                        T.C. Memo. 1996-80



                      UNITED STATES TAX COURT



         TATE & LYLE, INC. AND SUBSIDIARIES, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 26352-93, 16170-94.      Filed February 26, 1996.



     Henry B. Miller, for petitioner.

     Darrell C. Weaver, for respondent.




                        MEMORANDUM OPINION



     PANUTHOS, Chief Special Trial Judge:    These cases were

assigned pursuant to the provisions of section 7443A(b)(4) and

Rules 180, 181, and 183.1   These cases are before the Court on



     1
        All section references are to the Internal Revenue Code,
as amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 2 -


respondent's Motion for Leave to File Amendment to Answer filed

in each docket.

Background

     Tate & Lyle, Inc. (petitioner), is the common parent of a

consolidated group of corporations including A.E. Staley

Manufacturing Co.   At the time the petitions were filed in these

cases, petitioner maintained its principal place of business in

Wilmington, Delaware.

Docket No. 26352-93

     On September 15, 1993, respondent issued a statutory notice

of deficiency to petitioner (and its subsidiaries) determining a

deficiency of $1,718,143 in its Federal income tax for the

taxable year ended September 30, 1989.   A review of the notice of

deficiency shows that respondent determined the deficiency after

making a number of adjustments to petitioner's items of income

and expense and after allowing petitioner certain credits,

including the general business credit provided by section 38.

Respondent computed petitioner's general business credit on the

assumption that petitioner is entitled to a general business

credit carryover of $18,944,258 from its taxable year ended

September 30, 1988.

     Petitioner invoked this Court's jurisdiction by filing a

timely petition for redetermination on December 14, 1993,

assigned docket No. 26352-93.   Although the petition includes an

allegation that respondent erred in computing the amount of
                               - 3 -


petitioner's general business credit, it is clear from the

context that petitioner raised the issue as a purely

computational matter.   Respondent filed her answer to the

petition on January 31, 1994, including therein a general

admission that the computation of petitioner's general business

credit is dependent upon the resolution of the substantive issues

in dispute.

     By notice dated May 26, 1994, this case was calendared for

trial to be held in Washington, D.C., on October 31, 1994.     On

June 30, 1994, the parties filed a Joint Motion for Continuance

stating that one of the central issues in dispute would be

resolved consistent with the Court's final decision in docket No.

740-92 (Tate & Lyle, Inc. v. Commissioner, 103 T.C. 656 (1994),

on appeal (3d Cir., May 9, 1995)), and that the parties desired

additional time to attempt to settle the remaining issues without

a trial.   The parties' motion was granted on July 5, 1994.

     By notice dated September 29, 1994, this case was again

calendared for trial to be held in Washington, D.C., on March 6,

1995.   On February 3, 1995, the parties filed a Joint Motion for

Continuance along with a Stipulation of Settled Issues.    In their

Joint Motion for Continuance, the parties reported that:     (1)

although the Court had issued its opinion in docket No. 740-92,

Tate & Lyle, Inc. v. Commissioner, supra, respondent was

contemplating filing an appeal in the case; and (2) the parties

had reached a settlement with respect to all but one of the
                                 - 4 -


remaining issues as reflected in their Stipulation of Settled

Issues.2   The parties' motion was granted February 6, 1995.

     In late February 1995, respondent discovered that she may

have erred in allowing petitioner a general business credit for

the taxable period ended September 30, 1989.3   Counsel for

respondent first mentioned the matter of the correct computation

of petitioner's general business credit to counsel for petitioner

in a letter dated March 22, 1995, concerning petitioner's taxable

year ended September 30, 1990.    Counsel for petitioner was

formally advised of respondent's position regarding the

computation of petitioner's general business credit in this case

by way of a letter dated June 1, 1995.    In that letter,

respondent took the position that petitioner is not entitled to a

general business credit for the taxable year ended September 30,

1989, on the ground that the $18,944,258 general business credit

carryforward that respondent originally used in computing

petitioner's credit is subject to the separate return limitation


     2
        The sole unresolved issue is identified as the amount, if
any, of petitioner's foreign tax credit for its taxable year
ended Sept. 30, 1989. The parties explained that the amount of
the credit was dependent upon a then unresolved computation as
well as upon the determination of the correct amount of
carryforwards and carrybacks from prior and subsequent years--
years at issue in docket No. 20225-92 (A.E. Staley Manufacturing
Co. v. Commissioner, 105 T.C. 166 (1995)), and Tate & Lyle, Inc.
v. Commissioner, docket No. 16169-94.
     3
        Respondent concedes that she was in possession of all the
information necessary to compute properly petitioner's general
business credit at the time that she issued the notice of
deficiency in this case.
                                - 5 -


year (SRLY) provisions set forth in section 1.1502-3(c), Income

Tax Regs.4    Petitioner was also informed of respondent's

intention to raise the issue in this case by filing a motion for

leave to file amendment to answer with the Court.    Counsel for

petitioner responded by letter dated June 16, 1995, expressing

disagreement with respondent's interpretation of the SRLY

provisions.

     By notice dated August 8, 1995, this case was again

calendared for trial to be held in Washington, D.C., on January

16, 1996.

     On September 25, 1995, approximately 21 months after the

petition was filed in this case, respondent filed a Motion for

Leave to File Amendment to Answer and lodged her Amendment to

Answer with the Court.    In particular, respondent alleges that

petitioner is not entitled to a general business credit for the

taxable year ended September 30, 1989, and, in turn, that the

deficiency in this case is increased by $1,627,100.

     On the same date, the parties filed a Joint Motion for

Continuance again stating that the trial of this case should be

continued pending entry of a final decision in docket No. 740-92.



     4
        Respondent determined that the $18,944,258 general
business credit carryforward that she originally used in
computing petitioner's general business credit for the taxable
period ended Sept. 30, 1989, originated as investment tax credit
carryovers belonging to A.E. Staley Manufacturing Co. from
taxable periods preceding the date that petitioner acquired A.E.
Staley Manufacturing Co.
                                - 6 -


In addition, the parties' motion states that while petitioner

opposes respondent's Motion for Leave to File Amendment to

Answer, the parties nonetheless agree that resolution of the

general business credit issue will not require a trial for

submission of evidence.

Docket No. 16170-94

     On June 9, 1994, respondent issued a statutory notice of

deficiency to petitioner (and its subsidiaries) determining a

deficiency of $4,253,661 in its Federal income tax for its

taxable year ended September 30, 1990.   A review of the notice of

deficiency shows that respondent determined the deficiency after

making a number of adjustments to petitioner's items of income

and expense and after allowing petitioner certain credits,

including the general business credit provided by section 38.

Respondent computed petitioner's general business credit on the

assumption that petitioner is entitled to a general business

credit carryover of $17,526,965 from its taxable year ended

September 30, 1989.

     Petitioner invoked this Court's jurisdiction by filing a

timely petition for redetermination on September 7, 1994,

assigned docket No. 16170-94.   Although the petition includes an

allegation that respondent erred in computing the amount of

petitioner's general business credit for the year in issue, it is

clear from the context that petitioner raised the issue as a

purely computational matter.    Respondent filed her answer to the
                               - 7 -


petition on October 21, 1994, including therein a general

admission that the computation of petitioner's general business

credit is dependent upon the resolution of the substantive issues

in dispute.

     By notice dated January 13, 1995, this case was calendared

for trial to be held in Washington, D.C., on June 19, 1995.    In

late February 1995, respondent discovered that she may have erred

in allowing petitioner a general business credit for the taxable

period ended September 30, 1990.5   Counsel for respondent first

mentioned the matter of the possible error in the computation of

petitioner's general business credit for the taxable period ended

September 30, 1990, in a letter to petitioner's counsel dated

March 22, 1995.

     On March 27, 1995, the parties filed a Joint Motion for

Continuance stating that one of the issues in dispute would be

resolved consistent with the Court's final decision in docket No.

740-92 (Tate & Lyle, Inc. v. Commissioner, 103 T.C. 656 (1994)),

and that the parties desired additional time to attempt to settle

the remaining issues without a trial.   The Joint Motion for

Continuance contains no mention of the general business credit

issue.   The parties' motion was granted on March 29, 1995.




     5
        Respondent concedes that she was in possession of all the
information necessary to properly compute petitioner's general
business credit at the time that she issued the notice of
deficiency in this case.
                                - 8 -


     By notice dated August 8, 1995, this case again was

calendared for trial to be held in Washington, D.C., on January

16, 1996.

     On September 25, 1995, approximately 1 year after the

petition was filed in this case, respondent filed a Motion for

Leave to File Amendment to Answer and lodged her Amendment to

Answer with the Court.    As is the case in docket No. 26352-93,

respondent seeks leave to allege that petitioner is not entitled

to a general business credit for its taxable year ended September

30, 1990, on the ground that the general business credit

carryforward that respondent originally used in computing

petitioner's tax liability is subject to the SRLY provisions set

forth in section 1.1502-3(c), Income Tax Regs.    Consistent with

these allegations, respondent asserts that the deficiency in this

case is increased by $9,806,316.

     On September 25, 1995, the parties filed a Joint Motion for

Continuance again stating that the trial of this case should be

continued pending entry of a final decision in docket No. 740-92.

In addition, the parties' motion states that while petitioner

opposes respondent's Motion for Leave to File Amendment to

Answer, the parties nonetheless agree that resolution of the

general business credit issue will not require a trial for

submission of evidence.    The parties' motion was granted

September 28, 1995.
                              - 9 -


Petitioner's Opposition

     Petitioner filed an opposition to respondent's Motion for

Leave to File Amendment to Answer in both dockets.   Petitioner

opposes respondent's motion in docket No. 26352-93 on the ground

that respondent should not be permitted to raise a new issue

after the parties have entered into a comprehensive settlement of

all but one of the disputed issues.   Petitioner contends that--

     the prejudice * * * in this situation is clear.
     Petitioner would not have conceded the issues in this
     case in the same way had Petitioner known that
     Respondent would be trying to raise a substantial new
     issue * * *.

Petitioner's opposition to respondent's motion in docket No.

16170-94 (while less vigorous than petitioner's opposition in the

earlier docket) is based on the proposition that allowing

respondent to raise a new issue at this time will have the effect

of subverting ongoing settlement efforts in the case.6

     6
        These cases were called for hearing in Washington, D.C.,
on Dec. 6, 1995. Counsel for both parties appeared at the
hearing and presented argument on the pending motions. During
the hearing, the Court and counsel for petitioner had the
following colloquy concerning petitioner's opposition to
respondent's motion in docket No. 16170-94:

          MR. MILLER: * * * With respect to your question
     about where the later docket stands, I think the
     prejudice is much less in the later docket than in the
     first one. We have been negotiating with the IRS with
     an understanding that we were negotiating on all the
     issues in the later docket. We have agreed to a number
     of issues. We have not gotten to the point where we
     have agreed on all of the issues. * * *

                                                     (continued...)
                               - 10 -


     Respondent counters that petitioner will not be prejudiced

by the granting of her motions on the ground that petitioner was

aware of respondent's intention to seek leave to raise the issue

at the time the parties filed their last Joint Motion for

Continuance in both dockets.    Respondent also maintains that,

because neither case is presently calendared for trial,


     6
      (...continued)

          THE COURT: Given that difference, why should the
     Court not permit an amendment in * * * [docket No.
     16170-94]?

          MR. MILLER: I view the settlement process as sort
     of like playing cards. You are turning one card over
     at a time. You are trying to find what is important to
     the other side, what they have flexibility on, what the
     IRS national office is controlling that you know you
     can't do anything with, and it is sort of a process of
     feeling out while not showing all of your cards.

          The prejudice in * * * [docket No. 26352-93] is
     that we put out all of our cards. I thought the game
     was over, and suddenly the government pulled an ace
     from their pocket. * * * [In docket No. 16170-94] we
     have shown some of our cards. Once you have shown
     them, you can't ever put them back in your pocket. So
     the prejudice really is that we have begun the
     negotiations and we have conceded certain things going
     towards settling all the issues.

          As I say, Your Honor, I think the prejudice is a
     lot less in that. I am not as troubled by the
     government being able to raise the issue in the latter
     docket as I would be troubled if the Court allows the
     government to raise it in the earlier docket. The
     taxpayer paid for that certainty in the earlier docket.
     They gave up a number of issues and hundreds of
     thousands of dollars in order to get that settlement.

     *       *         *       *        *      *       *
                               - 11 -


petitioner will have ample opportunity to prepare to try the new

issue.

Discussion

     Section 6214(a) provides that this Court shall have

jurisdiction to redetermine the correct amount of the deficiency

even if the amount so redetermined is greater than the amount

determined by the Commissioner in the notice of deficiency mailed

to the taxpayer if the Commissioner asserts a claim therefor at

or before the hearing or a rehearing.   Consistent with the

general mandate of section 6214(a), this Court generally will

only exercise its jurisdiction over an increased deficiency where

the matter is properly pleaded.   See Markwardt v. Commissioner,

64 T.C. 989, 997 (1975), and cases cited therein.

     Rule 41(a) states in relevant part that a pleading to which

no responsive pleading is permitted may be amended at any time

within 30 days after it is served if the case has not yet been

placed on a trial calendar.   Otherwise, the pleading may be

amended only by leave of Court or by written consent of the

adverse party, and leave shall be given freely when justice so

requires.    The Commissioner bears the burden of proof in respect

of any increases in deficiency.   Rule 142(a).

     Respondent did not make a determination that the SRLY

provisions would reduce or eliminate the amount of petitioner's

general business credits during the examination period, nor was
                               - 12 -


the matter raised in either of the deficiency notices mailed to

petitioner.    The matter likewise was not placed in dispute in

either of the petitions filed herein or in respondent's answers

thereto.7    As a consequence, respondent may only raise the issue

of the correct amount of petitioner's general business credits

for the years in issue by obtaining leave to file an amendment to

her answer pursuant to Rule 41(a).

     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 in a timely fashion 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).

     Upon due consideration of the matter, we shall deny

respondent's Motion for Leave to File Amendment to Answer filed

in docket No. 26352-93.    As previously mentioned, approximately

21 months passed between the filing of the petition in this case

and the filing of respondent's Motion for Leave to File Amendment

to Answer.    It was during this period that the parties filed a

stipulation of settled issues with the Court resolving the vast

majority of the issues then in dispute in docket No. 26352-93.

As we see it, the stipulation of settled issues, like a contract,


     7
        Nor did respondent seek to amend within 30 days after
service of her respective answers. Rule 41(a).
                               - 13 -


reflects the parties' bargained-for exchange--each of the parties

made concessions in the course of arriving at the settlement.

See Saigh v. Commissioner, 26 T.C. 171, 177 (1956); Applestein v.

Commissioner, T.C. Memo. 1989-42.     Considering all the

circumstances, it seems inescapable that to grant respondent's

pending motion would necessarily lead to the collapse of the

stipulated settlement.    Recognizing that respondent was in

possession of all the facts necessary to raise the SRLY issue at

the time the deficiency notice was issued in this case, and

giving due regard to the policy favoring the settlement of cases

brought before this Court, we are convinced that justice would

best be served if respondent is precluded from raising a new

issue at this time, and we so hold.

     In contrast, we conclude that justice requires that we grant

respondent's Motion for Leave to File Amendment to Answer filed

in docket No. 16170-94.    Although 1 year elapsed between the time

of the filing of the petition in this case and the filing of

respondent's Motion for Leave to File Amendment to Answer, the

parties are in agreement that the general business credit issue

is a legal issue that will not require a trial for submission of

evidence.   We also find it significant that, although the parties

have engaged in settlement discussions in docket No. 16170-94,

those discussions have not resulted in a settlement agreement in

any form.   This case is not presently calendared for trial.
                              - 14 -


Moreover, respondent will bear the burden of proof in respect of

any increased deficiency.   Rule 142(a).   With these points in

mind, we see no substantial prejudice to petitioner in allowing

respondent to amend her answer at this time, and petitioner

essentially concedes the same.   Accordingly, we shall grant

respondent's Motion for Leave to File Amendment to Answer filed

in docket No. 16170-94.

     To reflect the foregoing,

                                       Appropriate orders will

                                  be issued.
