Lacher v. Commissioner

T.C. Memo. 2000-260

UNITED STATES TAX COURT

MICHAEL A. LACHER AND JUDITH W. LACHER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1386-89. Filed August 17, 2000.

Stuart A. Smith, for petitioners.

Moria L. Sullivan, for respondent.

MEMORANDUM OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Norman H. Wolfe pursuant to the provisions of section

7443A(b)(4) and Rules 180, 181, and 183. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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The Court agrees with and adopts the opinion of the Special Trial

Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

WOLFE, Special Trial Judge: This matter is before the Court

on petitioners’ Motion for Leave to File Amended Petition.

Because of concessions and agreements made by the parties,1 the

sole issue remaining for decision is whether petitioners are

entitled to the benefits of a settlement offer that was made

available to other taxpayers who had partnership interests in SAB

Resource Recovery Associates, a part of the Plastics Recycling

1
Petitioners concede that they are not entitled to any
deductions, losses, investment credits, business energy
investment credits, or any other tax benefits claimed on their
1981 Federal income tax return as a result of their participation
in SAB Resource Recovery Associates (SAB). Petitioners also
concede that they are not entitled to any investment tax credit
carrybacks to the years 1978 and 1979 that resulted from their
participation in SAB. Petitioners also concede that the
resulting underpayments in income tax are substantial
underpayments attributable to tax-motivated transactions, subject
to the increased rate of interest established under sec. 6621(c).
Petitioners stipulate that they are liable for an addition to tax
under sec. 6659 for valuation overstatement for 1981 of $17,253.
Petitioners also concede that the assessment period for 1981 with
regard to the amount of any deficiency that resulted from any
adjustment to items from SAB was extended pursuant to sec.
6501(c)(4). Petitioners further concede that to the extent the
notices of deficiency for 1978 and 1979 relate to investment tax
carrybacks from the year 1981 arising from petitioners’
participation in SAB, any assessments and collection of any
deficiencies arising from the disallowance of such credits are
not barred by the statute of limitations pursuant to sec.
6501(j). By stipulation, respondent concedes that petitioners
are not required to include in their 1978 gross income $42,935 as
a recovery of income. Respondent also concedes that petitioners
are not subject to an addition to tax under sec. 6651(a)(1) for
1978.
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group of cases. Petitioners have clarified the issue by limiting

their claim to the additions to tax under section 6653(a)(1) and

(2). Petitioners further concede that their only argument with

respect to the additions to tax under section 6653 is that they

were denied equal treatment with respect to the settlement offer,

and they do not seek any further proceeding with respect to the

merits under section 6653. An evidentiary hearing in regard to

this motion was held on March 6, 2000.

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioners resided in

New York, New York, when the petition in this case was filed.

References to petitioner in the singular are to petitioner

Michael A. Lacher.

The Plastics Recycling Transaction

In 1981, petitioner acquired a 4.48-percent limited

partnership interest in SAB Resource Recovery Associates (SAB).

SAB is part of the Plastics Recycling group of cases. The

Plastics Recycling group of cases centers about a multistep

transaction involving the sale and lease of machines designed to

recycle plastic scrap. The transactions involving the plastic

recyclers leased by SAB are substantially identical to those in

the Clearwater Group partnership, which was the subject of

Provizer v. Commissioner, T.C. Memo. 1992-177, affd. without
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published opinion 996 F.2d 1216 (6th Cir. 1993). For a detailed

discussion of the transactions involved in the Plastics Recycling

cases, see Provizer v. Commissioner, supra.

The facts concerning the transactions in Provizer can be

summarized as follows. Packaging Industries Group, Inc. (PI),

manufactured and sold six Sentinel Recyclers (the recyclers) to

Ethynol Cogeneration, Inc. (ECI), for $981,000 each. The sale of

the recyclers from PI to ECI was financed with nonrecourse notes.

In turn, ECI resold the recyclers to F&G Equipment Corp. (F&G)

for $1,162,666 each. The sale of the recyclers by ECI to F&G was

also financed with notes. These notes provided that 10 percent

of the note amount would be recourse but that the recourse

portion would only be due after the nonrecourse portion had been

paid in full. Subsequently, F&G leased the recyclers to the

Clearwater Group partnership, which then licensed the recyclers

to First Massachusetts Equipment Corp. (FMEC), which sublicensed

them back to PI. PI allegedly sublicensed the recyclers to

entities (the end-users), which would use them to recycle plastic

scrap. The sublicense provided that the end-users would transfer

100 percent of the recycled scrap to PI in exchange for payment

from FMEC based on the quality and amount of recycled scrap. All

the foregoing transactions were executed simultaneously.

In Provizer v. Commissioner, supra, we resolved the Plastics

Recycling matter as follows: (1) We found that each recycler had
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a fair market value of not more than $50,000; (2) we held that

the transaction, which was virtually identical to the transaction

in the present case, was a sham because it lacked economic

substance and a business purpose; (3) we sustained the additions

to tax for negligence under section 6653(a)(1) and (2); (4) we

sustained the addition to tax for valuation overstatement under

section 6659; and (5) we held that the partnership losses and tax

credits claimed with respect to the plastics recycling

partnership at issue were attributable to tax-motivated

transactions within the meaning of section 6621(c). See also

Addington v. Commissioner, 205 F.3d 54 (2d Cir. 2000), affg. Sann

v. Commissioner, T.C. Memo. 1997-259.

We have decided many Plastics Recycling cases that, like

this case, involve the question of additions to tax for

negligence. See, e.g., Greene v. Commissioner, T.C. Memo. 1997-

296; Kaliban v. Commissioner, T.C. Memo. 1997-271; Sann v.

Commissioner, T.C. Memo. 1997-259 n. 13, affd. sub nom. Addington

v. Commissioner, 205 F.3d 54 (2d Cir. 2000). The guidelines

concerning the question of negligence in the context of the

Plastics Recycling transactions are by now well established.

The Standard Settlement Offer

In approximately February 1988, respondent formulated a

standard settlement offer that was made available to taxpayers in

docketed Plastics Recycling cases. On August 10, 1988, the
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standard settlement offer was made available to taxpayers in

nondocketed Plastics Recycling cases. See Baratelli v.

Commissioner, T.C. Memo. 1994-484. The standard settlement offer

allowed a deduction for 50 percent of the amount of the

taxpayer’s cash investment, Government concessions of the

negligence addition to tax, and the taxpayer’s concession of the

valuation overstatement addition to tax and increased interest.

The standard settlement offer expired in 1989 following the trial

of Provizer v. Commissioner, supra. See Baratelli v.

Commissioner, supra n.3.

Petitioner and His Involvement in SAB

Petitioner is an experienced attorney who has litigated

cases for more than 35 years. Petitioner is well aware that

cases can be resolved through settlement at various stages of

litigation.

In 1981, petitioner acquired a limited partnership interest

in SAB. As a result of petitioners’ investment in SAB, they

claimed a net operating loss deduction of $39,697 and investment

tax credits and business energy credits totaling $82,558 on their

1981 Federal income tax return, which was limited to petitioners’

1981 income tax liability (as reduced by the partnership loss) of

$58,232. The balance of the credits, $24,326, was carried back

to the years 1978 and 1979 to generate tax refund claims of

$11,489 and $12,837, respectively.
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In notices of deficiency, dated November 4, 1988, respondent

disallowed petitioners’ claimed losses and tax credits that

related to their investment in SAB. Respondent also determined

that petitioners were liable for additions to tax under sections

6651(a), 6653(a), and 6659, and increased interest under section

6621(c).

Procedural Background

In response to the notices of deficiency, petitioners filed

a petition with this Court on January 23, 1989. In their

petition, petitioners claimed that they were not liable for

additions to tax under section 6653 because “[the] calculation of

their income tax liability for the years 1981, 1979, and 1978 and

their reporting of income for those years was in no way

negligent.” Petitioners did not mention or suggest in their

petition the argument that they were not granted equality of

treatment as a ground for contesting the addition to tax for

negligence.

On March 21, 1994, petitioners filed a motion for leave to

amend petition. On this occasion, respondent did not object, and

petitioners’ motion was granted. In their amended petition,

petitioners claimed that respondent was barred under section 6501

from assessing deficiencies for 1978 and 1979.

On April 1, 1994, we partially tried petitioners’ case. At

the trial, the parties submitted a Stipulation of Settled Issues.
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The Stipulation of Settled Issues provides that petitioners are

not entitled to the investment tax credits, business energy

investment credits, or any other tax benefits resulting from

their participation in SAB that they claimed on their 1981

Federal income tax return. Petitioners also conceded that the

underpayments in income tax attributable to their participation

in SAB were subject to the increased rate of interest pursuant to

section 6621(c). Accordingly, the issues remaining for decision

were: (1) Whether petitioners were liable for the additions to

tax under section 6653(a) for 1978, 1979, and 1981; (2) whether

petitioners were liable for the addition to tax under section

6659 for 1981; and (3) whether the assessments for 1978 and 1979

were barred by section 6501. At trial, again no evidence or

argument was presented concerning equality of treatment. Because

he was otherwise occupied on business in Europe, petitioner was

not present during the trial. However, at this trial the Court

received all of the evidence relevant to these issues, except for

petitioner’s testimony. Therefore, the Court held the trial

record open for the purpose of receiving petitioner’s testimony.

On October 25, 1999, the Court again calendared this case

for trial on March 6, 2000. On February 23, 2000, just days

before the case was called for trial and 6 years after this case

was partially tried, petitioners filed their second motion for

leave to file amended petition. In their amended petition,
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petitioners now contend that they should be relieved of the

additions to tax for negligence because respondent has a duty to

afford substantially equal treatment to similarly situated

taxpayers. Petitioners further contend that respondent breached

his duty when he failed to offer them the so-called standard

settlement offer that was made available to other taxpayers.

Petitioner asserts that he was first made aware of the standard

settlement offer sometime during middle or late 1999 and that he

would have accepted the standard settlement offer if he had

received it. At trial, petitioner failed to present evidence

that demonstrates that he or his counsel attempted to settle the

case. Instead, petitioner conceded that he never attempted to

settle with respondent.

On March 8, 2000, the parties filed an amended Stipulation

of Settled Issues. In this stipulation, petitioners concede that

they are liable for the addition to tax under section 6659 for

1981. Petitioners also concede that section 6501 does not bar

the assessments for 1978 and 1979. At trial, petitioners also

conceded that their only challenge to the additions to tax for

negligence under section 6653 is their present argument that they

were denied equal treatment.

Consents To Extend Period of Limitations

On their 1981 Federal income tax return, petitioners listed

their address as “C/O Stuart Becker & Co. 665 Fifth Ave., New
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York, New York 10022" (the Becker address). Stuart Becker & Co.

was also listed as the preparer of petitioners’ 1981 Federal

income tax return. Between early 1985 and the middle of 1987,

respondent mailed to petitioners a series of Forms 872, Consent

to Extend the Time to Assess Tax, requesting that petitioners

extend the period of limitations for 1981. The Forms 872 were

mailed by respondent to the Becker address. On March 12, 1985,

May 8, 1986, and May 14, 1987, petitioner signed the Forms 872

and returned them to respondent. At trial, petitioner initially

testified that he did not remember whether he signed any Forms

872 or whether Becker represented him when the Forms 872 were

sent to him. During cross-examination, respondent introduced

copies of the signed Forms 872. In response, petitioner stated:

“My memory may be faulty as to what these things meant or whether

and when I got them * * *, [but] my signature is my signature, I

did what I did.”

Piggyback Agreements

On December 19, 1991, respondent sent to petitioners a

proposed Stipulation of Settlement (piggyback agreement) that

would have enabled petitioners to have their case bound to the

results reached in Provizer v. Commissioner, T.C. Memo. 1992-177.

Petitioners did not agree to the piggyback agreement at this

time. On March 25, 1992, this Court issued an opinion in the

Provizer case. Respondent again offered the piggyback agreement
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to petitioners on June 1, 1992. Petitioners again declined or at

least failed to sign the piggyback agreement.

At trial, petitioner testified that he could not recall

whether he had received piggyback agreements and that he would

have responded to a piggyback offer if he had received one. In

his posttrial brief, petitioner conceded that he had received

respondent’s June 1, 1992, letter. However, there is no evidence

in the record that indicates that petitioners responded to the

piggyback offers.

Discussion

Rule 41(a) provides: “A party may amend a pleading once as

a matter of course at any time before a responsive pleading is

served. * * * Otherwise a party may amend a pleading only by

leave of Court or by written consent of the adverse party.” Rule

41(a) further provides that leave to amend “shall be given freely

when justice so requires.” This Court has looked to cases

decided under rule 15(a) of the Federal Rules of Civil Procedure

for guidance on the interpretation of Rule 41(a). See Kramer v.

Commissioner, 89 T.C. 1081, 1084-1085 (1987). Rule 15(a) of the

Federal Rules of Civil Procedure, like Rule 41(a), mandates that

leave to amend “shall be freely given when justice so requires.”

Petitioners’ motion for leave was not filed before the

responsive pleading, and respondent has not consented to the

motion. Accordingly, the Court must use its discretion in
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deciding whether to grant or deny petitioners’ motion for leave

to amend. See Kramer v. Commissioner, supra at 1085. In

exercising our discretion, we consider various factors, including

the timeliness of the motion, the reasons for the delay, and

whether granting the motion would result in issues being

submitted in a seriatim fashion. See Daves v. Payless Cashways,

Inc., 661 F.2d 1022, 1024 (5th Cir. 1981). Leave to amend may be

inappropriate when there is undue delay, bad faith, prejudice

resulting from the amendment, or a dilatory motive of the movant.

See Foman v. Davis, 371 U.S. 178, 182 (1962); Russo v.

Commissioner, 98 T.C. 28, 31 (1992). Moreover, we deny a

taxpayer’s motion to amend a petition when the argument raised is

futile. See Russo v. Commissioner, supra.

In their present motion for leave to amend their petition,

petitioners argue that they should be relieved of the negligence

addition to tax because respondent has a duty to afford

substantially equal treatment to similarly situated taxpayers.

In their last-minute new argument, they suggest that respondent

and this Court lack discretion to reach different results as to

them, as contrasted with other taxpayers who accepted a standard

settlement offer made 11 years ago, before trial of the test

case.

Absent proof that a taxpayer has been singled out for

disparate treatment based on impermissible considerations such as
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race or religion, or absent a contractual agreement to the

contrary, the Commissioner is not required to offer the same

settlement terms to similarly situated taxpayers. See Estate of

Campion v. Commissioner, 110 T.C. 165 (1998), affd. without

published opinion sub nom. Drake Oil Tech. Partners v.

Commissioner, 211 F.3d 1277 (10th Cir. 2000), affd. without

published opinion sub nom. Tucek v. Commissioner, 198 F.3d 259

(10th Cir. 1999); Vulcan Oil Tech. Partners v. Commissioner, 110

T.C. 153 (1998), affd. without published opinion sub nom. Drake

Oil Tech. Partners v. Commissioner, 211 F.3d 1277 (10th Cir.

2000), affd. without published opinion sub nom. Tucek v.

Commissioner, 198 F.3d 259 (10th Cir. 1999); Norfolk S. Corp. v.

Commissioner, 104 T.C. 13, 58-59, supplemented by 104 T.C. 417

(1995), affd. 140 F.3d 240 (4th Cir. 1998).

In the present case, petitioners have not asserted, nor do

we find, that respondent singled them out for disparate treatment

based on impermissible considerations. Petitioners have also not

asserted that respondent had a duty to offer them the standard

settlement offer due to a contractual obligation.

Petitioners have failed to convince us that the standard

settlement offer was not made available to them. At trial,

petitioner testified that he personally never was offered the

opportunity to have his case piggybacked to Provizer v.

Commissioner, T.C. Memo. 1992-177. However, his testimony was
 - 14 -

contradicted by letters dated December 19, 1991, and June 1,

1992. These letters indicate that petitioners were given the

opportunity to enter into a piggyback arrangement. Moreover,

petitioner also testified that he did not remember signing the

Forms 872. Again, petitioner’s testimony was contradicted. At

trial, respondent introduced signed copies of the Forms 872.

These instances reveal that with regard to events surrounding

this case petitioner’s memory is failing and unreliable. Apart

from petitioner’s own testimony, petitioners have failed to

present any evidence that demonstrates that they were not offered

the standard settlement offer. Under these circumstances, we are

unconvinced by petitioner’s self-serving and failing memory.

There is in this record no credible evidence that respondent

failed to send the standard settlement offer to petitioners

although the offer was sent to all other investors in the

plastics recycling project. On the other hand, respondent has

presented no affirmative evidence of mailing the standard offer

to petitioners. Respondent urges, quite reasonably, that it is

unfair to expect him to produce evidence concerning newly alleged

circumstances years after the events in question. Moreover,

petitioners have failed to convince us that they were inclined to

accept the standard settlement offer. Petitioner is an

experienced attorney who is aware that cases can be resolved

through settlement. We also note that petitioners have been
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represented in this case by counsel who for many years have been

or should have been aware of the settlement positions that were

made available by respondent.2 Additionally, on December 19,

1991, and June 1, 1992, respondent offered piggyback agreements

to petitioners. On both occasions, petitioners failed to accept

respondent’s offer and did not submit any counter offer. These

circumstances support the conclusion that petitioners never had

any intention of settling this case.

Petitioners’ motion for leave to amend their petition again

is also untimely. Presently, they are seeking to amend their

petition for a second time, more than 11 years after they filed

their original petition. Moreover, petitioners’ counsel for many

years have been or should have been aware of the settlement

agreements that were made available to participants in Plastics

Recycling cases. Accordingly, petitioners had ample time to

raise this argument. This Court has consistently refused to

reward such dilatory behavior. See Russo v. Commissioner, 98

2
Petitioner represented himself and his wife until Jan. 26,
1994. On that date, Hugh Janow (Janow) entered his appearance in
the case. On Aug. 8, 1994, Janow withdrew from the case and
petitioners’ current counsel, Stuart Smith (Smith), entered his
appearance. Smith has tried numerous Plastics Recycling cases.
See, e.g., Sann v. Commissioner, T.C. Memo. 1997-259, affd. sub
nom. Addington v. Commissioner, 205 F.3d 54 (2d Cir. 2000);
Jaroff v. Commissioner, T.C. Memo. 1996-527; Gollin v.
Commissioner, T.C. Memo. 1996-454. In Jaroff and Gollin, Smith
specifically referred to the standard settlement offer. See
Jaroff v. Commissioner, supra n.17; Gollin v. Commissioner, supra
n.21.
 - 16 -

T.C. 28 (1992); Bernard v. Commissioner, T.C. Memo. 1995-332

(taxpayer waited until she lost the substantive issues before she

filed a subsequent motion to raise a new issue.); Estate of

Allinson v. Commissioner, T.C. Memo. 1994-304 (Court denied

motion filed 7 years after stipulation of settlement executed).

Lastly, granting petitioners’ motion would result in undue

prejudice to respondent. As we have noted, petitioners are now

attempting to raise a new argument 12 years after the standard

settlement offer was made available, 11 years after they filed

their original petition and 6 years after this case was partially

tried. Petitioners seek relief from the penalty under section

6653(a) without regard to whether the penalty is appropriate

under the facts of this case. They seek relief from the penalty

by raising the equality of treatment argument many years after

the pleadings and partial trial and without convincing evidence

that they have been treated unfairly.

Petitioner has delayed trial and even been absent from a

partial trial. He has consistently refused to settle the case

but has waited until the issues have been tried many times by

others under closely analogous facts and circumstances. Now

after many years of avoiding, delaying, or refusing settlement or

trial, petitioner seeks to obtain for himself the benefit of a

settlement offer made many years ago before the issues in this

case had been tried. The prejudice to respondent is obvious; the
 - 17 -

motion for leave to amend the petition is contrary to the

interests of justice and impermissible.

For all the foregoing reasons, petitioners’ motion for leave

to amend petition shall be denied.

To reflect the foregoing,

An order will be issued

denying petitioners’ motion

for leave to amend petition,

and decision will be entered

under Rule 155.