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Posts Tagged ‘#IRS’

Continuing Fiduciary Relationship Does Not Always Toll the Statute of Limitations in California

Posted on: March 5th, 2018

By: Brett C. Safford

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In Choi v. Sagemark Consulting, 18 Cal. App. 5th 308 (2017) (“Choi”), plaintiffs, husband and wife, filed a lawsuit in November 2010 alleging that defendants, their former financial advisors, offered negligent and fraudulent financial planning advice with respect a complex investment program involving life insurance and annuities under former section 412(i) of the Internal Revenue Code (“IRC section 412(i) Plan”).  Audited by the IRS in 2006, Plaintiffs alleged that defendants misrepresented the IRC section 412(i) Plan’s promised benefits as well as its risk of adverse IRS action and tax consequences.  The audit concluded in 2009, and plaintiffs were subject to significant penalties and tax liabilities caused by the IRC section 412(i) Plan.

Defendants moved for summary judgment, arguing that plaintiffs’ causes of action were barred by the applicable statutes of limitation.  Defendants introduced two communications to show that plaintiffs were aware the IRS had identified defects in the IRC section 412(i) Plan as of November 2006, and IRS penalties and damages would be accruing as of September 2007. Trial court granted summary judgment, finding that plaintiffs were on notice of the IRS penalties as of September 2007, and therefore, the two-year and three-year statutes of limitations applicable to plaintiffs’ causes of action expired prior to filing of the complaint in November 2010.

The Court of Appeal affirmed, rejecting plaintiffs’ arguments that (1) the September 2007 e-mail only put plaintiffs on notice that damages might occur in the future, and (2) the fiduciary or confidential relationship between plaintiffs and defendants, as their financial advisors, tolled the statute of limitations.  Applying the general “discovery rule,” the court concluded that the plaintiffs discovered or should have discovered defendants’ negligent advice as of the September 2007 e-mail because that e-mail indicated “‘legally cognizable damage’ in the form of IRS penalties.” Choi, 18 Cal. App. 5th at 330.  Despite uncertainty as to the monetary amount of the penalties, “‘the existence of appreciable actual injury does not depend on the plaintiff’s ability to attribute a qualifiable sum of money to consequential damages.’” Id. at 331.  The court further held that tolling did not apply, even though the fiduciary relationship between plaintiffs and defendants continued while they collectively challenged the IRS assessment, because “[d]elayed accrual due to the fiduciary relationship does not extend beyond the bounds of the discovery rule.” Id. at 334.  Therefore, the court “decline[d] to apply the tolling principles to a scenario in which the defendants had disclosed the facts necessary to support’ the plaintiff’s cause of action.” Id.

The Court of Appeal’s analysis in Choi is significant in the professional liability context for two reasons.  First, the court reaffirmed that the general “discovery rule,” i.e., the statute of limitations period begins to run when a plaintiff discovers or should have discovered the cause of action, is the default rule for when causes of action accrue in professional liability cases.  The Court rejected plaintiffs’ attempt to apply a differing accrual rule applicable only to accounting malpractice actions arising from negligent preparation of tax returns.  The court explained, “It may be that actual injury results from an accountant’s allegedly negligent preparation of tax returns only as determined by an IRS audit, but the same cannot be said for more wide-ranging categories of negligent tax-related or investment advice.” Choi, 18 Cal. App. 5th at 328.

Second, and more importantly, the appellate court declined to toll the statute of limitations even though plaintiffs and defendants maintained a fiduciary relationship while challenging the audit.  California recognizes that certain cases involving a fiduciary obligation will toll the statute of limitations.  For example, the statute of limitations in a legal malpractice action is tolled while “[t]he attorney continues to represent the plaintiff regarding the specific subject matter in which the alleged wrongful act or omission occurred.” Cal. Civ. Proc. Code, § 340.6, subd. (a)(2).  However, in Choi, the court held that the discovery rule is not displaced by delayed accrual due to a fiduciary relationship—at least in the financial advisor-client context.  The court reasoned that Plaintiffs were on inquiry notice of the facts constituting their injury as of September 2007, and their continuing relationship with defendants “did not prevent or delay [them] from discovering the wrongdoing beyond September 2007.” Choi, 18 Cal. App. 5th at 335.

The Court of Appeal’s decision in Choi undermines the commonly asserted proposition that a continuing fiduciary relationship will toll the statute of limitations and reaffirms the importance of the “discovery rule.”  At least in professional liability cases involving financial advisors, plaintiffs cannot hide behind their fiduciary relationship with defendants to avoid a statute of limitations defense.  Rather, the central inquiry is when did plaintiffs discover their causes of action—regardless of whether the discovery occurred before or after the termination of the fiduciary relationship.  As such, the Choi decision provides valuable authority for professional liability defense attorneys, especially those representing financial advisors, in cases where the statute of limitations may offer a defense.

If you have any questions or would like more information, please contact Brett Safford at [email protected].

Is Virtual Currency Here To Stay?

Posted on: November 15th, 2017

By: Matthew S. Jones

With the growing interest in Bitcoin, Ethereum, and Litecoin, it was only a matter of time the U.S. Securities and Exchange Commission (“SEC”) and Internal Revenue Service (“IRS”) weighed in on the legality of such “cryptocurrency”. But what is “cryptocurrency”? It is a medium of exchange that functions like money, but is independent from national borders, central banks, sovereigns, or fiats. In the most basic sense, it only exists in the virtual world, traded on multiple global platforms, in an effort to secure and verify transactions easier.

Cryptocurrency is growing more and more popular because of the increased privacy, fast transactions (almost instantaneous), irrevocability, inexpensiveness, and global reach. In fact, approximately 80,000 to 220,000 transactions occur per day, representing over $50 million in estimated daily volume. Further, there are approximately 1,100 digital currencies in existence at this time.

So how does cryptocurrency work? Well, through a process called “the blockchain protocol.” This technology records all bitcoin transactions and removes the financial middleman, allowing transactions to be finalized within minutes. Each transaction is verified and creates a log that is public record.

However, with the use and trade of these new currencies on the rise, as well as the unknown allure of such cryptocurrencies, there has been an increase in ponzi schemes. These schemes essentially promise customers an opportunity to invest in Bitcoin when in fact, the customers are only brought into the company’s ponzi scheme.

In an effort to promote safety in the trade of these currencies, the SEC declared that any cryptocurrency token deemed to be a security must be registered with the SEC or otherwise be exempt. If such cryptocurrency is not registered or exempt from registration, the issuer and other participants may be subject to liabilities and other remedies under state and federal securities laws. Such regulation by the SEC is important to help prevent fraudulent transactions.

Additionally, with the increased trading of cryptocurrency as a security, there are tax implications as well. For example, Bitcoin value has increased approximately 800% over the past year. This has caught the IRS’s attention since tax reporting on such trades/profits does not match the actual number of individuals involved in such trading. However, this should come as no surprise given the significant and fast increases in value of cryptocurrency.

So, to answer the question posed by this blog’s title: it depends. At this point, it seems as if cryptocurrency is not going anywhere in the near future. The increased interest, fast transactions, and global reach will likely continue to drive the cryptocurrency’s use. However, with the SEC and IRS close behind to ensure its proper use, it may only be a matter of time until such currencies cease to exist or hold value.

If you have any questions or would like more information, please contact Matthew Jones at [email protected].

IRS Says Identity Theft Protection is No Longer Taxable

Posted on: January 22nd, 2016

option 1By: David Cole

The Internal Revenue Service (IRS) recently announced that it will treat identity theft protection as a non-taxable, non-reportable benefit, even when offered proactively before any data breach, and regardless of whether it is offered by an employer to employees, or by other businesses (such as retailers) to their customers.

The announcement comes only four months after an earlier announcement by the IRS that it would take the same approach with regard to identity theft protection offered to employees or customers in the wake of a data breach.   In the earlier announcement, the IRS requested public comments from providers of identity protection services on whether they provide such services other than as a result of a data breach, and in response received comments indicating that businesses are proactively providing identity theft protection to employees as a benefit, because many businesses view a data breach as “inevitable” rather than as a remote risk.

As a result, businesses and employers that offer identity theft protection, either as a proactive benefit to employees or as a remedial measure to affected individuals after a data breach, do not have to report the value of such services on a Form W-2 (provided to an employee) or Form 1099-MISC (provided to a customer or other non-employee).  Similarly, individuals receiving such services do not have to report their  value in their gross income.  However, proceeds received under an identity theft insurance policy will be treated under existing tax provisions applicable to insurance benefits.  In addition, tax-exempt treatment will not apply to cash provided to an employee or customer in lieu of identity protection services.