T.C. Memo. 2009-303
UNITED STATES TAX COURT
ESTATE OF KWANG LEE, DECEASED,
ANTHONY J. FRESE, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14511-06. Filed December 23, 2009.
Frank Agostino, Michael P. Mattaliano, and Soh-Yung Erica
Son, for petitioner.
Lisa M. Rodriquez, for respondent.
MEMORANDUM OPINION
LARO, Judge: This case is currently before the Court on
petitioner’s motion for leave to amend the petition to allege the
affirmative defense of equitable recoupment. In Estate of Lee v.
Commissioner, T.C. Memo. 2007-371 (Estate of Lee I), we held that
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the Estate of Kwang Lee (decedent’s estate) was not entitled to
claim a marital deduction under section 2056 because Kwang Lee
(decedent) died after his wife, Kyoung Lee (Ms. Lee).1 The
estates of decedent and Ms. Lee filed their respective Federal
estate tax returns as if decedent had predeceased Ms. Lee.
Consistent therewith, Ms. Lee’s estate reported that most of
decedent’s wealth passed to her as decedent’s surviving spouse
and was taxable to her estate. Petitioner argues in support of
the subject motion that our holding in Estate of Lee I means that
(1) Ms. Lee’s estate should not have included any of decedent’s
wealth; (2) inclusion of decedent’s wealth in Ms. Lee’s estate
resulted in a $356,336.33 overpayment of her estate’s Federal
estate tax; and (3) decedent’s estate may equitably recoup Ms.
Lee’s estate’s claimed $356,336.33 overpayment as a reduction of
any deficiency determined in this case.
We decide whether petitioner may amend the petition to
allege the affirmative defense of equitable recoupment. We hold
that petitioner may not.
Background
I. Decedent and Ms. Lee
Decedent died testate on September 30, 2001, leaving a last
will and testament dated June 21, 2001. Ms. Lee died testate on
1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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August 15, 2001, leaving a last will and testament dated June 21,
2001. The wills of decedent and Ms. Lee were drafted by Barbara
L. de Mare (Ms. de Mare), counsel for the Lees and later for
their estates, and were intended to include a deemed survivorship
provision under which Ms. Lee would be deemed to survive decedent
if she died shortly before him. The wills were administered as
if decedent predeceased Ms. Lee, when in fact he had not, and as
if much of decedent’s wealth had passed to Ms. Lee as his
surviving spouse.
The Federal estate tax returns of decedent’s estate and Ms.
Lee’s estate were similarly filed with respondent as if decedent
had predeceased Ms. Lee and as if much of his wealth had passed
to her. Anthony J. Frese (Judge Frese), as executor of
decedent’s estate, claimed a marital deduction for decedent’s
estate for the value of the property that was deemed under the
wills to have passed to Ms. Lee as the surviving spouse. Judge
Frese, as executor of Ms. Lee’s estate, paid to respondent
$348,998.29 in Federal estate tax on behalf of Ms. Lee’s estate,
which consisted in part of the property that was treated as
passing to her from decedent.2
2
Judge Frese, as executor of Ms. Lee’s estate, also paid
respondent $7,338.04 in interest for the late payment of estate
tax, resulting in a total payment of $356,336.33.
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II. Audit of the Estates and Ms. Lee’s Protective Claim
Respondent audited both estate tax returns. Respondent
disallowed the marital deduction claimed by decedent’s estate and
advised Ms. Lee’s estate to file a corresponding protective claim
for refund on behalf of Ms. Lee’s estate. At the direction of
respondent’s auditor, Ms. de Mare delivered a letter to the
auditor on July 22, 2005, asserting an informal claim for refund
on behalf of Ms. Lee’s estate, attributable to the property that
was treated as passing to Ms. Lee under the deemed survivorship
provision.
III. Notice of Deficiency, Petition, and Procedural History
On April 26, 2006, respondent issued decedent’s estate a
notice of deficiency (notice) disallowing its marital deduction
because decedent was not actually survived by Ms. Lee.
Petitioner petitioned the Court on July 27, 2006, in contest of
the notice. Respondent answered the petition on September 19,
2006.
On May 9, 2007, the Court ordered each party to file a
memorandum setting forth (i) the issues of fact and law to be
resolved by the Court; and (ii) a statement of the party’s legal
position and theory. The order stated that neither party would
be allowed to advance a position or theory in the case unless it
was mentioned in the memorandum. On August 20, 2007, petitioner
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filed petitioner’s memorandum without any mention of equitable
recoupment.
On June 4, 2007, respondent moved the Court for partial
summary judgment on the issue of whether decedent’s estate may
benefit from the marital deduction notwithstanding that decedent
died after Ms. Lee. In Estate of Lee I, we held that decedent’s
intent that he be treated as if he predeceased Ms. Lee was
insufficient to qualify his estate for the marital deduction
under section 2056 because Ms. Lee actually had to survive
decedent to qualify as a “surviving spouse” for purposes of that
section. Accordingly, the marital deduction sought by decedent’s
estate was denied.
On July 31, 2008, the parties filed a “Stipulation of
Settled Issues” stating that in accordance with our decision in
Estate of Lee I, the marital deduction claimed by decedent’s
estate was disallowed in full. The parties also agreed that
issues remaining for decision were whether decedent’s estate was
liable for the addition to tax and the accuracy-related penalty
determined by respondent.
The Court held a trial of the remaining issues on December
18, 2008, and closed the evidentiary record at the end of the
trial. On April 27, 2009, the Court held in Estate of Lee v.
Commissioner, T.C. Memo. 2009-84 (Estate of Lee II), that neither
the addition to tax nor the accuracy-related penalty was
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applicable to this case. The Court directed at the end of that
opinion that a decision be entered under Rule 155.
IV. Subsequent Claim for Refund
On May 21, 2009, Ms. Lee’s estate filed with respondent a
second claim for refund referencing the Court’s holding in Estate
of Lee I. Respondent denied that claim on June 24, 2009.
Respondent has yet to determine whether Ms. Lee’s estate is
entitled to a refund with respect to its first claim for refund
(i.e., the July 22, 2005, letter that Ms. de Mare delivered to
respondent’s auditor).
V. Developments Following Estate of Lee II
The parties have been unable to agree on a computation for
entry of decision under Rule 155. On August 25, 2009, petitioner
moved the Court for leave to file an amendment to petition.
Petitioner desires to amend the petition to allege equitable
recoupment as an affirmative defense. Petitioner states that Ms.
Lee’s estate overpaid its Federal estate tax as a result of our
ruling in Estate of Lee I and that decedent’s estate is allowed
to recoup this $356,336.33 overpayment as an offset to its estate
tax deficiency.
Discussion
I. Overview
Petitioner moves the Court for leave to amend the petition
to allege the affirmative defense of equitable recoupment.
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Section 6214(b) provides that this Court may apply equitable
recoupment as a defense to the same extent it is available in
civil tax cases before the U.S. District Courts and the U.S.
Court of Federal Claims. The Court of Appeals for the Third
Circuit, to which this case is appealable absent a stipulation to
the contrary, recognizes equitable recoupment as a potential
affirmative defense in civil matters. See, e.g., Boyle v. United
States, 355 F.2d 233 (3d Cir. 1965). Accordingly, petitioner may
benefit from the applicability of equitable recoupment to the
extent that the issue is properly before this Court and the law
on the subject favors petitioner.
II. Amendment of Pleadings
A. Overview
Rule 41(a) gives a petitioning taxpayer the right to amend
the petition once before an answer is served. Afterwards, a
petition may be amended only by leave of the Court or with the
written consent of the Commissioner. Id. Respondent served the
answer in this case on September 19, 2006, and objects to
petitioner’s motion for leave to amend the petition. Therefore,
petitioner requires leave of the Court to amend the petition.
Rule 41(a) states that leave to amend a pleading shall be
freely given when justice requires. Whether justice requires
such an amendment is determined by examining the facts and
circumstances surrounding the request in the light of sound
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reason and fairness. See Law v. Commissioner, 84 T.C. 985, 990
(1985). A court may consider various factors in determining
whether to allow an amendment to a pleading out of time. These
factors include (1) the timeliness of the motion for leave to
amend, (2) the reasons for the delay, and (3) whether the moving
party had sufficient prior opportunity to allege the matter
contained in the requested amendment. See Foman v. Davis, 371
U.S. 178, 182 (1962); Daves v. Payless Cashways, Inc., 661 F.2d
1022, 1024 (5th Cir. 1981); see also Derksen v. Commissioner, 84
T.C. 355, 358 n.7 (1985); Lacher v. Commissioner, T.C. Memo.
2000-260, affd. 32 Fed. Appx. 600 (2d Cir. 2002).
Notwithstanding these factors, a court should deny a party’s
request to amend a pleading where the party cannot prevail on the
merits of the requested amendment. See Klamath-Lake Pharm.
Association v. Klamath Med. Serv. Bureau, 701 F.2d 1276, 1293
(9th Cir. 1983); Block v. Commissioner, 120 T.C. 62, 64 (2003);
Russo v. Commissioner, 98 T.C. 28, 31 (1992).
We turn to decide petitioner’s request for leave to amend
the petition with these principles in mind.
B. Factors
1. Timeliness of Amendment
A court should generally consider, when weighing a request
to amend a pleading, whether an excuse for the delay exists and
whether the opposing party would suffer unfair surprise,
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disadvantage, or prejudice. See Estate of Quick v. Commissioner,
110 T.C. 172, 178 (1998). The Court applies a heightened
skepticism to an untimely request for an amendment that, if
granted, would prejudice the other party. See, e.g., Farr v.
Commissioner, 11 T.C. 552, 556-557 (1948), affd. sub nom. Sloane
v. Commissioner, 188 F.2d 254 (6th Cir. 1951).
Petitioner aims to assert a new legal defense to the notice
of deficiency 3 years after petitioner petitioned the Court and 2
years after the Court decided Estate of Lee I, the event
purportedly giving rise to the claim. Petitioner has had ample
time to assert a claim of equitable recoupment, and respondent
asserts, and we agree, that he would be unfairly prejudiced were
we to allow petitioner to prosecute the claim of an estate tax
overpayment attributable to Ms. Lee’s estate. To that end,
petitioner acknowledges that the record would need to be reopened
for further trial were the issue to be decided by the Court at
this time. See, e.g., Law v. Commissioner, supra at 990-991
(denying the Commissioner’s motion for leave to amend the answer
where a further trial would be necessary to decide the substance
of the requested amendment); Manzoli v. Commissioner, T.C. Memo.
1989-94 (denying as inexcusably late and prejudicial a motion for
leave to amend the petition where the motion was made incident to
the parties’ submission of their Rule 155 computations), affd.
904 F.2d 101 (1st Cir. 1990). In addition, Ms. Lee’s estate is
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not a party before this Court, and respondent’s counsel
represents that respondent does not have access to the
administrative file of Ms. Lee’s estate. Thus, whether Ms. Lee’s
estate is entitled to the proffered overpayment is not readily
ascertainable. We note further that our May 9, 2007, order
instructed each party to file a memorandum that was intended to
advise the parties and the Court at the early stages of this
proceeding as to each party’s legal positions and thus to
eliminate any undue surprise, disadvantage, or prejudice.
Contrary to the purpose of that order, petitioner seeks to raise
a new matter late in the proceeding.
2. Reasons for Delay and Prior Opportunity To Assert
Equitable Recoupment
In certain cases the Court may allow a party to raise a new
matter despite prejudice to the other party upon a showing of
good cause for the delay (e.g., the lack of opportunity to raise
the matter earlier). See, e.g., Waterman v. Commissioner, 91
T.C. 344, 348-349 (1988). We are not persuaded that this is one
of those cases. Petitioner rests the claim for equitable
recoupment on this Court’s opinion in Estate of Lee I, which was
filed on December 20, 2007. The trial of this case occurred on
December 18, 2008, at which time the Court closed the evidentiary
record. Following Estate of Lee I and leading up to the trial of
this case, both parties submitted multiple filings with the
Court, including status reports, issues memoranda, a stipulation
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of settled issues, and other pretrial memoranda. Petitioner did
not raise the application of equitable recoupment in any of these
filings. On April 27, 2009, the parties were ordered to file
computations under Rule 155 pursuant to the Court’s findings and
conclusions. Only afterwards was equitable recoupment asserted.3
Petitioner asserts that the request for leave to amend the
petition is being made at this late stage of the proceeding
because respondent only denied the May 21, 2009, claim for refund
after the evidentiary record closed. We are unpersuaded that
this assertion establishes good cause for the late request. The
second claim for refund was not made until more than 1 year after
the Court decided Estate of Lee I. In addition, petitioner
concedes that the first claim is still open and may be properly
considered by a refund forum.
C. Ability To Prevail on the Merits
1. Overview of Equitable Recoupment
Equitable recoupment has been a permissible affirmative
defense in Federal tax matters since the Supreme Court’s decision
3
Petitioner’s motion also tests the limits of Rule 155(c),
which generally frowns upon the introduction of new issues at the
Rule 155 stage of a proceeding. Cf. Menard, Inc. v.
Commissioner, 130 T.C. 54, 57 n.3 (2008) (permitting the taxpayer
to assert equitable recoupment at the Rule 155 stage of a
proceeding because the issue was raised at an earlier stage of
the proceeding and thus did not constitute a new issue within the
meaning of Rule 155(c)). Unlike the taxpayer in Menard,
petitioner did not previously assert equitable recoupment as an
affirmative defense and accordingly, the argument constitutes a
new issue under Rule 155(c).
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in Bull v. United States, 295 U.S. 247 (1935). Equitable
recoupment allows the bar of an expired statutory limitation
period to be overcome in limited circumstances to prevent
inequitable windfalls to a party that would otherwise result from
inconsistent tax treatment of the same transaction, item, or
event affecting the taxpayer or a sufficiently related taxpayer.
See United States v. Dalm, 494 U.S. 596, 605-606 n.5 (1990);
Rothensies v. Elec. Storage Battery Co., 329 U.S. 296 (1946);
Stone v. White, 301 U.S. 532 (1937). Equitable recoupment
operates out of fairness to reduce a taxpayer’s claim for refund
or the Government’s claim of deficiency. Estate of Mueller v.
Commissioner, 101 T.C. 551, 552 (1993).
In Estate of Mueller v. Commissioner, supra at 556, this
Court ruled that the party claiming the benefit of equitable
recoupment bears the burden of establishing its applicability.
That burden requires that the moving party prove the following:
(1) The overpayment or deficiency for which recoupment is sought
is barred by an expired period of limitation; (2) the time-barred
overpayment or deficiency arose out of the same transaction,
item, or taxable event as the overpayment or deficiency before
the Court; (3) the transaction, item, or taxable event has been
inconsistently subjected to two taxes; and (4) if the
transaction, item, or taxable event involves two or more
taxpayers, there is sufficient identity of interest between the
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taxpayers that they should be treated as one.4 See Menard, Inc.
v. Commissioner, 130 T.C. 54, 62-63 (2008); Estate of Branson v.
Commissioner, 113 T.C. 6, 15 (1999). The test set forth in
Estate of Mueller is conjunctive, and therefore the failure to
satisfy any one of the four elements precludes relief under the
doctrine.
2. Whether Petitioner’s Proffered Refund Due Ms.
Lee’s Estate Is Time Barred
A taxpayer must file a claim for refund with the
Commissioner before the taxpayer may file a suit for refund.
Sec. 7422(a). A taxpayer may not initiate a refund suit until
the earlier of (1) 6 months after the filing of the claim; or (2)
the date on which the Commissioner renders a decision on the
claim. Sec. 6532(a)(1).
Ms. Lee’s estate filed a claim for refund on May 21, 2009,
which the Commissioner denied on June 24, 2009. Ms. Lee’s estate
also filed an earlier claim for refund on July 22, 2005, which
the Commissioner has yet to decide. Petitioner concedes that the
period of limitations remains open on the earlier claim but
invites the Court to decide the propriety of that claim in this
case as part of an equitable recoupment issue. We decline to do
4
In certain cases, a sufficient identity of interest may
exist between the estate of an individual and the estate of his
or her spouse. See, e.g., Estate of Vitt v. United States, 706
F.2d 871 (8th Cir. 1983); Estate of Buder v. United States, 372
F. Supp. 2d. 1145, 1158-1159 (E.D. Mo. 2005), affd. 436 F.3d 936
(8th Cir. 2006).
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so. Petitioner’s concession, coupled with respondent’s
acknowledgment that the earlier claim for refund has not yet been
determined, leaves unsatisfied one of the prerequisites to the
doctrine of equitable recoupment.
III. Conclusion
We will deny petitioner’s motion for leave to amend the
petition because justice does not require that we grant it. We
have considered all of the arguments made by the parties, and, to
the extent that we have not specifically addressed them, we
conclude that they are without merit.
Accordingly,
An appropriate order will be
issued.