785 F.2d 715 (9th Cir. 1986), 84-4375, Swayze v. United States

• Citation: 785 F.2d 715
• Docket Number: 84-4376.,84-4375
• Date: 21 March 1986
• Parties: Darlene SWAYZE, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee, Stuart MARTIN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

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785 F.2d 715 (9th Cir. 1986)

Darlene SWAYZE, Plaintiff-Appellant,

v.

UNITED STATES of America, Defendant-Appellee,

Stuart MARTIN, Plaintiff-Appellant,

v.

UNITED STATES of America, Defendant-Appellee.

Nos. 84-4375, 84-4376.

United States Court of Appeals, Ninth Circuit

March 21, 1986

Argued and Submitted Nov. 5, 1985.

Barbara J. Rose, Milwaukie, Or., for plaintiffs-appellants.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Richard Farber, Paul E. Pelletier, Dept. of Justice Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the District of Oregon.

Before TANG and FARRIS, CIRCUIT JUDGES, and KELLEHER, ^[*] District Judge.

KELLEHER, District Judge:

Darlene Swayze and Stuart Martin (appellants), both professional tax preparers, appeal from summary judgment in these consolidated actions. The IRS assessed

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penalties pursuant to 26 U.S.C. Sec. 6694(a), charging that appellants had negligently or intentionally disregarded rules and regulations by preparing a number of so-called family trust tax returns. Appellants paid 15 percent of the assessed amounts and brought these refund actions. The district court granted summary judgment in favor of the government, holding that appellants failed to raise any genuine issues of material fact. We reverse.

BACKGROUND

In each of the tax returns prepared by appellants for which a penalty was assessed ("penalized returns"), the amount of taxable income declared by the client/taxpayer was apparently reduced from what it would otherwise have been through the use of a family trust. A family trust is created by a taxpayer's placement in trust of designated income, assets and/or "lifetime services." Family members are designated as beneficiaries. Under present law, such an arrangement is ineffective for tax avoidance purposes; income taxable to the grantor will not escape taxation when diverted to the beneficiaries of a family trust. This was unclear, however, in 1977, 1978 and 1979, the years for which appellants prepared the penalized returns. ¹

Before preparing the penalized returns, appellants were contacted by the IRS. Through written correspondence and personal communication, the IRS informed appellants of the Service's view that the family trust was an artificial and invalid tax avoidance scheme. Nevertheless, appellants prepared family trust returns for their clients, using forms and step-by-step instructions supplied by the Institute of Individual Religious Studies ("IOIRS") and Educational Scientific Publishers ("ESP").

Appellants claim they had sought, obtained and relied upon the advice of competent lawyers and accountants regarding the validity of the family trust returns they were about to prepare. The government contends that appellants neither exercised due diligence in seeking out, nor displayed good faith in relying upon, the advice they received. On that point the record contains the following evidence.

Swayze testified in her deposition that she paid a local attorney, Brad Burke, for legal research and advice, and for helping her design the family trust device she later used. Swayze testified she contacted a number of reputable lawyers employed by IOIRS, among them one Peter Stomer. Swayze also testified she received advice from her husband following his consultation with attorney Donald Krause. She stated in her affidavit she met with Mr. Anderson, a CPA, and conferred about the validity of the family trusts. She also stated she received legal help from attorneys Ronald Hughes and Harvey Richelson. She further stated she read and relied on letters supplied to her by IOIRS which were written and signed by two other lawyers, John R. Rarick and Carroll M. Lawson. These letters appear in the record along with extensive promotional materials. Both letters formally expressed the opinion that the trusts she was using were legal and offered legitimate tax benefits.

Mr. Martin testified at his deposition that Walt Hutchison, CPA, advised him the family trusts he prepared were "valid taxable entities." Martin further testified he listened to and relied upon a taped seminar conducted by attorney Bayles and CPA Bill Mertsching, which analyzed and endorsed the specific type of family trusts he later prepared. Martin also claimed familiarity with and reliance upon IOIRS and ESP materials similar to those described by Swayze.

ISSUE

The issue before the district court was whether appellants negligently or intentionally disregarded rules or regulations in preparing the penalized returns. The issue before us now is whether the district court

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properly granted summary judgment, which turns on whether the record discloses genuine issues of material fact.

STANDARD OF REVIEW

We review a district court's grant of summary judgment de novo. Lojek v. Thomas, 716 F.2d 675, 677 (9th Cir.1983). Summary judgment is appropriate if, viewing the evidence in the light most favorable to the party opposing the motion, there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. Id.; Fed.R.Civ.P. 56(c).

DEFENSE OF GOOD FAITH RELIANCE

Neither Swayze nor Martin is a lawyer or accountant, though, as laymen, they are permitted to prepare tax returns professionally under 26 U.S.C. Sec. 7701(a)(36). Both appellants raise the defense of "good faith reliance on the advice of counsel or a qualified accountant...." See Hanson v. Commissioner, 696 F.2d 1232, 1234 (9th Cir.1983) ² ; see also Leonhart v. Commissioner, 414 F.2d 749, 750 (4th Cir.1969) (reliance justified if accountant is independent and fully apprised of circumstances of transactions).

Appellants assert this defense to refute the charge of negligent or intentional disregard. First, appellants attempt to establish that by seeking out professional advice they exercised due care in their investigation into the validity of the family trust device. Secondly, appellants claim reliance on the advice they obtained and seek to establish the bona fides of the position they took as to the legal correctness of the penalized returns. See 26 C.F.R. Sec. 1.6694-1(a)(4) (good faith belief with reasonable basis defeats charge of intentional disregard).

Appellants maintain that their depositions and affidavits contain sufficient evidence from which a rational jury could infer they had sought, obtained and relied on competent professional advice. This, they argue, creates genuine fact issues material to the defense of good faith reliance. The government disputes appellants' good faith on two grounds.

First, the government argues that most of the lawyers and accountants named by appellants were affiliated with IOIRS or ESP. Secondly, the government argues that appellants' primary motive in preparing family trust returns was obviously the collection of higher fees.

On the first point, the record indicates some, but not all, lawyers and accountants relied on by appellants were affiliated with family trust promoters. The record reveals little concerning the nature of those affiliations. In any event, it is the jury's province to evaluate whether, and to what degree, lawyers' or accountants' affiliations diminish...