Wilson v. United States

• Decision Date: 28 July 2021
• Docket Number: August Term 2020,Docket No. 20-603
• Citation: 6 F.4th 432
• Parties: Emily S. WILSON, as Executrix of the Estate of Joseph A. Wilson, the Estate of Joseph A. Wilson, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

6 F.4th 432

Emily S. WILSON, as Executrix of the Estate of Joseph A. Wilson, the Estate of Joseph A. Wilson, Plaintiffs-Appellees,

v.UNITED STATES of America, Defendant-Appellant.

Docket No. 20-603

August Term 2020

United States Court of Appeals, Second Circuit.

Argued: April 5, 2021

Decided: July 28, 2021

ROBERT M. ADLER, Nossaman LLP, Washington, D.C. (Gary Redish, Michael Cohen, Winne Banta, Basralian & Kahn, P.C., Hackensack, NJ, on the brief), for Plaintiffs-Appellees.

ELISSA HART-MAHAN, Attorney, Department of Justice, Tax Division (Ellen Page DelSole, Attorney, Department of Justice, Tax Division, Richard E. Zuckerman, Principal Deputy Assistant Attorney General, Joshua Wu, Deputy Assistant Attorney General, Richard P. Donoghue, United States Attorney, on the brief), for Merrick B. Garland, United States Attorney General, Washington, D.C., for Defendant-Appellant.

Before: LIVINGSTON, Chief Judge, WESLEY, CARNEY, Circuit Judges.

WESLEY, Circuit Judge:

Joseph Wilson was the sole owner and beneficiary of an overseas trust. Section 6048 of the Internal Revenue Code ("IRC") requires U.S. owners of a foreign trust to ensure that the trust files an annual return, see 26 U.S.C. § 6048(b), and U.S. beneficiaries of a foreign trust to file a return reporting the distributions they received, see id. § 6048(c). Section 6677 of the IRC imposes different penalties for the late filing of two types of returns: a 35% penalty for beneficiaries who fail to timely report their distributions, see id. § 6677(a) ; and a 5% penalty for owners who fail to ensure that their trust timely files an annual return, see id. § 6677(b). Wilson filed both returns for tax year 2007 late. The Internal Revenue Service ("IRS") assessed a 35% penalty against Wilson for failing to timely disclose the distribution he received from his trust. Wilson paid and then filed for a refund, arguing he should have been charged only a 5% penalty that applies to trust owners. He died before his claim was resolved.

Emily S. Wilson, executrix of Wilson's estate, and Wilson's estate ("Plaintiffs") brought this action contending the government should have imposed only a 5% penalty because Wilson was responsible for reporting all the required information, including the distributions he received, as the trust owner. The United States District Court for the Eastern District of New York (Cogan, J .) agreed, finding that under the IRC, Wilson should have been penalized only as the trust owner. We vacate the court's judgment and hold that when an individual is both the sole owner and beneficiary of a foreign trust and fails to timely report distributions she received from the trust, the government has the authority under the IRC to impose a 35% penalty.

BACKGROUND

Wilson established a foreign trust in 2003 with a value of approximately $9 million.¹ In 2007, Wilson liquidated the trust and distributed all its assets, approximately $9.2 million,² to himself.

Section 6048 of the IRC imposes disclosure requirements related to foreign trusts. Subsection (c) instructs "any United States person [who] receives ... during any taxable year ... any distribution from a foreign trust" to "make a return with respect to such trust for such year" that includes, inter alia , "the aggregate amount of the distributions so received from such trust." 26 U.S.C. § 6048(c). In other words, § 6048(c) requires beneficiaries of a foreign trust––such as Wilson––to disclose distributions they received from the trust in an annual filing. Subsection (b) orders U.S. owners "of any portion of a foreign trust" to "ensure that ... such trust makes a return for such [taxable] year which sets forth a full and complete accounting of all trust activities and operations for the year" and "other information as the Secretary [of the Treasury] may prescribe." Id. § 6048(b).

To satisfy these two separate reporting requirements, Wilson and the trust needed to file Forms 3520-A and 3520. Form 3520-A, the "Annual Information Return of Foreign Trust With a U.S. Owner," provides that "[a] foreign trust with a U.S. owner must file Form 3520-A in order for the U.S. owner to satisfy its annual information reporting requirements under [§] 6048(b)." J.A. 128. It contains a section to report distributions from the trust. Form 3520, the "Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts," directs owners of "any part of the assets of a foreign trust" to provide the information in Part II and beneficiaries of a foreign trust to disclose distributions they received in Part III. Id. at 109. If the owner of a foreign trust received a distribution and completes Part II of Form 3520, and the trust has filed Form 3520-A, the instructions for Form 3520 state "do not separately disclose distributions again in Part III." Id. at 114.

Wilson failed to file Form 3520 and failed to ensure that his trust file Form 3520-A by their respective deadlines for tax year 2007.³ As a result, he did not timely disclose the $9.2 million distribution he received or report other information about his trust. The IRS assessed a late penalty of $3,221,183, 35% of the $9.2 million distribution. This penalty derives from § 6677(a) of the IRC, which provides "if any notice or return required to be filed by [§] 6048" is not filed on time or is incomplete, "the person required to file such notice or return shall pay a penalty equal to ... 35 percent of the gross reportable amount." 26 U.S.C. § 6677(a).

Wilson initially paid the penalty, but less than two months later submitted a claim to the IRS seeking a full refund. He argued that because he was both the sole beneficiary and the sole owner of the trust, only a 5% penalty applies for his failure to timely report the distribution to himself. The 5% penalty stems from § 6677(b) of the IRC, which states "[i]n the case of a return required under [§] 6048(b)," the reporting requirement for trust owners, a 5% penalty will substitute the 35% penalty. Id. § 6677(b)(2).

While Wilson's claim for a refund was pending, he passed away. Plaintiffs brought this action against the government to recover the money for Wilson's estate, pursuing Wilson's 5% penalty argument and alleging in the alternative that there was "reasonable cause" that excused Wilson's untimely filing.⁴ The government moved to dismiss only the 5% penalty claim, arguing that Plaintiffs did not exhaust their refund claim in the administrative process, which the district court denied.⁵ Plaintiffs moved for partial summary judgment on their 5% penalty argument, which the district court granted, concluding that "[t]he IRS can ... assess only the 5% penalty under ... § 6677 – not both or either the 5% and/or 35% penalty – for Wilson's untimely filing of his 2007 Form 3520." Wilson v. United States , No. 19-CV-5037 (BMC), 2019 WL 6118013, at *8 (E.D.N.Y. Nov. 18, 2019). The government appeals, arguing that the district court erred in its construction of the IRC.

DISCUSSION

"We review a grant of summary judgment de novo ; specifically, where the disposition presents only a legal issue of statutory interpretation, as here, we review de novo whether the district court correctly interpreted the statute." Power Auth. v. M/V Ellen S. Bouchard , 968 F.3d 165, 170 (2d Cir. 2020) (internal quotation marks and citation omitted). In interpreting any statute, we start with the plain meaning of the text, and absent any ambiguity, we end there too. See, e.g. , United States v. Venturella , 391 F.3d 120, 125 (2d Cir. 2004).

I. The Plain Meaning of Sections 6048 and 6677 of the IRC

The plain language of the IRC's disclosure and penalty provisions, §§ 6048 and 6677, unambiguously demonstrates that when an owner of a foreign trust fails to timely disclose a distribution she received as a beneficiary of that trust, she violates § 6048(c) and thereby triggers the 35% penalty under § 6677(a). Section 6048(c) states in relevant part:

If any United States person receives (directly or indirectly) during any taxable year of such person any distribution from a foreign trust, such person shall make a return with respect to such trust for such year which includes ... (B) the aggregate amount of the distributions so received from such trust during such taxable year.

26 U.S.C. § 6048(c)(1). Normally understood, "any United States person," id. , includes everyone, U.S. owners and beneficiaries of foreign trusts alike. The statute makes no exception for a beneficiary who is also the owner of a foreign trust. Wilson was therefore required under § 6048(c) to timely report the distribution he received from his trust.⁶

Under § 6677(a), "if any notice or return required to be filed by [§] 6048 ... is not filed on ... time ... the person required to file such notice or return shall pay a penalty equal to ... 35 percent of the gross reportable amount." Id. § 6677(a). "[I]n the case of a failure relating to [§] 6048(c)," the "gross reportable amount" is "the gross amount of the distributions." Id. § 6677(c). Because Wilson failed to timely report under § 6048(c), the IRS assessed––in accordance with § 6677(a) and (c) ––a penalty of 35% of Wilson's $9.2 million distribution.

Nothing in other parts of §§ 6048 and 6677 diminishes or eliminates the applicability of the 35% penalty to Wilson as a beneficiary of the trust. However, the district court relied on § 6677(b) to conclude that the 35% penalty cannot apply. See Wilson , 2019 WL 6118013, at *6. Section 6677(b) "substitut[es] ‘5 percent’ for ‘35 percent’ [of the gross reportable amount]" as the applicable penalty for the failure to timely file "a return required under [§] 6048(b)," which is the reporting requirement for owners of foreign trusts. 26 U.S.C. § 6677(b). According to the court, because Wilson violated § 6048(b) by failing to timely file as an owner, § 6677(b) ’s "mandate[ ] that the 5% replace the 35%" applies. Wilson , 2019 WL 6118013, at *6 (emphasis omitted).

The problem with the district court's...