                         T.C. Memo. 2008-69



                      UNITED STATES TAX COURT



                  WADE V. SHANG, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20910-06.              Filed March 18, 2008.



     Wade V. Shang, pro se.

     Margaret Burow, for respondent.



                         MEMORANDUM OPINION

     HAINES, Judge:   This case is before the Court on

respondent’s motion for leave to file amendment to answer under

Rule 41(a).1


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code as amended. Rule references are to the Tax
Court Rules of Practice and Procedure. Amounts are rounded to
                                                   (continued...)
                                 -2-

                             Background

     Petitioner resided in California at the time the petition

was filed.

     On August 1, 2006, respondent issued petitioner a notice of

deficiency based on petitioner’s criminal tax evasion convictions

in the U.S. District Court for the Northern District of

California for the years 1996, 1998, and 1999.2   Respondent

determined deficiencies in petitioner’s Federal income tax

totaling $66,828 and civil fraud penalties under section 6663

totaling $50,121.   Petitioner filed a timely petition to this

Court on October 16, 2006.    On December 5, 2006, respondent

timely filed his answer.

Respondent’s answer states in relevant part:

     FURTHER ANSWERING the petition in respect to
     respondent’s determination that the petitioner is
     liable for the civil fraud penalty pursuant to I.R.C.
     section 6663 for taxable years 1996, 1998, and 1999,
     respondent affirmatively relies upon the doctrine of
     collateral estoppel, and alleges:

The answer goes on to allege facts regarding petitioner’s

criminal conviction which would tend to support the application

of collateral estoppel.    Petitioner did not file a reply.

     On March 28, 2007, 113 days after the filing of the original

answer, respondent filed a motion for leave to file amendment to


     1
      (...continued)
the nearest dollar.
     2
      Petitioner’s conviction for 1999 was reversed by the U.S.
Court of Appeals for the Ninth Circuit. United States v. Shang,
114 Fed. Appx. 813 (9th Cir. 2004).
                                 -3-

answer.   Respondent seeks to set forth facts regarding the

determination of the civil fraud penalties without reliance on

collateral estoppel.   On May 31, 2007, petitioner filed his

objection to respondent’s motion for leave to file amendment to

answer.   On October 15, 2007, hearing was held on the motion in

San Francisco, California.

                             Discussion

     Rule 41 governs amended and supplemental pleadings.    Rule

41(a) covers amendments generally and provides in effect that

after a responsive pleading is served or after 30 days if no

responsive pleading is permitted, “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.”

Rule 41(a) reflects “a liberal attitude toward amendment of

pleadings.”   60 T.C. 1089 (explanatory note accompanying

promulgation of Rule 41).    Because the parties have framed this

issue as though leave were necessary for respondent to amend his

answer, we will assume arguendo that it is.

     Whether leave will be granted to file an amendment to answer

is a question falling within the sound discretion of the Court,

and the disposition of such a motion turns largely on whether the

matter is raised timely so as not to prejudice the taxpayer.

Waterman v. Commissioner, 91 T.C. 344, 349-350 (1988); Ross Glove

Co. v. Commissioner, 60 T.C. 569, 595 (1973).
                                   -4-

     Petitioner’s objections to the motion fall into three

categories.   Petitioner argues:    (1) Respondent is in violation

of the Court’s Rules, (2) respondent failed to exercise due

diligence, and (3) if the motion is granted, petitioner will be

unduly prejudiced in presenting his case.

Whether Respondent Has Complied With the Court’s Rules

     Petitioner argues that respondent is in violation of Rule

39, which requires that a party set forth in his pleading special

matters, including fraud and collateral estoppel.    Petitioner

argues that respondent pleaded collateral estoppel, but not

fraud, in his original answer.     However, the answer specifically

states:   “petitioner is liable for the civil fraud penalty

pursuant to I.R.C. section 6663 for taxable years 1996, 1998, and

1999”.    In his answer, respondent relies on collateral estoppel.

In his motion for leave to file amendment to answer, respondent

merely seeks to include the facts necessary for a finding of

fraud without reliance on collateral estoppel.    As respondent

alleged fraud in his answer, he has complied with Rule 39.

     Petitioner alleges that respondent did not set forth the

reasons for the amendment as required by Rule 41(a).    However,

the motion states that respondent seeks to set forth allegations

of facts surrounding the imposition of the civil fraud penalty

under section 6663.   This is sufficient to comply with Rule

41(a).
                                -5-

Whether Respondent Failed To Exercise Due Diligence

     In Chanik v. Commissioner, T.C. Memo. 1972-174, affd. 492

F.2d 1181 (6th Cir. 1974), the Court denied the Commissioner’s

motion to amend his answer to allege fraud rather than negligence

for the taxpayer’s 1961 tax year.     The Court found that the

Commissioner failed to exercise due diligence in alleging fraud

because he investigated the taxpayer’s 1961 tax year for 6 years

before the issuance of a notice of deficiency, he issued a notice

of deficiency for 1958, 1959, and 1960 which alleged fraud for

those years shortly after issuing the 1961 notice, and the motion

to amend was made at the time of trial.     Id.

     In Commissioner v. Estate of Long, 304 F.2d 136 (9th Cir.

1962), the court denied a motion to amend the answer to assert

additional deficiencies in excess of the amounts determined in

the notice of deficiency.   The Court found that the Commissioner

took no action for over 4 years, from the time of filing the

original answer until 2 days before the date of a hearing on an

order to show cause why the Court should not enter decisions when

the taxpayer consented to decisions based on the amounts

determined in the notice of deficiency.     Id. at 143.

     Respondent is not asserting additional deficiencies or

penalties as the Commissioner did in Chanik and Estate of Long.

Respondent affirmatively alleged fraud in his answer, and the

motion was made less than 4 months after the original answer was
                                -6-

filed and before the case was set for trial.    The Court,

therefore, finds that respondent was not dilatory in moving to

amend the answer.

      Petitioner further argues “that respondent is bound by the

doctrine of ‘abundant notice’ of any alleged facts of fraud and

self-acknowledged privity with the prior criminal proceedings,

wherein fraud allegations were made.”   The Court is not aware of

a “doctrine of abundant notice”.   Whatever notice respondent had

of the criminal proceedings is irrelevant to the issue of whether

respondent’s motion for leave should be granted.

Whether Petitioner Would Be Unduly Prejudiced

      Petitioner argues that the motion should be denied because

the proposed amendment seeks to raise factual issues that would

require substantial preparation and trial time, whereas

collateral estoppel is a legal issue requiring fewer resources.

In Wyman-Gordon Co. v. Commissioner, T.C. Memo. 1985-433, the

Court denied the Commissioner’s motion for leave to amend his

answer to raise a new factual issue, finding that the amendment

prejudiced “petitioners’ efforts to obtain a resolution of the

other issues that were raised by respondent in a timely manner.”

Id.

      In Wyman Gordon Co., the Commissioner filed his motion for

leave 4 days after calendar call and 11 months after filing his

answer.   As discussed above, this case has not been set for trial
                                  -7-

and respondent filed his motion for leave less than 4 months

after filing his answer.   Furthermore, petitioner presumably

prepared a defense in his criminal case which would require the

presentation of much of the same evidence as the civil case

before this Court.

Conclusion

     Put simply, respondent’s motion for leave to file amendment

to answer has been submitted without undue delay, respondent has

complied with the Court’s Rules, and petitioner will not be

prejudiced by the granting of respondent’s motion.

     To reflect the foregoing,

                                        An appropriate order will be

                                 issued granting respondent’s motion

                                 for leave to file amendment to

                                 answer.
