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Ronson v. Talesnick

33 F. Supp.2d 347 (D. N.J. 1999)

ACCOUNTANTS; MALPRACTICE; DAMAGES—Interest charged by the Internal Revenue Service may be collected as part of damages in accounting malpractice actions.

A taxpayer invested in tax advantaged limited partnerships and reported losses from the investments on its tax return. Its accountant later determined that the Internal Revenue Service might disallow the reported losses and the disallowance would result in a $91,293 underpayment. It suggested that the taxpayer forward a cash bond to the Internal Revenue Service to stop further interest from accruing. Such a bond was posted. Later that year, the accountant also calculated an interest liability, but the taxpayer elected not to post a bond with respect to the potential unpaid interest. Ultimately, the Internal Revenue Service advised the taxpayer of the continuing accrual of interest on the unpaid interest liability. It far exceeded the amount originally estimated by the accountant. The taxpayer then sought to recover the extra interest from its accountant. In the action, the accountant argued that the taxpayer could not establish damages because the taxpayer was not permitted by law to recover interest paid to the IRS. The District Court held that whether the taxpayers were permitted to recover interest due and owing to the IRS as damages was a question of state law. Because the New Jersey Supreme Court had not spoken on the issue, the District Court had to determine how the New Jersey Supreme Court would rule on the issue. In its review of case law, the Court found a split among the various jurisdictions concerning whether taxpayers may recover tax interest as damages in accounting malpractice actions. Some courts hold that the appropriate measure of damages is the “difference between what the [taxpayers] would have owed if the tax returns had been properly prepared and they owe now because of the professional’s negligence, plus incidental damages.” Another court concluded that “interest is not a proper element of damages in an accounting malpractice action.” The Courts permitting taxpayers to recover the interest reason that such recovery is necessary “to place the injured in the position he would have been in but for the negligence of and/or breach of contract by the [accountant].” Courts denying the recovery of IRS interest conclude that taxpayers are not put in a worse position because the interest paid simply is compensation to the IRS for the use of money that the taxpayer would not have had if the money had been paid to the IRS. Under this analysis, “some courts have reasoned that [taxpayers] have not been injured and may have even benefitted because they have had the opportunity to invest the money held from the IRS at an interest rate higher than the rate charged by the IRS.” In trying to discern what the New Jersey Supreme Court would rule, the District Court looked at New Jersey’s collateral source rule and the benefits rule. Under the collateral source rule, “it has long been the law in New Jersey that a tortfeasor may not benefit because of payments to or for the injured party from a collateral source. Public policy dictates that a tortfeasor should not benefit from the generosity of a third party or the ingenuity of the plaintiff.” However, New Jersey also has a strong public policy against permitting double recoveries. In furtherance of that policy, the state has enacted the collateral source statute, N.J.S. 2A:15-97. The collateral source statute permits a court to deduct any duplicative award from a plaintiff’s recovery. The collateral source statute, however, is expressly limited in applicability to a “civil action of a personal injury or death.”

The benefits rule provides “[w]hen the defendant’s tortious conduct has caused harm to the plaintiff or to his property and in so doing has conferred a special benefit to the interest of the plaintiff that was harmed, the value of the benefit conferred is considered in mitigation of damages to the extent that this is equitable.” Reconciling the collateral source rule and the benefits rule in New Jersey, the District Court concluded that New Jersey would permit recovery of IRS interest as damages in accounting malpractice actions. “Construing those rules together reflects the principle that a harmed plaintiff is permitted to recover for the wrongdoing of a tortfeasor, but that the plaintiff’s recovery should be reduced by any benefits received from the wrongdoers’ actions. This is the only reasonable interpretation that furthers the overriding tort damages principle of restoring the plaintiff to the position he or she would have been but for the actions of the tortfeasor.” Further, the Court held that, “[d]enying recovery of IRS interest from a negligent accountant permits the tortfeasor to benefit from the presumption that a harmed taxpayer has been or should have been ingenious enough to (1) maintain a sum of money that he would have otherwise had to pay over to the IRS and (2) invest that money in a manner in which he earned interest in an account comparable to the interest rate charged to the IRS. The Court felt that it was not presented with a situation where the taxpayer merely was repaying the IRS for a debt for which it would have been responsible despite its accountant’s negligence. Instead, the taxpayer incurred further debt that would have been avoided completely but for the accountant’s negligence. Further, the Court believed that the New Jersey Supreme Court takes a very liberal approach concerning accountants’ liability to third parties. Therefore, the Court concluded that the New Jersey Supreme Court would adopt a liberal approach with respect to the recovery of IRS interest. In its view, such a rule would serve the public interest because it would encourage accountants to “exercise greater care leading to greater diligence” in the performance of professional services.


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