Rost v. United States

Decision Date11 August 2022
Docket Number21-51064
Citation44 F.4th 294
Parties Daphne Jeanette ROST, Executor of the Estate of John H. Rebold, Plaintiff—Appellant, v. UNITED STATES of America, the Internal Revenue Service, Defendant—Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

Joseph M. Erwin, Erwin Law Firm, Dallas, TX, for PlaintiffAppellant.

Lauren E. Hume, Jennifer Marie Rubin, Esq., U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC, Herbert W. Linder, U.S. Department of Justice Tax Division, Dallas, TX, for DefendantAppellee.

Before Smith, Duncan, and Oldham, Circuit Judges.

Stuart Kyle Duncan, Circuit Judge:

In 2005, John Rebold formed the Enelre Foundation as a Stiftung under the laws of Liechtenstein. Stiftung is a German word meaning, roughly, "foundation" or "endowment." Enelre's purpose is to provide education and general support for Rebold and his children. Rebold transferred $3 million to Enelre's bank accounts. He later learned the IRS would consider Enelre a "foreign trust," triggering certain reporting requirements. Rebold belatedly filed the reports, and the IRS assessed penalties. Rebold paid the penalties and then filed this refund action. The district court granted summary judgment for the government. We affirm.

I.
A.

The Internal Revenue Code (IRC) requires disclosures regarding foreign trusts. See I.R.C. § 6048. Under section 6048(a), a "United States person" must report "the creation of any foreign trust" and "the transfer of any money or property (directly or indirectly) to a foreign trust." Id. § 6048(a)(1), (3)(A)(i)(ii). A "United States person" includes U.S. citizens and residents. Id. § 7701(a)(30)(A). These reportable events are disclosed to the IRS on Form 3520.1 Failure to timely file the form or to fully disclose all required information results in a "penalty equal to the greater of $10,000 or 35 percent of the gross reportable amount." Id. § 6677(a). The "gross reportable amount" is "the gross value of the property involved in the event (determined as of the date of the event)." Id. § 6677(c).

Under section 6048(b), as in effect during the years relevant to this case, anyone treated as the owner of a foreign trust under the grantor trust rules of I.R.C. §§ 671 – 679 must "ensure" the trust annually "makes a return ... which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe." Id. § 6048(b)(1)(A) (2009).2 The return is made on Form 3520-A.3 Failure to timely file the form or to fully disclose all required information results in "a penalty equal to the greater of $10,000 or [5] percent of the gross reportable amount." Id. § 6677(a)(b). The "gross reportable amount" is "the gross value of the portion of the trust's assets at the close of the year treated as owned by the United States person." Id. § 6677(c)(2).

B.

Rebold was a U.S. citizen who worked overseas as an engineer in the oil and gas industry. In 2005, he traveled to Switzerland and created the Enelre Foundation as a Stiftung4 under the laws of Liechtenstein. At the time of Enelre's founding, Rebold was the settlor and primary beneficiary, and his children were secondary beneficiaries. "Enelre" is the name of Rebold's wife, Erlene, spelled backwards.

Enelre's organizing documents provide that its purpose is to provide education, training, support, and maintenance for its beneficiaries. The documents prohibit "commercial trade" and do not provide for allocation of profits. They refer to Enelre as a trust, and Enelre has trustees and pays trustee fees. Liechtensteinian Public Registry filings reiterate Enelre's purpose and prohibition of commercial business.

Rebold opened bank accounts for Enelre at Credit Suisse, UBS, and Bank Wegelin.

He transferred $2 million to Enelre in 2005 and another $1 million in 2007. Neither Rebold nor Enelre filed Form 3520 or 3520-A disclosing to the IRS the creation of Enelre or these transfers.

In 2010, UBS notified Rebold that it intended to turn over Enelre's account records to the IRS. Rebold consulted counsel regarding tax liability for Enelre. An attorney for "the trust and trustees" (i.e. , Enelre and its trustees) advised Rebold's counsel that Rebold was "an American who set up a foreign trust, so [h]e will need to do 3520's and 3520-A's as well as amended US returns," and recommended that he participate in a voluntary disclosure program "to limit his exposure to penalties." That attorney noted that Rebold "will owe some serious tax! Nothing to be taken lightly." Rebold's counsel explained that he was "trying to find a way to treat the Enelre Foundation as something other than a trust for US tax purposes," which was "not easy."

In 2013, Daphne Jeanette Rost, Rebold's daughter and power of attorney, filed a Form 3520 for 2005 on Rebold's behalf, reporting that he owned a portion of Enelre and had transferred money to it. Rost also filed Forms 3520-A for the years 2005, 2006, and 2007, reporting year-end balances of $1,680,272, $1,807,873, and $3,116,898, respectively.

In 2014, the IRS assessed $1,380,252.35 in penalties against Rebold under section 6677(a) and (b) for his failure to timely file Forms 3520 and to ensure that Enelre timely filed Forms 3520-A in 2005, 2006, and 2007. The IRS soon notified Rebold of its intent to levy the penalties. Rebold contested his liability and requested collection due process hearings. The IRS Appeals Office sustained the levy notices but cut the penalties in half. In June 2017, Rebold paid the penalties, as adjusted. In August 2018, he filed administrative refund claims with the IRS.

C.

In June 2019, having not received a decision from the IRS, Rebold filed this action, seeking refunds for the penalties. Upon Rebold's death in December 2019, Rost, his executor, substituted as plaintiff.

After discovery, the parties cross-moved for summary judgment on Rebold's liability. The government argued that federal tax law determines the classification of an entity as a trust for tax purposes and that, under a facts-and-circumstances test, Enelre qualified as a foreign trust. Rost argued that because no statute, regulation, or judicial decision provides that a Liechtensteinian Stiftung is a foreign trust for federal tax purposes, the penalties violated the government's "duty of clarity when imposing sanctions," the Administrative Procedure Act (APA), and the Due Process Clause.

The court granted the government's motion and denied Rost's. Rost v. United States , No. 1:19-CV-0607-RP, 2021 WL 5190875 (W.D. Tex. Sept. 22, 2021). Applying a facts-and-circumstances test, the court held that Enelre qualified as a foreign trust based on its purpose and form, as stated in its organizing documents, and because it failed the tests for domestic trusts set forth in Treasury regulations. Id. at *4. The court found that Rost submitted no evidence "demonstrating fact issues that would prevent [it] from determining that [Enelre] is a ‘foreign trust’ as a matter of law." Ibid. The court rejected Rost's notice arguments, finding the statutory and regulatory frameworks were "sufficiently clear." Id. at *5, *7–9. Rost timely appealed.

II.

We review a summary judgment de novo . United States v. Bittner , 19 F.4th 734, 740 (5th Cir. 2021) (citation omitted), cert. granted , ––– U.S. ––––, 142 S. Ct. 2833, ––– L.Ed.2d –––– (2022). Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a) ; see Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Once the movant satisfies this burden, the nonmovant "must present competent summary judgment evidence of the existence of a genuine [dispute] of fact." Johnson v. World All. Fin. Corp. , 830 F.3d 192, 195 (5th Cir. 2016) (citations omitted). "We view the evidence in the light most favorable to the nonmovant and draw all reasonable inferences in its favor." Bittner , 19 F.4th at 740 (citation omitted).

In a tax refund action, "the taxpayer bears the burden of proving both the error in the assessment and the amount of refund to which he is entitled." Brown v. United States , 890 F.2d 1329, 1334 (5th Cir. 1989) (citations omitted); see also Trinity Indus., Inc. v. United States , 757 F.3d 400, 413 (5th Cir. 2014).

III.

At bottom, Rost argues that Rebold had insufficient notice that Enelre qualifies as a foreign trust for federal tax purposes. She contests the facts-and-circumstances test employed by the district court. She claims that applicable statutes, regulations, and case law do not clearly "connect[ ] the imposition of penalties for failure to file foreign trust information returns with respect to a Liechtenstein Stiftung. " She then argues the penalties violate the APA, the government's "duty of clarity," and due process.

We disagree with each contention. We first outline the legal framework for classifying an arrangement as a foreign trust, then explain why Enelre qualifies as one, and then address Rost's notice arguments.

A.

The classification of an organization "for federal tax purposes is a matter of federal tax law and does not depend on whether the organization is recognized as an entity under local law." Treas. Reg. § 301.7701-1(a). Sections 301.7701–2, 301.7701–3, and 301.7701–4 determine the classification of organizations recognized as separate entities, unless the IRC "provides for special treatment of that organization." Id. § 301.7701-1(b). Neither the IRC nor its regulations specifically classify or provide for special treatment of Stiftungen . Cf. id. § 301.7701-2(b)(8) (classifying Liechtenstein Aktiengesellschaften as corporations).

Determining whether an arrangement is a foreign trust requires a two-step inquiry: (1) whether it is a trust under section 301.7701-4 or a business entity under sections 301.7701-2...

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