United States District Court, D. Colorado
FINDINGS, CONCLUSIONS AND ORDER OF JUDGMENT
R. Brooke Jackson United States District Judge.
This case was tried to the Court on January 11 and 12, 2016. The Court here sets forth its findings of fact and conclusions of law. For the reasons expressed in this order, the Court directs that final judgment enter in favor of the defendant.
This case arises from a tax return filed by Richard Blanco and Patricia Duke, husband and wife, for the 2009 tax year. After being informed by the Internal Revenue Service that they had underreported their income, plaintiffs agreed and paid the additional tax, interest and penalty assessed. However, they did not believe that the penalty was appropriate and filed this lawsuit 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).
FINDINGS OF FACT
In 2004 Richard E. Blanco, a financial advisor at UBS Financial Services, was recruited by Morgan Stanley to be the branch manager of its Denver, Colorado office. In 2006 his employment was terminated. He hired a lawyer, Otto K. Hilbert II, to represent him in a wrongful discharge claim which ultimately was pursued in an arbitration proceeding conducted by the Financial Industry Regulatory Authority, Inc. (FINRA). Mr. Blanco through counsel filed his initial Statement of Claim with FINRA on September 14, 2007. Ex. 13 at Bates MS000057. The arbitration was ultimately concluded with an award to Mr. Blanco of $390, 000 in “compensatory damages” plus $600 in costs on March 31, 2009. Id. at Bates MS000058.
On one or more occasions while the arbitration was pending Mr. Blanco had informed his Certified Public Accountant, Mark Rohn, that he was pursuing an age discrimination claim, and that he and his attorney were not sure whether an award would be taxable. Mr. Rohn confirmed that he had a vague recollection of discussing this with Mr. Blanco. Mr. Rohn thinks that he might have indicated that, depending upon “how the settlement was based, ” i.e., whether part of it would be for pain and suffering, part of the settlement or award might not be taxable. He recalls that he had one telephone conversation with Mr. Hilbert back then too, probably about how a settlement could be structured for tax purposes.
In fact, the claim resolved by FINRA was not an age discrimination claim. To be clear, Mr. Hilbert had suggested in an Amended Statement of Claim filed with FINRA on November 2, 2007 that discrimination because of Mr. Blanco’s age and race were additional reasons for the unlawful termination of Mr. Blanco’s employment. Ex. 11 at 3. Nevertheless, he stated that Mr. Blanco would pursue his claim “under theories of breach of contract, unjust enrichment, fraudulent inducement to contract, negligence and misrepresentation.” Id. This list of claims was repeated in a Second Amended Statement of Claim filed on March 4, 2008. Ex. 12 at 3. Likewise, the arbitration award described the causes of action as “breach of contract, unjust enrichment, fraudulent inducement to contract, negligence and misrepresentation in connection with his employment.” Ex. 13 at Bates MS000058.
Morgan Stanley paid the award with two checks, one for $390, 000 and the other for $600, on April 16, 2009. Ex. 14. Mr. Blanco testified that he thought the award would be taxable, and he expected to receive a Form 1099 from Morgan Stanley reporting on this payment. However, he did not receive a 1099, and in March 2010 he asked his attorney, Mr. Hilbert, what he thought about that. According to Mr. Blanco, Mr. Hilbert told him, “well, looks like it isn’t taxable, ‘cause you can’t pay tax on a 1099 that you haven’t received.” In his deposition Mr. Blanco’s testimony was even stronger: “At one point I told him that I hadn’t received a 1099. He said it was nontaxable, from my recollection.” ECF No. 19-1 at 14 (depo. p. 24). He added that Mr. Hilbert did not give him any explanation for why he thought the award was not taxable, nor did Mr. Blanco ask for an explanation. Id. at 15 (depo. p. 25).
Mr. Hilbert did not fully confirm that testimony. He denies that he ever expressed an opinion to Mr. Blanco as to whether or not the arbitration award was a taxable event. Rather, he told Mr. Blanco that he shouldn’t pay tax on the award until he received a 1099, and that he should talk to his accountant about the taxability of the award. Mr. Hilbert also testified that he has no special education in tax law; that no part of his practice deals with tax; and that the tax courses he took in law school became largely irrelevant when the Code was changed the year after he graduated. He practices as a securities litigator.
Based on the conflicting testimony and my assessment of the credibility of the gentlemen, I find that Mr. Hilbert probably told Mr. Blanco something to the effect that he did not have to pay the tax until he received a 1099; that if Morgan Stanley did not issue a 1099, the award might not be taxable; and that he should consult with his accountant about it. There is no credible evidence that Mr. Hilbert told Mr. Blanco that the award was not taxable or that it need not be reported. The Court further finds that Mr. Hilbert was not competent by training or experience to give tax advice. Mr. Blanco, who is highly educated and experienced as a financial advisor, knew that Mr. Hilbert was not a tax lawyer. He picked Mr. Hilbert for his securities expertise, and he admitted that he does not know whether Mr. Hilbert is competent to give tax advice.
In fact, Morgan Stanley did issue a 1099 to Mr. Blanco on January 18, 2010, and there is at least some circumstantial evidence that he might have received it. In his deposition Mr. Blanco testified that he did not remember whether he received a 1099. ECF No. 19-1 at 21 (depo. p. 32). At trial he testified that the deposition testimony was mistaken, and he is positive that he did not receive it. In support he notes that the 1099 was sent to an incorrect address. However, Morgan Stanley’s checks paying the arbitration award, which Mr. Blanco received, were sent to the same address. Nevertheless, there is no direct evidence that he received the form, and I am willing to give him the benefit of the doubt and assume that he did not receive it.
Mr. Blanco admits, however, that he expected that he would receive a 1099 from Morgan Stanley and, after talking to Mr. Hilbert, he thought that whether he received a 1099 was “the critical fact in whether or not [he] needed to report the $390, 000.” But, despite that belief (or possibly because of it) he didn’t contact Morgan Stanley and learn that it had issued a 1099. Mr. Blanco says that he called Morgan Stanley’s toll-free number four or five times to attempt to inquire whether a Form 1099 had been sent, but only once did he speak to anyone. The person with whom he spoke “really didn’t know very much about the whole situation, ” “didn’t give me much information, ” and “barely spoke any English.” He said that this individual said that “they” would get back to him, but they didn’t, and at that point “I gave up.” Nor did he ask Mr. Hilbert to contact Morgan Stanley’s lawyers and ask about a 1099.
I also note that Mr. Blanco’s testimony about the one person with whom he spoke was not consistent with his deposition testimony. There, when he was asked whether he had ever called anyone at Morgan Stanley to ask them whether they planned to issue a Form 1099, he testified (twice) that he never spoke to a human being, only a recorded line. ECF No. 19-1 at 21 (depo. page 32) and 29 (depo. p.48).
Mr. Blanco did talk to his CPA, Mr. Rohn, and he relayed what he says Mr. Hilbert told him. He says that Mr. Rohn told him that “a lot of these types of situations are nontaxable because they’re pain and suffering.” According to Mr. Rohn, Mr. Blanco told him that he had not received a 1099, and that his attorney told him that if he hadn’t received a 1099, the award probably was not taxable. Mr. Rohn asked Mr. Blanco what the award was for. Mr. Blanco responded that the award was probably for pain and suffering, and that it wasn’t taxable. Mr. Blanco did not give Mr. Rohn a copy of the written arbitration award. Mr. Rohn thinks that he might have asked to see the document, but he didn’t get it. Asked why he did not follow up he said, “I don’t know. I guess I felt that the conversation that the client had with his attorney was probably sufficient.” Based on Mr. Blanco’s statements Mr. Rohn did not include the award in the tax return.
Mr. Blanco says that he learned that the award should have been reported when he received a form from the IRS indicating that “I owed them a lot of money.” He says he tried to call the IRS several times but no one returned his calls. He told Mr. Rohn about it, and says, “I think he wrote them a letter.” Mr. Blanco found out that the IRS was going to put a lien on his property, which he knew would not be good for his record as a stockbroker or financial advisor. He therefore “ran over” to the office of the IRS ...