Unpublished Disposition, 940 F.2d 669 (9th Cir. 1991)

MEMORANDUM^** 

Appellant Darlene Swayze, a professional tax preparer, brought an action under 28 U.S.C. § 1346 for a refund of penalties assessed for the negligent preparation of her clients' family trust tax returns pursuant to Sec. 6694(a) of the Internal Revenue Code of 1986. A jury found in favor of the government and Swayze appealed. We have jurisdiction under 28 U.S.C. § 1291. We affirm.

* Swayze contends that the district court abused its discretion in admitting into evidence a decision of the United States Tax Court affirming the imposition of a negligence penalty against Swayze for her reliance in the preparation of her personal income tax returns on a family trust tax evasion scheme. The government offered the opinion to rebut Swayze's claim that she had exercised due diligence in preparing the family trust tax returns at issue in her refund action.

As Swayze rightly points out, prior civil judgments are generally considered inadmissible hearsay. See J. Weinstein & M. Berger, 4 Weinstein's Evidence p 803(22) (1990). To evade this rule, the government refers us to Greycas, Inc. v. Proud, 826 F.2d 1560 (7th Cir. 1987), cert. denied, 484 U.S. 1043 (1988), where the Seventh Circuit expressed doubt as to whether the rule should apply to bar admission of a prior state court judgment offered solely for its evidentiary effect. The plaintiff and district court in Greycas relied on a prior state court declaration that the plaintiff's lien on certain property was subordinate to other creditors as evidence of the amount of damages the plaintiff suffered as a result of the defendant's negligent misrepresentations. Id. at 1567. Greycas is distinguishable for several reasons. First, rather than holding that the rule against the admission of a prior civil judgment was inapplicable, the court merely expressed doubt about its application. Second, the court recognized that any exception to that rule would apply only in a bench trial, whereas in this case, the evidence was presented to a jury. Finally, in Greycas, the prior civil judgment was used merely for evidentiary effect, whereas here the government sought to introduce the Tax Court opinion as substantive proof of Swayze's negligence. We thus conclude that the opinion was inadmissible hearsay.

The government argues in the alternative that even if the Tax Court opinion was inadmissible, Swayze waived her objections to its admission under the rule of curative admissibility or the "opening the door" doctrine. The rule of curative admissibility provides that if one party introduces inadmissible evidence, her opponent may, in the court's discretion, introduce otherwise inadmissible evidence on the same issue to remove any unfair prejudice that might otherwise result. See United States v. Whitworth, 856 F.2d 1268, 1285 (9th Cir. 1988), cert. denied, 489 U.S. 1084 (1989); Teague v. United States, 268 F.2d 925, 927 (9th Cir. 1959). The "opening the door" rule, sometimes referred to as the "invited error" doctrine, provides that a party may present otherwise inadmissible evidence to correct a false impression left by the defendant's testimony, see United States v. Beltran-Rios, 878 F.2d 1208, 1212 (9th Cir. 1989); United States v. Segall, 833 F.2d 144, 148 (9th Cir. 1987); United States v. Doe, 656 F.2d 411, 412 (9th Cir. 1981), or to pursue an otherwise improper line of inquiry that the defendant initiated either in his opening statement or on direct examination, see United States v. Segal, 852 F.2d 1152, 1155-56 (9th Cir. 1988); Burgess v. Premier Corp., 727 F.2d 826, 835 (9th Cir. 1984); United States v. Giese, 597 F.2d 1170, 1188-91 (9th Cir.), cert. denied, 444 U.S. 979 (1979).

Neither doctrine is applicable here. Swayze did not introduce inadmissible evidence that would entitle the government to respond in kind. Cf. Teague, 268 F.2d at 927 (doctrine of curative admissibility applies "where incompetent and irrelevant evidence is received"). In cases in which we have applied the "opening the door" doctrine, we have done so because of "a misleading impression left by selective questioning," Doe, 656 F.2d at 412, or in response to testimony as to a "specific fact," Giese, 597 F.2d at 1190; see also Segall, 833 F.2d at 148 (cross-examination evidence as to specific amount in bank account opened the door to redirect that only a fraction of the funds were retained). We cannot say that Swayze's general comments on direct examination about the steps she took to set up her personal family trust, R.T. 27-29, similarly left the jury with a false impression as to a specific fact at issue. Finally, we note that it was the government in its opening statement, R.T. 13, not Swayze, that "opened the door" to Swayze's liability for the preparation of her own family trust returns. Under these circumstances, we decline to find that Swayze waived any objection to admission of the Tax Court opinion.

The government also argues that the Tax Court opinion was admissible as an adoptive admission under Fed.R.Evid. 801(d) (2) (B) because Swayze acknowledged on cross-examination that the opinion accurately reflected the facts about her family trust, R.T. 75-76, and the fact that she was aware of the "dubious effect of equity trusts," id. at 117. Rule 801(d) (2) has no application here, however, since it applies only to statements "offered against a party," and Swayze's statements were never offered against her.

Having concluded that the district court abused its discretion in admitting the Tax Court opinion, we must determine whether that error was harmless. " [W]hen an appellate court ponders the probable effect of an error on a civil trial, it need only find that the jury's verdict is more probably than not untainted by the error." Haddad v. Lockheed Cal. Corp., 720 F.2d 1454, 1459 (9th Cir. 1983).

Section 6694(a) permits the Commissioner to assess a civil penalty of $100 against an income tax return preparer whose negligent or intentional disregard of rules or regulations results in an understatement of tax liability. 26 U.S.C. § 6694(a) (1988). Negligence is determined by the reasonable, prudent person standard, with the taxpayer bearing the burden of establishing that assessment of the penalty was erroneous. Betson v. Commissioner, 802 F.2d 365, 370 (9th Cir. 1986).¹  While hiring an attorney or an accountant will not insulate a taxpayer from a negligence penalty, good faith reliance on professional advice concerning tax laws is a defense. Skeen v. Commissioner, 864 F.2d 93, 96 (9th Cir. 1989); Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988); Betson, 802 F.2d at 370.

The Tax Court opinion admitted over Swayze's objection states in pertinent part,

Although reliance on an attorney's advice may sometimes be a defense to negligence, no competent lawyer could have advised petitioners to act in this manner and no intelligent financial planner or income tax preparer could have accepted such advice, if proffered, in good faith.

Swayze v. Commissioner, 52 T.C.M. (P.H.), p 83,168 at 83-637 (1983).

While this pronouncement no doubt had some influence on the jury, we conclude, in light of the substantial independent evidence introduced by the government, that it was more probable than not that the jury would have found in favor of the government had the Tax Court memorandum opinion not been accepted into evidence.

Swayze testified that prior to preparing the family trust returns in question she received at least two IRS newsletters which stated unequivocally that family trusts were not legitimate methods of reducing or avoiding income taxes. R.T. 88-90; Ex. 101; R.T. 90-92; Ex. 102. An October 1976 newsletter summarized four revenue rulings finding family trusts invalid tax avoidance devices and warned of increased IRS enforcement efforts against users and preparers of family trusts. R.T. 88-90; Ex. 101. In February 1978, at the same time that Swayze established a family trust for her family and began preparing family trust returns for clients, she received a second IRS newsletter, jointly issued by the IRS, the Oregon Department of Revenue and several other professional and civic organizations to similar effect. R.T. 90-92; Ex. 102. The newsletter warned that the IRS and the Oregon Department of Revenue would audit all tax returns filed by persons using family trust estates. R.T. 103-04. It also warned that the promoters of family trust estates had improperly stated the legality and tax benefits of family trusts. The newsletter suggested that prospective grantors should seek independent legal or financial advice and provided a list of organizations interested parties could contact for further information. R.T. 103-04. Swayze admitted having read this newsletter at the time she received it. R.T. 90.

Despite these explicit warnings, Swayze prepared family trust tax returns for clients and created a family trust for her family. R.T. 27. As to the specific warning in the February 1978 newsletter, Swayze testified that she responded to it by asking her attorney to verify whether or not the Oregon State Bar, one of the signatories to the newsletter, had in fact joined in it. R.T. 92. She did not contact any of the numerous other organizations listed in the newsletter, including the Oregon Association of Public Accountants, of which she is Secretary, nor did she seek an independent legal opinion about the validity of the position adopted by the IRS. Id.

Swayze testified that in preparing her own family trust, she and her husband relied on the advice of Bradford Burke, a local attorney. R.T. 28. Burke, however, was not a tax attorney and did not provide Swayze with a written opinion about the legality of family trusts. R.T. 105. Swayze also claims to have relied on the opinion of an attorney retained by one of her husband's clients. R.T. 29. However, Swayze never met with this attorney, id., nor did she know whether he had any expertise in tax matters, R.T. 105-06. Swayze testified further that she relied indirectly on the advice of two attorneys who had established trusts for her clients. R.T. 30. She also claims to have relied on the advice of Lawrence Anderson, a Salt Lake City certified public accountant. R.T. 31. However, she did not seek Anderson's opinion as to the legality of the family trust, R.T. 31-32, and never formally retained him for the advice she received, R.T. 106. Moreover, she was aware that Anderson was affiliated with the Institute of Individual Religious Studies (IOIRS), the organization which sold the family trusts Swayze and her clients employed, and was paid by the IOIRS for the opinions he rendered. R.T. 106-07. Swayze also testified that she relied on opinion letters from her clients' attorneys. R.T. 41-44. Yet neither of the letters she relied upon addressed specifically the taxation of family trust estates. R.T. 112-114. Finally, Swayze relied extensively on the legal opinions of lawyers associated with IOIRS. R.T. 46-48, 53-57.

This evidence alone is more than sufficient to support the jury's determination that Swayze failed to exercise due diligence in preparing the family trust returns. While good faith reliance on professional advice is a defense, Betson, 802 F.2d at 372, that reliance must have been justified. Collins, 857 F.2d at 1386. As we stated in reversing summary judgment against Swayze, " [t]he validity of [her] 'good faith reliance' defense rests on the quality and objectivity of professional advice which [she] obtained." Swayze v. United States (Swayze I), 785 F.2d 715, 719 (9th Cir. 1986). Given the explicit warnings in the two newsletters Swayze received prior to or at the time she first prepared family trust returns, her reliance on Burke's advice was not justified, since Burke was not a tax attorney and did not render an opinion as to the validity of the family trust in light of contrary IRS revenue rulings. See Betson, 802 F.2d at 372 (notice of taxpayer's erroneous legal position may defeat good faith reliance on professional advice). Similarly, her reliance on the legal advice given her clients and on the advice of Anderson was not justified, since it hardly qualifies as independent advice. See Neely v. United States, 775 F.2d 1092, 1095 (9th Cir. 1985) ("Reasonable inquiry as to the legality of the tax plan is required, including the procurement of independent legal advice when it is common knowledge that the plan is questionable.") (emphasis added). Finally, Swayze's failure to take any action to investigate the substantive validity of the February 1978 joint newsletter further undermines her claim to the good faith defense. See Collins, 857 F.2d at 1386 (warnings about validity of tax scheme require reasonable investigation); Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1987) (failure to obtain independent legal advice not reasonable in light of extensive press coverage of questionable tax shelter at issue).

On the strength of this independent evidence, we conclude that the introduction of the Tax Court memorandum opinion, while erroneous, was harmless.² 

II

Swayze also alleges that the district court abused its discretion in failing to give two requested jury instructions. Because she did not specifically object to the instructions given, R.T. 184, we review for plain error. United States v. Olson, 925 F.2d 1170, 1174 (9th Cir. 1991). "Plain error is highly prejudicial error affecting substantial rights and is found only in exceptional circumstances." United States v. Harris, 738 F.2d 1068, 1072 (9th Cir. 1984). The instructions must be considered as a whole, and there must be a high probability that the error materially affected the outcome. United States v. Kessi, 868 F.2d 1097, 1103-04 (9th Cir. 1989); United States v. Bryan, 868 F.2d 1032, 1039 (9th Cir.), cert. denied, 110 S. Ct. 167 (1989). Improper jury instructions rarely constitute plain error. United States v. Bustillo, 789 F.2d 1364, 1368 (9th Cir. 1988).

Swayze ascribes three errors to the instructions given. First, she contends that the instructions improperly stated that her reliance on independent legal advice had to be reasonable. R.T. 178. She claims that our decision in Swayze I "relieved Plaintiff, as a layperson, from the unfair responsibility of judging the competence of her lawyer before relying on him." Contrary to her assertion, Swayze I does not hold that reasonableness is irrelevant to our assessment of whether a tax preparer is entitled to the good faith defense. To the contrary, we implicitly held that the validity of a "good faith reliance" defense turned on the reasonableness of the preparer's choice in professional counsel--"the quality and objectivity of professional advice" obtained. 785 F.2d at 719; see also Collins, 857 F.2d at 1386 (reliance must have been justified). We thus conclude that the instruction was an accurate statement of the law and that no error could have resulted from it.

Swayze's second allegation of error is that the instructions improperly informed the jury that the professional advice on which she relied must have come from a "skilled expert in the field." R.T. 178. We likewise find that this instruction was consistent with our case law. In Betson, we noted that the good faith defense could be invoked upon the receipt of "professional advice concerning tax laws," 802 F.2d at 372, by definition, the professional advice upon which they are entitled to rely will have come from an accountant or an attorney who is a "presumed expert" on tax law, United States v. Boyle, 469 U.S. 241, 251 (1985). See also Swayze I, 785 F.2d at 719. We therefore find no error in this aspect of the instructions.

Finally, Swayze argues that the instructions failed to inform the jury that the state of the law on family trusts was not settled at the time she filed the returns at issue. The instructions did just that, however, stating that a plaintiff engaged in a good faith dispute with the IRS would not be found negligent "simply because matters were cloudy and uncertain as of that time and then were later cleared up by later court rulings." R.T. 180.

III

For the foregoing reasons we AFFIRM the denial of Swayze's request for a refund of the penalties assessed against her for negligent preparation of tax returns.