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).