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Executives Can Be Held Personally Liable in Suit Over Company’s False Tax Returns—C.A.
By a MetNews Staff Writer
Top-level executives of a technology company were properly held personally liable, in a civil action by an individual, for filing false financial returns, Div. Three of the Fourth District Court of Appeal has held, rejecting their contention that only the company was the “filer” and it therefore solely bore responsibility for fraudulent representations as to the nature of a pay-off pursuant to a settlement agreement.
Under that 2017 agreement, it was specified that Hovik Nazaryan, a founder of FemtoMetrix, Inc.—who had sued the company in 2015 for allegedly providing him with fewer shares of stock than were promised—would receive “ ‘Founder’s Stock’ for his capital/equitable contributions to Femtometrix” which, it was specified, was “not ‘compensation,’ ‘salary,’ or ‘income.’ ” That language was the product of extensive negotiations.
Nonetheless, FemtoMetrix reported to the Internal Revenue Service (“IRS”) that payments to Nazaryan were non-employee compensation. That undermined Nazaryan’s own representation to the IRS that the settlement entailed his receipt of “founder’s stock” based on “capital/equitable contributions” which had less onerous tax consequences for him than if he had received compensation.
Federal Statute
He sued Femtometrix based on a breach of the settlement agreement, and also for a violation of Internal Revenue Code §7434 which provides for civil damages for the fraudulent filing of information returns. Also named as defendants were Alon Raphael, FemtoMetrix’s president/chief executive officer CEO, and Tyler Rubin, its chief financial officer, who directed the company’s actions.
Orange Superior Court Judge Martha K. Gooding, after a bench trial, ruled in favor of Nazaryan on the §7434 issue, awarding him $3,000 to in actual damages. It was only the discussion of that issue in Wednesday’s opinion—which also discussed other aspects of the judgment—that was certified for publication.
At issue was the meaning of §7434(a) which provides:
“If any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.”
Sanchez’s Opinion
Justice Maurice Sanchez authored the opinion. He noted a split of authority among U.S. district courts as to whether liability under §7434(a) “is limited to the person required to file the information return or extends to those involved in preparing the return.” He recited that “[s]ome courts limit liability to the person or entity required by statute to file the information return,” relating that those courts reason that “the statute only authorizes a claim “against the person so filing” the return,” adding the italics.
Some of the district courts, Sanchez said, “point to IRS regulations, which elsewhere define a ‘filer’ as the person or entity required to file an information return and on whose behalf a return is filed.”
On the other hand, he continued, there are district courts that “apply a broader interpretation and extend liability to those who cause a fraudulent information return to be filed,” explaining, with italics again inserted for emphasis:
“The rationale of those decisions is that the plain language of the statute broadly imposes liability on ‘any person [who] willfully files a fraudulent information return’…and was not intended to limit liability to filers.”
Better Reasoned Decisions
Sanchez declared:
“Considering the statute’s plain language and the anomalous results of a contrary interpretation, we are persuaded by the latter cases.”
He embraced decisions detecting a legislative intent that business executives who actively participate in attempting to cheat the government and harass other taxpayers—in this instance, Nazaryan—be within the reach of §7434.
The jurist specified:
“[W]e do not suggest all individuals involved in preparing or assisting with an information return are per se liable. Instead, there must be some level of culpability, and imposing individual liability under the facts of this case is consistent with the statute’s legislative history and plain language.”
The case is Nazaryan v. FemtoMetrix, Inc., 2025 S.O.S. 1129.
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