UBS Sued in Federal Court Over Form 1099 Reporting

When bonds are purchased at a premium, i.e., at more than their face value, 26 U.S.C. § 171 allows the premium to be amortized over the remaining life of the bond to reduce the bondholder's taxable income. (Id. ¶ 30.) Federal regulations govern how financial institutions report their clients' income to the Internal Revenue Service and require such information to be shared with the clients. (Id. ¶ 33.) Treasury Department regulations state that unless a client indicates in writing that he or she does not wish to amortize the premium, "the broker must report the amount of any amortizable bond premium allocable to a stated interest payment made to the customer during the calendar year" on Form 1099-INT. (Id. ¶ 38.) The broker may either report both the gross amount for interest and the bond premium, or may subtract the premium from the interest to calculate a net amount. (Id. ¶ 38, 40.) These regulations were reflected in UBS's Form 1099 Guide, which the bank provided to clients. (Id. ¶ 60.) The 2017 Guide states, "For a covered security acquired at premium, unless you notified UBS in writing in accordance with Regulations section 1.6045-1(n)(5) that you did not want to amortize the premium under section 171, we will report a gross amount for both the interest paid to you and the premium amortization for the year." (Id. ¶ 63.) 

Goodman alleges that instead of following the policy set out in the Form 1099 Guide, the Form 1099s that UBS provided to him, included only the amount of interest, without including the amortizable bond premium, either as a gross amount or as part of a net calculation. (Id. ¶ 86.) Eventually, Goodman convinced UBS to provide him with corrected 1099 Forms for the years 2015- 2018. (Id. ¶ 86-104.) The corrected Forms revealed that the original forms had overstated Goodman's income by $200,868.34 during those four years. (Id. ¶ 104.) Goodman alleges that he was not alone in this and UBS had made the same mistake with the 1099 Forms of the absent class members (Id. ¶ 108-13.) He also alleges that in FINRA Letters of Acceptance, Waiver and Consent from 2015 and 2019 UBS admitted to systemic errors tax reporting related to municipal bonds. (Id. ¶ 76-85, 114.)

[G]oodman argues that the breach of the implied covenant claim differs from his breach of contract claim because the latter claim "alleges that UBS's failure resulted from its arbitrary, irrational, and recklessly indifferent misconduct." (Opp. at 22.) This does not change the fact that the core Goodman's claim is the allegation that UBS failed to report tax information accurately, as required by the CRA. Even if UBS had been warned by FINRA and its own employees about the issue, the claim is still one of breach of contract, even if that breach could have been prevented by more active compliance procedures. I therefore GRANT UBS's motion to dismiss as to Count 2.

Goodman argues that he is not claiming that UBS has a fiduciary duty as a maker of investment decisions but rather has such a duty relating to tax information reporting. (Opp. at 31.) He cites only one case for this proposition, but that quarter-century-old unpublished case does not relate in any way to tax reporting. (Id. at 32 (citing Salomon Bros., Inc. v. Huitong Int'l Tr. & Inv. Corp., 1996 WL 675795, at *3 (S.D.N.Y. Nov. 21, 1996).) Other cases he cites relate to the duty of brokers to provide accurate information to their clients. This duty, however, relates only to information related to the broker's core purpose of executing trades, not tax reporting. For example, in United States v. Szur, a criminal case that Goodman cites, the court found that the convicted brokers were required to disclose the fact that they were receiving 45% to 50% commissions on certain stock sales. 289 F.3d 200, 212 (2d Cir. 2002). Thus, to the degree that there exists a fiduciary duty related to information, it is limited to information related to the trades that the client makes. 

Because Goodman has not plausibly alleged that there was a fiduciary relationship between him and UBS related to tax information reporting, he cannot state a claim for breach of fiduciary duty and Count 3 must be dismissed.  

[L]eaving aside the fact that the "specialized expertise" element is more properly applied to professionals such as engineers or attorneys, UBS has no unique or specialized expertise in tax information reporting. UBS has the same legal obligation to report tax information as any other similar financial institution and Goodman has not pleaded any facts that show that UBS has any particular specialized expertise. Nor, as discussed above, has Goodman pleaded that he had any type of particularly close or trusting relationship with UBS. Goodman was merely one client among many who had a normal business relationship with UBS and he therefore has not stated a claim for negligent misrepresentation and Count 4 must be dismissed. 

The question, then, is whether UBS had a duty to accurately report tax information on the forms it provides to its clients. I find that it is not appropriate to reach a conclusion on the record before me and therefore decline to dismiss Goodman's negligence claim. This is admittedly a novel issue (Opp. at 37), and there are a number of factors that are relevant to determining what duty, if any, UBS owed to Goodman. Federal statutes and Treasury regulations, FINRA investigations, and standard industry practices may all come into play. This issue was not briefed in any great depth on the motion to dismiss and, in any event, the factual issues regarding UBS's policies and procedures need to be developed further after discovery. I thus find that it is not appropriate to grant a motion to dismiss on this fact-bound duty issue solely on the pleadings. 

Here, as noted above, I consider Goodman's tort Counts as pleaded in the alternative to his contract Counts. For the purposes of this count, I assume, arguendo, that the CRA does not address tax information reporting. I have already determined that UBS, potentially, has a duty of reasonable care to accurately report tax information. This potential duty is clearly "connected with and dependent on the [CRA]" but I find, on this record, that Goodman has alleged that the duty to accurately report tax information arises from "circumstances extraneous to" the CRA. Bayerische Landesbank, 692 F.3d at 58. It is true, of course, that Goodman's relationship with UBS is governed primarily by the CRA. It is nevertheless possible for such a duty to arise from an extraneous circumstance, for example industry standards or federal statutes. I thus conclude that, at this stage, the economic loss rule does not bar Goodman's claims and decline to dismiss Count 5.

• UBS
• Form 1099
• Bonds
• IRS
• Tax
• Breach of Contract
• Tort
• CRA
• BrokeAndBroker
• Bill Singer