Benson v. United States

[85-1 USTC ¶9424]Raymond D. Benson, Plaintiff v. United States of America, Defendant

U. S. District Court, East. Dist. Calif., Nos. Civil S-81-509 LKK, S-81-510 LKK, S-81-511 LKK, S-81-512 LKK, S-81-513 LKK, S-81-514 LKK, 1/18/85


Order


KARLTON, Chief Judge:


Plaintiff, Raymond Benson, is an income tax preparer. See 26 U. S. C. ("I. R. C.") §7701(a)(36) (West Supp. 1984). In this capacity, plaintiff prepared the 1977 federal income tax returns for six married couples. 1 Each of the returns claimed a reduction in federal income tax as a consequence of the taxpayers' participation in a "family trust" plan. In 1980, plaintiff was assessed a $100.00 penalty for each of the six returns pursuant to I. R. C. §6694(a), which imposes liability for understating the tax liability on a return if that understatement was the result of negligent or intentional disregard of the I. R. S.' rules or regulations. 2 On August 5, 1981, plaintiff filed these six actions seeking to avoid the penalties imposed. 3


This court exercises jurisdiction over the cases pursuant to 28 U. S. C. §1346(a)(1) (West Supp. 1984).


I

Procedural History


Plaintiff's three-count complaints each challenged the constitutionality of the penalty statute, sought refund of the portion of the penalty paid (see n. 4, supra), avoidance of the remainder of the penalty, and sought remedies for an alleged violation of 42 U. S. C. §1983. The government was granted summary judgment on the constitutional issue, and the six cases were consolidated. (Order of December 14, 1982). The §1983 claim appears to have been abandoned. 4


The case then was referred to Magistrate Esther Mix for the taking of evidence, and the formulation of proposed findings and recommendations pursuant to 28 U. S. C. §636(b)(1)(B) (West Supp. 1984). (Order of March 8, 1984). The magistrate conducted a trial, and on June 5, 1984, filed her Proposed Findings and Recommendations. The magistrate's report specifically found that the tax liability was understated on each return, that plaintiff had prepared each of the returns, and that he had "negligently and intentionally" disregarded the rules and regulations by relying "exclusively" on the opinions of those who were promoting the "family trust" device. The report further found that the plaintiff "failed to exercise the level of care which an ordinary, reasonable person would have exercised under the circumstances." The magistrate recommended that the court enter judgment for the defendant in each case.


Plaintiff objected to the magistrate's report asserting that the evidence before the magistrate was that he did not rely exclusively on E. S. Publishers, the organization promoting the device, but had reviewed the positions of the I. R. S., E. S. Publishers, and independent accountants and attorneys.


II

Standard of Review


This court reviews de novo those factual findings of the magistrate to which objections have been made. 28 U. S. C. §636(b)(1). See United States v. Raddatz, 447 U. S. 667 (1980).


III

Liability for Understatement of Tax Liability


Pursuant to statute, an income tax return preparer is subject to a $100.00 penalty if s/he understates the tax liability on the return due to a negligent or intentional disregard of the Treasury's rules and regulations. I. R. C. §6694(a) (West Supp. 1984). The points in dispute in this case are (1) whether the plaintiff understated the tax liability of the couples for whom he prepared income tax returns, and if so, (2) whether such understatement resulted from negligent or intentional disregard of "rules and regulations."


A. Burdens of Proof


The government asserts that once the Commissioner of the Internal Revenue Service ("the Commissioner") has made an assessment against the plaintiff the government has thereby met its burden of establishing a prima facie case of the validity of the assessment. See 26 C. F. R. §1.6994-1(a)(5) (1984) (Treasury Regulations); United States v. Janis [76-2 USTC ¶16,229], 428 U. S. 433, 440 (1976). 5 The plaintiff does not dispute this assertion, and I thus accept the parties' position as a correct statement of the law.


B. Understatement of Tax Liability 6


Plaintiff does not attempt to rebut the presumption that he had understated the tax liability of the six couples before the magistrate. Since the presumption is unrebutted, I adopt the magistrate's finding that the plaintiff understated the tax liability in each case.


C. Negligent or Intentional Disregard of Rules and Regulations


The only aspect of the penalty assessment the plaintiff has chosen to challenge is the presumption (and magistrate's finding) that he negligently or intentionally disregarded rules and regulations in using the family trust for income tax reduction purposes.


It is undisputed that "[t]he term 'rules or regulations' includes . . . Internal Revenue Service revenue rulings published in the Cumulative Bulletin." 26 C. F. R. §1.6694-1(a)(3) (1984). It is furthermore undisputed that Revenue Ruling 75-257 (1975) states that the family trust device employed by the plaintiff as a tax-reduction device is not valid for that purpose. Therefore the sole question before the magistrate and the court was and is whether plaintiff's decision to employ the device in spite of its disapproval in the Treasury rules and regulations constitutes a negligent or intentional disregard of those rules and regulations.


Plaintiff's testimony (in deposition, June 21, 1982), leaves no other reasonable inference but that he disregarded Revenue Ruling 75-257 on the basis of opinions given him by those who were promoting the family trust device, namely, E. S. Publishers. The plaintiff objects to the magistrate's findings on the basis that the consulted independent accountants and attorneys. In fact, according to his own testimony, he consulted Bill White and Jim Norman, attorneys, who said they could give him no advice on the devices since they knew nothing about trusts. The other "independent" accountants and attorneys plaintiff sought out for advice were Pipp Boyles and Paul Wright, both employed by or associated with E. S. Publishers.


Contrary to plaintiff's objections, he got no independent advice on the validity of the family trust for tax purposes. His only sources of information, therefore, were the Revenue Ruling and E. S. Publishers (and their employees or associates). Plaintiff simply ignored the rules and regulations of the Treasury Department and chose to follow the advice of E. S. Publishers. Without obtaining independent advice on this move, the plaintiff was in negligent or intentional disregard of the Revenue Ruling.


IV

Conclusion


The Recommendations and Findings of the magistrate are adopted in full. The Clerk of the Court is directed to enter judgment for the defendant in each of the consolidated cases.


IT IS SO ORDERED.
Ridgley, and Kenneth and Lucille Young.


2 The section reads:


If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim.


I. R. C. §6694(a) (West Supp. 1984).


3 It is not disputed that plaintiff met all the requirements for bringing this suit, to wit, payment of 15% of the penalty and filing of the suit within 30 days of notice of the penalty.


4 In any event, it is frivolously alleged as it completely fails to meet the pleading requirements of Fed. R. Civ. P. 8(a), and Gomez v. Toledo, 446 U. S. 635, 640 (1980) (citing Monroe v. Pape, 365 U. S. 167, 171 (1961)).


5 Compare I. R. C. §7427 (West Supp. 1984), putting the burden upon the Secretary (of the Treasury) to prove "willful understatement of liability" under I. R. C. §6694(b).


6 "[T]he term 'understatement of liability' means any understatement of the net amount payable with respect to any tax imposed by subtitle A . . .." I. R. C. §6694(e).