Opinion
15447-19S
06-24-2021
Peter Brancovich Turek, Petitioner v. Commissioner of Internal Revenue, Respondent
ORDER
Peter J. Panuthos Special Trial Judge
A petition was filed in this matter on August 21, 2019. Petitioner filed the petition pro se and has been self-represented throughout this proceeding. Petitioner elected and the Court granted small tax case status. The petition was filed in response to a notice issued April 2, 2019, determining deficiencies for tax years 2014 and 2015 in the amounts of $4,739 and $21,332 and penalties pursuant to section 6662 in the amounts of $947.80 and $4,266.40. The primary adjustments in the notice of deficiency are disallowed Schedule C, Profit or Loss From Business, and Schedule E, Supplemental Income and Loss, deductions. The case was initially scheduled for trial at the Court's New York, New York trial session (conducted remotely) commencing September 28, 2020.
Section references are to the Internal Revenue Code in effect for all relevant times and Rule references are to the Tax Court Rules of Practice and Procedure.
On August 28, 2020, respondent filed a motion for continuance that petitioner opposed. The Court conducted a conference call with the parties on September 2, 2020, and on September 29, 2020, the Court held a hearing (remotely). The matters discussed were (1) whether the case should be continued as well as the prospect of settlement and (2) respondent's indicated intention to file a motion for leave to amend the answer to claim an increased deficiency. During the hearing, the parties advised the Court that the case was not ready for trial. Thus, the Court continued the matter and retained jurisdiction.
The Court carefully explained to petitioner both during the conference call and at the remote hearing that if he did not accept respondent's settlement proposal, he could be subject to an increased deficiency if the Court permitted respondent's proposed amendment to answer to be filed. Petitioner indicated that he was not prepared to accept respondent's settlement offer. In this connection on October 22, 2020, petitioner filed a motion entitled "Motion to Concede Deficit Assessment". In the motion, petitioner appears to concede all issues except one adjustment relating to his 2015 tax return.
On October 29, 2020, respondent filed a Motion for Leave to File Out of Time First Amendment to Answer (motion for leave) and lodged respondent's First Amendment to Answer (amendment to answer). In the amendment to answer respondent claims that petitioner is not entitled to additional Schedule C expenses for contract labor, moving expenses, meals and entertainment, and travel for 2014. With respect to 2015, respondent claims that non-passive income on Schedule E should be increased, that additional Schedule E expenses should be disallowed, that a deduction for self-employed health insurance should be disallowed, and that a premium tax credit should be disallowed.
Respondent's amendment to answer failed to indicate the amount of the claimed increased deficiency. In an order dated November 4, 2020, the Court ordered respondent to advise whether he accepted petitioner's proposal filed October 22, 2020, and to further indicate the amount of the deficiencies and additions claimed in his amendment to answer.
In a status report filed November 19, 2020, respondent indicated that he did not accept petitioners October 22, 2020, proposal and further set forth the proposed deficiencies and penalties as claimed in his amendment to answer. The proposed deficiencies and penalties claimed are as follows:
Tax Year
Deficiency
Penalty under Sec. 6662
2014
$29,714
$5,942.00
2015
87, 812
17, 562.40
On November 19, 2020, petitioner filed his opposition to respondent's motion for leave.
Amendment to Answer Claiming an Increased Deficiency
Rule 41 sets forth the procedures for amended pleadings. Rule 41(a) states in part
Amendments: A party may amend a pleading once as a matter of course at any time before a responsive pleading is served. If the pleading is one to which no responsive pleading is permitted and the case has not been placed on a trial calendar, then a party may so amend it at any time within 30 days after it is served. Otherwise 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.
Since the amendment was not filed within the 30-day period described, the filing of the amendment to answer may only be permitted by leave of Court. The standard of Rule 41(a) is that leave may be granted freely when justice so requires it.
Section 6214 provides that
Except as provided by section 7463, the Tax Court shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.
It is thus clear that the Court has jurisdiction to determine a deficiency greater than the amount shown in the notice of deficiency. Brooks v. Commissioner, T.C. Memo. 1975-295 (holding that the Court had jurisdiction to redetermine an increased deficiency where respondent asserted the higher deficiency in his answer), aff'd without published opinion, 552 F.2d 367 (5th Cir. 1977).
In determining the justice of allowing an amendment to the pleadings, the Court must examine the particular circumstances in the case before it. Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998). The Court will generally consider any delay, the reasons for the delay and whether the opposing party will suffer unfair surprise, disadvantage, or prejudice. See Estate of Quick v. Commissioner, 110 T.C. at 178; Estate of Lee v. Commissioner, T.C. Memo. 2009-303. Prejudice for this purpose does not mean mere disadvantage. Ax v. Commissioner, 146 T.C. 153, 168 (2016). "Rather, the question is whether the addition of those new issues by a later amendment, rather than inclusion in the initial pleading, works an unfair disadvantage to the other party." Id. Thus, "[w]here an amendment is requested on the eve of trial, so that the other party is deprived of fair notice and an opportunity to prepare, prejudice may be obvious. * * * However, where the non-moving party is given adequate time (such as by a continuance of trial) to respond to the new pleading, there is no prejudice (or any prejudice is cured)." Id. at 168-169.
In his motion for leave respondent indicates that the bases for seeking an increased deficiency were not evident at the time of filing his answer. Respondent also asserts that there is a voluminous administrative file, available only in paper and that shortly after March 13, 2020, it was no longer available because of the closure of offices due to COVID-19. Finally, respondent asserts that the files did not become available until about July 13, 2020, when restrictions were eased allowing access to the documents and opportunity for review and analysis.
The Court has found that there is no unfair surprise or prejudice in cases where a taxpayer was aware for "some time" of the arguments that respondent wished to affirmatively allege in amended pleadings. Estate of Quick v. Commissioner, 110 T.C. at 179; see Waterman v. Commissioner, 91 T.C. 344, 351 (1998). This matter is not currently set for trial. The parties have had some limited communication and the Court has had some communication with the parties in an attempt to assist them in resolving the matter prior to the trial date in the Fall of 2020. While petitioner is pro se in this matter, it is noted that he is highly educated (Dr. Turek is a psychiatrist and psychoanalyst). The Court attempted to fully explain to petitioner the risks of failing to resolve this matter, particularly given respondent's notice that he was intending to file a motion for leave to amend pleadings claiming an increased deficiency. Petitioner nevertheless advised that he wanted to proceed forward and did not want to resolve this matter on terms proposed by respondent. Petitioner presented a settlement proposal which was rejected by respondent. For reasons discussed herein the Court will grant respondent's Motion for Leave to File Out of Time First Amendment to Answer and the First Amendment to Answer will be filed.
The Court also notes that while a taxpayer normally bears the burden of proof in deficiency cases, an exception applies where respondent claims an increased deficiency. Rule 142(a)(1). Thus, to the extent respondent seeks increased deficiencies and penalties, he will bear the burden of proof. Shea v. Commissioner, 112 T.C. 183, 190-191 (1999).
As noted above, petitioner elected, and the Court granted, small tax case status. The deficiencies and penalties determined in the notice of deficiency for each of the tax years 2014 and 2015 did not exceed $50,000 and thus this case qualified for small tax case procedures. See sec. 7463(a); Rules 170-174. Considering the claim made by respondent in his First Amendment to Answer, the deficiency and penalty in issue for 2015 exceed $50,000. It is thus clear that this case no longer qualifies for small tax case status. Sec. 7463(d); see Kallich v. Commissioner, 89 T.C. 676 (1987). Accordingly, the Court will strike the "S" designation from the docket in this case and this matter will be proceed on the regular docket of the Court.
In his motion for leave, respondent asserts that he intends to engage in informal and, if necessary, formal discovery. The Court encourages the parties to communicate and comply with the Court rules for exchange of information. In this connection the Court will require the parties to jointly or separately file status reports on or before September 20, 2021, and advise as to the progress of discovery and the readiness for trial.
Upon due consideration and for cause, it is
ORDERED that respondent's Motion for Leave to File Out of Time First Amendment to Answer, filed October 29, 2020, is granted, and that the Clerk of the Court shall file respondent's previously lodged First Amendment to Answer as of the date of service of this Order. It is further
ORDERED that the caption of this case is amended by deleting the letter "S" from the docket number and the docket number is changed on the Court's records to "Docket No. 15447-19". It is further
ORDERED that the proceedings in this case shall not be conducted under the Small Tax Case procedures. It is further
ORDERED that the parties shall, on or before October 22, 2021, file status report(s) (joint or separate) advising as to the progress in the discovery process and the parties' readiness for trial.