James v. USA
ORDER denying 17 Defendant's Motion for Summary Judgment. Signed by Judge James S. Moody, Jr on 8/14/2012. (LN)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
BRIAN CHIVAS JAMES,
Case No. 8:11-cv-271-T-30AEP
UNITED STATES OF AMERICA,
THIS CAUSE comes before the Court upon Defendant’s Motion for Summary
Judgment (Dkt. #17), Plaintiff’s Response (Dkt. #18), Defendant’s Reply (Dkt. #23), and
Plaintiff’s Sur–Reply (Dkt. #28). Upon reviewing the motion and responses, and being
otherwise advised in the premises, the Court concludes that Defendant’s motion should be
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. § 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
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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.
Summary Judgment Standard
Motions for summary judgment should only be granted when the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits,
show there is no genuine issue as to any material fact and that the moving party is entitled
to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317,
322 (1986). The existence of some factual disputes between the litigants will not defeat an
otherwise properly supported summary judgment motion; “the requirement is that there be
no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
(1986) (emphasis in original). The substantive law applicable to the claimed causes of action
will identify which facts are material. Id. Throughout this analysis, the court must examine
the evidence in the light most favorable to the non-movant and draw all justifiable inferences
in its favor. Id. at 255.
Once a party properly makes a summary judgment motion by demonstrating the
absence of a genuine issue of material fact, whether or not accompanied by affidavits, the
nonmoving party must go beyond the pleadings through the use of affidavits, depositions,
answers to interrogatories and admissions on file, and designate specific facts showing that
there is a genuine issue for trial. Celotex, 477 U.S. at 324. The evidence must be
significantly probative to support the claims. Anderson, 477 U.S. at 248-49 (1986).
This Court may not decide a genuine factual dispute at the summary judgment stage.
Fernandez v. Bankers Nat’l Life Ins. Co., 906 F.2d 559, 564 (11th Cir. 1990). “[I]f factual
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issues are present, the Court must deny the motion and proceed to trial.” Warrior Tombigbee
Transp. Co. v. M/V Nan Fung, 695 F.2d 1294, 1296 (11th Cir. 1983). A dispute about a
material fact is genuine and summary judgment is inappropriate if the evidence is such that
a reasonable jury could return a verdict for the nonmoving party. Anderson, 477 U.S. at 248;
Hoffman v. Allied Corp., 912 F.2d 1379 (11th Cir. 1990). However, there must exist a
conflict in substantial evidence to pose a jury question. Verbraeken v. Westinghouse Elec.
Corp., 881 F.2d 1041, 1045 (11th Cir. 1989).
Legal Standards with Respect to Foreign Trust Filing Requirements
Under 26 U.S.C. § 6048, an owner of a foreign trust is required to file Form 3520, due
at the same time as his or her federal income tax return for that year. I.R.S. Notice 97-34,
1997-1 C.B. 422; I.R.S. Announcement 98-30, 1998-17 I.R.B. 38.
If the trust owner fails to timely file Form 3520, or submits an incomplete or incorrect
form, he is subject to a penalty of $10,000 or 35% of the gross reportable amount, whichever
is greater. 26 U.S.C. § 6677(a). No penalty shall be imposed, however, if the failure to file
was “due to reasonable cause and not due to willful neglect.” 26 U.S.C. § 6677(d).
The IRS has failed to issue regulations explicating the meaning of “reasonable cause”
for failure to file Form 3520. In general, reasonable cause exists when a taxpayer exercises
ordinary care and prudence in determining his tax obligations despite his failure to comply.
See I.R.M. 126.96.36.199.2 (11-25-2011). Whether reasonable cause exists depends upon all of
the facts and circumstances of the case, including the taxpayer’s reason for failing to properly
file, and the extent of his efforts to comply. Id. Moreover, the Internal Revenue Manual
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(“IRM”) provides that ignorance of the law may provide reasonable cause if: “A. A
reasonable and good faith effort was made to comply with the law, or B. The taxpayer was
unaware of a requirement and could not reasonably be expected to know of the requirement.”
I.R.M. 188.8.131.52.2.2.6 (11-25-2011).
Did James Reasonably Rely Upon Famiglio’s Advice?
Plaintiff’s primary argument in this case is that he reasonably relied on Famiglio to
provide him with sound advice with respect to all aspects of the foreign trust, including
informing him of any filing requirements, such as the requirement to file Form 3520. Thus,
Plaintiff principally argues that Famiglio’s mistake was to fail to advise him of the
requirement to file Form 3520, not Famiglio’s failure to file the return.1
There has been considerable case law on whether reliance on the advice of an expert
can constitute reasonable cause for failing to file one’s tax returns. It is 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. See, e.g., Estate of La Meres v.
Comm’r, 98 T.C. 294, 316-17 (1992) (Stating that courts have found reasonable cause for
failing to meet a filing deadline where taxpayer made full disclosure to expert, relied on his
advice, and did not otherwise know that the return was due.).
In addition to arguing that James did not reasonably rely upon the advice of Famiglio, the
Government argues that, to the extent that James delegated the actual filing of his information
returns to Famiglio, James cannot show reasonable cause as a taxpayer cannot legitimately delegate
the filing of his tax returns to his agent. United States v. Boyle, 469 U.S. 241, 252 (1985). The
Court need not reach this argument as it concludes that there is a genuine issue of material fact with
respect to whether James reasonably relied upon Famiglio’s advice.
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Here, the Court concludes that there is a genuine issue of material fact with respect
to whether Famiglio provided James with advice upon which James reasonably relied. The
record, viewed in a light most favorable to Plaintiff, shows, among other things, that: (1)
James (or his agent) timely provided all required trust forms to Famiglio; (2) James relied on
Famiglio to advise him on all matters related to the trust; (3) Famiglio advised him on at least
some trust matters (for example, Famiglio advised him how to report loans from the trust for
tax purposes and advised him that the trust loans did not result in taxable income); (4) James
relied on Famiglio to advise him about making the appropriate filings for the trust; (5)
Famiglio failed to so advise him; and (6) James, based on his conversations with Famiglio,
believed that he had filed all required forms.
In addition, Famiglio prepared James’s personal tax returns. On Schedule B of his
Form 1040 tax returns, it appears that Famiglio answered no to the question “did you [James]
receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If
‘yes,’ you may have to file Form 3520.” Answering “no” to this question could be construed
as Famiglio providing advice that James need not file Form 3520, advice upon which James
could have potentially reasonably relied.
Taking all of these allegations as true, the Court concludes that there is a genuine issue
of material fact with respect to whether Famiglio provided James with advice that James need
not file Form 3520, and whether James reasonably relied upon that advice.
The Court also rejects the Government’s argument that James is procedurally barred from
raising his “reliance on advice” argument because of an alleged failure to properly raise the same
in his initial refund claim. The substantial variance doctrine, which would bar a taxpayer from
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Haywood Lumber & Mining Co. v. Comm’r, 178 F.2d 769, 771 (2d. Cir. 1950) (Holding that
the taxpayer had shown that it had reasonably relied upon its accountant’s advice, the court
stated that “[w]hen a...taxpayer selects a competent tax expert, supplies him with all
necessary information, and requests him to prepare proper tax returns, we think the taxpayer
has done all that ordinary business care and prudence can reasonably demand.”).
It is therefore ORDERED AND ADJUDGED that:
Defendant United States of America’s Motion for Summary Judgment (Dkt.
#17) is hereby DENIED.
DONE and ORDERED in Tampa, Florida on August 14, 2012.
Copies furnished to:
Counsel/Parties of Record
raising an argument not properly asserted in his initial refund claim, does not apply so long as the
taxpayer either explicitly or implicitly alerted the IRS to his claim during the administrative process.
First Nat’l Bank of Fayetteville v. United States, 727 F.2d 741, 744 (8th Cir. 1984). Here, the record
is clear that James did so.
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