Custom Radio Corp. v. Actuaries & Benefit Consultants, Inc.

• Decision Date: 16 January 2014
• Docket Number: No. 32A01–1303–CC–143.,32A01–1303–CC–143.
• Citation: 998 N.E.2d 263
• Parties: CUSTOM RADIO CORP., Custom Management Group, Inc., Richard Yarger and Robert O'Brien, Appellants–Plaintiffs, v. ACTUARIES & BENEFIT CONSULTANTS, INC., and John M. Fogle, Appellees–Defendants.
• Court: Indiana Appellate Court

998 N.E.2d 263

CUSTOM RADIO CORP., Custom Management Group, Inc., Richard Yarger and Robert O'Brien, Appellants–Plaintiffs,

v.ACTUARIES & BENEFIT CONSULTANTS, INC., and John M. Fogle, Appellees–Defendants.

No. 32A01–1303–CC–143.

Court of Appeals of Indiana.

Oct. 9, 2013.

Rehearing Denied Jan. 16, 2014.

John C. Theisen, Nathaniel O. Hubley, Theisen Bowers & Associates, LLC, Fort Wayne, IN, Attorneys for Appellants.

Seth B. Lewis, Seth B. Lewis Law Office, LLC, Danville, IN, Attorney for Appellees.

OPINION

BRADFORD, Judge.

CASE SUMMARY

Appellants–Plaintiffs Custom Radio Corp.; Custom Management Group, Inc.; Richard Yarger; and Robert O'Brien appeal the trial court's grant of summary judgment in favor of Appellees–Defendants Actuaries & Benefit Consultants, Inc. and John Fogle. From 1995 to 2004, Appellees provided consulting services to Appellants with respect to certain Welfare Benefit Plans investing in cash value life insurance. The plans were designed to comply with 26 U.S.C. § 419(A)(f)(6) so that Appellants' contributions thereto would be tax-deductible. In July of 2003, however, the Internal Revenue Service (“IRS”) issued final regulations with regard to subsection 419(A)(f)(6), which rendered Appellants' plans non-compliant and their contributions retroactively taxable. A subsequent IRS audit revealed that Appellants owed nearly $750,000 in back taxes, penalties, and interest, but, on October 20, 2008, Appellants entered into a settlement agreement with the IRS, whereby the tax penalties were waived.

On October 19, 2010, Appellants filed suit against Appellees, claiming negligent provision of consulting services and breach of oral contract. Appellees moved for summary judgment on the basis that the statutes of limitation had expired. The trial court determined that Appellants' causes of action accrued and their respective statutes of limitation began to run on April 30, 2004, by which date Appellants allegedly knew that their Welfare Benefit Plans were non-compliant with 26 U.S.C. § 419(A)(f)(6). On appeal, Appellants argue that their causes of action did not accrue until October 20, 2008, the date on which they reached their settlement agreement with the IRS and thereby discovered their damages.

We conclude that Appellants' causes of action accrued and the statutes of limitation began to run on the date Appellants knew or, through ordinary diligence, could have discovered that their Welfare Benefit Plans were non-compliant with subsection 419(A)(f)(6) and that their plan contributions were retroactively taxable. But finding a genuine issue of fact as to whether Appellants knew or could have known this information by April 30, 2004, we hold that summary judgment is inappropriate. The judgment of the trial court is reversed and remanded.

FACTS AND PROCEDURAL HISTORY¹

Yarger and O'Brien are the owners and operators of Custom Radio Corp. (“CustomRadio”), a company that supplies the truck and bus market with audio and video systems. Fogle is the President of and a consultant with Actuaries & Benefit Consultants, Inc. (“ABC”), a company that specializes in designing, installing, and administering retirement plans. From 1995 to 2006, ABC and Fogle provided consulting services to Yarger and O'Brien with respect to Custom Radio. Throughout the course of this business relationship, Yarger was the point of contact at Custom Radio, and O'Brien was relatively uninvolved.

In late 1995, Fogle discussed with Yarger the purchase of cash value life insurance to fund a buy-sell agreement between Yarger and O'Brien with respect to Custom Radio. Fogle advised that using a Welfare Benefit Plan in compliance with 26 U.S.C. § 419(A)(f)(6) would enable Yarger and O'Brien to claim tax deductions for their plan contributions ( i.e., their life insurance premiums). Fogle further advised Yarger and O'Brien to establish a management company for Custom Radio, such that only a select few employees could benefit from the Welfare Benefit Plan. Yarger and O'Brien established Custom Management Group, Inc. (“Custom Management”) for this purpose and named themselves as the company's only employees.

In January of 1996, Custom Management enrolled in a Welfare Benefit Plan known as the Prime Financial Multiple Employer Welfare Benefit Fund (the “Prime Plan”). At the time, the IRS had issued no regulations regarding 26 U.S.C. § 419(A)(f)(6), but the sponsor of the Prime Plan believed that it complied with that subsection. In June of 1997, however, the United States Tax Court issue its decision in Booth v. Commissioner, 108 T.C. 524 (1997), striking down the Prime Plan as non-compliant with subsection 419(A)(f)(6).

In February of 1998, in response to the Booth decision, Fogle recommended that Custom Management switch to a different Welfare Benefit Plan, the National Benefit Plan and Trust (the “National Plan”). At the time, the IRS still had issued no regulations regarding 26 U.S.C. § 419(A)(f)(6), but, like with the Prime Plan, the sponsor of the National Plan believed it to comply with that subsection. On July 17, 2003, however, the IRS issued final regulations declaring Welfare Benefit Plans investing in cash value life insurance—like the Prime and National Plans—to be non-compliant with subsection 419(A)(f)(6).

The final regulations included the following provision regarding their effective date:

Except as explained below, these regulations—which generally clarify existing law—are effective for contributions paid or incurred in taxable years of an employer beginning on or after July 11, 2002. For contributions made before this effective date, the IRS will continue applying existing law, including the analysis set forth in Notice 95–34 and relevant case law. Thus, taxpayers should not infer that a contribution that would be nondeductible under the regulations would be deductible if made before that date. In this regard, taxpayers are reminded that the IRS has already identified transactions that are the same as or substantially similar to the transactions described in Notice 95–34 as listed transactions for purposes of Sec. 1.6011–4T(b)(2) of the Temporary Income Tax Regulations and Sec. 301.6011–2T(b)(2) of the Temporary Procedure and Administration Regulations[.]

Appellants' App. p. 61 (emphasis in original). As a result, Yarger's and O'Brien's contributions to the National Plan were retroactively taxable.² (Appellants' App. 43–44, 46).

In February of 2004, in response to the IRS's final regulations, Fogle recommended that Custom Management switch to a single employer plan under 26 U.S.C. § 419(E). Custom Radio's CPA agreed with Fogle's recommendation, and Yarger decided to have the CPA handle the transaction. In April of 2004, Yarger informed Fogle that his services with respect to Custom Management's Welfare Benefit Plan were no longer needed.

In early 2007, the IRS notified Yarger and O'Brien that it would be conducting an audit of Custom Management's taxes. In March of 2008, the IRS completed its audit and reported to Yarger and O'Brien that they owed $291,578.82 and $441,023.76, respectively, in back taxes, penalties, and interest. Yarger and O'Brien, however, were able to negotiate settlements with the IRS, whereby the tax penalties were waived in exchange for their payment of the back taxes and interest. The IRS prepared settlement agreements reflecting these terms on September 25, 2008, which agreements O'Brien and Yarger signed on October 19 and 20, 2008, respectively.

On October 19, 2010, Yarger and O'Brien ³ filed a complaint against ABC and Fogle, claiming negligent provision of consulting services and breach of oral contract. ABC and Fogle answered the complaint, asserting the affirmative defense that both claims were barred by their respective statutes of limitation.⁴ On November 15, 2012, ABC and Fogle moved for partial summary judgment with respect to their statute of limitation defense. Specifically, ABC and Fogle argued that Yarger and O'Brien's causes of action accrued as early as July 17, 2003, the date on which the IRS issued its final regulations with regard to 26 U.S.C. § 419(A)(f)(6), and, at the latest, on April 30, 2004, the date by which Yarger and O'Brien allegedly knew that their Welfare Benefit Plans were non-compliant with that subsection. Yarger and O'Brien responded in opposition to summary judgment, arguing that their causes of action accrued on October 20, 2008, the date on which they entered into their settlement agreements with the IRS.

The trial court heard argument on ABC and Fogle's motion on January 28, 2013, and, on March 1, 2013, granted summary judgment in their favor. In its order, the court specifically found as follows:

10. In the instant case, while it is perhaps arguable whether the Statutes of Limitations applicable to this case began to run on July 17, 2003, it is beyond doubt that Yarger and O'Brien knew that Section 419(A)(f)(6) Welfare Benefit Plans had been rendered “experience rated” and had become “listed transactions” because by April 30, 2004, they had been told of those facts by Fogle himself during a meeting or meetings with at least one of their accountants,and had acted independently to adopt a Single–Employer Plan (the Arrowhead Trust), without bothering to inform Fogle.

11. The Court, therefore, finds that each of the applicable Statutes of Limitations in this case began to run on April 30, 2004, and thus expired as a matter of law on April 30, 2006[,] as to Plaintiffs' negligence claim and on April 30, 2010[,] as to Plaintiffs' breach of oral contract claim.

Appellants' App. p. 19. Where appropriate, additional facts will be supplied below.

DISCUSSION AND DECISION

Yarger and O'Brien challenge the trial court's grant of summary judgment in favor of ABC and Fogle. The standard of appellate review of a summary judgment ruling is the same as that used in the trial court. Boggs v. Tri–State Radiology, Inc., 730 N.E.2d 692, 695 (Ind.2000). Summary judgment is...