749 F.2d 1248 | 7th Cir. | 1984
Lead Opinion
This appeal raises the issue of whether the tax return preparer negligence penalty, section 6694(a) of the Internal Revenue Code,
I.
The appellant is a certified public accountant. In January 1979, he was hired by the CPA firm of Goldman, Weiss, Gelman & Sered (“Goldman, Weiss”). For several years Goldman, Weiss had prepared the income tax returns of Rubert-Busch, M.D., S.C., an Illinois professional corporation, and those of Dr. Robert Busch, the corporation’s sole shareholder. The appellant’s first contact with the tax affairs of Rubert-Busch and Dr. Busch was in March 1979.
The appellant prepared Rubert-Busch’s corporate income tax return for its fiscal year ended February 28, 1979. He used a trial balance sheet prepared by the corporation’s bookkeeper. The trial balance sheet showed loans to the corporation from Dr. Busch and from a bank. It also showed that the corporation had made payments for interest expense; however, it did not show whether any of the interest had been paid to Dr. Busch.
The appellant also prepared the 1978 income tax return for Dr. and Mrs. Busch. Goldman, Weiss had adopted a procedure of sending a data questionnaire to its individual income tax clients. The client was either to complete and return the questionnaire or to use it as a guide in collecting the information necessary to prepare the return. The Busches chose not to complete a questionnaire. Rather, the information was supplied by the corporation’s business manager or bookkeeper. The information was then entered on input sheets of an outside computer service. The appellant reviewed the sheets and compared them with the information supplied and the information shown on the Busches’ 1977 return. There were no items shown on the 1977 return that were not accounted for in the 1978 return. The appellant signed the 1978 return and sent it to the Busches for signature and filing. The appellant never inquired whether any of the interest expense shown on the corporate trial balance sheet had been paid to the Busches.
In May 1980, an IRS agent began an examination of the corporate return. The agent requested an analysis of the corporation’s interest expense account. The appellant went to the corporation’s offices and examined the general ledger and disbursements journal. From this, he learned that the corporation had paid interest to Dr. Busch. The appellant promptly brought the omission to the attention of the IRS agent.
The corporation had paid Dr. Busch interest income in the amount of $15,291.20. The Busches had not reported the income on their 1978 return. This resulted in an underpayment of federal income taxes in the amount of $10,538.76.
The district court denied the refund. It found that the appellant was negligent in omitting interest income from the return. The court found that he knew that the corporation had borrowed money from Dr. Busch and also that it had made interest payments. The court held that under these circumstances, a reasonable, prudent person would have made inquiries to determine whether any interest was paid to Dr. Busch. The court held that appellant was negligent in failing to obtain a completed data questionnaire from the Busches. Finally, the court relied on the factors listed in Revenue Procedure 80-40, which deals with liability under section 6694(a), to hold that the appellant had negligently disregarded a tax rule or regulation and thus was liable.
On appeal, the appellant argues that section 6694(a) does not apply to a tax return preparer’s negligence in gathering facts from the taxpayer. He contends that section 6694(a) only applies where a preparer negligently misapplies a rule or regulation to a known item, and that where the preparer does not know of an item, he is not required to make inquiries or verify data. The appellant maintains that even if section 6694(a) does apply to a negligent failure to gather facts, his actions in this case were not negligent.
II.
Section 6694(a) allows a penalty of $100 to be assessed against an income tax return preparer whose negligent disregard of rules or regulations results in an understatement of tax liability.
Section 6694 was one of several provisions added by the Tax Reform Act of 1976 to regulate income tax return preparers. Congress generally was concerned with deterring abusive practices by preparers. Prior to 1976, preparers were subject only to criminal penalties for willfully aiding or assisting in the preparation of a fraudulent return. Congress found that these criminal penalties were inadequate. See H.R.Rep. No. 658, 94th Cong., 2d Sess. 273-76, reprinted in 1976 U.S.Code Cong. & Ad.News 2897 at 3169-71. Although Congress was concerned with abuses by “commercial” preparers — those who are not accountants or lawyers — it determined that regulation of all preparers was appropriate. Id. at 274-75, 1976 U.S.Code Cong. & Ad.News at 3169-70. Section 6694 was added primarily to deter preparers from engaging in negligent or fraudulent practices designed to understate tax liability. Id. at 278, 1976 U.S.Code Cong. & Ad.News at 3174. However, Congress did not limit the applicability of section 6694(a) to situations involving disregard of rules or regulations applicable to the facts as provided by the taxpayer. Rather, section 6694(a) applies generally to “negligent disregard.” We therefore hold that a tax preparer negligently disregards a rule or regulation under section 6694(a) if his or her negligent failure to inquire into information provided by the taxpayer results in the filing of a return that violates a rule or regulation.
To determine whether a tax preparer’s actions constitute negligence under section 6694(a), we must first determine the applicable standard of care. Negligence in this context is defined generally as a “lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances.” Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir.1967), cert. denied, 389 U.S. 1044, 88 S.Ct. 787, 19 L.Ed.2d 835 (1968); see also Zmuda v. Commissioner, 731 F.2d
We find this standard of care to be consistent with the congressional purpose behind section 6694(a). Congress passed section 6694 as part of an attempt to curb abusive practices by preparers. For a preparer to ignore the implications of information furnished where the error is apparent and simple to correct would be an abusive practice. We note that the IRS has interpreted section 6694(a) to apply to situations where the preparer has reason to know that the information supplied is incomplete or incorrect. See Rev.Rul. 80-265, 1980-2 C.B. 878 (under section 6694(a), although the preparer is not required to audit information, “the preparer may not ignore the implications of information furnished to the preparer”) (citing guidelines set forth in Rev.Proc. 80-40, 1980-2 C.B. 774-75).
Applying the standard of care outlined above to the facts in this case, we agree with the district court that the appellant was negligent in failing to inquire whether any of the interest paid by the corporation had been paid to Dr. Busch. The error involved was relatively apparent. The appellant was aware that Dr. Busch had made loans to the corporation and that the corporation had made interest payments.
Affirmed.
. Section 6694(a) provides:
(a) Negligent or Intentional Disregard of Rules and Regulations. — If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $ 100 with respect to such return or claim.
. Section 6694(c) provides in pertinent part:
(c) Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty.—
(1) In general. — If, within 30 days after the day on which notice and demand of any penalty under subsection (a) or (b) is made against any person who is an income tax return preparer, such person pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided in paragraph (2)....
(2) Preparer must bring süit in district court to determine his liability for penalty.— If, within 30 days after the day on which his claim for refund of any partial payment of any penalty under subsection (a) or (b) is denied (or, if earlier, within 30 days after the expiration of 6 months after the day on which he filed the claim for refund), the income tax return preparer fails to begin a proceeding in the appropriate United States district court for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the applicable 30-day period referred to in this paragraph.
. Section 6694(a) also applies to intentional disregard of rules or regulations. There is no claim that the appellant’s actions were intentional, and thus we limit our discussion to negligent disregard.
. These cases were decided under § 6653(a), relating to disregard of rules or regulations by taxpayers on their own returns. Congress has indicated that § 6694(a) is to be interpreted in a manner similar to § 6653(a). See H.R.Rep. No. 658, 94th Cong., 2d Sess. 278, reprinted in 1976 U.S.Code Cong. & Ad.News at 3174.
. The appellant contends that there is no proof that he received the corporate trial balance sheet before he prepared the individual return. We do not regard the order in which he prepared the returns as significant. Even if he prepared the individual return first, the corporate trial balance sheet should have alerted him to the possibility of interest payments to Dr. Busch. At that time, he should have made the appropriate inquiries, recognizing that an amended individual return might be necessary.
. We do not regard the appellant’s failure to obtain a completed data questionnaire from the Busches as significant in determining whether he was negligent. The parties stipulated that a client did not have to fill out the questionnaire but rather could use it as a guide. Stipulation of Facts ¶ 10.
. The appellant argues that § 7216, providing sanctions for unauthorized disclosure of information by tax return preparers, prohibited him from using information obtained from the corporate trial balance sheet in attempting to prepare the individual return. However, it appears that the regulations permit such disclosure. Treas.Reg. § 301.7216-2.
Dissenting Opinion
dissenting.
I regret that I cannot agree with the majority either in its construction of the statute or in its application to this case. The majority utilizes a general negligence analysis which is not justified by the language of the statute or the legislative history. In doing so it has given a broad interpretation to the statute in contravention of the principle that penal statutes are to be strictly construed. Furthermore, the majority has failed to present all the material facts and thus does not properly analyze the appellant’s conduct. While the penalty assessed is quite modest, the sanction is important to the professional standing of the appellant. Moreover, this is the first published case involving this aspect of 26 U.S.C. § 6694(a). For these reasons, it is important that this case receive careful consideration.
The facts were presented to the district court in the form of a lengthy written stipulation. As noted by the majority, it is undisputed that the trial balance sheet indicated loans to the corporation from Dr. Busch and included entries for interest expense.
The majority notes that the appellant prepared the income tax return of Dr. and Mrs. Busch without requiring them to comply with the Goldman, Weiss data questionnaire procedure.
Congress did not limit the applicability of section 6694 to situations involving disregard of rules or regulations applicable to the facts as provided by the taxpayer. Rather, it applies generally to “negligent disregard.” p. 1251
I do not understand what “negligent disregard” in the abstract is, but I do know that such a selective editing of the statute is not supported by the legislative history. The majority relies on Marcello v. Commissioner, 380 F.2d 499 (5th Cir.1967), cert. den., 389 U.S. 1044, 88 S.Ct. 787, 19 L.Ed.2d 835 (1968), a case applying 26 U.S.C. § 6653(a), as authority for the application of a general negligence standard. The justification for such reliance is provided in a footnote:
Congress has indicated that § 6694(a) is to be interpreted in a manner similar to § 6653(a). See H.R.Rep. No. 658, 94th Cong., 2d Sess. 278, reprinted in 1976 U.S.Code Cong. & Ad.News at 3174. fn. 4
This statement is an oversimplification. The penalty provision in § 6653 applies to taxpayers for under-payments “due to negligence or intentional disregard of rules or regulations” [Emphasis supplied]. The penalty provision in § 6694 applies to “negligent or intentional disregard of rules or regulations” [Emphasis supplied]. Thus, under § 6653 two discrete standards of conduct are involved: general negligence and intentional disregard of rules or regulations, see discussion Marcello, supra, 380 F.2d at 505-507. However, under § 6694 there must be a disregard of rules or regulations (either negligent or intentional) in order to impose the penalty.
Whenever § 6653 is referred to in the legislative history of § 6694 its relevance is limited to the “disregard of rules or regulations” provision:
The penalty applies generally to every negligent or intentional disregard of such regulations and rulings except that a good faith dispute by an income tax return preparer about an interpretation of a statute (expressed in regulations or rulings) is not considered a negligent or intentional disregard of rulings and regulations. The provision is thus to be interpreted in a manner similar to the interpretation given the provision under present law (sec. 6653(a)) relating to the disregard of rules and regulations by taxpayers on their own returns.
H.R.Rep. No. 94-658, 94th Cong. 2d Sess. 278, reprinted in 1976 U.S.Code & Admin. News at 3174; see also, S.Rep. No. 94-938, 94th Cong. 2d Sess. 355, reprinted in 1976 U.S.Code & Admin.News at 3784; H.R.Rep. No. 95-1800, 95th Cong.2d Sess. 284, reprinted in 1978 U.S.Code & Admin.News at 7279.
[T]he bill establishes new penalties for certain negligent or willful attempts to understate a taxpayer’s tax liability. H.R.Rep. No. 94-658, supra p. 278; see also, S.Rep. No. 94-938, supra p. 355.
Such a construction does not contravene the legislative purpose of the penalty:
These penalties are primarily aimed at deterring income tax return preparers who prepare a large number of returns from engaging in negligent or fraudulent practices designed to understate a taxpayer’s liability.
H.R.Rep. No. 94-658, supra p. 278; see also, S.Rep. No. 94-938, supra p. 355; see,
In summary, the language of the statute does not provide that the penalty applies to all acts of negligence by an income tax preparer. While clearly § 6694(a) is mo-delled after § 6653(a) there is a significant difference in the terms of the statutes and we must assume that that distinction was intended by Congress. This conclusion is buttressed by a review of the legislative history. There is an additional consideration which reinforces, and to my mind solidifies, this analysis: odioso restinjenda sunt (translation: things odious must be strictly construed). This ancient principle of common law is so venerated that it is even applied to the tax gatherer:
We are here concerned with a taxing Act which imposes a penalty. The law is settled that “penal statutes are to be construed strictly,” Federal Communications Commission v. American Broadcasting Co., 347 U.S. 284, 296, 74 S.Ct. 593, 601, 98 L.Ed. 699, and that one “is not to be subjected to a penalty unless the words of the statute plainly impose it,” [Footnote and Citations omitted]. Commissioner v. Acker, 361 U.S. 87, 91, 80 S.Ct. 144, 147, 4 L.Ed.2d 127 (1959).
Thus, we are strictly limited to determining whether Brockhouse “disregarded a rule or regulation” either negligently or intentionally. The standard provided in the IRS’s regulations is:
A preparer is not considered to have negligently or intentionally disregarded a rule or regulation if the preparer exercises due diligence in an effort to apply the rules and regulations to the information given to the preparer to determine the taxpayer’s correct liability for tax. 26 C.F.R. § 1.6694-1(a).
In this case, there is no question that Brockhouse properly applied the rules and regulations to the information he received. The underpayment of tax occurred because he was not informed that Dr. Busch received interest on his loans to the corporation. The issue then becomes whether he was justified in relying on the information provided. Rev.Proc. 80-40 provides:
.03 The penalty under section 6694(a) of the Code generally will not apply where a preparer in good faith relies without verification upon information furnished by the taxpayer. Thus, the preparer is not required to audit, examine or review books and records, business operations, or documents or other evidence in order to verify independently the taxpayer’s information.
This language further exculpates the appellant. There is a caveat, however:
[T]he preparer may not ignore the implications of information furnished to the preparer or which was actually known by the preparer. The preparer shall make reasonable inquiries if the information as furnished appears to be incorrect or incomplete. Rev.Proc. 80-40.
I have no quarrel with this standard of conduct, but I do not think the appellant violated it in this case. It is undisputed that Brockhouse did not have any personal knowledge of the financial operations of Rubert-Busch, M.D., S.C. Furthermore, I do not believe we can find that the information provided to him appeared incorrect or incomplete. The corporation’s trial balance sheet, the Busches’ income data, and their 1977 income tax return are all consistent with a situation in which a sole shareholder made interest-free loans to his corporation. There was no data presented to Brock-house which contradicted that common scenario. Thus, I do not believe that we can find that the appellant ignored the implication of the information provided to him.
. The stipulation of the parties reads:
This trial balance sheet contained an item showing loans made by the Corporation to its sole shareholder. Stip. ¶ 14.
This is apparently an error as it is undisputed that Dr. Busch made the loans to the corporation.
. The majority indicates in footnote 6 that it did not consider this fact to be significant in evaluating Brockhouse’s conduct. I agree with them on that point and I discuss the issue only because the district court found that evidence to be persuasive.
. In the Revenue Act of 1978 certain technical corrections were made with respect to the Tax Reform Act of 1976. The Conference Report to that portion of the legislation addressed § 6694 and reiterated the discussion quoted above, concluding with this statement:
The conferees further direct that the Internal Revenue Service shall reasonably interpret section 6694(a) according to the standards of section 6653(a) and in light of all the facts and circumstances of each case, taking into account any and all mitigating factors.
Out of context it might appear to direct that the two statutes be applied identically. However, in the context of the report it does not.
. Revenue Ruling 80-265 presents two factual situations similar to ours with slight, but significant, differences. In Situation 1, the income tax preparer had no knowledge of any loans by the' sole shareholder to the corporation, although he did deduct an interest expense on the corporate return. Subsequently, it was determined by the IRS that the shareholder had loaned money to the corporation and received interest income on it. The Revenue Ruling concludes that the penalty provision of § 6694(a) does not apply to the income tax preparer in that situation. In Situation 2 the information relating to the corporation indicated that the shareholder had received