Opinion
3182-20 4693-20
03-16-2022
JULIAN WOLPERT AND ESTATE OF EILEEN WOLPERT, DECEASED, JULIAN WOLPERT, EXECUTOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Courtney D. Jones, Judge
This consolidated case was tried on April 27, 2021, at the remote trial session of the Court held in New York City, New York, that commenced on April 26, 2021.
On September 30, 2021, petitioners filed a motion to strike portions of respondent's seriatim answering brief pursuant to Rule 52. Specifically at issue are those portions of the answering brief that argue that (1) petitioners lacked a profit motive with respect to the activity for which Schedule C expense deductions were claimed for the taxable years at issue (i.e., 2016 and 2017), and (2) that the section 6662(a) penalty determined for taxable year 2017 against petitioner Julian Wolpert was "automatically calculated through electronic means" for purposes of section 6751(b)(2)(B) (thereby rendering inapplicable the section 6751(b)(1) written supervisory approval requirement for the assessment of penalties).
Unless indicated otherwise, all statutory references are to the Internal Revenue Code, Title 26, U.S.C., in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
On January 18, 2022, respondent filed a motion to conform pleadings to the proof pursuant to Rule 41(b)(1) and (2). He argues therein that the Court should grant leave to amend his answer such that it places at issue petitioners' profit motive (or lack thereof) with respect to the Schedule C activity for which they reported the various deductible expenses in dispute.
For the reasons elaborated upon below, we will grant petitioners' motion to strike and deny respondent's motion to conform the pleadings.
I. Petitioners' Motion to Strike
Rule 52 provides that the Court may strike objectionable matter (for being "redundant, immaterial, impertinent, frivolous, or scandalous") from briefs.
With respect to the first category of disputed content concerning whether petitioners engaged in the Schedule C activity with a profit motive, we conclude that such material is improperly raised in respondent's seriatim answering brief. Respondent previously attempted to raise this issue when he moved for leave to amend his answer at the eleventh hour prior to trial. The Court denied that motion in an order issued on April 22, 2021, because permitting amendment would have denied petitioners fair notice and an opportunity to prepare. Consequently, the profit motive issue addressed in respondent's seriatim answering brief has already been foreclosed, and we will not entertain respondent's attempt to undermine our previous order.
With respect to the second category of disputed content concerning section 6751(b)(2)(B), we similarly find that such material is improperly addressed in respondent's seriatim answering brief.
Generally, we do not consider an issue that was raised for the first time at trial or on brief. See, e.g., Niemann v. Commissioner, T.C. Memo. 2016-11, at *14; Seidel v. Commissioner, T.C. Memo. 2007-45, 2007 WL 601867, at *1, n.3; Rinehart v. Commissioner, T.C. Memo. 2002-71, 2002 WL 459098, at *2.
Respondent raised the section 6751(b)(2)(B) issue for the first time at trial. At no earlier point in this litigation had respondent argued that the section 6662(a) penalty (for taxable year 2017) was "automatically calculated through electronic means" for purposes of section 6751(b)(2)(B).
Although there is some language to weakly support respondent's contention (in his seriatim answering brief) that the section 6751(b)(2)(B) issue was raised in his pretrial memorandum (concerning taxable year 2017), respondent also stated therein that he would concede the section 6662(a) penalty for taxable year 2017 if he could not ascertain whether Steven Bowling was the immediate supervisor for purposes of section 6751(b)(1). Such a statement leads us to conclude that respondent (1) did not contemplate the applicability of section 6751(b)(2)(B), and (2) intended to sustain the penalty determination at trial solely by proving that written supervisory approval was timely obtained pursuant to section 6751(b)(1). We further note that the language respondent points to purportedly raising the issue in his pretrial memorandum has no basis in the statutory text of section 6751(b)(2)(B) (i.e., whether the penalty was "asserted computationally" versus "automatically calculated through electronic means").
Relevant portions of the seriatim answering brief are incorporated by reference into respondent's response to petitioners' motion to strike.
We therefore decline to consider whether the section 6751(b)(2)(B) exception to the section 6751(b)(1) written supervisory approval requirement applies (with respect to respondent's penalty determination for taxable year 2017).
II. Respondent's Motion to Conform Pleadings
Respondent moves under Rule 41(b)(1) and (2) to conform his answer to the proof such that it places at issue petitioners' profit motive (or lack thereof) with respect to the Schedule C activity for which they reported the various deductible expenses in dispute.
Under Rule 41(b)(1), the Court may treat issues that are not raised in the pleadings as though they were raised therein when such issues are tried by express or implied consent of the parties. Upon motion of any party, the Court may allow amendment of a pleading to cause it to conform to the evidence and raise such issues tried. See Rule 41(b)(1).
Rule 41(b)(1) is modeled after Federal Rule of Civil Procedure 15(b)(2), see Explanatory Notes to Tax Court Rules of Practice and Procedure, 60 T.C. 1057, 1090, regarding which a preeminent treatise comments:
An amendment is not allowed if the issue has not been tried completely by the parties even if there is evidence in the record which could possibly support the amendment. . . This principle is sound, because there is no implied consent to try an issue when the parties do not precisely recognize it as an issue in the trial.2 Moore's Manual--Federal Practice and Procedure § 20.08.
Whether to permit leave to amend a pleading under Rule 41(b)(1) nonetheless lies within the sound discretion of the Court. See, e.g., Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998). In considering whether to grant leave to amend, we consider inter alia whether the opposing party would suffer unfair disadvantage or prejudice. Id.
Respondent does not identify anywhere in his motion how petitioners provided express or implied consent to try the profit motive issue, although we assume his motion is predicated on petitioners' alleged implied consent. Nonetheless, we find no indication in the record to suggest that petitioners expressly or impliedly consented to trying as an issue whether they engaged in the Schedule C activity with a profit motive.
Furthermore, as to implied consent, we find the commentary from the Moore treatise concerning Federal Rule of Civil Procedure 15(b)(2) upon which Rule 41(b)(1) is modeled particularly on point. That is, whether petitioners engaged in the Schedule C activity with a profit motive was not completely tried because the parties did not squarely recognize it as an issue during trial. To the contrary, this Court made clear that we would not regard it as an issue for trial when we denied respondent's motion for leave to amend his answer on April 22, 2021. Petitioners tried their case five days later in reliance on that order and with the understanding that profit motive was not at issue. Consequently, we conclude there was no implied consent.
Notwithstanding the lack of express or implied consent, we also note that exercise of our discretionary authority to grant leave would be improper given the unfair disadvantage and prejudice it would inflict upon petitioners. See Estate of Quick, 110 T.C. at 178. As stated previously, petitioners participated in trial with the understanding that profit motive was not at issue based on the Court's April 22, 2021 order. Without such an understanding, they could not have possibly presented a defense to respondent's eleventh-hour allegation. We will not permit respondent to cherry pick a record that was developed without petitioners' awareness that the issue was being tried. Doing so would undeniably place them at unfair disadvantage and prejudice their case.
For the reasons elaborated upon above, we will not grant respondent leave to amend his answer under Rule 41(b)(1).
Under Rule 41(b)(2), when evidence is objected to at trial for being outside the issues raised by the pleadings, the Court may nonetheless receive such evidence and permit amendment of pleadings at any time to conform to the proof when (1) justice so requires, and (2) the objecting party fails to demonstrate that the admission of such evidence would prejudice such party. While granting leave to amend lies within our discretion, see Estate of Quick, 110 T.C. at 178, this Court has denied leave pursuant to Rule 41(b)(2) when the nonmoving party would otherwise be prejudiced, see Udeobong v. Commissioner, T.C. Memo. 2016-109, at *8-9.
Respondent argues that "[g]ranting [r]espondent's motion will serve the interests of justice by conforming [r]espondent's answer to the evidence adduced at trial." To the extent respondent intended for this language to communicate why justice requires our grant of leave under Rule 41(b)(2), we disagree. To hold such reasoning sufficient would render superfluous Rule 41(b)(2)'s justice requirement. Moreover, as previously elaborated upon, granting leave would unduly disadvantage and prejudice petitioners' case given their reliance at trial on our April 22, 2021 order. Consequently, we hold that justice does not require our grant of leave for respondent to amend his answer; we will not grant respondent leave to amend his answer under Rule 41(b)(2).
Upon due consideration and for the reasons elaborated upon above, it is
ORDERED that petitioners' motion to strike (filed on September 30, 2021) is granted in that all portions of respondent's seriatim answering brief (filed on September 24, 2021) addressing (1) whether petitioners engaged in Schedule C activity with a profit motive, and (2) whether the section 6662(a) penalty for taxable year 2017 was "automatically calculated through electronic means" for purposes of section 6751(b)(2)(B), are hereby stricken. It is further
ORDERED that respondent's motion to conform pleadings to the proof (filed on January 18, 2022) is denied.