An insurance broker who issued a Form 1099 to a payee who never cashed the check for the payment reported on the 1099 did not commit tax fraud, the Seventh Circuit held, reversing a decision by an Illinois federal district court (Shiner v. Turnoy, No. 14-2999 (7th Cir. 3/16/17)).
Bernard Turnoy is an insurance broker who had sold insurance policies to the in-laws of David Shiner for many years. After Shiner, a successful lawyer, demanded that Turnoy split the commissions he received on premiums from Shiner’s mother-in-law’s life insurance policies, Turnoy sent Shiner a check for $149,000, which was about half of the commissions Turnoy had received to date. The check had a restrictive endorsement stating that by cashing the check Shiner had accepted the $149,000 in full payment.
Shiner did not cash the check, and he eventually returned it to Turnoy. Before returning the check, Shiner did not ask for a new check without the restrictive endorsement and did not communicate to Turnoy that he was rejecting the check. More than a month after sending the check, but before he received the returned, uncashed check, Turnoy filed a Form 1099 with the IRS reporting that he had made a $149,000 payment to Shiner.
Shriner then sued in two courts—in Illinois state court for a breach-of-contract claim for more money from Turnoy and in federal district court for a claim of tax fraud. The state court rejected the breach-of-contract claim. The federal district court, however, held that Turnoy’s issuing a Form 1099 reporting the $149,000 payment to Shiner was a willfully fraudulent filing of an information return under Sec. 7434 and ordered Turnoy to pay Shiner $16,000 in damages. The district court found that because of the restrictive endorsement on the check, it did not qualify as a bona fide payment to Shiner, and that Turnoy had no good-faith basis to believe that he had made a payment at the time he filed the Form 1099.
Turnoy appealed the district court’s decision. Shiner did not file a brief or any motion because he claimed the case was moot.
The Seventh Circuit found that Shiner’s inaction in the time between when he received the check and the Form 1099 was issued gave Turnoy a solid basis for believing he would accept the check. This undercut Shiner’s argument that the filing of the Form 1099 was a willfully fraudulent act under Sec. 7434.
In response to Shiner’s claim that the case was moot, the appeals court explained that the case was not moot because Shiner’s tax fraud claim had caused Turnoy harm by preventing him from obtaining errors and omissions insurance he needed to continue in business. His interest in clearing his name from the taint of fraud meant that the case was not moot even though he had discharged the $16,000 damages claim in bankruptcy.
The appeals court reversed the district court’s decision and remanded the case, instructing the lower court to grant Turnoy’s motion for summary judgment.
—Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.