United States District Court, D. Colorado
R. Brooke Jackson United States District Judge
The parties have filed cross-motions for summary judgment. For the reasons expressed in this order, both motions are denied.
This case arises from a tax return filed by Richard Blanco and Patricia Duke, husband and wife, for the 2009 tax year. Plaintiffs later were notified by the IRS that they had underreported their income, and that additional tax was due. After further investigation, plaintiffs agreed and paid the additional tax, interest and penalties assessed. They did not, however, believe that the penalty should have been assessed. This lawsuit was filed to challenge the Commissioner’s rejection of plaintiffs’ claim for a refund of the penalty payment. ECF No. 1. The Court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).
Plaintiffs support their motion for summary judgment with, among other things, Mr. Blanco’s affidavit. ECF No. 18-8. He relates that sometime before 2009 he informed his Certified Public Accountant, Mark Rohn, that he might receive a monetary settlement from an age discrimination case against his previous employer. Mr. Rohn told him that the settlement might be structured to minimize the amount that was taxable as income. After Mr. Blanco received a settlement, he told Mr. Rohn that his attorney told him that the settlement was not taxable. Mr. Rohn responded that “they must have consider [sic] the monetary settlement [to be] for pain and suffering.” Id. at ¶2. Therefore, “we did not include the settlement in income on my 2009 tax return.” Id. at ¶3. Mr. Blanco states that he relied on the advice of his attorney and his CPA. Id.
Mr. Blanco continues that when he was audited he learned that awards for pain and suffering are only excluded from income if they were related to a physical injury. Therefore, he agreed to pay additional tax, interest and penalties as assessed by the IRS agent. However, the IRS agent told him that the penalty could be abated based upon reasonable reliance on his CPA’s advice. An IRS document submitted in support of the plaintiff’s motion confirms that the original IRS agent agreed to abate the penalty based on a letter she received from Mr. Rohn; the agent interpreted the Rohn letter as indicating that Mr. Rohn had told Mr. Blanco that a “settlement” he had received was not taxable income. ECF No. 18-2 at 4, ECF No. 18-3 at 1.
Plaintiffs submitted an affidavit from Mr. Rohn that repeats, in virtually identical language, this portion of Mr. Blanco’s account. ECF No. 18-9. It even relates that he too learned after Mr. Blanco was audited that monetary awards for pain and suffering are only excluded from income if related to a physical injury. Id. at ¶5.
Mr. Blanco’s affidavit goes on to state that the IRS agent later told him that she was unable to get the refund processed properly. The IRS document indicates that the “field” was overruled by a “division, ” to the consternation of the original agent. ECF No. 18-3 at 1. Mr. Blanco then contacted a “Taxpayer Advocate Service, ” which looked into it but told him that he would receive a letter denying the refund and informing him of his right to go to court. Id. at ¶¶ 4-7. This suit followed.
In its cross-motion for summary judgment the government provides additional details gleaned from depositions and other materials. Mr. Blanco has a B.S. in Marketing and has received further training in finance, insurance and compliance issues. ECF No. 19-1 at 10 (depo. p. 10). He is, and apparently throughout much of his career has been, a financial advisor. Id. at 8-11 (depo. pp. 10-13). He has held management positions, including his two years as the branch manager of Morgan Stanley Denver office. Id. at 11-12(depo. pp. 13-14).
After he was terminated by Morgan Stanley, Mr. Blanco pursued a wrongful discharge claim that initially was based on age discrimination. Id. at 13 (depo. p. 20). However, the claim that was ultimately presented to the FINRA arbitration panel did not include any claim based on age discrimination. ECF Nos. 19-1 at 72-79. The written arbitration decision listed the claims as breach of contract, unjust enrichment, fraudulent inducement to contract, negligence and misrepresentation in connection with employment. ECF No. 19-2 at 7. Mr. Blanco was awarded compensatory damages of $390, 000 without discussion of the nature of the damages. Id.
In January 2010 Morgan Stanley sent Mr. Blanco a Form 1099-MISC Tax Statement. The Form 1099 classified the arbitration award as “other income” and stated, “Generally, report this amount on the ‘Other income’ line of Form 1040 and identify the payment.” ECF No. 19-2 at 19-20. In his deposition Mr. Blanco denied that he had seen the document, noting that it was incorrectly addressed, but he also testified that he could not remember whether he ever received a Form 1099 from Morgan Stanley. ECF No. 19-1 at 29 (depo. p. 48) and 21 (depo. p. 32).
Mr. Blanco was asked about the advice he had received from his CPA, Mr. Rohn. He testified that the year before he received the arbitration award he alerted Mr. Rohn to the possibility that he might receive an award, and he was told that those awards are often not taxable “due to age discrimination, things like that.” Id. at 35 (depo. p. 35). He talked with Mr. Rohn after receiving the award, but he did not provide any information about the arbitration. Id. at 23 (depo. p. 34). Mr. Rohn “said he presumed it was nontaxable due [sic] the fact of the way the lawsuit was - or the arbitration came about.” Id. Mr. Blanco admitted that he thought that Mr. Rohn based that presumption on “age discrimination and personal - I don’t know what you call that.” Id. at 25 (depo. p. 37). He thought that was because of what he had told Mr. Rohn about his suit the previous year. Id.
Mr. Rohn testified in his deposition that he did not get a copy of the “settlement agreement” (the arbitration award). ECF No. 19-1 at 60 (depo. p. 28). He assumed the suit was based on age discrimination based on what Mr. Blanco had told him. Id. at 61 (depo. p. 29). When asked what advice he gave Mr. Blanco about the taxability of the award, Mr. Rohn testified, “I talked with Rick about it, and I guess I was wrong on this. I thought maybe there could be some pain and suffering or something like that attached to the suit, that it might exempt him from income taxes.” Id. at 62-63 (depo. pp. 30-31). Mr. Rohn’s letter to the original IRS agent, to which she referred in explanation of her decision to abate the penalty, states that when Mr. Blanco’s suit was initiated “there was some discussion that a portion of any settlement could be exempt from income taxes if it addressed pain and suffering resulting in personal injuries.” ECF No. 18-5 at 1. The letter also states that the income ...