The owners of a company who sought second opinions from tax experts after disagreeing with their accountant’s advice were time-barred from suing the accountant for malpractice, the 1st U.S. Circuit Court of Appeals has found.
A U.S. District Court judge had found that the October 2009 suit was filed too late to meet the three-year statute of limitations and granted summary judgment.
The 1st Circuit affirmed, finding the “discovery rule” inapplicable.
“In this instance, warning signs abounded. Moreover, the plaintiffs were aware of all the critical facts by July of 2006. … At that point, both the plaintiffs’ harm and the cause of that harm were pellucid, even if the precise claims that they could (and ultimately did) pursue against the defendants were not,” Judge Bruce M. Selya wrote for the panel.
The plaintiffs’ claims of unfair trade practices under Massachusetts’ Chapter 93A also failed because they could not show damages, even though an expert concluded that different advice would have lowered their tax liability.
The 22-page decision is RTR Technologies, et al. v. Helming, et al.
Steven J. Bolotin, a partner at Morrison Mahoney in Boston, represented the defendants. He said the ruling clearly delineates for both accountants and lawyers that the statute of limitations on professional malpractice claims is not a bright-line test.
“The ruling places a bit more of an onus on clients to understand the nature of their claims and when they may begin to run,” Bolotin said.
Boston attorney George A. Berman, who represents lawyers and other professionals in malpractice suits, said the ruling clears up confusion surrounding how the discovery rule is applied.
“The 1st Circuit opinion was a very welcome and clear statement of the statute of limitations proposition that is often confusing to people,” said Berman, a Peabody & Arnold lawyer who was not involved in the case. “It makes clear the distinction between causes of action that are undiscoverable as opposed to those that are merely undiscovered.”
The plaintiffs had all the pieces of the puzzle in front of them, Berman said. Their failure “to put those pieces together isn’t something you can charge the defendant with. That’s the plaintiffs’ responsibility.”
Bolotin noted that a key fact was that the plaintiffs sought second opinions at the time of the advice.
“The trigger was the advice she was given, and she basically said, ‘I don’t agree,’” said Bolotin, referring to one of the plaintiffs. “The most important aspect had to do with the plaintiff seeking other opinions with the understanding she did not believe the advice she was given was in her best interests. … Once the harm resulted, the court felt the statute of limitations began to run.”
James C. Donnelly, a partner at Mirick O’Connell in Worcester, Mass., who represented the plaintiffs in their appeal, called the ruling “a harsh decision for taxpayers.”
“The case raises the question of when an ordinary taxpayer should be expected to know that a tax advisor gave bad advice,” he said. “Taxes are complicated. Most of us rely on experts who know more about them than we do.”
The decision “could have the unintended consequence of suggesting a taxpayer should file a lawsuit before being certain the advice is wrong,” Donnelly added.
But Berman said it is the nature of a time bar to encourage plaintiffs to sue as the deadline approaches. Plaintiffs who are not sure if they have a claim or who do not want to sue can ask a defendant to toll the statute, something that is routinely done.
“There is nothing in this ruling that encourages suits. It only takes away a plaintiff’s unilateral [attempt] to extend the tolling of the statute of limitations,” Berman said.
Plaintiffs Rosalie and Craig Berger sought tax advice when their company, which sells heating systems to railways, fell on hard times in the aftermath of 9/11.
In 2003, accountant Carlton Helming advised them to amend their 2002 tax return, resulting in significant additional taxes, interest and penalties.
Unhappy with the advice, Rosalie Berger sought second opinions from two tax attorneys, one who was neutral and the other who agreed with Helming.
The plaintiffs followed Helming’s advice and filed the amended return, incurring a $525,000 tax lien. They continued to retain Helming for at least the next three years.
In 2008, they hired Edward Szwyd partly because they wanted to reverse the amended 2002 return. The IRS accepted the re-amended returns and abated the lien and other penalties.
The following year they sued Helming for malpractice, breach of contract and unfair trade practices.
When the trial judge granted the defendants summary judgment, the plaintiffs appealed to the 1st Circuit.
Selya said “the law normally ministers to the vigilant, not to those who sleep upon perceptible rights.”
He went on to note that, according to the record, Rosalie Berger sought out Szwyd “because she already believed — and had believed virtually from day one — that Helming’s advice was wrong. She explained in her deposition that she contacted Szwyd because she ‘didn’t agree with [amending the returns] to begin with.’ She added that she had signed the amended returns ‘under duress and it was very, very damaging to my company, and I thought to inquire [with] a professional [to see] if I had the privilege of re-amending.’”
At other points in her deposition Berger said that even before the IRS lodged its lien, she had concluded that Helming’s advice to amend the returns “was ‘poorly thought out’ and was ‘probably some of the poorest advice I could have possibly taken,’” Selya said. “She further vouchsafed that, even though she was ‘not a tax professional,’ she ‘knew’ that amending the returns ‘was not the right approach.’”
Those statements left no doubt that the plaintiffs knew before July 2006 that re-amendment of the returns was “a dicey proposition,” Selya said.
“Here, the facts show with conspicuous clarity that the plaintiffs knew of the claimed error, its cause, and the resulting harm more than three years before they sued,” he said.
Meanwhile, the 93A claim, which was subject to a four-year statute of limitations, was not time-barred, the court said.
The trial court judge had dismissed that claim because the plaintiffs failed to show the required degree of wrongfulness.
The 1st Circuit found different grounds to dismiss, holding that there was no proof of damages even though an expert testified that different tax advice would have resulted in lower taxes.
“In this case, the federal tax lien has been abated, the penalties rescinded, and the status quo ante has been restored. Moreover, the plaintiffs have adduced no evidence showing that the defendants’ advice increased their tax liability above what they will owe once Szwyd fully accounts for reconverting the transfers into loans. … The existence of a tax deficiency, without more, is not a reliable measure of damages attributable to allegedly erroneous tax advice,” Selya wrote.