UBS Sued in Federal Court Over Form 1099 Reporting

July 7, 2022

UBS Financial Services, Inc. customer Richard M. Goodman bought municipal bonds issued by Michigan and Texas -- for purposes of the ensuing lawsuit, that's about all you really need to know concerning the transaction. Where problems arose was what UBS reported (or didn't) on a Form 1099-INT for tax years between 2015 and 2018. As Goodman argues, UBS screwed up and it caused him to overpay his federal taxes. 
RICHARD GOODMAN, individually and as trustee of the Richard M. Goodman revocable living trust, and on behalf of all others similarly situated, Plaintiff, v. UBS FINANCIAL SERVICES, INC., Defendant (Opinion, United States District Court for the District of New Jersey ("DNJ"), 21-CV-08123 / June 30, 2022)

Amortizing Premium

So . . . you're likely not a tax expert and I'm sure as hell not, so, let's just go with what DNJ informs us:

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.)

at pages 2 -3 of the DNJ Opinion

Nearly $201,000 in over-stated income! Ooops!!

Contract and Torts Claims

And so, not unexpectedly, on October 5, 202`1, Goodman filed a Complaint against UBS asserting the following seven counts:
  1. Breach of contract. 
  2. Breach of implied covenant of good faith and fair dealing. 
  3. Breach of fiduciary duty. 
  4. Negligent misrepresentation. 
  5. Negligence.
  6. Negligence per se
  7. Punitive damages.
At some point, Goodman DNJ may well force Goodman to pick fish or fowl when conjuring up his legal theory -- contract or tort -- but at this early stage, he can go with his legal buffet. UBS was not having any of the meal and moved to dismiss for failure to state a claim upon which relief can be granted, which Goodman opposed.

Breach of Contract / Implied Covenant of Good Faith and Fair Dealing

In advancing his breaches of contract counts, Goodman cites to the his UBS "Client Relationship Agreement" ("CRA"), and argues, in pertinent part, that UBS' failure to include the bond premium on the Forms 1099 constituted a breach of the CRA. Although some of Goodman's arguments fall flat and DNJ acknowledges that UBS specifically disclaimed any aspect of giving tax advice, the Court found that UBS was obligated pursuant to the DRA to "provide accurate tax forms and that UBS will follow its stated policies in providing tax forms." at Page 6 of the DNJ Opinion.

As to Goodman's claim for a breach by UBS of the covenant of good faith and fair dealing, the Court essentially arches its eyebrow and finds this argument a tad superfluous and a bit along the lines of trying to take a second bite out the the old breach-of-contract apple:

[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.

at Page 10 of the DNJ Opinion

Breach of Fiduciary Duty

Under applicable New York law, there is no fiduciary duty imposed upon a brokerage firm within the context of its customers -- such a duty can be created pursuant to some authorization but Goodman did not grant UBS with any discretionary trading authority and, pointedly, placed his own trades. In an effort to circumvent such an interpretation:

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.  

at Pages 11 - 12 of the DNJ Opinion

Negligent Misrepresentation

If there had been some "special duty of care" imposed upon UBS beyond the ordinary care attendant to handling Goodman's brokerage business, that might have altered DNJ's resolution of whether the firm had made a "negligent misrepresentation;" however, as the Court explained:

[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. 

at Page 12 of the DNJ Opinion


In an intriguing bit of jurisprudence, DNJ offers this somewhat edgy analysis:

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. 

at Page 13 of the DNJ Opinion

In the Alternative: Fish or Fowl

As to the 800 pound gorilla that has largely been unmentioned in the Opinion, the Court finally addresses the fish-or-fowl (contract or tort) issue involving Goodman's pleading of both breaches of contract and torts:

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.

at Page 14 of the DNJ Opinion


DNJ granted  UBS' Motion to Dismiss with regard to Counts, 2, 3, 4, 6, and 7;  but DNJ denied the motion with regard to Counts 1 and 5.