In re Estate of Lee, T.C. Memo. 2009-303 (U.S.T.C. 12/23/2009)
| Decision Date | 23 December 2009 |
| Docket Number | No. 14511-06.,14511-06. |
| Parties | ESTATE OF KWANG LEE, Deceased. ANTHONY J. FRESE, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Frank Agostino, Michael P. Mattaliano, and Soh-Yung Erica Son, for petitioner.
Lisa M. Rodriquez, for respondent.
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 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.
Decedent died testate on September 30, 2001, leaving a last will and testament dated June 21, 2001. Ms. Lee died testate on 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 after 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
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.
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 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 applicable to this case. The Court directed at the end of that opinion that a decision be entered under Rule 155.
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).
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.
Petitioner moves the Court for leave to amend the petition to allege the affirmative defense of equitable recoupment. 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.
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 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.
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 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. 1...
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