Friday, August 24, 2012

Reliance on Accountant May Provide Reasonable Basis to Avoid Penalty for Failure to File Foreign Trust Form

 
A district court has denied IRS's motion for summary judgment in a case dealing with the Code Sec. 6677 penalty for failure to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The court concluded that there was a genuine issue of material fact about whether the taxpayer's accountant provided him with advice on which he reasonably relied in not filing the form.
 


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United States District Court, M.D. Florida, Tampa Division.

Brian Chivas JAMES, Plaintiff,

v.

UNITED STATES of America, Defendant.

No. 8:11–cv–271–T–30AEP.

Aug. 14, 2012.

Dwaune L. Dupree, Kendall C. Jones, Sutherland, Asbill & Brennan, LLP, Washington, DC, Patricia A. Gorham, Sutherland, Asbill & Brennan, LLP, Atlanta, GA, for Plaintiff.

Michael W. May, U.S. Department of Justice, Washington, DC, for Defendant.

ORDER

JAMES S. MOODY, JR., District Judge.


Background

Plaintiff Brian Chivas James is a Sarasota physician specializing in pain management. In 2001, looking to protect his assets from potential malpractice claims, James proceeded to create an irrevocable foreign trust in Nevis, West Indies, with First Fidelity Trust Limited (FFT) as its trustee. James initially funded the trust in 2001 with a contribution of $192,000. He made additional contributions of $805,000 in 2002 and $607,146 in 2003.

Under 26 U.S.C. sec. 6048, the trust was required to file Form 3520–A, Annual Information Return of Foreign Trust with a U.S. Owner, which the trust timely filed for all relevant years. In addition, as owner of the trust, James was required to file IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. James failed to file the required Form 3520 for the years 2001, 2002, and 2003.

James argues that his failure to file Form 3520 is the fault of his former accountant, George Famiglio. Famiglio had prepared James's personal and business taxes for a number of years, and James relied on Famiglio to properly oversee and advise him about the tax requirements of the foreign trust. According to James, he or his agent timely provided Famiglio with all appropriate trust documents and information, for each year in question, yet Famiglio failed to timely file Form 3520, and/or advise James that it should be filed. James further contends that he was personally unaware of the requirement to file Form 3520.

James argues that he acted prudently and with sound business judgment in engaging Famiglio to handle all issues related to the foreign trust, and that his accountant simply dropped the ball. Although James does not remember the details of most conversations he had with Famiglio, or any specific advice he received, he recalls that they "talked a pretty good bit" about the trust, and he believed at the time that "[Famiglio] had filed all the-everything required with the IRS." In short, James argues that he had "reasonable cause" in failing to file Form 3520 by reasonably relying on Famiglio.

The Government contends that James lacks reasonable cause. Noting that James was put on notice of the requirement to file Form 3520, the Government argues that his reliance on Famiglio cannot constitute reasonable cause. In 2006, the Government assessed penalties of $67,200, $281,750, and $230,000, for failure to file Form 3520 in years 2001, 2002, and 2003, respectively. James now sues for a refund of tax penalties, arguing that his failure to file Form 3520 was due to reasonable cause and not willful neglect.

The district court said it was clear that a taxpayer may reasonably rely on an expert's advice that no return is required; thus, if an expert erroneously advises him that no return is required, or erroneously advises him that it can be filed beyond the due date, reasonable cause may be found. The court pointed to these factors in deciding that there was a genuine issue of material fact about whether Famiglio provided Dr. James with advice upon which the latter reasonably relied:

  • Dr. James timely provided all required trust forms to Famiglio and relied on Famiglio to advise him on all matters related to the trust;
  • Famiglio advised him on at least some trust matters (for example, he advised on how to report loans from the trust for tax purposes and that the trust loans did not result in taxable income);
  • Dr. James relied on Famiglio to advise him about making the appropriate filings for the trust, but Famiglio failed to so advise him; and
  • Dr. James, based on his conversations with Famiglio, believed that he had filed all required forms.

In addition, the court pointed out that Famiglio prepared James's personal tax returns. On Schedule B of his Form 1040 tax returns, Famiglio answered “no” to the question asking whether the taxpayer received a distribution from, or was the grantor of or transferor to, a foreign trust. The court said that answering “no” to this question could be construed as Famiglio providing advice that Dr. James need not file Form 3520, advice upon which James could have potentially reasonably relied.

As a result, the court denied IRS's motion for summary judgment.
 
 James v.U.S., 2012 WL 3522610 (M.D.Fla., Slip Copy, Aug. 14, 2012).

3 comments:

  1. Something worth reading -

    a taxpayer brief-- HEADLINE: #20 2005 TNT 96-20 LONG TERM CAPITAL HOLDINGS CLAIMS REASONABLE CAUSE TO AVOID PENALTIES. (Long Term Capital Holdings, L.P. et al. v. United States) (No. 04-5687) (United States Court of Appeals for the Second Circuit) (Section 6664 -- Penalty Definitions and Special Rules;) (Release Date: MAY 13, 2005) (Doc 2005-10903)
    ABSTRACT: In an appellants' reply brief for the Second Circuit, Long Term Capital Holdings has argued that no penalty should be imposed for disallowed capital losses because it acted with reasonable cause and in good faith and that the 40 percent gross undervaluation misstatement penalty is inapplicable.

    -- 2006 TNT 147-11 COUPLE UNREASONABLY RELIED ON FRAUDULENT TAX RETURN PREPARER. (Ronald A. Lehrer et ux. v. Commissioner) (T.C. Memo. 2006-156) (No. 2381-04) (United States Tax Court) (Section 6662 -- Accuracy-Related Penalty) (Release Date: JULY 31, 2006) (Doc 2006-14380) ABSTRACT: The Tax Court has upheld accuracy-related penalties against a couple that unreasonably relied on a fraudulent tax return preparer, finding that they failed to prove that he was a competent tax adviser to justify their reliance on him and they did not act in good faith regarding their understatements of income tax.


    Tax Notes Today, MAY 19, 2005 THURSDAY
    DEPARTMENT: Court Documents; Taxpayer Briefs
    CITE: 2005 TNT 96-20, LENGTH: 9063 words
    HEADLINE: #20 2005 TNT 96-20 LONG TERM CAPITAL HOLDINGS CLAIMS REASONABLE CAUSE TO AVOID PENALTIES. (Long Term Capital Holdings, L.P. et al. v. United States) (No. 04-5687) (United States Court of Appeals for the Second Circuit) (Section 6664 -- Penalty Definitions and Special Rules;) (Release Date: MAY 13, 2005) (Doc 2005-10903)
    CODE: Section 6664 -- Penalty Definitions and Special Rules;
    Section 6662 -- Accuracy-Related Penalty
    ABSTRACT: In an appellants' reply brief for the Second Circuit, Long Term Capital Holdings has argued that no penalty should be imposed for disallowed capital losses because it acted with reasonable cause and in good faith and that the 40 percent gross undervaluation misstatement penalty is inapplicable.
    SUMMARY: Published by Tax AnalystsTM
    In an appellants' reply brief for the Second Circuit, Long Term Capital Holdings (LTCH) has argued that no penalty should be imposed for disallowed capital losses because it acted with reasonable cause and in good faith and that the 40 percent gross undervaluation misstatement penalty is inapplicable.

    The lower court denied LTCH's claimed $ 106 million loss and imposed a 40 percent gross valuation misstatement or, in the alternative, a 20 percent substantial understatement penalty. Based on an analysis of the economic substance of the transaction, the court concluded that LTCH had no expectation of making a nontax profit by engaging in its tax shelter transaction. It applied the gross valuation misstatement penalty because LTCH's purported basis in the stock it obtained was over 400 percent of the value the court determined was correct. On appeal, LTCH conceded that it purchased a tax shelter without any economic substance. However, LTCH appealed the district court's decision to impose the gross valuation misstatement penalty. The government filed a reply brief contending that LTCH should be held liable for the penalty because it did not reasonably and in good faith claim its disallowed tax deduction. The government also claimed that the district court properly applied the gross valuation misstatement penalty.

    Posted by Paul A. Studly, Esq.

    ReplyDelete
  2. Without a citation one cannot see the court reasoning, and it is only a summary judgement motion. Is this really a duty that can be delegated (it is an oddball type filing, not widely known to the public) -

    See United States v. Boyle, 469 U.S. 241, 245, 55 AFTR2d 1535, 85 1 USTC ¶13,602 (1985).
    IRM 1.2.1.2.3 P-1-18 (Approved 04-27-1992) [Policy Statement]
    IRM 1.2.1.3.3 P-2-7 (Approved 12-29-1970) [Policy Statement

    The seminal authority for delinquent filing where there is reliance on counsel is United States v. Boyle, 469 U.S. 241, 55 AFTR2d 1535, 85 1 USTC ¶13,602 (1985) which was decided by the Supreme Court holding as follows:

    SYLLABUS: Respondent, executor of his mother's will, retained an attorney to handle the estate. Respondent provided the attorney with all relevant information and records for filing a federal estate tax return, which under @ 6075(a) of the Internal Revenue Code was required to be filed within nine months of the decedent's death. Respondent inquired of the attorney from time to time as to the preparation of the return and was assured that it would be filed on time. But the return was filed three months late, apparently because of a clerical oversight in omitting the filing date from the attorney's calendar. Acting pursuant to @ 6651(a)(1) of the Code, which provides a penalty for failure to file a return when due "unless it is shown that such failure is due to reasonable cause and not due to willful neglect," the Internal Revenue Service assessed a penalty for the late filing. Respondent paid the penalty and filed a suit in Federal District Court for a refund, contending that the penalty was unjustified because his failure to file the return on time was "due to reasonable [***2] cause," i. e., reliance on his attorney. The District Court agreed and granted summary judgment for respondent. The Court of Appeals affirmed.

    Held: The failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not "reasonable cause" for a late filing under @ 6651(a)(1). While engaging an attorney to assist in probate proceedings is plainly an exercise of the "ordinary business care and prudence" that the relevant Treasury Regulation requires the taxpayer to demonstrate to excuse a late filing, this does not answer the question presented here. To say that it was "reasonable" for respondent to assume that the attorney would meet the statutory deadline may resolve the matter as between them, but not with respect to the respondent's obligation under that statute. It requires no special training or effort on the taxpayer's part to ascertain a deadline and ensure that it is met. That the attorney, as respondent's agent, was expected to attend to the matter does not relieve the principal of his duty to meet the deadline. Pp. 245 252.

    Posted by Paul A. Studly, Esq.

    ReplyDelete
  3. Thanks for posting this article.I'm exactly looking for the same...

    Accountants in Basingstoke

    ReplyDelete