tax predictions unreliable as matter of law

Brakke v. Economic Concepts, Inc., --- Cal.Rptr.3d ----, 2013 WL 441606 (Cal. App. 4 Dist.)

Brakke and other principals of Dealer Management Group sued American General Life Insurance, Economic Concepts (EC), and other parties for alleged misrepresentations about a pension plan.  Defendants allegedly persuaded Brakke et al. to establish the pension plan by representing that contributions were tax deductible. Subsequently, the IRS determined that the pension plan didn’t qualify for favorable tax treatment, resulting in back taxes and penalties. The trial court rejected the claims for fraud, violation of the consumer protection law, etc. on the pleadings, and the court of appeals affirmed.

Plaintiffs alleged that defendants told them that the plan was legal and that contributions would be tax deductible.  EC’s marketing materials said that EC “has secured a letter opinion of ‘more likely than not’ from” a named law firm, and “[a]ll participating employers in the ... [p]lan will receive an individual IRS letter opinion approving the plan.”  After 3 years, though, the IRS audited the plan and determined that it failed to comply with certain requirements.  Plaintiffs alleged that defendants knew that their statements were false or had no reasonable ground to believe them to be true.

The trial court accepted the argument that the claims failed as a matter of law because they were based on future predictions about tax law on which plaintiffs couldn’t have justifiably relied.  It wasn’t until 2004, after plaintiffs established the plan, that the IRS declared such plans unlawful.

The plans at issue required careful design to comply with the law, and the 2004 IRS ruling was designed to clear up ambiguities that had developed.  As a matter of law, 2004 rulings couldn’t be used to show that earlier statements were false when made.  Berry v. Indianapolis Life Ins. Co., 638 F. Supp. 2d 732 (N.D. Tex. 2009) (rejecting claims similar to these).

There are exceptions to the general rule that misrepresentations are only actionable if they relate to existing fact, not to opinions or predictions.  These exceptions are  “(1) where a party holds himself out to be specially qualified and the other party is so situated that he may reasonably rely upon the former's superior knowledge; (2) where the opinion is by a fiduciary or other trusted person;  (3) where a party states his opinion as an existing fact or as implying facts which justify a belief in the truth of the opinion.”  However, as Berry held, it’s inherently unreasonable for anyone to rely on a prediction of future IRS enactment, enforcement, or non-enforcement of the law from someone who isn’t affiliated with the US government.

Plaintiffs argued that, based on earlier IRS administrative materials, they could show that the IRS had long criticized many of the features that characterized their plan, and could amend their complaint to allege that the IRS had begun scrutinizing plans similar to theirs.  Thus, they argued, defendants shouldn’t have emphatically promised tax deductibility. The court of appeals didn’t agree.  The IRS documents mentioned failed to provide definitive guidance and didn’t support the idea that the defendants knew their representations were false when made. 

Although the UCL only requires likely deception, deception requires that the public have had an expectation or assumption about the matter in question. Absent a duty to disclose, failure to disclose doesn’t support a UCL claim.  Given EC’s representations about the “more likely than not” qualification for favorable tax treatment, plaintiffs couldn’t allege that they could reasonably expect or assume that the IRS would never disqualify their plan or revise its interpretation of the tax laws, or that EC would have a duty to tell clients about a possible future change in tax law.