The Supreme Court of South Carolina issued an opinion in November 2017 that is of interest to accountants or accounting firms that prepare tax returns. Tax return preparers have long known that federal law prohibits them from disclosing information received in connection with the preparation of a tax return. Violation of 26 U.S.C. § 7216 can result in fines and imprisonment. In Bennett v. Carter, 807 S.E.2d 197 (S.C. 2017), the Court held that an aiding and abetting a breach of fiduciary duty claim against a tax return preparer could not be based on the preparer’s failure to disclose information received in connection with the preparation of a client’s income tax returns to the client’s family member. The Court’s ruling represents the first time that a court has held that the limitations imposed on accountants by Section 7216 also apply to claims by third parties that the accountant had a duty to disclose to them adverse information.
Lynne Kerrison, an accountant at the firm Dixon Hughes, prepared annual income tax returns for Jacquelin Stevenson (Mother) and two trusts created by Mother’s deceased husband. The residual beneficiaries of the two trusts were Mother’s two sons—the Stevenson brothers—and two daughters—Kathleen Turner and her sister. In preparing the income tax returns for the trusts, Kerrison learned of loans from the trusts to the Stevenson brothers. Kerrison alerted Mother’s attorney. The brothers were advised of the impropriety of the transactions, but Turner and her sister were not informed. The Stevenson bothers continued receiving illicit funds from the trust for years. In 2006, Turner attended a meeting with Kerrison, the Stevenson brothers, and Mother’s attorney and learned, for the first time, of the improper transactions. Turner successfully sued her brothers. Turner also sued Kerrison and Dixon Hughes alleging professional negligence, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty.
The circuit court ruled that all of Turner’s claims were time barred and that Turner’s aiding and abetting claim lacked sufficient evidence to withstand summary judgment. The appellate court reversed the limitations ruling, finding that a question of fact remained as to when the statute began to run. The court also ruled that Turner had offered sufficient evidence of her aiding and abetting claim to survive summary judgment.
The Supreme Court of South Carolina agreed but modified the appellate ruling. The Court ruled that Turner’s aiding and abetting claim survived summary judgment because evidence showed that Kerrison knew about the improper transfers but, other than alerting Mother’s attorney, took “no further action.” The Court clarified, however, that the “no further action” language in the opinion could not be construed on remand to suggest that Kerrison should have disclosed the brothers’ illicit withdrawals to Turner or her sister because such a disclosure by Kerrison “is prohibited” both under Section 7216 and South Carolina law.
The Court rejected Turner’s argument that disclosure was permitted under an exception to Section 7216 because she was a “related taxpayer.” The “related taxpayer” exception did not apply, the Court held, because even though Kerrison also prepared Turner’s tax returns, the trusts’ tax return information evidencing illicit transfers was not used to prepare Turner’s returns. The Court also rejected Turner’s argument that Kerrison had a duty to disclose the information to Turner because she was designated as Mother’s attorney-in-fact under a power of attorney. Kerrison had notified Mother’s attorney, the Court reasoned, and even though Kerrison “could have” disclosed information to Turner as Mother’s attorney-in-fact, the power of attorney did not create any duty to do so.
Tax preparers can face difficult questions of whether and to whom they can disclose tax return information in their possession. The Court’s ruling in Bennett advises tax preparers that they may not be able to continue to perform services in the same fashion as before when they become aware of illicit activity but that they must nevertheless maintain the confidentiality of client information even when that information may show illicit activity. Tax preparers are advised to seek the advice of legal counsel when faced with such a situation. Under the Court’s ruling, Section 7216 provides a strong but not complete defense for tax preparers otherwise stuck between the Scylla and Charybdis of disclosing confidential client information in violation of federal law and facing civil litigation from those claiming confidential client information should have been disclosed to them. The ruling also confirms the importance of accountants recognizing that the criminal prohibition contained in Section 7216 may be applicable to common law tort claims that can be brought against them.