Opinion
28040-14
05-22-2023
EATON CORPORATION AND SUBSIDIARIES, Petitioner(s) v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Kathleen Kerrigan Chief Judge
This case is not currently calendared for trial. Both petitioner and respondent were awaiting a decision in the related case of Eaton Corp. & Subs. v. Commissioner, Docket No. 5576-12, which was on appeal with the United States Court of Appeals for the Sixth Circuit. On August 25, 2022, the Sixth Circuit issued Eaton Corp. & Subs. v. Commissioner, 47 F.4th 434 (6th Cir. 2022), affirming in part and reversing in part the decisions reached by this Court.
The related case dealt with transfer pricing issues for petitioner's 2005 and 2006 tax years. The parties agreed in their Joint Motion for Continuance filed on November 13, 2015, that resolution of the related case would likely facilitate resolution of the transfer pricing issues in this case because both involve the same advance pricing agreement.
On February 2, 2023, respondent filed a Motion for Leave to File Second Amendment to Answer, and the Second Amendment to Answer was lodged with the Court. On February 6, 2023, the Court issued an Order requesting petitioner to file a response to respondent's Motion by February 27, 2023. On February 27, 2023, petitioner filed a Response, objecting to respondent's Motion. On March 1, 2023, the Court issued an Order requesting respondent file a reply to petitioner's Response. On March 24, 2023, respondent filed a Reply to petitioner's Response.
Respondent's Second Amendment to Answer includes section 482 adjustments for petitioner's tax years 2007, 2008, and 2009. It also includes the following penalty determinations: (1) 40% gross valuation misstatement pursuant to section 6662(h) for tax year 2007; (2) 20% substantial valuation misstatement pursuant to section 6662(e) for tax year 2008; and (3) 20% negligence or disregard of rules or regulations pursuant to section 6662(c) for tax years 2007 and 2008. Petitioner does not object to amending the Answer to include the section 482 adjustments since it already conceded them earlier on. Petitioner objects to the penalty additions.
Rule 41(a) provides that "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." Whether leave will be granted is a question falling within the sound discretion of the court. Law v. Commissioner, 84 T.C. 985, 990 (1985). In determining the justice of a proposed amendment, we must examine the particular circumstances before us. Id. We consider, among other factors, whether an excuse for the delay exists and whether the opposing party would suffer unfair surprise, disadvantage, or prejudice if the motion to amend were granted. Estate of Quick v. Commissioner, 110 T.C. 172, 178 (1998), supplemented by 110 T.C. 440 (1998).
Petitioner asserts three arguments supporting its objection to respondent's Motion. First, petitioner asserts that the proposed amendment causes an unjustifiable delay in the case. It argues that respondent has been aware of the penalty issue since at least March 2018 when respondent asserted in Docket No. 5576-12 that it would be seeking penalties based on petitioner's self-adjustments. Petitioner contends that because respondent has waited until now to seek penalties- even after having moved to amend the Answer twice before-the Motion is unduly delayed.
While we agree that respondent could have asserted the penalty issue at an earlier stage, it was not clear that penalties could be applied since respondent did not make the section 482 adjustments in question. Petitioner made this very argument in its supplemental brief in Docket No. 5576-12 [Docket No. 784]. We ultimately agreed with petitioner in Eaton Corp. & Subs. v. Commissioner, 153 T.C. 119, 125 (2019), holding that there had been no allocation by the Secretary pursuant to section 482 and therefore section 6662(h) penalties were inappropriate. Until the Sixth Circuit affirmed that petitioner's adjustments were section 482 adjustments within section 6662(e)'s meaning, Eaton Corp. & Subs. v. Commissioner, 47 F.4th at 449, it was not certain that the penalties were capable of being asserted. For that reason, we do not think that respondent's delay in seeking this amendment was unjustifiable.
Second, petitioner argues that the new penalty issue will materially prejudice its case by fostering additional delay in the case's resolution as well as by calling for stale evidence. Respondent counters that no prejudice exists because-as petitioner has mentioned-the penalty issue was raised in Docket No. 5576-12 in March 2018. Respondent contends petitioner should be fully prepared to defend against the penalties and has no grounds to claim an unfair surprise. Respondent also argues that petitioner will not be disadvantaged because the case remains uncalendared.
We agree with respondent. Although it was not clear until the Sixth Circuit issued its August 2022 opinion whether petitioner could be liable for section 6662(h) penalties based on its own adjustments, the parties fully briefed the issue in December 2018. Petitioner then cannot argue that it would be prejudiced by the introduction of that same penalty basis on the grounds of surprise. It has been fully aware of this possibility for approximately four years.
We also do not think that petitioner will be prejudiced by stale evidence. In the notice of deficiency respondent asserted section 6662(h) gross valuation misstatement penalties for tax years 2007, 2008, and 2010. Regardless of the basis for those penalties we think that the evidence for them and the ones asserted and in the Second Amendment to Answer is the same.
On that basis we agree with respondent that no prejudice should befall petitioner by allowing the amendment. See Pagel, Inc. v. Commissioner, 91 T.C. 200, 212 (1988), aff'd, 905 F.2d 1190 (8th Cir. 1990) ("Of key importance in evaluating the existence of prejudice is the amount of surprise and the need for additional evidence on behalf of the party opposed to the new position."). This conclusion is reinforced by the fact that the case has not been set for trial, giving petitioner ample opportunity to generate a defense if it has not done so already. See Ax v. Commissioner, 146 T.C. 153, 168-69 (2016).
Lastly, petitioner argues that the Court should not allow the amendment because the new penalties present a futile argument. It contends that because this Court and the Sixth Circuit found that petitioner acted with reasonable cause and good faith in reporting its tax treatment related to the corrections it made to its 2005- 06 returns, it cannot be liable for the new penalties. Respondent asserts that the merits of petitioner's penalty defenses have not been considered. We agree with respondent that this argument is not futile.
We conclude that respondent has not delayed unjustifiably the proceedings by bringing the Motion at issue. Neither will the proposed amendment unfairly prejudice petitioner.
Upon due consideration, it is
ORDERED that respondent's Motion for Leave to File Second Amendment to Answer filed February 2, 2023, is granted, and the Clerk of the Court shall file respondent's Second Amendment to Answer, lodged February 2, 2023, as of the date of this Order.