A Strong Offense
A Stronger Defense
Right now we are all in the peak of tax return filing season. As part of the tax return process, many tax practitioners file information returns for the entities they represent. Any person, including a corporation, partnership, individual, estate, and trust, who makes a payment (such for as rent, wages, salaries, and annuities) must file an information return with the IRS to report the payment. But what happens if a false information return is filed with the IRS?
In 1996, Congress enacted 26 U.S.C. § 7434(a), which gives victims of fraudulent filing activities a damage remedy against the perpetrators. The provision applies whenever “any person willfully files a fraudulent information return with respect to payments purported to be made to any other person.” It allows the subject of the false information return to recover from the person filing the return the greater of $5,000 or actual damages flowing “as a proximate result” of the fraudulent return including costs incurred in dealing with deficiencies resulting from the return, court costs and, in the court’s discretion, “reasonable attorneys fees.”
In Vandenheede v. Vecchio, the U.S. District Court, Eastern District of Michigan, recently granted the Defendants’ motion for summary judgment based on the fact that violations of 26 U.S.C. § 7434(a) fall on the “filer,” and not on every person involved in preparing the return. The Plaintiff, Mary C. Vandenheede (“Vandeheede”), filed suit against the co-trustees of her husband’s revocable trust for, among other things, filing a false and fraudulent tax form. The facts are as follows:
Vandenheede and Donald Chinn (“Chinn”) began dating in 1992. Chinn paid for Vandenheede’s living expenses and bought her a house with funds from his revocable trust, the Chinn Trust. Chinn and Vandendeede got married in 2006. Chinn’s children resigned as trustees of the Chinn Trust, in favor of Chinn’s attorney, Frank B. Vecchio (“Vecchio”), and Chinn’s accountant, Frank A. Borschke (“Borschke”). After Vecchio and Borschke became co-trustees, the Chinn Trust issued Forms 1099-MISC to Vandenheede for 2006 and 2007, and sent copies of the forms to the IRS. The 1099s asserted that the Chinn Trust had paid income to Vandenheede, as a trade or business, of $87,893 in 2006 and $27,542 in 2007. Vandenheede objected to the issuance of the 1099s, asserting that any amounts paid to her were to reimburse her for Chinn’s living expenses, or to continue his practice of paying for her personal living expenses. The IRS and the Michigan Treasury assessed income tax and penalties against Vandeheede. Vandenheede brought a refund action in the U.S. District Court, which led to the full abatement of the Federal income tax, penalty, and accrued interest. Vandenheede then filed suit against the co-trustees to recover under 26 U.S.C. § 7434(a).
Defendant co-trustees argued that in order to have a cause of action under 26 U.S.C. § 7434, the information return must be willful and fraudulent when it is filed. In addition, the defendant must be the person “so filing” such a return. Defendants argued that the “filer” is the person required by statute to file the return, and not every person involved in preparing the return. Defendants cited Treasury Regulation § 301.6721-1(g)(6) regarding the failure to correctly file information returns, for the proposition that the filer is the person “required to file an information return . . .” The Court granted the co-trustees’ motion for summary judgment on the basis that the 1099s ran directly to Chinn, who reported all income and deductions of his trust on his personal income tax returns. Therefore, although Borschke and Vecchio prepared and caused the return to be filed, it was Chinn who “filed the return” for purposes of 26 U.S.C. § 7434. Vandenheede’s claim against Borsche and Vecchio was dismissed.
This case is interesting because its holding seems to deviate from the purpose of 26 U.S.C. § 7434(a). Congress enacted 26 U.S.C. §7434(a) as remedy for the victims of fraudulent filings. However, the Defense’s argument in Vandenheede v. Vecchio, that the filer is the one “required to file an information return,” will result, in most cases, as the filer being the taxpayer itself. Such holdings could prevent the taxpayer from recovering against the tax professional who may have prepared and caused the fraudulent return to be filed.