Custom Radio Corp., Custom Management Group, Inc., Richard Yarger and Robert O'Brien v. Actuaries & Benefit Consultants, Inc., and John M. Fogle , 2013 Ind. App. LEXIS 493 ( 2013 )

Oct 09 2013, 6:05 am
FOR PUBLICATION
ATTORNEYS FOR APPELLANTS: ATTORNEY FOR APPELLEES:
JOHN C. THEISEN SETH B. LEWIS
NATHANIEL O. HUBLEY Seth B. Lewis Law Office, LLC
Theisen Bowers & Associates, LLC Danville, Indiana
Fort Wayne, Indiana
IN THE
COURT OF APPEALS OF INDIANA
CUSTOM RADIO CORP., )
CUSTOM MANAGEMENT )
GROUP, INC., RICHARD )
YARGER and ROBERT )
O’BRIEN, )
)
Appellants-Plaintiffs, )
)
vs. ) No. 32A01-1303-CC-143
)
ACTUARIES & BENEFIT )
CONSULTANTS, INC., and )
JOHN M. FOGLE, )
)
Appellees-Defendants. )
APPEAL FROM THE HENDRICKS SUPERIOR COURT
The Honorable David H. Coleman, Judge
Cause No. 32D02-1010-CC-266
October 9, 2013
OPINION - FOR PUBLICATION
BRADFORD, Judge
CASE SUMMARY
Appellants-Plaintiffs Custom Radio Corp.; Custom Management Group, Inc.; Richard
Yarger; and Robert O’Brien appeal the trial court’s grant of summary judgment in favor of
Appellees-Defendants Actuaries & Benefit Consultants, Inc. and John Fogle. From 1995 to
2004, Appellees provided consulting services to Appellants with respect to certain Welfare
Benefit Plans investing in cash value life insurance. The plans were designed to comply with
26 U.S.C. § 419(A)(f)(6) so that Appellants’ contributions thereto would be tax-deductible.
In July of 2003, however, the Internal Revenue Service (“IRS”) issued final regulations with
regard to subsection 419(A)(f)(6), which rendered Appellants’ plans non-compliant and their
contributions retroactively taxable. A subsequent IRS audit revealed that Appellants owed
nearly $750,000 in back taxes, penalties, and interest, but, on October 20, 2008, Appellants
entered into a settlement agreement with the IRS, whereby the tax penalties were waived.
On October 19, 2010, Appellants filed suit against Appellees, claiming negligent
provision of consulting services and breach of oral contract. Appellees moved for summary
judgment on the basis that the statutes of limitation had expired. The trial court determined
that Appellants’ causes of action accrued and their respective statutes of limitation began to
run on April 30, 2004, by which date Appellants allegedly knew that their Welfare Benefit
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Plans were non-compliant with 26 U.S.C. § 419(A)(f)(6). On appeal, Appellants argue that
their causes of action did not accrue until October 20, 2008, the date on which they reached
their settlement agreement with the IRS and thereby discovered their damages.
We conclude that Appellants’ causes of action accrued and the statutes of limitation
began to run on the date Appellants knew or, through ordinary diligence, could have
discovered that their Welfare Benefit Plans were non-compliant with subsection 419(A)(f)(6)
and that their plan contributions were retroactively taxable. But finding a genuine issue of
fact as to whether Appellants knew or could have known this information by April 30, 2004,
we hold that summary judgment is inappropriate. The judgment of the trial court is reversed
and remanded.
FACTS AND PROCEDURAL HISTORY1
Yarger and O’Brien are the owners and operators of Custom Radio Corp. (“Custom
Radio”), a company that supplies the truck and bus market with audio and video systems.
Fogle is the President of and a consultant with Actuaries & Benefit Consultants, Inc.
(“ABC”), a company that specializes in designing, installing, and administering retirement
plans. From 1995 to 2006, ABC and Fogle provided consulting services to Yarger and
O’Brien with respect to Custom Radio. Throughout the course of this business relationship,
Yarger was the point of contact at Custom Radio, and O’Brien was relatively uninvolved.
In late 1995, Fogle discussed with Yarger the purchase of cash value life insurance to
1
On July 29, 2013, Appellants filed a motion to strike certain portions of Appellees’ Appendix and
Appellees’ Brief. We have reviewed the complained of material and, finding it to have no bearing on our
decision in this matter, deny Appellants’ motion as moot.
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fund a buy-sell agreement between Yarger and O’Brien with respect to Custom Radio. Fogle
advised that using a Welfare Benefit Plan in compliance with 26 U.S.C. § 419(A)(f)(6)
would enable Yarger and O’Brien to claim tax deductions for their plan contributions (i.e.,
their life insurance premiums). Fogle further advised Yarger and O’Brien to establish a
management company for Custom Radio, such that only a select few employees could benefit
from the Welfare Benefit Plan. Yarger and O’Brien established Custom Management Group,
Inc. (“Custom Management”) for this purpose and named themselves as the company’s only
employees.
In January of 1996, Custom Management enrolled in a Welfare Benefit Plan known as
the Prime Financial Multiple Employer Welfare Benefit Fund (the “Prime Plan”). At the
time, the IRS had issued no regulations regarding 26 U.S.C. § 419(A)(f)(6), but the sponsor
of the Prime Plan believed that it complied with that subsection. In June of 1997, however,
the United States Tax Court issue its decision in Booth v. Commissioner, 108 T.C. 524
(1997), striking down the Prime Plan as non-compliant with subsection 419(A)(f)(6).
In February of 1998, in response to the Booth decision, Fogle recommended that
Custom Management switch to a different Welfare Benefit Plan, the National Benefit Plan
and Trust (the “National Plan”). At the time, the IRS still had issued no regulations
regarding 26 U.S.C § 419(A)(f)(6), but, like with the Prime Plan, the sponsor of the National
Plan believed it to comply with that subsection. On July 17, 2003, however, the IRS issued
final regulations declaring Welfare Benefit Plans investing in cash value life insurance—like
the Prime and National Plans—to be non-compliant with subsection 419(A)(f)(6).
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The final regulations included the following provision regarding their effective date:
Except as explained below, these regulations—which generally clarify existing
law—are effective for contributions paid or incurred in taxable years of an
employer beginning on or after July 11, 2002. For contributions made before
this effective date, the IRS will continue applying existing law, including the
analysis set forth in Notice 95-34 and relevant case law. Thus, taxpayers
should not infer that a contribution that would be nondeductible under the
regulations would be deductible if made before that date. In this regard,
taxpayers are reminded that the IRS has already identified transactions that are
the same as or substantially similar to the transactions described in Notice 95-
34 as listed transactions for purposes of Sec. 1.6011-4T(b)(2) of the
Temporary Income Tax Regulations and Sec. 301.6011-2T(b)(2) of the
Temporary Procedure and Administration Regulations[.]
Appellants’ App. p. 61 (emphasis in original). As a result, Yarger’s and O’Brien’s
contributions to the National Plan were retroactively taxable.2 (Appellants’ App. 43-44, 46).
In February of 2004, in response to the IRS’s final regulations, Fogle recommended
that Custom Management switch to a single employer plan under 26 U.S.C. § 419(E).
Custom Radio’s CPA agreed with Fogle’s recommendation, and Yarger decided to have the
CPA handle the transaction. In April of 2004, Yarger informed Fogle that his services with
respect to Custom Management’s Welfare Benefit Plan were no longer needed.
In early 2007, the IRS notified Yarger and O’Brien that it would be conducting an
audit of Custom Management’s taxes. In March of 2008, the IRS completed its audit and
reported to Yarger and O’Brien that they owed $291,578.82 and $441,023.76, respectively, in
back taxes, penalties, and interest. Yarger and O’Brien, however, were able to negotiate
2
It is unclear from the record whether this retroactivity reached all of Yarger’s and O’Brien’s
contributions to the National Plan and whether it reached any of their contributions to the Prime Plan. The
absence of this information, however, has no bearing on our decision in this matter.
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settlements with the IRS, whereby the tax penalties were waived in exchange for their
payment of the back taxes and interest. The IRS prepared settlement agreements reflecting
these terms on September 25, 2008, which agreements O’Brien and Yarger signed on
October 19 and 20, 2008, respectively.
On October 19, 2010, Yarger and O’Brien3 filed a complaint against ABC and Fogle,
claiming negligent provision of consulting services and breach of oral contract. ABC and
Fogle answered the complaint, asserting the affirmative defense that both claims were barred
by their respective statutes of limitation.4 On November 15, 2012, ABC and Fogle moved for
partial summary judgment with respect to their statute of limitation defense. Specifically,
ABC and Fogle argued that Yarger and O’Brien’s causes of action accrued as early as July
17, 2003, the date on which the IRS issued its final regulations with regard to 26 U.S.C. §
419(A)(f)(6), and, at the latest, on April 30, 2004, the date by which Yarger and O’Brien
allegedly knew that their Welfare Benefit Plans were non-compliant with that subsection.
Yarger and O’Brien responded in opposition to summary judgment, arguing that their causes
of action accrued on October 20, 2008, the date on which they entered into their settlement
agreements with the IRS.
The trial court heard argument on ABC and Fogle’s motion on January 28, 2013, and,
on March 1, 2013, granted summary judgment in their favor. In its order, the court
3
We refer to Appellants collectively as “Yarger and O’Brien” for the remainder of this opinion.
4
Indiana Code section 34-11-2-4 requires Yarger and O’Brien’s negligence claim to have been
commenced within two years after that cause of action accrued. Indiana Code section 34-11-2-7 requires their
breach of oral contract claim to have been commenced within six years of its accrual.
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specifically found as follows:
10. In the instant case, while it is perhaps arguable whether the Statutes
of Limitations applicable to this case began to run on July 17, 2003, it is
beyond doubt that Yarger and O’Brien knew that Section 419(A)(f)(6) Welfare
Benefit Plans had been rendered “experience rated” and had become “listed
transactions” because by April 30, 2004, they had been told of those facts by
Fogle himself during a meeting or meetings with at least one of their
accountants, and had acted independently to adopt a Single-Employer Plan (the
Arrowhead Trust), without bothering to inform Fogle.
11. The Court, therefore, finds that each of the applicable Statutes of
Limitations in this case began to run on April 30, 2004, and thus expired as a
matter of law on April 30, 2006[,] as to Plaintiffs’ negligence claim and on
April 30, 2010[,] as to Plaintiffs’ breach of oral contract claim.
Appellants’ App. p. 19. Where appropriate, additional facts will be supplied below.
DISCUSSION AND DECISION
Yarger and O’Brien challenge the trial court’s grant of summary judgment in favor of
ABC and Fogle. The standard of appellate review of a summary judgment ruling is the same
as that used in the trial court. Boggs v. Tri-State Radiology, Inc., 730 N.E.2d 692, 695 (Ind.
2000). Summary judgment is appropriate only when there are no genuine issues of material
fact and the moving party is entitled to a judgment as a matter of law. Ind. Trial Rule 56(C);
First Farmers Bank & Trust Co. v. Whorley, 891 N.E.2d 604, 607 (Ind. Ct. App. 2008). In
reviewing the designated evidence, we construe all facts and reasonable inferences drawn
therefrom in favor of the nonmoving party. Boggs, 730 N.E.2d at 695. And where, as here,
the trial court enters findings of fact and conclusions of law in support of its judgment, such
special findings are not binding on appeal. Whorley, 891 N.E.2d at 608.
I. Whether Appellants’ Causes of Action Accrued When They Knew or Could Have
Discovered that Their Welfare Benefit Plans Were Non-Compliant
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Yarger and O’Brien argue that the trial court erred in determining that their causes of
action accrued on the date by which they allegedly knew that their Welfare Benefit Plans
were non-compliant with 26 U.S.C. § 419(A)(f)(6). Under Indiana’s discovery rule, “a cause
of action accrues and the statute of limitations begins to run when the plaintiff knew or, in
the exercise of ordinary diligence, could have discovered that an injury had been sustained as
a result of the tortious act of another.” Wehling v. Citizens Nat. Bank, 586 N.E.2d 840, 843
(Ind. 1992). “In other words, a cause of action accrues … when the resultant damage of a
negligent act is susceptible of ascertainment.” Page v. Hines, 594 N.E.2d 485, 487 (Ind. Ct.
App. 1992). This rule applies to both tort and contract claims. Del Vecchio v. Conseco, Inc.,
788 N.E.2d 446, 449 (Ind. Ct. App. 2003).
Yarger and O’Brien claim their causes of action did not accrue until they reached their
respective settlement agreements with the IRS. Prior to that date, Yarger and O’Brien
contend, their damages were not ascertainable. Yarger and O’Brien, however, confuse
“damage,” a requisite element of any tort, with “damages,” a measure of compensation. See
Shideler v. Dwyer, 417 N.E.2d 281, 289 (Ind. 1981). “For a wrongful act to give rise to a
cause of action and thus to commence the running of the statute of limitations, it is not
necessary that the extent of the damage be known or ascertainable but only that damage has
occurred.” Id. at 281-87 (holding devisee’s damage from a negligently drafted will, if any,
occurred at the moment testator died rather than upon probate court’s decree that the devise
was void); see Filip v. Block, 879 N.E.2d 1076, 1082 (Ind. 2008) (holding insureds’ claim
against insurance agent for negligent procurement of coverage accrued on the date insureds
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could have discovered they were underinsured rather than the date that fire destroyed their
property).
Here, the damage resulting from ABC and Fogle’s alleged negligent provision of
consulting services and their breach of oral contract, if any, was Yarger’s and O’Brien’s
retroactive tax liability for unauthorized deductions associated with their Welfare Benefit
Plans. This liability arose on the date the IRS published its final regulations regarding 26
U.S.C. § 419(A)(f)(6), declaring Welfare Benefit Plans investing in cash value life insurance
non-compliant with that subsection. Therefore, we hold that Yarger and O’Brien’s causes of
action accrued and the statutes of limitation began to run on the date they knew or, through
the exercise of ordinary diligence, could have discovered that their Welfare Benefit Plans
were non-compliant with subsection 419(A)(f)(6) and that their plan contributions were
retroactively taxable. See Whorley, 891 N.E.2d at 610 (holding heir’s breach of fiduciary
duty claim against estate’s court appointed guardian, who never informed heir about estate’s
ineligibility for Special Use Valuation and its corresponding favorable tax regime, accrued on
the date the IRS notified heir that estate’s farmland had been denied Special Use Valuation
and incurred increased tax liabilities).
II. Whether Appellants Knew or Could Have Discovered that Their Welfare Benefit
Plans Were Non-Compliant by April 30, 2008
Yarger and O’Brien argue that there is a genuine issue of material fact as to whether
they knew or could have discovered by April 30, 2004, that their Welfare Benefit Plans were
non-compliant with 26 U.S.C. § 419(A)(f)(6). Based on our review of the designated
evidence, we agree. During his deposition, Fogle testified that, in February of 2004, he told
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Yarger that the IRS had issued final regulations with respect to subsection 419(A)(f)(6) that
had rendered the National Plan “experience rated” and contributions to it “listed
transactions.” Appellants’ App. p. 47. Yarger, however, testified in his deposition that he
was unaware that the IRS had issued final regulations with respect to subsection
419(A)(f)(6), and that the terms “experience rated” and “listed transactions” did not mean
anything to him until Custom Management was audited in 2007. The parties also dispute
whether Fogle told Yarger there would be no adverse tax consequences if Custom
Management switched to a single employer plan.
From this evidence, we conclude there is a genuine issue of material fact as to whether
Yarger and O’Brien knew or, through ordinary diligence, could have discovered by April 30,
2004, that their Welfare Benefit Plans were non-compliant with 26 U.S.C. § 419(A)(f)(6) and
their contributions thereto, retroactively taxable. When application of a statute of limitation
rests on questions of fact, it is generally an issue for a jury to decide. Wehling, 586 N.E.2d at
843. Therefore, summary judgment premised on the running of the statute of limitations is
inappropriate.
The judgment of the trial court is reversed and remanded.
BAILEY, J., and MAY, J., concur.
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