American Contractors Indemnity Company v. United States of America

Filing 42

ORDER by Judge Edward M. Chen Denying 32 Defendant's Motion for Summary Judgment. (emcsec, COURT STAFF) (Filed on 3/21/2014)

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1 2 3 4 5 UNITED STATES DISTRICT COURT 6 NORTHERN DISTRICT OF CALIFORNIA 7 8 AMERICAN CONTRACTORS INDEMNITY COMPANY, No. C-12-4439 EMC 9 Plaintiff, ORDER DENYING DEFENDANT’S MOTION FOR SUMMARY JUDGMENT v. 11 For the Northern District of California United States District Court 10 (Docket No. 32) UNITED STATES OF AMERICA, 12 13 Defendant. ___________________________________/ 14 15 I. INTRODUCTION 16 Plaintiffs Ashley Berns (the former administrator of her uncle’s estate) and American 17 Contractors Indemnity Co. (Ms. Berns’ surety) filed the instant action seeking a refund of the 18 penalties and interest assessed by the Internal Revenue Service in response to Ms. Berns’ failure to 19 timely file a federal estate tax return and to timely pay the estate taxes. The United States has 20 moved for summary judgment, arguing that there is no genuine dispute of material fact as to whether 21 Ms. Berns had “reasonable cause” for her failure to timely file the return and pay the taxes. The 22 Court finds this matter suitable for disposition without oral argument and VACATES the hearing set 23 for March 27, 2014. For the following reasons, Defendant’s motion is DENIED. 24 /// 25 /// 26 /// 27 /// 28 /// 1 2 II. FACTUAL & PROCEDURAL BACKGROUND Mr. Paul Berns passed away on November 19, 2004. Def. Statement of Undisputed Facts 3 (“Def. Facts”) ¶ 1 (Docket No. 33); Complaint ¶ 9 (Docket No. 23).1 Ashley Berns – the appointed 4 personal representative of the decedent’s estate – filed a petition to probate the decedent’s estate on 5 January 11, 2005. Def. Facts ¶ 1; Compl. ¶ 10. At the time, Ms. Berns was 21 years old and had 6 never served as a fiduciary on behalf of a decedent’s estate. Def. Facts ¶ 2. 7 Ms. Berns hired an attorney – Scott Hancock – to represent her in her role as administrator of 8 the estate. Compl. ¶ 10. He advised Ms. Berns that a “Federal Estate Tax Return (‘FETR’) may 9 need to be filed and of her responsibilities concerning this return.” Def. Facts. ¶ 3; see also Deposition of Scott Hancock (“Hancock Depo.”) at 10 (Docket No. 33-1, Ex. 2) (“I certainly 11 For the Northern District of California United States District Court 10 informed her that a federal estate tax return may need to be filed in this estate.”). Specifically, he 12 informed Ms. Berns that the FETR was due within nine months of the decedent’s death, but that an 13 extension of time to file and pay the estate taxes could be obtained by filing an application with the 14 IRS. Id. Additionally, he told her that the FETR need not be filed until the “total value of the gross 15 estate was determined and until the beneficiaries of the estate were determined.” Id.; see also Def. 16 Facts, Ex. 1 (“Mr. Hancock led Ms. Berns to understand that the [FETR] and payment of the estate 17 taxes was open ended until these matters were finally determined by the courts.”); Hancock Depo at 18 13-14 (Mr. Hancock admitting that he told Ms. Berns that federal law did not require the FETR until 19 the total value of the estate was determined and the actual beneficiaries had been identified). 20 Further, Ms. Berns asserts in her declaration that Mr. Hancock also told her that an “FETR 21 was only required to be filed if there were estate taxes due” and that he would “notify me if a FETR 22 was required for the Decedent’s estate.” Declaration of Ashley Berns (“Berns Decl.”) ¶ 3 (Docket 23 No. 38). Along these lines, Mr. Hancock in his deposition testified that “if the estate did not reach 24 the value necessary to file a return, then no return would be due.” Hancock Depo. at 20. He stated 25 that he did not know at the beginning that the estate would reach this value, but only had a 26 1 27 28 The Defendant has filed a Statement of Undisputed Facts. The Plaintiffs have stated the do not have “any objection” to this statement, but they have provided their own statement of undisputed facts that adds additional factual materials. The Defendants have not controverted any of the representations in Plaintiffs’ undisputed facts statement and have not filed a reply to the opposition. 2 1 “suspicion” that it would reach the value necessary to file an FETR. Id. The initial probate petition 2 filed indicated that the estimated value of the estate for “filing fee purposes” was at least $1,000,000 3 and less than $1.5 million. Pl. Facts, Ex. 2 (Docket No. 40-2). 4 On August 12, 2005, Mr. Hancock submitted a “Form 4768 Application for Extension of that this extension was sought because he and Ms. Berns were not, at that point “really sure of the 7 full nature and extent of the estate” and did not “have liquid funds to pay tax at the time.” Hancock 8 Depo. at 11. The written statement filled out by Mr. Hancock indicated that once pending litigation 9 involving the estate was concluded, the “Administrator will be in a position to determine the 10 complete extent and nature of the Estate assets, liquidate Estate assets, and pay estate taxes.” 11 For the Northern District of California Time to File a Return and/or Pay U.S. Estate Tax.” Id. ¶ 5. Mr. Hancock stated in his deposition 6 United States District Court 5 Plaintiffs’ Statement of Undisputed Facts (“Pl. Facts”), Ex. 1, at 4 (Docket No. 40-1). This 12 application was granted and the deadline to file the estate return and pay any liability was granted 13 until February 19, 2006. Def. Facts ¶ 6. No FETR was filed by this deadline and no estate taxes 14 were paid. Id. On May 4, 2009, the estate made its first payment of tax in the amount of $700,000. 15 The same month, Ms. Berns was removed as administrator of the decedent’s estate. Id. ¶ 8. An 16 FETR and second payment of $573,056 were filed on August 19, 2009 (three and one half years 17 after it was due). Id. 18 Subsequently, on October 26, 2009, an assessment was made against the estate in the amount 19 of $286,437.60 for late filing penalties and $280,707.04 for late payment penalties. Compl. ¶ 18. 20 Additionally, interest of $476,531.04 was assessed on these penalties. Id. By May 2010 all estate 21 taxes, penalties, and interest had been paid by the estate. 22 On January 25, 2010, the Superior Court of California for Los Angeles County granted Rosie 23 Castro’s – one of the replacement administrators for decedent’s estate – request for sanctions and for 24 establishing admissions against Ms. Berns. Def. Facts ¶ 10; Ex. 5 (order granting admissions and 25 request for sanctions). Among the facts deemed admitted were that Ms. Berns “knowingly misled 26 the Court about the status of the estate tax return” and that Ms. Berns had failed to account for 27 certain property from decedent’s estates. Id., Ex. 5, at 2, 4. 28 3 1 Plaintiff American Contractors Indemnity Company (“ACIC”), acting as surety for Ms. 2 Berns, reimbursed the estate for the penalties and interest the estate had paid to the IRS. Compl. ¶ 3 21. On June 28, 2011, the decedent’s estate filed a claim for refund and request for abatement with 4 the IRS, seeking a refund of the late filing and late payment penalties as well as the interest assessed 5 on the estate taxes that had been paid by the estate. Compl. ¶ 19. On October 3, 2011, the Superior 6 Court handling the decedent’s estate ordered the administrator of the estate to distribute the 7 remaining assets of the estate to the beneficiaries and to transfer to Ms. Berns the estate’s claim for 8 refund. Id. ¶ 20. Ms. Berns has transferred all right, title and interest in the refund claim to ACIC. 9 Id. ¶ 21. Plaintiffs filed the instant action seeking a refund of the late filing and payment penalties (as 11 For the Northern District of California United States District Court 10 well as the accumulated interest). The Defendant has filed a motion for summary judgment, arguing 12 that there is no genuine dispute of material fact as to whether Ms. Berns has “reasonable cause” for 13 failing to timely file the FETR and pay estate taxes.2 14 15 III. A. DISCUSSION Legal Standard 16 Under Federal Rule of Civil Procedure 12(b)(6), a party may move to dismiss based on the 17 failure to state a claim upon which relief may be granted. See Fed.R.Civ.P. 12(b)(6). A motion to 18 dismiss based on Rule 12(b)(6) challenges the legal sufficiency of the claims alleged. See Parks 19 Sch. of Bus. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). In considering such a motion, a court 20 must take all allegations of material fact as true and construe them in the light most favorable to the 21 nonmoving party, although “conclusory allegations of law and unwarranted inferences are 22 insufficient to avoid a Rule 12(b)(6) dismissal.” Cousins v. Lockyer, 568 F.3d 1063, 1067 (9th 23 Cir.2009). While “a complaint need not contain detailed factual allegations ... it must plead ‘enough 24 facts to state a claim to relief that is plausible on its face.’” Id. “A claim has facial plausibility when 25 the plaintiff pleads factual content that allows the court to draw the reasonable inference that the 26 defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); see 27 28 2 Ms. Berns instituted a malpractice action against Mr. Hancock. This suit has settled. 4 1 also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007). “The plausibility standard is not akin to 2 a ‘probability requirement,’ but it asks for more than sheer possibility that a defendant acted 3 unlawfully.” Iqbal, 129 S.Ct. at 678. 4 B. Analysis 5 Under 26 U.S.C. § 6651(a), failure to timely file an estate tax return or pay estate taxes may 6 result in penalties being imposed “unless it is shown that such failure is due to reasonable cause and 7 not due to willful neglect.” See also Knappe v. United States, 713 F.3d 1164, 1168 (9th Cir. 2013) 8 (“An executor who fails to file a timely estate-tax return is subject to a penalty.”). If “reasonable 9 cause” is shown, the estate (or, here, Ms. Berns for the reasons described above) is entitled to a refund of any penalties or interest paid. See Constantino v. United States, No. C-84-6838 SC, 1985 11 For the Northern District of California United States District Court 10 WL 6399 (N.D. Cal. Apr. 19, 1985) (“Plaintiff may obtain for the estate a refund of the penalties 12 assessed and paid if she shows that the failure to file the return and pay the tax within the statutory 13 period was due to reasonable cause and not due to willful neglect.”). “To escape the penalty, the 14 taxpayer bears the heavy burden of proving both (1) that the failure did not result from ‘willful 15 neglect,’ and (2) that the failure was ‘due to reasonable cause.’” United States v. Boyle, 469 U.S. 16 241, 245 (1985) (quoting 26 U.S.C. § 6651(a)(1)) 17 The sole question raised in the instant motion to dismiss is whether Ms. Berns’ reliance on 18 her retained attorney – Mr. Hancock – constitutes reasonable cause. The parties do not dispute that 19 the applicable framework regarding reliance on experts has been articulated by the Supreme Court in 20 Boyle and the Ninth Circuit in Knappe. In Knappe, the Ninth Circuit interpreted the Supreme 21 Court’s holding in Boyle as establishing “two general categories” of cases addressing reasonable 22 cause for late filing of tax returns. In the first category are cases “involving taxpayers who delegate 23 the task of filing a return to an expert agent, only to have the agent file the return late or not at all.” 24 Knappe, 713 F.3d at 1169. 25 The Boyle case fell into this first category. In that case, the taxpayer – the executor of his 26 mother’s estate – retained an attorney who advised him that an estate-tax return was due, but failed 27 to advise him regarding when it was due. Boyle, 469 U.S. at 245. The taxpayer contacted the 28 attorney time a number of times to inquire about “the progress of the proceedings and the 5 1 preparation of the tax return.” Id. at 242-43. The attorney responded that “they would be notified 2 when the return was due and that the return would be filed ‘in plenty of time.’” Id. at 243. The tax 3 return was, in fact, not timely filed as a result of the attorney omitting the filing date from his master 4 calendar. Id. The Supreme Court held that the taxpayer’s reliance on the attorney did not constitute 5 “reasonable cause” under § 6651(a). The Court noted that “Congress has placed the burden of 6 prompt filing on the executor, not on some agent or employee of the executor. The duty is fixed and 7 clear; Congress intended to place upon the taxpayer an obligation to ascertain the statutory deadline 8 and then to meet that deadline, except in a very narrow range of situations.” Id. at 249-50. 9 Accordingly, the Court concluded: 11 For the Northern District of California United States District Court 10 12 13 14 [O]ne does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due. In short, tax returns imply deadlines. Reliance by a lay person on a lawyer is of course common; but that reliance cannot function as a substitute for compliance with an unambiguous statute. . . . It requires no special training or effort to ascertain a deadline and make sure that it is met. 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). 15 Id. at 251-52; see also Baccei v. United States, 632 F.3d 1140 (9th Cir. 2011) (“[W]e have also 16 explained that a taxpayer’s reasonable reliance on an agent to timely file a return does not constitute 17 reasonable cause when the due date of the return was ascertainable by the taxpayer.”). 18 By contrast, the second category of cases consists of cases where the taxpayer “relies on an 19 agent’s erroneous advice” as to a substantive legal matter. Knappe, 713 F.3d at 1170. The Boyle 20 Court expressly recognized this distinction: 21 22 23 24 When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a “second opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. 25 26 Boyle, 469 U.S. at 250-51. Both the Boyle Court and the Ninth Circuit in Knappe indicated that 27 erroneous advice regarding whether the filing of a return was necessary falls into this latter category. 28 See id. at 250 (“Courts have frequently held that ‘reasonable cause’ is established when a taxpayer 6 1 shows that he reasonably relied on the advice of an accountant or attorney that it was unnecessary to 2 file a return, even when such advice turned out to have been mistake.”); Knappe, 713 F.3d at 1170 3 (“Cases in this category stand for the principle that the question of whether a return is due is a matter 4 of substantive tax law, and that a taxpayer acts with ordinary business care and prudence when he 5 relies on an expert’s answer to that question.”). Defendant argues that this is a straightforward example of a taxpayer relying on an attorney to 8 timely file a return and therefore there is no “reasonable cause.” It further argues that the advice 9 rendered by Mr. Hancock was “non-substantive.” By contrast, Plaintiffs argues this is a case of Ms. 10 Burns relying on Mr. Hancock’s legal advice regarding whether the FETR was in fact required to be 11 For the Northern District of California The parties dispute into which category Ms. Berns’ reliance on Mr. Hancock falls. The 7 United States District Court 6 filed – not when it was required to be filed. 12 The Court finds that on the current record, Plaintiffs are correct and the motion for summary 13 judgment should be denied. There is, at very least, a genuine dispute of material fact as to the nature 14 of the advice Ms. Berns received from Mr. Hancock. Plaintiffs’ statement of undisputed facts and 15 Ms. Berns’ declaration (to which Defendant has not responded), assert that Mr. Hancock told her 16 that a “FETR was only required to be filed if there were estate taxes due. Hancock also told Berns 17 that he would notify her if a FETR was required for the Decedent’s estate.” Pl. Facts ¶ 7; Berns 18 Decl. ¶ 3. Significantly, there is an indication in Mr. Hancock’s deposition that he believed at the 19 relevant time (and advised Ms. Berns) that it was an open question regarding whether the estate 20 would even have estate taxes due: 21 22 23 24 Q. Okay. And do you recall any conversations with Ashley Berns about – in connection with the filing of the extension? The first extension? A. I don’t remember a specific conversation with her in that regard. I do recall that I think I told her we needed to file an extension and that we did not have funds at that time available to pay taxes if taxes were due. 25 26 Hancock Depo. at 9 (emphasis added). Combining certain statements from Mr. Hancock’s 27 deposition with Ms. Berns’ declaration, there is support in the record that Mr. Hancock had advised 28 7 1 Ms. Berns that an FETR was not required unless taxes were due and the question of whether taxes 2 were due was an open question. 3 4 5 6 7 Similarly, during his deposition, Mr. Hancock testified as to substantive legal matters on which he (erroneously) advised Ms. Berns. For example: Q. And so, I guess, it says here that at some point you informed Ashley Berns that a federal estate tax return may need to be filed for the estate and her responsibilities concerning the filing of that return. Do you want to comment on that because I know that that is not your statement. 8 9 11 For the Northern District of California United States District Court 10 A. I certainly informed her that a federal estate tax return may need to be filed in this estate. And I recall, early on, telling her that, ultimately, the personal representative of the estate would be the person who needed to file the return. 12 Id. at 10 (emphasis added). Advising a client that a tax return may need to be filed in the estate 13 implies that, at the present time, filing a return is not required. Accordingly, this appears to fit into 14 the second category of cases identified in Knappe, where “the question of whether a return is due is 15 a matter of substantive tax law, and that a taxpayer acts with ordinary business care and prudence 16 when he relies on an expert’s answer to that question.” Knappe, 713 F.3d at 1170. 17 To be sure, there are other aspects of Mr. Hancock’s deposition which suggests the advice he 18 gave Ms. Berns was related more to when the FETR needed to be filed as opposed to whether it 19 needed to be filed. If this was the case, the cases upon which Defendant relies in support of its 20 argument that Mr. Hancock’s advice was “non-substantive” would be applicable. See Knappe, 713 21 F.3d at 1173 (“We conclude that the question of when a return is due – even when an executor has 22 sought an extension – is nonsubstantive.”); see also Sarto v. United States, 563 F. Supp. 2d 476, 478 23 (N.D. Cal. 1983) (same). However, the Court will not, at the summary judgment stage, resolve the 24 apparent ambiguities in Mr. Hancock’s deposition. This, as well as whether Ms. Berns reliance was 25 reasonable in the circumstances, is a question for the trier of fact to determine. See Boyle, 469 U.S. 26 at 249 n.8 (“Whether the elements that constitute ‘reasonable cause’ are present in a given situation 27 is a question of fact, but what elements must be present to constitute ‘reasonable cause’ is question 28 of law.”). Here, there is a sufficient basis from which a jury could conclude that Mr. Hancock 8 1 advised Ms. Berns that, at least up to a certain point, an FETR was not required to be filed and that 2 Ms. Berns reasonably relied upon such advice. Under those facts, Ms. Berns would have reasonable 3 cause for failing to file timely the tax return and pay taxes. 4 5 6 IV. CONCLUSION For the foregoing reasons, Defendant’s motion for summary judgment is DENIED. This order disposes of Docket No. 32. 7 8 IT IS SO ORDERED. 9 Dated: March 21, 2014 11 For the Northern District of California United States District Court 10 _________________________ EDWARD M. CHEN United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9

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