The IRS "assessed penalties of $67,200, $281,750, and $230,000, for failure to file Form 3520 in years 2001, 2002, and 2003, respectively." The opinion is rather cryptic, certainly as to the facts leading up to the assessment, so it is difficult to assess precisely what triggered the substantial penalties.
James, a pain management physician, apparently set up the foreign trusts as an asset protection mechanism against malpractice suits. (I guess his notion was that he and his family were more entitled to those assets than some patient who suffered from his malpractice.)
James proceeded to create an irrevocable foreign trust in Nevis, West Indies, with First Fidelity Trust Limited (FFT) as its trustee. James initially funded the trust in 2001 with a contribution of $192,000. He made additional contributions of $805,000 in 2002 and $607,146 in 2003.James urged that he informed his accountant about the trust and relied upon his accountant to advise him and prepare the Forms required from these actions. The Government argued that "James was put on notice of the requirement to file Form 3520, the Government argues that his reliance on Famiglio cannot constitute reasonable cause." From the wording of this sentence, it would appear that the Government's argument is that factually James was put on notice and that notice was what made his reliance on the accountant untenable. The opinion, however, does not flesh that out, and I suppose that whether James really had some independent notice that made reliance on his accountant untenable is really a question of fact.
The Court noted at the inception (emphasis suppied):
The IRS has failed to issue regulations explicating the meaning of "reasonable cause" for failure to file Form 3520. In general, reasonable cause exists when a taxpayer exercises ordinary care and prudence in determining his tax obligations despite his failure to comply. See I.R.M. 20.1.1.3.2 (11-25-2011). Whether reasonable cause exists depends upon all of the facts and circumstances of the case, including the taxpayer's reason for failing to properly file, and the extent of his efforts to comply. Id. Moreover, the Internal Revenue Manual ("IRM") provides that ignorance of the law may provide reasonable cause if: "A. A reasonable and good faith effort was made to comply with the law, or B. The taxpayer was unaware of a requirement and could not reasonably be expected to know of the requirement." I.R.M. 20.1.1.3.2.2.6 (11-25-2011).As usual in a case involving a failure to file penalty, the Government trotted out United States v. Boyle, 469 U.S. 241 (1985), here. In Boyle, the Supreme Court rejected a reasonable cause defense for a late filing penalty based on reliance of the attorney who should have known the estate tax filing date and made the filing timely. The James Court declined to reach the Boyle argument. (See fn. 1.) (I should note that I think the Court did reach the argument by denying summary judgment where the Government's point, I think, was that Boyle compelled summary judgment.)
