitable contribution deduction of $12,940,000 in connection with the easement donation. [Id. at 20.]
The IRS thereafter examined Top Rock's 2017 tax year and, on March 3, 2021, issued an FPAA denying the deduction and asserting various penalties. [Doc. 1 at 32-38.] The FPAA states that Top Rock failed to establish that (1) "[it] satisfied all the requirements of I.R.C. § 170 and the corresponding Treasury Regulations for deducting a noncash charitable contribution," and (2) "the value of the noncash charitable contribution deduction." [Id. at 38.] As to penalties, the Commissioner asserted (1) a 40% gross valuation misstatement penalty under section 6662(h), (2) a 30% reportable transaction understatement penalty under section 6662A, and (3) a 20% accuracy related penalty under section 6662(c), (d), and (e). [Id.]
Top Rock timely filed a petition in this Court, which the Commissioner answered two years ago in October 2021. [Doc. 1, Doc. 5.] The Commissioner's answer, like the FPAA, made no reference to disguised sales or bona fide transfers. [Doc. 5.]
The parties exchanged informal discovery starting in June 2022. Top Rock requested that the Commissioner identify the provisions of section 170 and the accompanying Treasury Regulations that Top Rock failed to satisfy, but the Commissioner refused to answer. [Doc. 25 at 19, 77-78] In the wake of a motion to compel, we ordered the Commissioner "to serve on counsel for Top Rock full, complete, and responsive answers" to its contention interrogatories, thereby to "identify the provisions of I.R.C. § 170 and the accompanying regulations that Top Rock purportedly failed to satisfy, as well as the legal and factual basis underlying his position." [Doc. 35 at 2-3.] The Commissioner was to do so "within 14 days of this Order"-i.e., by January 10, 2023. [Id. at 3.] The response he served on that date did not raise the "disguised sale" and "no bona-fide transfer" issues. [Doc. 51 at 153-56.]
On May 2, 2023-almost four months after the response to the contention interrogatory had been due-Commissioner's counsel wrote Top Rock's counsel "to apprise [Top Rock] of [the Commissioner's] intention to raise additional, alternative bases for the disallowance of a portion of the charitable contribution deduction[]." [Doc. 45 at 8.] Commissioner's counsel identified three possible issues that "[he] may seek to raise:" (1) "disguised sale under . . . section 707," (2) "the partnership anti-abuse rule," and (3) "lack of a partnership." [Id.] Even then the letter was equivocal as to whether the Commissioner would actually plead these issues: Commissioner's counsel noted that he was "still evaluating the arguments and plan[ned] to file motions for leave to file amendments to . . . answer[] to raise these issues, but wanted to bring [his] intentions to [Top Rock's] attention as soon as possible." [Id.]
Nearly four more months passed. Not until August 31, 2023-more than seven months after the deadline to respond to the interrogatory, and only two-and-a-half months before trial-did the Commissioner move for leave to amend his answer to raise one of the three issues that had been identified in the May letter, as well as two others that were not. [Doc. 45.] The first amendment to answer lodged with the Court asserted that certain transactions undertaken by D. Brent Scarbrough and Chris Barnett (through various corporate vehicles they controlled) constituted disguised sales. [Doc. 46 at 2-6.] According to the Commissioner, "[b]ecause of the disguised sales . . . the Property was not long-term capital gain property when Top Rock granted the conservation easement and, under I.R.C. § 170(e)(1), any allowable deduction for the conservation easement is limited to basis." [Id. at 5-6.] In the alternative, the Commissioner alleged that there was no bona fide transfer of property. [Id. at 6.] The Commissioner further contended "that a penalty applies to any allowable deduction attributable to the disguised sale of portions of the Property and because Hill Creek's transfer of the Property to Top Rock was not bona fide." [Id.]
As noted supra at 1, this case is subject to a stipulation to be bound, which would ostensibly apply to the points the Commissioner seeks to raise here. [See Doc. 57 at 5 n.4.] Our reference to trial thus refers to the trial in Rock Bottom v. Commissioner, No. 9145-21, which is slated to begin November 13, 2023.
In his motion (as developed in his reply), the Commissioner contends that he only became aware of the facts supporting these arguments in late April and July, 2023. [Doc. 45 at 4-5; Doc. 57 at 8-9, 11.] He asserts that the "language of the FPAA disallowing the deduction as not comporting with section 170 sufficiently permits [the Commissioner] to raise the issues without amendment." [Doc. 57 at 3.] The Commissioner further argues that, to the extent that amendment is necessary, his May letter sufficiently alerted Top Rock to his arguments such that there was neither prejudice nor undue delay. [Id. at 6-12.] The briefing regarding the Commissioner's motion concluded on October 5, 2023, with the filing of the Commissioner's reply.[Doc. 57.]
Top Rock filed a motion for leave to file a sur-reply, but we will deny that motion. [Doc. 58.] We have not considered the sur-reply lodged with that motion [Doc. 59], and it plays no role in our analysis.
Discussion
Generally, leave to amend a pleading is "given freely" when justice requires, based on the facts and circumstances viewed in light of sound reason and fairness. Rule 41(a); see also Law v. Commissioner, 84 T.C. 985, 990 (1985). When evaluating a motion for leave to amend, we consider factors including the timeliness of the motion, the reasons for the delay, and whether the moving party had sufficient prior opportunity to allege the matter contained in the requested amendment. Derksen v. Commissioner, 84 T.C. 355, 358 n.7 (1985); Watkins v. Commissioner, T.C. Memo. 2014-197, at *11-12; Estate of Lee v. Commissioner, T.C. Memo. 2009-303, 2009 WL 4981328, at *3. Leave to amend may be withheld when there is undue delay, bad faith, prejudice resulting from the amendment, or a dilatory motive of the movant. See, e.g., Foman v. Davis, 371 U.S. 178, 182 (1962); Russo v. Commissioner, 98 T.C. 28, 31 (1992); Ho v. Commissioner, T.C. Memo. 2006-41, 2006 WL 626254, at *6.
We will deny the Commissioner's motion for leave to amend. As an initial matter, the Commissioner urges the Court to decide that "[n]o amendment to answer was necessary because the FPAA encompassed these issues," relying on the FPAA's broad reference to section 170. [Doc. 57 at 5; see also Doc. 45 at 4-5.]
Assuming arguendo that the amendment the Commissioner seeks is unnecessary, the Commissioner's identification of these issues on August 31 nonetheless implicates our December 27, 2022 order, which required him to "identify . . . the legal and factual basis underlying his position in the FPAA" within two weeks, i.e., January of 2023. [Doc. 35 at 2.] In that order, we directed the Commissioner to provide "full, complete, and responsive answers," so that Top Rock could "understand the Commissioner's current factual and legal positions." [Id. at 2-3.] A petitioner, who will generally bear the burden of proof, is entitled to know what is in dispute, and the Court is obliged and empowered to assure that the parties disclose their contentions on a reasonable schedule. We do not believe that the Commissioner has complied with our December 27 order, disclosing new contentions a scant two-and-a-half months before trial.
The Commissioner's belated identification of new issues works the type of prejudice our December 27 order and Rule 41(a) were intended to prevent. To put it simply, the Commissioner's allegations would require Top Rock to develop a new strategy after years of administrative and judicial proceedings designed to shape the presentation of issues at trial.
The Commissioner asserts, however, that he "sent the May letter . . . to put [Top Rock] on notice as early as possible while still developing exactly which argument to make and whether those arguments necessitate the filing of an amendment to answer (or whether such a filing should be made as a protective matter)." [Doc. 57 at 11.] This contention builds on the Commissioner's representation that he "became aware of the facts" supporting these arguments after witness interviews in April and July. [Doc. 45 at 4-5.]
As evidenced in the lodged amendment [Doc. 46], however, the Commissioner's arguments are rooted in the structure of the transaction, and the evidence underlying his contentions (principally, the Contribution and Amendment and the Purchase and Sale Agreement [Doc. 57 at 6]) has long been available [Doc. 51 at 18-20]. Although the Commissioner notes that he asked questions to witnesses regarding the disguised sale and bona fide transaction issues in April and July, he fails to show that the answers he received were necessary to understand and identify these issues in a timely fashion. [Doc. 57 at 8-9, 11-12.] The Commissioner, in fact, explains that the person interviewed in July "did not remember many details" [id. at 11], suggesting that the bulk of the material on which he relies to craft the new contentions was available (at the latest) after witness interviews in April.
We thus are left to consider whether the Commissioner's May letter sufficiently identified the issues and gave Top Rock an adequate opportunity to prepare for trial. As a general matter, we believe that identifying a new issue or argument six months before trial would offer ample time to prepare and minimize any prejudice on the opposing party. Thus, if the Commissioner in May had filed his motion to amend, or supplemented the discovery responses he had made in answer to our December order, we believe that the prejudice to Top Rock would have been low.
The Commissioner insists, however, that his May letter had the same effect as filing the motion or supplementing his discovery requests in that it provided sufficient notice of his intention to raise the disguised sale and bona fide transaction issues. As an initial matter, the letter did not reference the bona fide transaction issue whatsoever, and we struggle to see how it could be seen to apprise Top Rock of the Commissioner's intention to raise it. More significantly, the letter sounded an uncertain trumpet; it did not state that the Commissioner would raise the identified issues, but merely that he may raise such issues. This point is underscored by the fact that the Commissioner ultimately decided not to raise two of the three issues referenced in that letter. Further, the Commissioner indicated in the letter that he "plan[ned] to file motions for leave to file amendments to . . . answer to raise these issues" [Doc. 45 at 8], but did not do so for an additional four months. In these circumstances, we do not believe that Top Rock could be fairly expected to reserve some of the last precious weeks before trial to prepare for issues that were not yet before the Court-and perhaps never would be.
In short, it was incumbent on the Commissioner to determine at a much earlier stage (e.g., in the March 2021 FPAA, or the October 2021 answer, or the January 2023 interrogatory response, or unequivocally in the May 2023 letter along with a either a motion to amend or a supplement to contention interrogatories) if he wished to assert these new contentions, so that the parties could properly contest them at trial. Before concluding, we note that the allegations the Commissioner seeks to raise are intertwined with issues properly before us. If, in the trial of those properly raised issues, evidence was to come out that might support the Commissioner's contentions, then our current denial of his motion to file an amendment would not preclude him from seeking to conform the pleadings to the evidence at trial as appropriate.
It is therefore
ORDERED that the Commissioner's motion for leave to file first amendment to answer [Doc. 45], filed August 31, 2023, is denied.