                        T.C. Memo. 1995-604



                      UNITED STATES TAX COURT



          ALAN E. AND HARRIET R. LEWIS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 17601-90.      Filed December 26, 1995.



     David R. Andelman and Edward F. Fay, for petitioners.

     Charles W. Maurer, Jr., for respondent.



                 SUPPLEMENTAL MEMORANDUM OPINION


     WRIGHT, Judge:   This matter is before the Court on

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

petitioner's counter Motion for Summary Judgment.   Both parties

filed their respective motions after the Court of Appeals for the

First Circuit reversed our opinion, filed at T.C. Memo. 1992-391,

and remanded the case to us for further proceedings in accordance



     *This opinion supplements our opinion in Lewis v.
Commissioner, T.C. Memo. 1992-391.
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with that court's opinion, Lewis v. Commissioner, 18 F.3d 20 (1st

Cir. 1994).   Respondent seeks to amend her answer so as to raise

for the first time before this Court the affirmative defense of

quasi-estoppel, also known as the duty of consistency.

Petitioners seek judgment as a matter of law on grounds that

respondent has untimely raised such affirmative defense.   For the

reasons set forth herein, we grant respondent's motion and deny

petitioners' motion.

Background

     Our initial opinion in this case, filed at T.C. Memo. 1992-

391, dealt with Alan E. Lewis’ (petitioner) involvement in a

series of complicated loan transactions throughout a 10-year

period ending in 1984.   These loan transactions involved domestic

and foreign corporations, partnerships, and trusts in which

petitioner maintained ownership interests.   The series of loan

transactions culminated in 1984 when a foreign corporation

controlled by petitioner indirectly transferred $1,062,500 to a

trust also controlled by petitioner.   Petitioners did not report

the $1,062,500 transfer on their Federal income tax return for

taxable year 1984; petitioners did, however, report interest

income from the trust.   Respondent determined that the trust at

issue was a grantor trust and the $1,062,500 was income to such

trust.   A deficiency noticed followed.

     Petitioners advanced three alternative arguments in their

attack upon respondent's determination.   We analyzed petitioners'
                               - 3 -

arguments and concluded, with respect to each, that they had

failed to carry their burden of proof.   We held that the

corporation which transferred the $1,062,500 to the subject trust

in 1984 had sufficient earnings and profits at the time of the

transfer and that such transfer constituted a dividend

distribution.

     On appeal to the Court of Appeals for the First Circuit,

petitioners argued that this Court erroneously concluded that the

controlled foreign corporation had sufficient earnings and

profits in 1984 to support a finding that the $1,062,500 was a

dividend distribution.   The Court of Appeals agreed, explaining

that the record lacks adequate support for our conclusion.   The

Court of Appeals, however, refused to hold that the $1,062,500 at

issue was properly excluded from petitioners' 1984 tax return.

In remanding this matter to us for further proceedings, the Court

of Appeals explained that the doctrine of quasi-estoppel or duty

of consistency might operate to enable respondent to recoup taxes

on the $1,062,500 transfer.   Accordingly, the Court of Appeals

instructed us to entertain the theory of quasi-estoppel.1

     1
      In its opinion, the Court of Appeals for the First Circuit
stated:

          The “duty of consistency” seems to apply when the
     earlier taxpayer position amounts to a misstatement of
     fact, not of law. See, e.g., Herrington v.
     Commissioner, 854 F.2d 755, 758 (5th Cir. 1988), cert.
     denied, 490 U.S. 1065 (1989) * * *; Beltzer, 495 F.2d
     at 213; Mayfair Minerals, Inc. v. Commissioner, 456
                                                   (continued...)
                               - 4 -

     Subsequent to the remand of the instant case, both parties

filed separate motions.   Petitioners' motion seeks summary

judgment.   Petitioners contend that we may not properly consider

the issue of quasi-estoppel because quasi-estoppel is an




     1
      (...continued)
     F.2d 622, 623 (5th Cir. 1972); Crosley Corp. v. United
     States, 229 F.2d 376, 380 (6th Cir. 1956); Ross v.
     Commissioner, 169 F.2d 483, 496 (1st Cir. 1948)(simple
     failure to report income “is not a representation that
     such income has in fact not been received” and does
     not, without more, furnish grounds for estoppel);
     Mertens, supra, sec. 60.05 ("Where there is a mistake
     of law and no factual misrepresentations, the doctrine
     of consistency does not apply."). Moreover, the
     misstatement must be one on which the government
     reasonably relied, in the sense that it neither knew,
     nor ought to have known, the true nature of the
     transaction mischaracterized by the taxpayer. See
     Herrington, 854 F.2d at 758; Mayfair Minerals, 456 F.2d
     at 623; Ross, 169 F.2d at 495-96.

          In this case, it seems possible that * * *
     [petitioner] made representations of key facts
     regarding the genuine business activities of * * * [the
     foreign controlled corporation] throughout the 1970's
     and the genuine intent on his and * * * [his partner’s]
     part to repay the * * * [foreign controlled
     corporation] “loans.” If such representations of fact
     were made, then holding * * * [petitioner] to them now
     might generate a 1984 tax liability.

          We stress, however, that we are uncertain about
     this matter. Since it has not been argued here, and
     since factual history is at issue, both the Lewises and
     the Commissioner should have a full opportunity to
     argue the issue before the Tax Court. We therefore
     vacate the Tax Court's judgment insofar as it is
     inconsistent with this opinion. And, we remand the
     case to the Tax Court for further proceedings. [Lewis
     v. Commissioner, 18 F.3d 20, 26 (1st Cir. 1994),
     vacating in part and remanding T.C. Memo. 1992-391.]
                                 - 5 -

affirmative defense which, pursuant to Rule 39,2 is required to

be specifically pleaded.   Respondent's motion, on the other hand,

seeks to permit the amendment of her answer in the instant case

so as to include the affirmative defense of quasi-estoppel.

Discussion

     Before we address the substance of each motion, it is

important that we set out the current status of this case.       In

our initial opinion, we addressed each of petitioners’ three

arguments and held for respondent on all three.      We cited

petitioners’ failure to carry their burden of proof as the

principal reason for such holdings.      The Court of Appeals

rejected the analysis of our initial opinion but has instructed

us to consider whether the doctrine of quasi-estoppel operates to

effect the same result.    To comply with the court’s mandate, we

will grant respondent’s motion to amend the pleadings.

     Our Rules of Practice and Procedure, in many respects,

parallel the Federal Rules of Civil Procedure.      Rule 41(a)

permits amendments to pleadings and provides that "A party may

amend a pleading once as a matter of course at any time before a

responsive pleading is served.    * * *    Otherwise a party may

amend his pleading only by leave of Court or by written consent

of the adverse party".    Rule 41(a) further provides that leave to

amend "shall be given freely when justice so requires."

     2
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                - 6 -

     This Court has looked to cases decided under rule 15(a) of

the Federal Rules of Civil Procedure for guidance on the

interpretation of Rule 41(a).     Kramer v. Commissioner, 89 T.C.

1081, 1084-1085 (1987).   Like Rule 41(a), rule 15(a) of the

Federal Rules of Civil Procedure mandates that leave to amend

"shall be given freely when justice so requires."

     The decision of whether a motion to amend the pleadings

should be granted is within the sound discretion of the Court.

Zenith Radio Corp. v. Hazeltine Research, 401 U.S. 321, 330

(1971); Foman v. Davis, 371 U.S. 178, 182 (1962).    The exercise

of our discretion, however, must be controlled by sound reason

and fairness.   Law v. Commissioner, 84 T.C. 985, 990 (1985).

     Petitioners maintain that Rule 39 requires a party to

include in his or her pleadings any matter consisting of an

avoidance or affirmative defense.    The underlying rationale for

this Rule is to provide the opposing party ample opportunity to

address the related issues.   There is no doubt that estoppel and

its various counterparts, such as quasi-estoppel and equitable

estoppel, are affirmative defenses within the meaning of Rule 39.

Petitioners, however, fail to properly consider Rule 41 or the

appellate mandate in this case.    In appropriate circumstances we

may permit the movant to amend the pleadings so as to include a

previously omitted affirmative defense.    See Flint v.

Commissioner, T.C. Memo. 1991-405; Lilley v. Commissioner, T.C.

Memo. 1989-602, affd. without published opinion 925 F.2d 417 (3d
                                 - 7 -

Cir. 1991).   In fact, in LeFever v. Commissioner, 103 T.C. 525,

538 n.16 (1994), we granted respondent's post-trial motion for

leave to amend her answer so as to include the affirmative

defense of quasi-estoppel.

     Under the circumstances of this case and in light of the

instruction from the Court of Appeals, we do not believe that

petitioners will be unfairly prejudiced by the proposed amendment

of the pleadings.    Accordingly, we grant respondent’s motion.

     As we have granted respondent’s motion to amend her answer,

it is necessary that we deny petitioners’ motion for summary

judgment.   Summary judgment is intended to expedite litigation

and avoid unnecessary costs.     Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).     Summary judgment is

inappropriate if there remains an unresolved genuine issue as to

a material fact.    Rule 121(b); Zaentz v. Commissioner, 90 T.C.

753, 754 (1988).    Considering our ruling granting respondent’s

motion for leave to amend, a genuine issue remains unresolved.

Hence, summary judgment is improper.     Accordingly, petitioners’

motion is denied.

     To reflect the foregoing,

                                 An appropriate order will be

                           issued granting respondent’s motion

                           and denying petitioners’ motion.
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