Sorenson v. H & R Block, Inc. ( 2004 )

Not for Publication in West’s Federal Reporter
Citation Limited Pursuant to 1st Cir. Loc. R. 32.3
United States Court of Appeals
For the First Circuit
No. 03-2268
WALTER F. SORENSON, JR.; SARAH O. SORENSON,
Plaintiffs, Appellants,
v.
H & R BLOCK, INC.; H & R BLOCK TAX SERVICES, INC.; H & R BLOCK
EASTERN TAX SERVICES, INC.; KARL BRANDENBURG; INTERNAL REVENUE
SERVICE, DEPARTMENT OF TREASURY,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Selya, Circuit Judge,
Porfilio,* Senior Circuit Judge,
and Lynch, Circuit Judge.
James B. Krasnoo with whom Paul J. Klehm was on brief for
appellants.
Adrienne M. Markham with whom Gary M. Ronan was on brief
for defendants, appellees H & R Block, et al.
Richard M. Gelb for defendant, appellee Karl Brandenburg.
*
Of the Tenth Circuit, sitting by designation.
Lewis S. Yelin with whom Mark B. Stern, and Sharon Swingle,
Attorneys, Appellate Staff, Civil Division, Department of Justice,
Peter D. Keisler, Assistant Attorney General, and Michael J.
Sullivan, United States Attorney, were on the brief for defendant,
appellee Internal Revenue Service.
August 20, 2004
PORFILIO, Senior Circuit Judge. Walter F. and Sarah O.
Sorenson, appeal the dismissal of their action for damages against
H & R Block, Inc. and others (collectively “Block”). Our review of
the issues raised by the Sorensons on appeal discloses no error,
and we affirm.
Mr. Sorenson, an airline pilot who also owns a small
business, used Block to prepare his state and federal income tax
returns for years. Apparently no problems emerged from this
association until preparation of the returns for tax year 1993.
Then, however, disputes arose because Mr. Sorenson insisted on
claiming certain income tax deductions contrary to Block’s advice.
Mr. Sorenson ultimately prevailed and the deductions were made; but
later he was subjected to audits by the Massachusetts Department of
Revenue (DOR) and the Internal Revenue Service (IRS). Although
matters with the taxing authorities were settled, Mr. Sorenson paid
the DOR over $8,000 and the IRS over $45,000 in back taxes,
interest, and penalties for the tax years 1993, 1994, and 1995.
The Sorensons brought this action against Block seeking
$5 million in damages, asserting claims for negligence; breach of
fiduciary duty; professional malpractice; intentional or negligent
infliction of emotional distress; breach of contract; breach of the
covenant of good faith and fair dealing; intentional or negligent
misrepresentation; loss of consortium; and false and deceptive
-3-
trade practices under Massachusetts statutes.1 Plaintiffs and
defendants both moved for summary judgment. After a studious and
careful consideration of all the issues, the district court granted
summary judgment to Block, except for a specific breach of contract
claim and a trade practices claim.2 On those, the court granted
judgment to the Sorensons and awarded total damages of $630.
The genesis of the dispute between the parties occurred
on March 3, 1994 during an interview for the purpose of preparing
Mr. Sorenson’s 1993 returns. At that meeting, Mr. Sorenson
insisted that he was entitled to claim a deduction from taxable
income for expenses he incurred in campaigning for local political
office. He also insisted upon a charitable deduction for left over
food he had given to a charity when his wedding was cancelled.3
The preparer and supervisory personnel advised Mr.
Sorenson those deductions were improper. Unwilling to accept that
advice, Mr. Sorenson called Block’s headquarters to protest. Among
his complaints was his dissatisfaction with the service he had
received from Karl Brandenburg, the district manager under whose
direction the Sorenson return was being prepared.
1
Although not an original party to the action, having filed a
brief in this court on the discovery issues raised in the district
court, the IRS was added as a party to this appeal.
2
Sorenson v. H & R Block,Inc., 2002 WL 31194868 (D. Mass.)
3
Apparently he had no receipts for those donations.
-4-
During that conversation, Mr. Sorenson told Linda Murphy,
Mr. Brandenburg’s supervisor, that he was going to a local Block
office “in an hour” to sign the necessary form to have his return
filed electronically. He demanded a resolution from Ms. Murphy of
whether his campaign expenses were deductible before he signed the
document. Without having received a response to that demand, Mr.
Sorenson nonetheless signed the form permitting electronic filing
of his return on March 16, 1994. The return claimed the deductions
questioned by Block.
In July of 1994, the DOR commenced an audit of Mr.
Sorenson’s state returns, ultimately determining he had improperly
declared a Massachusetts domicile. Consequently, DOR disallowed
deductions based on that claim as well as other employee business
expenses and assessed Mr. Sorenson $8,322.93 in back taxes,
interest, and penalties.
In June 1995, the IRS notified Mr. Sorenson of an audit
of his 1993 federal return. Mr. Sorenson was instructed to attend
a meeting with an auditor and to provide supporting information for
deductions he had taken including charitable contributions and
employee expenses. Mr. Brandenburg accompanied Mr. Sorenson to at
least two meetings with IRS Agent Paul Lounsbury, the auditor.
Before the first meeting, Mr. Brandenburg told Agent
Lounsbury he knew the reason for the audit and stated he “wished”
he had the “courage” to report Mr. Sorenson to the IRS. He also
-5-
showed Agent Lounsbury a number of Block’s internal memoranda
concerning Mr. Sorensons’s 1993 return, including a memo Mr.
Brandenburg had written to Ms. Murphy describing the return as
“Fraud in Capital Letters.”
At a subsequent meeting, in Mr. Sorenson’s presence,
Agent Lounsbury asked for a paper copy of the 1993 return. In
response, Mr. Brandenburg handed over a file which contained not
only the return but also copies of Block’s internal memos and a
letter to Mr. Sorenson that Mr. Brandenburg had prepared but had
not sent. The parties agree that at that time, Mr. Sorenson did
not know those documents were in the file or even existed. Whether
Mr. Brandenburg knew the Block papers were in the file when he gave
it to Agent Lounsbury is unresolved.
In late 1996, Mr. Sorenson hired an attorney to represent
him in the audit process which, by that time, had grown to include
tax years 1992 through 1995. About a year later, the attorney was
informed the case had been turned over to the IRS Criminal
Investigation Division. The underlying circumstances behind the
investigation were the deductions Mr. Sorenson had claimed on his
returns and other subsequent actions for which he was responsible.
Mr. Sorenson had applied for a bank loan in connection
with his business. In support of that loan application, he
obtained “amended returns” for 1994 and 1995 which indicated an
income for that business substantially more than the income
-6-
disclosed in the returns he actually filed for those years.
Although the “amended returns” were used in connection with the
loan application, they were never filed with the IRS.
After six months, IRS closed the criminal investigation
and returned the Sorenson file for a continuation of the civil
audit. By then, however, the statute of limitations for recovery
of back taxes for 1992 through 1994 had expired, leaving for
possible recovery by the IRS only the penalties for civil fraud for
those years.
Mr. Sorenson ultimately settled with the IRS. In exchange
for an agreement by the Service not to pursue civil fraud penalties
for any year, Mr. Sorenson waived the statute of limitations on
ordinary assessments for 1994. He also agreed to pay $46,439 in
back taxes (deemed negligently unpaid) for 1994 and 1995, plus
interest and non-fraud penalties.
On the basis of these essential facts, the Sorensons
contend the district court erred on many issues. We review a grant
of summary judgment de novo, Douglas v. York County, 360 F.3d 286,
290 (1st Cir. 2004), and, because cross motions for summary judgment
were filed, we have considered each motion separately and drawn
inferences against each movant in turn. See Reich v. John Alden
Life Ins. Co., 126 F.3d 1, 6 (1st Cir. 1997). Employing these
standards, we conclude none of the Sorensons’ arguments is
persuasive.
-7-
I. Fiduciary Responsibility of a Tax Preparer.
The Sorensons first assert that as a tax preparer, Block
had a fiduciary responsibility to them which Block breached in
several ways. Although the Sorensons’ counsel admits he has found
“no case in Massachusetts which holds that tax preparers owe a
fiduciary duty to their clients,”4 he nonetheless argues such a
fiduciary duty arises when trust is reposed in one who has “a great
disparity of knowledge or expertise in a commercial setting.” He
buttresses that theory by relying principally upon Green v. H & R
Block, Inc., 735 A.2d 1039 (Md. 1999) and Basile v. H & R Block,
Inc., 761 A.2d 1115 (Pa. 2000), to craft an argument that there is
an agency relationship between a taxpayer and a tax preparer.
Counsel then segues into a contention that the agency relationship
gives rise to a fiduciary responsibility owed to the taxpayer by the
preparer. As the district court correctly recognized, however, the
rationale is inapposite because it is dependent upon a theory of
agency recognized in Maryland and Pennsylvania but not in
Massachusetts.
As the district court noted, Massachusetts courts have
accepted the Restatement’s view that the essential ingredients of an
agency relationship are: 1) the agent’s power to alter the legal
relationships between the principal and third parties; 2) a fiduciary
relationship toward the principal regarding matters within the scope
4
The district court was less equivocal. It said there is
none, and it was not going to break new ground.
-8-
of the agency; and 3) the principal’s right to control the agent’s
conduct in matters within the scope of the agency. See Thornton v.
Harvard Univ., 2 F. Supp. 2d. 89, 95 (D. Mass. 1998); Sabel v. Mead
Johnson & Co., 737 F. Supp. 135, 138 (D. Mass. 1990) (citing the
Restatement (Second) of Agency §§ 12 -14 (1958)); United States v.
Ferber, 266 F. Supp. 90, 100 (D. Mass. 1997).
The district court concluded two of the three requirements
of an agency relationship between Mr. Sorenson and Block were
unproved. Block did not have the power to alter Mr. Sorensons’ legal
relationships with others, nor did Mr. Sorenson have the capacity to
control Block’s conduct in the preparation of tax returns. These
conclusions have patent support in the record.
Having failed to prove the essential elements of an agency
relationship, the Sorensons’ basic premise fails, and with it, the
contention that Block breached fiduciary duties. With that
conclusion, we do not consider allied arguments they assert.
II. Compelling Disclosure of IRS Source.
The Sorensons next argue the district court erred by
denying their motion to compel the IRS to disclose the name of the
person who provided the Service with information about Mr. Sorenson’s
tax returns. They contend the denial of this information “unfairly
prejudiced” them, postulating the disclosure would have permitted
them to show the court Block “received a benefit from turning in
Sorenson.” With this evidence, they could have proved “additional
-9-
damages flowing from this wrongdoing.” Moreover, the information
could have “bolster[ed] their claims for breach of contract and
unfair and deceptive business practices at trial.”
This discovery dispute is governed by a stringent standard
of review. We will intervene in discovery matters only upon a clear
showing of manifest injustice, that is, where the lower court’s
discovery order was plainly wrong and resulted in substantial
prejudice to the aggrieved party. Faigin v. Kelly, 184 F.3d 67, 84
(1st Cir. 1999); Mack v. Great Atlantic & Pacific Tea Co. Inc., 871
F.2d 179, 186 (1st Cir. 1989). The Sorensons have failed to clear
this high hurdle.
The District Director instructed IRS employees being
deposed in this case that they could testify about any conversations
with Block employees pertinent to Mr. Sorenson’s taxes, but they were
not to disclose any information or records that would reveal a
confidential source. Faced with the issue of whether the identity
of the informant was discoverable, the magistrate judge, in an order
later adopted by the district judge, ruled it was not. The court
reasoned the issue was governed by the Administrative Procedure Act,
5 U.S.C. § 702, because the government is not a party to this action.
The APA proscribes overruling any agency action that is
not “arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.” 5 U.S.C. § 706(2)(A). Viewing the
statutory prohibition of disclosing “return information” under 26
-10-
U.S.C. § 6103, and the broad inclusory language of that statute, see
Chamberlain v. Kurtz, 589 F.2d 827, 837 (5th Cir. 1979), the court
concluded the refusal to reveal the identity of the informant did not
rise to the level required for an order compelling disclosure. That
holding is not plainly wrong.
III. Damages.
The district court concluded Block had a contractual
obligation to keep confidential the contents of Mr. Sorenson’s
returns, and this obligation was breached for tax year 1993. As
damages, the court awarded the cost of the preparation of those
returns. The Sorensons now argue they are entitled to foreseeable
and consequential damages for the penalties and interest Mr. Sorenson
had to pay, contending under the common law they must be placed in
the same position they would have occupied had the contract not been
breached.
The district court held there is “no basis under any
theory of recovery to shift responsibility for the amount of
Sorenson’s unpaid back taxes. These are Sorenson’s responsibility,
however they came to be discovered. And, absent some contractual
obligation, I decline to permit recovery of interest and penalties
as well.” (emphasis in original). We see no error in this holding.
Moreover, Sorensons’ proof was inadequate to show causation between
Block’s actions and those claimed damages.
The Sorensons also argue the district court erred by
-11-
granting summary judgment to Block on the Sorensons’ claim of damages
for unauthorized disclosure of information prior to the filing of the
1993 return. They argue the evidence “strongly supports the
inference that a Block employee turned in Sorenson.” They do not
state what other damages resulted from this alleged breach but
contend only they should have been able to go to trial on the
inference. The district court held there was no evidence to support
the claim of breach and refused to award preparation fees for 1991,
1992, 1994, and 1995. Again, this holding is supported by the
record.
The Sorensons also maintain the district court erred by
denying them emotional distress damages, contending there are
unresolved material issues of fact applicable to that claim. They
argue additional damages should have been awarded for breach of
contract and infliction of emotional distress.
The court denied those damages, finding no evidence to
support them. Although broadly arguing principles in which emotional
damages could apply to either claim, short of conclusory factual
inferences not warranted by the record, the Sorensons fail to show
specific facts that demonstrate the error of the district court’s
judgment.
For example, although the district court found no evidence
either plaintiff suffered the “severe distress” essential to their
claims, they have shown us no reason why that finding is faulty.
-12-
Indeed, the court observed the very essence of their claim was
undercut by virtue of Mr. Sorenson’s “continu[ing] to work as a
commercial airline pilot throughout the relevant period, and without
any reports (by him or by the physicians who examined him every six
months) of distress.” We are not persuaded the district court erred
by granting Block summary judgment on this claim.
IV. Denial of Motion for Reconsideration.
The Sorensons contend the district court should have
granted their motion for reconsideration for several reasons. Once
again, our standard of review of this issue is limited. “[O]nce a
motion . . . for summary judgment has been granted, the district
court has substantial discretion in deciding whether to reopen the
proceedings in order to allow the unsuccessful party to introduce new
material or argue a new theory.” Aybar v. Crispin-Reyes, 118 F.3d
10, 13 (1st Cir. 1997)(quoting Mackin v. City of Boston, 969 F.2d
1273, 1279 (1st Cir. 1992)). “Consequently, we will overturn the
trial court’s decision on such a matter only if an appellant can
persuade us that the refusal to grant favorable consideration was a
clear abuse of discretion.” Id. The Sorensons fail to make that
showing.
The Sorensons argue the district court erred in not
reconsidering their claim that Block‘s conduct constituted unfair and
deceptive business practices as that term is defined in Mass. Gen.
Laws ch 93A, § 2. They assert a breach of contract coupled with
-13-
conduct that is “immoral, unethical, oppressive, or unscrupulous”
meets that definition. The district court held “[t]here is nothing
immoral, unethical, oppressive or unscrupulous in making a disclosure
of suspected fraud to the IRS, even if it was a breach of Block’s
contractual obligation of confidentiality.” Because we are in full
agreement with that holding, we cannot say the district court’s
ruling on this issue was a clear abuse of discretion.
V. Other Issues.
The Sorensons contend the conduct of H & R Block and
Brandenburg was “outrageous in character and extreme in degree” and
“beyond all possible bounds of decency.” They add, “Block,
Brandenburg, and other employees, went to great lengths to cause
Sorensons severe emotional distress, all in their effort to punish
Sorenson and to protect Brandenburg and Block from tax preparer
penalties.” Specific factual evidence justifying this hyperbole is
not cited. In a similar vein, the Sorensons assert Mr. Sorenson had
to undergo a DOR audit, IRS civil and criminal audits, and “such
betrayal exceeds all possible bounds of decency and is absolutely
atrocious.” We find no facts in the record that justify these
characterizations either. Moreover, the arguments conveniently
overlook the fact that the tax deductions that were at the bottom of
the Sorensons’ difficulty were taken only because of Mr. Sorenson’s
insistence and contrary to the advice given to him by Block. We are
-14-
not inclined to reverse the district court on the basis of these arguments.
After entry of the order granting summary judgment on the
major issues, the district court directed the parties to work towards
framing those remaining for final judgment so the court and parties
could avoid “further investment of extensive resources at the trial
court level.” In response, Block moved for summary judgment in the
maximum amount of damages previously found by the court. In
contrast, the Sorensons moved for reconsideration as previously
noted. Not only did the court find no new issues in the motion, but
also it denied the Sorensons’ attempt to present new evidence. The
court held the “expert opinion” plaintiffs offered to support
reconsideration comprised evidence that would be inadmissible and
would not affect the results already reached by the court.
Now the Sorensons claim this procedure caused them “unfair
prejudice” because it came about before they could exercise their
“absolute right to a jury trial.” This argument is without
substance. As we have already noted, the denial of reconsideration
was proper. Moreover, the parties’ “right to trial” had already been
precluded by the grant of summary judgment.
The judgment of the district court is affirmed.
-15-