*239 An appropriate order will be issued granting respondent's motion for leave to file amendment to answer
Respondent issued a notice of deficiency for 1985 and 1986. The 1985 deficiency was determined by using income averaging. Respondent moved to amend her answer to assert an increased deficiency for 1985, by asserting that petitioner's taxable income for each of the base period years, 1982-1984 (for which respondent is barred by
Held: Respondent may amend the answer to increase the deficiency for 1985.
MEMORANDUM OPINION
CHABOT, Judge: This matter is before us on respondent's motion for leave to file amendment to answer.
Respondent determined deficiencies in Federal individual income tax against petitioner for 1985 in the amount of $ 35,141 and for 1986 in the amount of $ 46,623, and additions to tax under*240 sections 6653(a)(1) and 6653(a)(1)(A) 1 (negligence, etc.) in the amount of $ 1,757 for 1985 and in the amount of $ 2,331 for 1986, plus 50 percent of the interest due on the entire deficiency for 1985 and 1986 under sections 6653(a)(2) and 6653(a)(1)(B), respectively. Respondent's amendment to answer would increase the deficiency for 1985 by $ 20,865, for a total of $ 56,006; 2 it would correspondingly increase the additions to tax for 1985; and it would assert additions to tax under section 6661 in the amounts of $ 14,001 for 1985 and $ 11,633 for 1986.
*241 After concessions by petitioner, the issue for decision is whether, for purposes of determining the correct deficiency, if any, for 1985 using income averaging, respondent may increase petitioner's taxable income for the base period years (1982, 1983, and 1984) even though
The deficiencies and additions to tax were determined in a notice of deficiency dated March 16, 1990. The petition was filed in the instant case on June 12, 1990. Respondent filed her answer on August 13, 1990. On December 6, 1991, respondent filed a motion for leave to file amendment to answer. 3 Petitioner filed a memorandum in opposition to respondent's motion, and respondent filed a memorandum in response to petitioner's objection. This case is set for trial at a special trial session to begin July 6, 1992, at Westbury, New York.
*242 Nona Lou Greene (hereinafter sometimes referred to as Greene) resided in Westchester County, New York, at the time the petition was filed. By an order dated March 5, 1990, the New York State Supreme Court in and for Westchester County, declared "that Nona Lou Greene has suffered substantial impairment of her ability to care for her property and provide for herself", and appointed conservators for Greene. The State Court also found that Greene "is not, and, in all likelihood will never be capable of resuming the management of her property".
It appears that Greene operated a horse breeding and racing activity, a Schedule C activity. Respondent disallowed deductions relating to this activity for 1985 and 1986 and determined deficiencies for these years. The 1985 deficiency amount was determined by use of income averaging (secs. 1301-1305, since repealed). In the proposed amendment to answer, respondent asserts that Greene's taxable incomes for 1982, 1983, and 1984 (the base period years for the 1985 income averaging) are greater than the amounts reported on Greene's tax returns. This is based on respondent's assertion that Greene's 1982, 1983, and 1984 losses from the horse breeding*243 and racing activity are not deductible against Greene's other income because they "were incurred in connection with an activity not engaged in for profit within the meaning of
Although respondent is barred by
Petitioner contends that respondent's motion should be denied because (1) respondent has already determined that the activity was engaged in for profit for purposes of
Respondent contends that she should be allowed to amend the answer because (1) respondent's motion was filed sufficiently in advance of trial to prevent surprise and prejudice to petitioner, (2) the Court may compute petitioner's taxable income for the base period years for purposes of income averaging for 1985, and (3) equitable principles do not support petitioner's position.
We agree with respondent.
*244 Recomputation of Income for Base Period Years;
*245 In
In Unser v. Commissioner, respondent reallocated to the taxpayers (under section 482) the income and expenses from the taxpayers' corporation for 1966 through 1968. The taxpayers agreed to the reallocation, but contended that respondent was barred by
We must therefore determine whether the "taxable income" for the base period years as used in the provisions of sections 1301 through 1305 refers to the income of a taxpayer as previously reported on the taxpayer's return where an assessment of a deficiency or a refund of an overpayment is barred*246 by the statute of limitations or refers to the proper taxable income of the taxpayer for that base period year. Section 1302(c)(2) defines the base period income for any taxable year as "the taxable income for such year" increased and reduced in a manner not here pertinent. Since the statute uses the phrase "the taxable income of such year" as distinguished from "the income as reported" or the "income as previously determined," the inference is clear that the income to be used for each base period year is the correct income for such year whether or not the assessment of a deficiency or the refund of an overpayment for such base period year is barred by the statute of limitations.
We conclude that, pursuant to
Petitioner attempts to distinguish Unser v. Commissioner and Odend'hal v. Commissioner by contending that in those cases "the determination of the tax item at issue was applied retroactively to the*247 closed prior year without an examination by the Court of the closed year." Petitioner contends that in the above-mentioned cases the retroactive application occurred because the taxpayer either conceded the closed-year liability or no facts distinguished the closed year from the open year. Petitioner contends that the instant case is distinguishable because the issue of whether an activity is engaged in for profit under
Petitioner also contends that, if we grant respondent's motion, then we "will have to determine whether Greene underpaid tax for those years [1982-1984]." Firstly, we have already held that there is a difference for
We hold for*249 respondent on this issue.
Estoppel
Petitioner contends that respondent examined Greene's tax returns on four previous occasions, involving 1976 through 1984, and involving the issue of whether the activity was engaged in for profit under
Firstly, respondent's acquiescence to petitioner's tax treatment of an item ordinarily does not estop respondent from later challenging the treatment of the item. As we put it in
In Union Equity [
"neither the duty of consistency, nor the principle of equitable estoppel bind the Commissioner to unauthorized acts of his agents * * * nor preclude him from correcting mistakes of law * * * including the power to retroactively correct his rulings, regulations and decisions upon which taxpayers have relied." [Emphasis supplied.]
To the same effect are
Secondly, petitioner contends that respondent has a duty*251 of consistency, citing
In the instant case, petitioner relies on language in
So if a taxpayer who acquired gain in an exchange of property sets up as its measure a value of what he received in which the Commissioner acquiesces, that value is the basis to be taken in measuring a further gain on a sale of the property in a later year. The taxpayer cannot say: "I was mistaken. The value was many times what I said it was. I therefore realized less gain on the last sale," without doing justice all around in correcting his mistake. The reverse principle is also true if the Commissioner, in reviewing the return, should correct the first valuation and the taxpayer should acquiesce. The Commissioner could not repudiate his action when that value again became a determining factor.
(This doctrine of consistency is discussed in some detail inWe need not explore the ramifications of equity, duty of consistency, or tax benefit rule. We merely point out that respondent did not require Greene to deduct her losses from her horse breeding and racing activity in the base period years. As we noted in dealing with petitioner's estoppel argument, respondent's acquiescence in one year does not estop her from challenging a taxpayer in another year. Alamo Nat. Bank is consistent with the position respondent takes in the instant case.
Thirdly, petitioner contends that the amendment will require this Court to examine petitioner's records for 1982-1984, which will "substantially impose a repetitive examination", something respondent is prohibited from doing by section 4241 of the Manual. For a general discussion of the circumstances under which respondent may be bound by her procedural rules, see
We hold for respondent on this issue.
Equitable Principles
Petitioner contends it is not equitable to allow respondent to amend the answer because the present motion is due to respondent's failure to timely disallow petitioner's 1982-1984 deductions. Petitioner also contends that allowing respondent to amend the answer at this time would impose undue hardship upon petitioner because of the lapse of time between 1982-1984 and the present, and because petitioner now suffers from total memory loss.
We disagree.
Firstly, the facts for 1982, 1983, and 1984 are relevant to one of the central issues of the case, whether Greene was operating the horse breeding and racing activity as an activity for profit in 1985 and 1986. E.g.,
Secondly, by the time the notice of deficiency was issued in the instant case, Greene's condition had already deteriorated to such a point that the State Court had appointed conservators. Thus, respondent's motion to amend does not work any greater hardship on petitioner than there would have been if respondent had proceeded more diligently and made the determinations in the notice of deficiency.
Thirdly, respondent's motion to amend the answer was filed 7 months before the start of the session at which the instant case is to be tried. Thus, the motion was not so late as to make it unreasonable for petitioner to be able to*256 prepare for this issue at trial.
We hold for respondent on this issue.
Conclusion
We conclude that this Court may consider facts relating to 1982, 1983, and 1984 to determine whether the horse breeding and racing activity was engaged in for profit in each of those years, and (if necessary) recompute petitioner's taxable income for each base period year, for purposes of income averaging for 1985.
We hold for respondent. 6
An appropriate order will be issued granting respondent's motion for leave to file amendment to answer
Footnotes
1. Unless indicated otherwise, all section references are to sections of the Internal Revenue Code of 1954 as in effect for 1985; references to
section 6501(a) are to that section of the Internal Revenue Code of 1986 as in effect for the date of the notice of deficiency; references tosection 6214(b)↩ are to that section of the Internal Revenue Code of 1986 as in effect for the date of respondent's motion for leave to amend her answer.2. Respondent's amendment to answer would decrease the deficiency for 1986 by $ 92, with corresponding reductions to the additions to tax under section 6653(a)(1)(A) and (B).↩
3.
Rule 41(a), Tax Court Rules of Practice and Procedure , provides in pertinent part as follows:(a) Amendments. A party may amend a pleading once as a matter of course at any time before a responsive pleading is served. If the pleading is one to which no responsive pleading is permitted and the case has not been placed on a trial calendar, then a party may so amend it at any time within 30 days after it is served. Otherwise 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.↩
4.
SEC. 6214 . DETERMINATIONS BY TAX COURT.* * *
(b) Jurisdiction Over Other Years and Quarters. -- The Tax Court in redetermining a deficiency of income tax for any taxable year or of gift tax for any calendar year or calendar quarter shall consider such facts with relation to the taxes for other years or calendar quarters as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year or calendar quarter has been overpaid or underpaid.↩
5. See, e.g.,
Tucker v. Commissioner, T.C. Memo. 1983-210 ;Chapman v. Commissioner, T.C. Memo. 1982-68↩ .6. As respondent acknowledges, she has the burden of proof as to the increases in the deficiency and additions to tax. Rule 142(a);
Reiff v. Commissioner, 77 T.C. 1169">77 T.C. 1169 , 1173↩ (1981).