Kim Phuong Vu Bui v. United States,U.S. District Court, West. Dist. Wash. at Seattle, C00-939R , 9/18/2001

[Code Secs. 6694, 6695 and 7701]


A tax return preparer was not entitled to a refund of penalties assessed against her for preparation of falsified income tax returns. Although her ex-husband had done the customer consultations and tax calculations in connection with the tax preparation business they owned, the taxpayer qualified as a tax return preparer because her signature and social security number appeared in the space for certification of the preparer of the returns. No good faith reliance exception to liability existed because the taxpayer failed to support her contention that she relied on her husband's preparations of the returns when signing, under penalty of perjury, that the returns were true to the best of her knowledge.


ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT


ROTHSTEIN, District Judge:



THIS MATTER comes before the court on the parties' cross-motions for summary judgment. Plaintiff Kim Bui seeks judgment in her favor on her claim for a refund of penalties assessed against her by defendant Internal Revenue Service ("IRS") for alleged preparation of falsified income tax returns. IRS has separately moved for judgment as a matter of law on its counterclaim to collect the portion of the penalties assessed against Bui that remain outstanding, and has also moved to strike portions of a declaration submitted by Bui in support of her motion. Both motions are now fully briefed. Having reviewed the pleadings filed in support of and in opposition to these motions, together with the relevant portions of the record, and being fully advised, the court finds and rules as follows:




I. BACKGROUND


This case involves over nine hundred income tax returns prepared under the auspices of Best Income Tax, a tax return business jointly owned by Bui and her then husband, Steve Bui. The IRS's investigation of Bui's business revealed that 846 returns contained willful underestimation of tax liabilities, and that copies of the remaining 56 returns were not provided to the applicable taxpayer as required by law. Bui's name and social security number were reflected on each of these returns, so the IRS assessed a $1,000 statutory penalty for each falsified return, and a $50 penalty for each uncopied return, for total penalty of $848,800, against Bui as the return preparer. Bui has thus far paid fifteen percent of the assessed penalty and filed for a refund of the amount paid based on her belief that the penalties assessed against her were improper. The additional facts relevant to the instant motions are expressly undisputed and adequately set forth in the parties' joint Stipulation of Facts, filed on August 9, 2001. The court, therefore, finds it unnecessary to recite those facts in this order and hereby incorporates those undisputed facts into this discussion by reference to the parties' Stipulation.




II. DISCUSSION


The primary issue presented by each of these cross-motions is whether Bui was a "tax return preparer" for purposes of the substantial civil penalties assessed against her under 26 U.S.C. §6694 and §6695. In addition, Bui argues in support of her motion that, even if she were found to be a tax return preparer as defined by statute, that she is entitled to a "good faith reliance" exception to liability for preparers of falsified returns. These issues are addressed in turn.




A. Preparer Liability


The parties have stipulated, for purposes of these motions, that all of the tax returns identified by the IRS violated the requirements of §6694 or §6695. Thus, the crux of both parties' motions is whether Bui was a "preparer" of those tax returns as such is defined in 26 U.S.C. §7701. Section 7701 provides that, in general, an income tax return preparer means any person who 1) prepared; 2) for compensation; 3) any return of tax imposed by subtitle A of the Internal Revenue Code. 26 U.S.C. §7707(a)(36)(A). There is no dispute that the tax returns at issue here are returns of tax imposed by subtitle A of the Internal Revenue Code. The remaining uncertainty therefore pertains only to whether Bui prepared all or a substantial part of the returns for which she was penalized, and whether she was compensated for her efforts.




1. Substantial Preparation


"For purposes of [this definition], the preparation of a substantial portion of a return or claim for refund shall be treated as if it were the preparation of such return or claim for refund." Id. See also 26 C.F.R. §301.7701-15(a) ("An income tax return preparer is any person who prepares for compensation ... all or a substantial portion of any return of tax."). The Code of Federal Regulations makes clear that "[o]nly a person (or persons acting in concert) who prepares all or a substantial portion of a return or claim for refund shall be considered to be a preparer (or preparers)." Id. at §301.7701-15(b)(1). Specifically excepted from liability are people "who are not preparers. A person shall not be considered to be a preparer of a return or claim for refund if the person performs only one or more of the following services: (1) Typing, reproduction, or other mechanical assistance in the preparation of a return or claim for refund." Id. at §301.7701(d)-(d)(1) (emphasis added); see also 26 U.S.C. §7701(36)(B)(i).



Bui argues that she cannot fall within the statutory definition of an income tax preparer given the stipulated facts indicating that she never met with any of Best Income Tax's clients, that she did not discuss the data to be entered on clients' returns, that she did not access the networked computers used to generate the falsified returns, and that her main duties in the office included greeting customers, providing them forms, and making photocopies of their documentation. Bui argues that she squarely fits within the express definition of people who are not preparers set forth in §7707(36)(B)(i) of the Internal Revenue Code, cited above, because she made no substantive tax determinations with respect to the returns at issue and instead provided only mechanical or clerical assistance.



The IRS counters this argument by claiming that Bui must be a statutory preparer based on the undisputed facts of this case. The IRS points out that Bui completed an income tax preparation course through H&R Block in 1995, in which she earned substantial praise from her instructor and a highly successful passing grade, and learned the specific obligations imposed on paid income tax preparers. The IRS further notes that Bui's name and image was used in local advertising, on in-office promotional materials, and appeared jointly with Steve Bui's on Best Income Tax's business cards.



Furthermore, while it has been stipulated that Bui's husband did all the client consultations and calculations that led to the preparation of the returns at issue, it is also undisputed that Bui's name and social security number appear on those returns as the paid preparer. That signature creates a legal presumption that she did, in fact, sign the returns, 26 U.S.C. §6064.1 Indeed, the applicable regulations require a return preparer to "manually sign the return or claim for refund (which may be a photocopy) in the appropriate space provided on the return or claim for refund." 26 C.F.R. §6695-1(b)(1). Bui did this, and her training in income tax preparation undoubtedly made her aware of the significance of that act.



Bui's signature on the tax returns also constitutes a declaration, sworn to under penalty of perjury, that she had "examined th[e] return and the accompanying schedules and statements, and [that] to the best of [Bui's] knowledge and belief, they are true, correct, and complete." IRS Form 1040, Declaration of Paid Preparer. Moreover, the Revenue Code provides that if "the preparer is unavailable for signature, another preparer shall review the entire preparation of the return or claim for refund, and then shall manually sign the return or claim for refund." 26 C.F.R. §1.6695-1(b)(1). See also United States v. Bailey [92-1 USTC ¶50,246], 789 F.Supp. 788, 815 (N.D. Tex. 1992) ("The only circumstance under which a person can sign his name to a return he did not prepare is if the signer reviews the entire preparation of the return and is satisfied that the return is prepared properly ... the preparer whose signature appears at the bottom of the return is responsible for the contents of the return."). To the extent that Bui's husband initially prepared any of the returns she ultimately signed, Bui became the return preparer as a matter of law when she adopted and vouched for the correctness of those returns. Bui simply cannot make sworn representations under penalty of perjury, which declarations are attested to by her signature, and now avoid the civil penalties for failing to fulfill the obligation of reviewing the entire return she expressly undertook.



Nevertheless, Bui insists that she cannot be a legal return preparer because she did not prepare a substantial portion of any return. This argument relies on the regulatory provision that a "person who renders advice which is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim or refund, will be regarding as having prepared that entry." 26 C.F.R. §301.7701-15(b)(1). Bui claims that, since her husband was the only one who rendered such advice, only he can be the return preparer.



The court is unpersuaded. There is nothing in the statute or regulations to suggest that the definition last cited is comprehensive of all scenarios in which a person may be regarded as a return preparer to the exclusion of all others. Furthermore, while an income tax preparer for present purposes is "a person (or persons acting in concert) who prepares all or a substantial portion of a return," 26 C.F.R. §301.7701-15(b)(1), Congress has indicated that



[w]hether a schedule, entry, or other portion of a return or claim for refund is a substantial portion is determined by comparing the length and complexity of, and the tax liability or refund involved in, that portion to the length and complexity of, and the tax liability or refund involved in, the return or claim for refund as a whole."


Id. As detailed above, Bui's signature as the paid preparer on the subject returns is her sworn certification of the accuracy of the entire contents of those returns. Bailey [92-1 USTC ¶50,246], 789 F.Supp. at 815 (finding "the preparer whose signature appears at the bottom of the return is responsible for the contents of the return") (emphasis added). Although the statute and implementing regulations provide little concrete guidance in addressing this question, the totality of the circumstances persuade the court that Bui is an income tax preparer as anticipated by the statute.2



2. Compensation


Having determined that Bui prepared the returns for which she was penalized, the remaining issue is whether she was compensated for those efforts. The Revenue Code provides that a "person who prepares a return or claim for refund with no explicit or implicit agreement for compensation is not a preparer." 26 C.F.R. §301.7701-15(a)(4); 26 U.S.C. §7701(a)(36). Bui argues in conclusory fashion that she was not compensated for her work at Best Income Tax. The undisputed facts of the case show otherwise.



Bui personally collected payment from numerous clients for the returns at issue. Those clients had an express obligation to pay Best Income Tax for its services, and Bui was listed as the sole proprietor of that business. Even though Bui claims that she was only listed as Best Income Tax's sole proprietor to avoid revealing Steve Bui's interest in the business, that is of no moment where, as here, the business was started with community funds and where all income derived from the business inured to the benefit of the marital community. By operation of Washington law, Bui at all times had an undivided one-half interest in Best Income Tax and all its revenues. RCW 26.16.030. These facts are more than adequate to establish that Bui received compensation for her preparation of income tax returns as anticipated in the Revenue Code.




B. Good Faith Exception


Bui argues in the alternative that even if she were a statutory preparer of the tax returns, she is entitled to the benefit of the "good faith exception" to liability for preparation of falsified returns. Bui contends that, given her husband's superior knowledge in this area, she was justified in relying on his representations that the information she certified on the returns as true was accurate. It is true that the regulations create an exception to liability under 26 U.S.C. §6694 that allows "the preparer [to] rely in good faith without verification upon information furnished by the taxpayer," 26 C.F.R. §1.6694-1(e)(1) (emphasis added), but by its own terms the exception does not allow reliance on information furnished by a coworker or additional return preparer. This exception does not justify Bui's reliance without verification on information provided by her husband because he is not the taxpayer with respect to any of the challenged returns. Furthermore, the regulations make clear that "the preparer may not ignore the implications of information furnished to the preparer or actually known to the preparer." Id. Bui's tax code training made her actually or constructively aware of the proper elements of and calculations necessary to complete a tax return, and she could not look the other way when confronted with identical sham deduction schedules over and over again. In sum, Bui has no basis to invoke and cannot benefit from the good faith exception carved out in the regulations.




III. CONCLUSION


In light of the foregoing, the court concludes that the undisputed facts of this case entitle the IRS to judgment as a matter of law on its claim to collect the remaining 85% of the civil penalties it assessed against Bui. Accordingly, the IRS's motion for summary judgment is GRANTED.3 The court further concludes that Bui has failed to carry her affirmative burden in seeking summary judgment on her right to a refund of the assessed penalties, and her motion therefore is, hereby, DENIED. The parties shall be free to negotiate suitable arrangements for collection of the funds owing, or to seek further assistance in that regard from this court.


1 Bui further admits that she permitted her signature to be affixed to any returns she did not personally sign, such that the end result is the same.

2 As an aside, the court notes that Bui's performance of clerical tasks does not, per se, remove her from preparer status because that was not her only role in operating the Best Income Tax business. Cf. 26 U.S.C. §7701(36)(B)(i) and 26 C.F.R. §301.7701(d)(1). Bui also worked with various clients' data sheets, and more importantly, she arranged for and collected payment from clients on a regular basis.

3 The IRS has also requested that the court strike portions of the Declaration of Steve Bui as lacking foundation. Because the court found those challenged portions immaterial to the analysis necessary for resolution of the substantive motions, and in light of the court's conclusions on the merits presented, it finds striking those portions of the declaration unnecessary and DENIES the IRS's request.