[96-2 USTC ¶50,500] Thomas H. Foulds and Helen K. Foulds, Petitioners-Appellants v. Commissioner of Internal Revenue, Respondent-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-70312, 8/15/96 , Affirming the Tax Court, 68 TCM 858, Dec. 50,153(M) , TC Memo. 1994-489

[Code Sec. 6653 , prior to amendment by P.L. 101-239 ]

Penalties, civil: Straddle transactions: Professional advice.--Married investors were liable for the negligence penalty with respect to a tax underpayment arising from straddle transactions of forward contracts to purchase and sell mortgage-backed securities that were previously found to be illusory and fictitious (T.L. Freytag, SCt, 91-2 USTC ¶50,321 ). The taxpayers' claimed reliance on the advice of a CPA was not reasonable. Although the CPA was an expert in the area of straddle transactions and in the particular program at issue, he had no expertise regarding any tax issues related to the investment. Therefore, the CPA was not qualified to advise the taxpayers about the program. Further, the husband met with the CPA on only one occasion, and neither party could remember the advice given. Since the husband was an attorney with experience in and general knowledge of investments, he should have known that the program was too good to be true. Therefore, the Tax Court's finding of negligence was not clearly erroneous

[Code Sec. 7122 ]

Compromises: Partner's settlement.--An investor's business partner's settlement with the IRS , which did not require payment of the negligence penalty, was not imputed to the investor merely because they were partners in the same venture. The investor was not in the same position as the partner, so the partner's settlement was not relevant to the investor's case.

Thomas H. Foulds, Helen K. Foulds, 703 6th Ave., Seattle, Wash. 98109, pro se. Charles S. Casazza, Internal Revenue Service, Washington, D.C. 20224, Gary R. Allen, David I. Pincus, Thomas V. Linguanti, Department of Justice, Washington, D.C. 20530, for respondent.

Before: CHOY, SNEED, and FERGUSON , Circuit Judges. ^*

 

MEMORANDUM ^**

Taxpayers Thomas and Helen Foulds ¹ (the Foulds) appeal the tax court's order imposing penalties for the negligent underpayment of taxes. 26 U.S.C. §6653(a) (repealed 1989). We have jurisdiction pursuant to 26 U.S.C. §7482(a) and affirm.

The Foulds were among over 3000 taxpayers who participated in straddle transactions operated by First Western Government Securities Inc. (First Western). The details of the investment program were fully explained in the Fifth Circuit decision Freytag v. Commissioner which found the transactions were not bona fide as they were illusory and fictitious; accordingly, the Internal Revenue Service has properly disallowed any losses claimed by investors. Freytag v. Commissioner [90-2 USTC ¶50,381 ], 904 F.2d 1011, 1013-17 (5th Cir. 1990), aff'd on other grounds [91-2 USTC ¶50,321 ], 501 U.S. 868 (1991).

Thomas Foulds and Thomas Felker formed a partnership for the purpose of investments. As a result of the partnership's investments in First Western in 1980 and 1981, the Foulds claimed their share of partnership losses on their joint income tax returns. ² The Commissioner of Internal Revenue (Commissioner) issued a deficiency notice pursuant to these claims, which included interest and an additional penalty for the negligent underpayment of taxes. See 26 U.S.C. §§6621(c) , 6652(a) . The Foulds eventually paid the deficiency and interest, but denied negligence in claiming deductions for their investment losses because they reasonably relied on expert advice. The Tax Court rejected this argument, and upheld the Commissioner's determination of the negligence penalty. This appeal followed.

We review the Tax Court's consideration of negligence penalties for clear error. Sacks v. Commissioner [96-1 USTC ¶50,247 ], 82 F.3d 918, 920 (9th Cir. 1996).

I. Reliance on Professional Advice

Negligence is the lack of due care or the failure to do what a reasonable and prudent person would do under similar circumstances. Allen v. Commissioner [91-1 USTC ¶50,080 ], 925 F.2d 348, 353 (9th Cir. 1991). A negligence penalty is not warranted if the taxpayer is misguided, unsophisticated in tax law, and acts in good faith. Collins v. Commissioner [88-2 USTC ¶9549 ], 857 F.2d 1383, 1386 (9th Cir. 1988). The Foulds have the burden of establishing that their actions were not negligent. Allen [91-1 USTC ¶50,080 ], 925 F.2d at 353. The Foulds argue that they relied on the advice of an accountant, John Walsh, and therefore were not negligent. Good faith reliance on a professional is a defense, but a taxpayer is not automatically protected by such reliance. Id. To establish their good faith reliance on a professional, the Foulds must establish the qualifications and purported expertise of Walsh, the nature of the advice given, and their reasonable reliance on that advice. Id. at 354.

To establish this defense, the Foulds rely on the meeting Thomas Foulds and Felker attended with Walsh. Thomas Foulds stated that Walsh was an expert in the field of straddles and forward contracts based on his reputation. Walsh testified that he was a certified public accountant with Price Waterhouse, and in his capacity as technical coordinator in securities and commodities he investigated the operations of the New York and San Francisco offices of First Western in 1979. The evidence supports that Walsh was an expert in the area of straddles, and particularly in the First Western program. However, there was no evidence that he had expertise regarding any tax issues of the investment. Therefore, Walsh did not have the qualifications or expertise to give tax advice on the First Western program, although he did possess expertise in the field of straddle investments.

The nature of the advice Walsh gave is critical in this case. Thomas Foulds and Felker met with Walsh on only one occasion. Walsh testified that the partners came to "talk to [him] about First Western and some other" possible investment opportunities. Prior to and following the meeting there was no written correspondence, agreements, opinions or invoices between the parties. Further, Thomas Foulds could not recall paying compensation to Walsh, but believes payment was made through the partnership. Given the absence of any exhibits, Walsh's testimony is the only evidence presented to demonstrate the nature of his advice. In response to a question regarding his opinion as to the legitimacy of the program, Walsh stated:

I would say what I would tell to Mr. Foulds, as well as to many others that inquired at that particular time, that based on what I have seen--what I'd seen at that time, it appeared that First Western was basically doing what they were saying they were doing, and that there would be some opportunity to make money, and also some opportunity to take advantage of certain tax aspects.

Clearly, Walsh could not remember specifically what he told Thomas Foulds and Felker, only what he might have said. "Where no reliable evidence exists in the record suggesting the nature of any advice given, a finding of negligence is not erroneous." Howard v. Commissioner [91-1 USTC ¶50,210 ], 931 F.2d 578, 582 (9th Cir. 1991). Neither Walsh nor Foulds could remember the advice given, and Walsh is not an expert in tax law, therefore, the finding of negligence is not clearly erroneous.

Having found that Walsh is not a tax expert, and the nature of the advice being unknown, this court need not address the element of the Foulds' reliance on Walsh's advice, as any reliance the Foulds placed on Walsh's advice does not preclude a finding of negligence.

II. Reasonable Prudent Person Standard

The Foulds next claim that the Tax Court erred in its analysis of the reasonable prudent person standard. The Tax Court found that given Thomas Foulds background as an attorney, his experience and general knowledge of investments, his education, and the nature of the deductions involved, he should have known the First Western scheme was too good to be true. See Freytag [90-2 USTC ¶50,381 ], 904 F.2d at 1017. In reference to this First Western scheme, the Eighth Circuit has found: "If there had been any serious examination of the program 'no reasonable person would have expected ... [the] scheme to work.' " Chakales v. Commissioner [96-1 USTC ¶50,175 ], 79 F.3d 726, 729 (8th Cir. 1996) (quoting Freytag [CCH Dec. 44,287 ], 89 T.C. 849, 889 (1987)) (internal quotation omitted). We agree, and affirm the Tax Court's determination that the Foulds should have known that the scheme was "too good to be true." Therefore, the Tax Court's finding of negligence is not clearly erroneous.

III . Felker's Settlement

The Foulds also contend that Felker's settlement with the IRS , which did not require him to pay a negligence penalty, should have been imputed to the Foulds as a partner in the same venture. The Secretary of the Treasury "may compromise any civil ... case arising under the internal revenue laws." 26 U.S.C. 7122. Such compromises, however, lack probative value as the offer may be motivated by desire for peace rather than from any concession of weakness of position, and in the promotion of the public policy favoring the compromise and settlement of disputes. Hudspeth v. Commissioner [90-2 USTC ¶50,501 ], 914 F.2d 1207, 1214 (9th Cir. 1990) (citing Fed. R. Evid. 408). A party which does not settle its tax liability is not in the same position as one who has; therefore Felker's settlement has no relevance to the issues in this case.

AFFIRMED.

^* The panel unanimously finds this case suitable for decision without oral argument. Fed. R. App. P. 34(a); 9th Cir. R. 34-4.

^** This disposition is not appropriate for publication and may not be cited to or by the courts of this Circuit except as provided by 9th Cir. R. 36-3.

¹ The notice of appeal was signed by only Thomas Foulds appearing pro se on behalf of Helen Foulds and himself. Generally the notice must be personally signed by all parties in a pro se action. See Carter v. Commissioner [86-1 USTC ¶9279 ], 784 F.2d 1006, 1008 (9th Cir. 1986). However, we construe pro se appeals leniently. Hollywood v. City of Santa Maria , 886 F.2d 1228, 1232 (9th Cir. 1989). On October 17, 1993, Helen issued a power of attorney granting Thomas full power to represent her interest in this litigation. The tax returns were filed jointly, and in the interest of substantive justice we disregard this minor irregularity in the form of the notice of appeal. Id. Therefore, we consider both Thomas and Helen to be the appellants in this case.

² Thomas and Helen Foulds filed joint returns for the applicable tax years. They reported an alleged tax loss of $63,030.00 from First Western for 1980, and $102,618.00 loss from First Western for 1981.

 

 

57-1 USTC ¶9280]United States of America , Plaintiff-Appellee v. Allen M. Wainer, Defendant-Appellant

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 11777, 240 F2d 595, 1/3/57, Aff'g Dist. Ct., 56-1 USTC ¶9299

[1939 Code Sec. 2800(d)--substantially unchanged in 1954 Code Sec. 5005(b)]

Liquor taxes: Persons liable for tax: Joint and several liability: Effect of release after offer in compromise.--Taxpayer contended that he was released from liability on an assessment for taxes on illegally-distilled liquor because the Government had accepted for $5,000 an offer in compromise from his co-distiller without validity reserving any rights against other obligors. Although the release specified that no other persons were to be released, taxpayer alleged that he himself nevertheless was released, since the document was not acknowledged by the same person acknowledging the offer in compromise and since, inferentially, it was not signed at the same place and time as the offer. The court held that because the release was executed and authoricated on the same days as the offer in compromise and could have referred only to that offer, the saving clause in the release was intended to be an integral part of the offer in compromise. The fact that different parties acknowledged the signatures was of no consequence.

Charles K. Rice, Lee A. Jackson, Washington, D. C., Robert Tieken, John Peter Lulinski, Alexander O. Walter, Donald L. Lowitz, Chicago, Ill., for plaintiff-appellee. Maurice J. Walsh, 105 West Adams, Chicago , Ill. , for defendant-appellant.

Before DUFFY, Chief Judge, MAJOR and LINDLEY, Circuit Judges.

LINDLEY, Circuit Judge:

This cause was previously before us on appeal by defendant from an order denying his motion to amend his answer. 211 Fed. (2d) 669 [54-1 USTC ¶49,032]. In the original proceeding [53-1 USTC ¶9210] the United States sought, pursuant to 26 U. S. C. A. §2800(d), to recover taxes plus penalties and interest assessed on distilled spirits and alcohol seized at an illicit unbounded distillery near Joliet, Illinois in 1935, in which the defendant and others allegedly had a proprietary interest. The trial court awarded a judgment of $47,357.63 against defendant, less a pro tanto credit of $5,000.

[Scope of Release]

During the course of the original trial, it developed that Harry Braverman, with whom defendant was jointly and severally assessed, had submitted an offer in compromise which had been accepted by the Commissioner of Internal Revenue without notice to defendant, in accordance with his authority under 26 U. S. C. A. §3761(a), which provides inter alia that: "The Commissioner, with the approval of the Secretary, * * * may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution of defense * * *." At the close of the case, defendant moved to amend his answer to conform to the evidence and to allege that the acceptance of the offer in compromise effectively released him from liability. The District Court noted that "defendant's motion to amend his answer to conform to the evidence * * * presents for judicial determination the question as to whether a release, through compromise, of one assessee from the joint and several assessments * * * releases the other assessee." It concluded that the acceptance of the offer in compromise extinguished merely the individual liability of Braverman and did not constitute a release of defendant. On appeal the taxpayer urged that the lower court was in error in its determination that the effect of a release of one of two or more joint and several obligors failed, as a matter of law, to extinguish the liability of the others. There is no doubt but that issue was squarely presented to this court on the prior appeal in this manner even though documentary evidence constituting the release itself was not before us at that time. As we stated in our opinion at page 671: "The principal questions presented here are whether the taxpayer had such a connection with the distillery as to be liable for the taxes assessed, and whether the release of Braverman by the acceptance of his offer in compromise effected also the taxpayer's release." (Italics supplied.) Therefore, as no special circumstances exist herein for a redetermination of the aforementioned issue, our conclusion on the former appeal constitutes the law of this case. Commercial Nat. Bank in Shreveport v. Connolly, 176 Fed. (2d) 1004, 1006 (CA-5); Consumers Petroleum Co. v. Consumers Co., 176 Fed. (2d) 441, 442 (CA-7); United States v. Huff, 175 Fed. (2d) 678, 649 (CA-5); May Department Stores Co. v. Reynolds, 140 Fed. (2d) 799, 800 (CA-8).

[Decision on First Appeal]

On the first appeal we concluded that, in the absence of a saving clause, the release of one of two or more joint and several obligors would release them all. However, as previously stated, at that time, the release in question was not a part of the record and we had no basis for determining its nature and scope. Consequently, the judgment was reversed with instructions to grant defendant leave to file his amended answer, for the purpose of determining whether or not the release did in fact contain a saving clause. From the evidence introduced on retrial after remand [56-1 USTC ¶9299], the trial court found from the terms of the compromise agreement that the government had effectively reserved its rights against this defendant.

[Second Appeal]

On this, the second appeal, the defendant in asserting that there was no restrictive language in the compromise agreement, presents assignments of error upon which we shall comment as we discuss the nature of the evidence presented.

[Restriction in Release]

On February 3, 19 41, Harry Braverman submitted an offer in compromise of $5,000 on Form 656-C together with a Statement of Financial Condition and Other Information. Both documents were certified by Harry K. Jacols on that date. The offer was designated by serial number 443. At the time of this submission, there were no other offers of Braverman outstanding. On the same day, Mr. Braverman executed a statement containing the following pertinent language: "May Liability to pay the balance of said tax, penalties and interest, remaining after deducting from the assessment the amount hereby tendered, collection of which balance shall not be enforced against me by suit or any other proceeding; it being understood that this undertaking shall not release any other person from liability under said assessment." (Italics supplied.) This document was acknowledged by Percy L. Graham, was not attached to the offer in compromise and does not refer specifically to the offer in question, but was executed and acknowledged on the same date as the offer in compromise.

It is defendant's position that as this statement was not acknowledged by the same party, and as, inferentially, it was not signed at the same time and place, these facts in themselves precluded the District Court from concluding that the restrictive instrument was executed in conjunction with and intended to be a component part of the offer in compromise. Such a contention, we think, is simply without foundation, inasmuch as on its face the document was executed and authenticated on the same day as the offer in compromise, and could have referred only to the offer in question as there were no other offers of Braverman outstanding at that time. In the absence of other evidence, the fact that a different party acknowledged the signatures is of no material significance. It is clear from the evidence in the record that the restrictive clause was intended to constitute an integral part of the offer in compromise.

[Internal Revenue Policy]

An interoffice memorandum issued by the Commissioner to the various Collectors of Internal Revenue, dated March 25, 19 38 (Com-Mimeograph Coll. No. 4749, A. T. No. 158) indicated that the prior policy had been to treat the acceptance of an offer in compromise from one of two or more taxpayers jointly and severally liable to a single assessment, as determinative of the entire assessment and a release of all taxpayers involved. By this memorandum, however, the Commissioner initiated the following change of policy: "If an offer, submitted by one of two or more taxpayers named in a single assessment, is accompanied by a stipulation that it is to cover the liability of the proponent alone, such offer may be accepted in compromise of such proponent's individual liability without releasing the remaining taxpayers from liability to the assessment, less the amount of the offer." Also included was a declaration of the procedure to be followed "Where an Offer is Submitted in Compromise of a Taxpayer's Individual Liability to a Joint Assessment", whereby it was declared that a stipulation should be obtained from the proponent evidencing that the offer was limited to his individual liability and containing the exact language to be used, which was identical with that used by Mr. Braverman in the separate document executed by him previously alluded to. Similarly, the language to be used in the letter of acceptance to a taxpayer was spelled out. The only deviations from the instructions in the case before us were that the restrictive statement was not inserted in Form 656-C as required, and that the language used in the letter of acceptance to taxpayer Braverman did not conform. Nevertheless, the procedure established by the Commissioner's statement of policy was substantially complied with. Even if there were a material deviation, that in itself would not be determinative of the matter at issue, as the policy outlined by the Commissioner in the mimeograph was merely directory and not mandatory in character.

If defendant's contention were correct, it would have not only the government in effecting a compromise, but also the taxpayer under certain circumstances. To approve defendant's suggestion would be to sacrifice the principle of compromise to mere form of procedure and render settlements with the government delusive and uncertain. As was aptly expressed in Willingham v. United States, 208 Fed. 137, 139 (CA-5): "If the defendant in good faith made the payment of the tax and penalty for the purpose of compromising the impending criminal action, he is entitled to the full effect and benefit of it regardless of whether or not he followed any technical rules of procedure laid down by the Internal Revenue Department."

[Other Documents]

In evidence were other documents constituting, in main, interdepartmental correspondence relating to the compromise of Braverman's liability which defendant insists do not reflect an intention on the part of the government to rely on the saving provision in Braverman's offer in compromise. However, in the abstract and statement which recorded the action taken by the Commissioner it is quite clear that the statement executed by Braverman was considered as part of the offer in compromise. The particular serial number 443 was referred to, which we have previously determined included the restrictive clause. However, there is also the following statement: "this compromise is for proponent's individual liability, such proposition being in the form of the stipulation prescribed by Com. Mim., Coll. No. 4749, A. T. No. 158, dated Mar. 25, 19 38.", which clearly indicates an intent to rely on the so-called stipulation.

One of the essential ingredients relied on by the defendant to indicate that the government release did not contain a saving clause is a legger of December 22, 19 41 to Braverman from the government formally accepting his offer in compromise. This letter does not in haec verba state that it is only the individual liability of Mr. Braverman that is being released. However, in the caption of this piece of correspondence serial number 443 is referred to as is the amount of the offer.

[Saving Clause Part of Compromise]

We need not further discuss the nature of the evidence introduced below, for when viewed in its entirety, the conclusion is inescapable that the saving clause constituted a component part of the compromise agreement whereby the government effectively preserved its rights against the taxpayer in question.

Finally, it is urged that the effect of 26 U. S. C. A. §3761, the source of the Commissioner's power of compromise, is to lodge in the Commissioner an unfettered discretion, in effect, to shift partially the tax burden from one party to another without notice to the other taxpayer upon acceptance of an offer in compromise. However, taxpayer evidently fails to recognize the significance of a joint and several assessment whereby the government could single out any one of the assessed taxpayers and proceed against him for the entire amount of the assessment without any basis for complaint on his part.

For the reasons stated, the judgment is affirmed.