Opinion
Docket No. 31669-84
Decision: December 4, 1986
Tax Analysts Citation: 88 TNT 29-23 1986 Del. Ch. LEXIS 490 Principal Code Reference: Section 162
Summary
SERVICE MAY FILE AMENDED ANSWER IN DISPUTE CONCERNING DEDUCTIBILITY OF INVESTMENT BANKER ADVISORY FEE.
The Service determined a deficiency with respect to National Starch and Chemical Corporation's 1978 taxable year, ruling that the corporation's payment of its investment banker advisory fee was not deductible as an ordinary and necessary business expense. The corporation petitioned the Tax Court and claimed that it was entitled to another expense deduction. The Service moved for summary judgment and sought to amend its answer to include the alternative argument that the advisory fee was paid primarily for the benefit of the company's shareholders, rather than in the ordinary course of business. The corporation opposed the amendment, arguing that it presented a "new matter and a new defense." In a nonprecedential memorandum sur order, Tax Court Special Trial Judge Cantrell has granted the Service's motion to amend its answer, holding that it did not present a new matter. Rather, the court said, it merely developed the original determination without increasing the amount of the original deficiency or requiring the presentation of different evidence. The court also held that the burden of proof was not shifted to the Service.
Full Text MEMORANDUM SUR ORDER
On July 2, 1986 the parties' Cross-Motions for Summary Judgment were called and argued at Washington, D.C. Also, at the July 2 hearing respondent filed a Motion for Leave to File Amendment to Answer with attachments. Respondent's Motion for Leave, which was argued by counsel and which is the subject of this Memorandum, was accompanied by an Amendment to Answer, which was "lodged" with the Court on July 2, 1986.
Those motions have been decided. See National Starch and Chemical Corporation v. Commissioner, T.C. Memo. 1986-512, and the Court's Order dated October 20, 1986.
The attachments were comprised of a copy of a "Branerton" letter dated November 8, 1984 to petitioner's counsel, copies of respondent's first set of interrogatories to petitioner and respondent's first request for production of documents, both of which latter documents were served on petitioner's counsel by respondent on January 14, 1986.
On June 12, 1984 respondent issued the notice of deficiency to petitioner upon which this case is predicated. In an "Explanation of Items" attached thereto respondent recites —
It is determined that the payment of $2,225,586.00 to Morgan Stanley and Company, Incorporated and taken on your return as a deduction for professional advisory fees REPRESENTS A CAPITAL EXPENDITURE AND, THEREFORE, NOT DEDUCTIBLE AS AN ORDINARY AND NECESSARY BUSINESS EXPENSE. Accordingly, your taxable income is increased $2,225,586.00 for year ended August 15, 1978. (Emphasis added.)
Petitioner timely filed its petition on September 7, 1984. Therein, at paragraph 4.(a), it disputes the foregoing determination and at paragraph 4.(b) it claims that it is entitled to yet additional expenses of $706,079. Respondent filed his answer to the petition on November 6, 1984, on which date the pleadings were closed and wherein he denies the allegations of paragraphs 4.(a) and (b) of the petition.
Petitioner, in its petition, thus claims that both the Morgan Stanley payment and the additional expenses claimed are deductible as ordinary and necessary business expenses under sec. 162. See paragraphs of the petition which respondent denies in his answer. All section references are to the Internal Revenue Code of 1954, as amended.
See Rule 38. All Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent now seeks leave to amend his answer by adding thereto the following paragraph:
7. FURTHER ANSWERING the petition, the respondent herewith notifies the petitioner that he is relying upon THE ADDITIONAL THEORY for disallowance of the claimed deduction for amounts paid to Morgan Stanley Co. and any "Ancillary Expenses" claimed as additional deductions in the petition THAT THESE EXPENDITURES ARE NOT DEDUCTIBLE BY PETITIONER BECAUSE THEY WERE MADE PRIMARILY FOR THE BENEFIT OF PETITIONER'S SHAREHOLDERS AND THEREFORE ARE NOT "ORDINARY AND NECESSARY" WITHIN THE MEANING OF I.R.S. SEC. 162. (Emphasis added.)
Respondent admits that the notice of deficiency disallowed the Morgan Stanley payment as non-deductible in characterizing the payment as a capital expense. Nonetheless, he seeks permission to file his amendment for the following principal reasons —
1. The amendment merely sets forth an additional theory (not new matter) for the disallowance. Petitioner's counsel was made aware of this prior to the time he filed petitioner's motion for summary judgment on March 18, 1986.
2. This case has not been set for trial. The new theory doesn't change the amount of the disallowance nor does it increase the amount of the determined deficiency.
3. The introduction of the new theory will not require any additional proof beyond that which petitioner must produce to support the deductibility of the Morgan Stanley fee and, hence, will not require additional trial time. In short, it is respondent's contention that petitioner has the burden of proof to show that all of its claimed expenditures are deductible under section 162.
Petitioner recognizes that it is within the Court's discretion to permit the amendment sought. However, it insists that if the amendment is permitted "it's inescapable that he's [respondent] raising a new matter and a new defense." Therefore, according to petitioner, the burden of proof with respect thereto shifts to respondent. It is clear that the parties are at loggerheads as to whether the proposed amendment contains new matter. We will address that subject later herein.
To begin with, it is in the complete discretion of this Court in the interest of justice to allow pleadings to be made out of time. Rule 25(c); Ballantine v. Commissioner, 74 T.C. 516, 520 (1980). Moreover, such decision "will not be reversed unless it abuses its discretion." Law v. Commissioner, 84 T.C. 985, 990 (1985).
Rule 25(c), Enlargement or Reduction of Time: Unless precluded by statute, the Court in its discretion may make longer or shorter any period provided by these Rules. * * *
Rule 41(a), respecting amended and supplemental pleadings, and as applicable here, provides in relevant part "(a) Amendments: * * * Otherwise a party may amend his pleading only by leave of Court * * * and leave shall be freely given when justice so requires. * * *"
In determining the justice of the proposed amendment we have carefully examined the particular circumstances of this case. In our view, since the case had not been set for trial at the time respondent filed his motion there is no element of prejudice or surprise involved. Rule 31(a) specifically states that "the purpose of the pleadings is to give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions." We think respondent's proposed amendment meets the mandate of Rule 31(a). In these circumstances, we will exercise our discretion by granting respondent's Motion for Leave and his Amendment to Answer will be filed.
See Commissioner v. Ray, 88 F.2d 891 (7th Cir. 1937), revg. a Memorandum Opinion of this Court, and Buffalo Union Furnace Co. v. Helvering, 72 F.2d 399 (2d Cir. 1934), revg. on this issue 23 B.T.A. 439 (1931), where this Court was reversed for refusing to allow the Commissioner to amend his answer to claim an increased deficiency, even after the Court has filed its opinion.
Finally, we turn to the more difficult task of determining whether the information contained in respondent's amendment constitutes new matter. As noted earlier, petitioner maintains that it does and respondent contends that it doesn't.
At the hearing we note that petitioner's counsel stated — "As to the dividend issue, I do not want to spend a great deal of time on whether it is or is not a new matter. Again, it is my view that it is a new matter and that it would shift the burden of proof, but I asked myself, what does it mean to shift the burden of proof in this case? This case is not a factual case, its a legal issue, and I don't see that it makes a great deal of difference who has the burden of proof."
Rule 142(a) provides generally that the burden of proof shall be on petitioner, except as otherwise provided by statute or determined by the Court, and except that, in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in his answer, it shall be upon the respondent. Thus, under Rule 142(a) the burden of proof in respect of any genuinely new matter would be upon respondent.
No increase in deficiency is involved here nor an affirmative defense. See Rule 39.
"* * * [A] new position taken by respondent is not necessarily a `new matter,' especially when it merely clarifies or develops the original determination without being inconsistent or increasing the amount of the deficiency * * *." Estate of Jayne v. Commissioner, 61 T.C. 744, 748 (1974). There, the Court determined that the burden of proof was retained by petitioner. "However, if the assertion in the amended answer either alters the original deficiency or requires the presentation of different evidence, then respondent has introduced new matter." Achiro v. Commissioner, 77 T.C. 881, 890 (1981), which is also relied upon by petitioner and where the Court found that the burden of proof did shift to respondent.
Citing McSpadden v. Commissioner, 50 T.C. 478 (1968), relied upon by petitioner.
It is clear that the assertions in the amendment to answer do not alter the original deficiency. Do they, then, require the presentation of different evidence as claimed by petitioner? We do not believe that it does. In order for petitioner to carry its burden of proof with respect to the Morgan Stanley and ancillary expenditures, the claim that such expenditures were "ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business" must be fully substantiated. Sec. 162(a). If petitioner is able to carry this burden of proof, particularly with respect to the purpose for which the expenditures were paid or incurred, it will have proved that the expenditures were ordinary and necessary in carrying on its trade or business. Respondent's amendment to answer does not now require that petitioner offer additional evidence in its case in chief to support the deductibility of its expenditures. Therefore, respondent's additional claim that petitioner's expenditures were made to primarily benefit its shareholders is not a "new matter" under Rule 142(a), and the burden of proof with respect to the claimed expenses does not in any manner shift to respondent in this case.
We contrast our determination on this point with Achiro v. Commissioner, supra, in which respondent's assertions in his amended answer introduced additional Code sections and required that petitioner present additional evidence in response to the new matters raised therein. We find no similar pattern in this case. As noted before, both the notice of deficiency and the amendment to answer seek to disallow the expenditures as other than "ordinary and necessary business expenses" under section 162(a). In our view, respondent's amendment to answer introduces a "new theory" rather than a "new matter", and no shifting of the burden of proof is necessary, because respondent is not seeking to proceed under a new section of the Internal Revenue Code to disallow the Morgan Stanley deduction. He is simply raising a further theory as to the purpose and beneficiaries of the expenditures. See Estate of Jayne v. Commissioner, supra, wherein we determined that shifting the burden of proof pursuant to arguments raised in an amended answer was not in analogous circumstances necessary. See also Scharf v. Commissioner, 38 T.C. 15 (1962). We also contrast the instant case with McSpadden v. Commissioner, 50 T.C. 478, 493 (1968), cited by petitioner, in which a new matter was clearly raised in the amended answer. We stated therein that the transaction alleged in the amended answer was "entirely different from the transaction referred to in the notice of deficiency." We are unable to find a similar distinction in this case.