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Weissglass v. Deloitte & Touche USA LLP

UNN-L-1369-09 (N.J. Super. Law Div. 2009) (Unpublished)

ACCOUNTANTS; LIABILITY; STATUTE OF LIMITATIONS — The statute of limitations accrues on claims of accounting malpractice in contested federal tax proceedings when the Commissioner of the Internal Revenue Service issues a deficiency notice, and not the earlier date when an examination has begun.

Individual members of a family, and certain trusts formed for the benefit of the family members, were the principals and shareholders of a corporation that hired an accounting firm to perform certain services for the company. As a result of a tax examination conducted in 2001, the Internal Revenue Service (IRS) concluded that the accounting firm had made miscalculations which substantially increased the corporation’s taxable income. This ruling was made largely because the accounting firm had no work papers or contemporaneous documentation to contest the IRS’s findings. The firm’s lack of documentation also made it difficult for an independent accounting firm to review its work. The corporation appealed the tax examiner’s finding. The IRS did not make a final determination on the matter until it issued Notices of Final S Corporation Administrative Adjustments (FSAA) in 2004. This deficiency notice had substantially increased the corporation’s tax liability and created a legal debt of the corporation. The corporation filed a motion before the United States Tax Court challenging the IRS determination. In 2007, the corporation decided to settle with the IRS rather than risk greater liability, believing that the accounting firm’s errors and omissions and failure to maintain and produce files sufficient for an expert to undertake an independent evaluation forced the corporation to take this position. It sued the accounting firm in 2008, less than two years after the adverse Tax Court judgment, and about five years after the final decision of the Tax Commissioner (through its issuance of the FSAA). This was more than six years after the tax examination had taken place. The accounting firm responded by claiming that: (a) the complaint was barred by the statute of limitations; and (b) the New Jersey’s Accountant Liability Act barred negligence claims alleged by the individual family members and the members of the family trust.

The Law Division held that the claims were not barred by the six-year statute of limitations applicable to breaches of contract, negligence, and accounting malpractice but agreed with the accounting firm that the Act barred the negligence claims alleged by the individual family and family trust members. It rejected the accounting firm’s contention that the claim accrued in 2001 when the corporation knew the underlying facts for its claims and had even administratively appealed the tax examiner’s decision. The Court held that the mere threat or possibility of an unfavorable judgment does not represent an actual loss which could generate a cause of action. It noted that, in a majority of jurisdictions in the country, when attorney malpractice occurs during the course of litigation, the cause of action accrues on entry of an adverse judgment in the lower court because only then does the attorney negligence proximately cause real, as opposed to speculative, damage to the client. By analogy, the corporation argued that its claims did not accrue until the adverse United States Tax Court judgment was entered in 2007 because it was the Tax Court judgment that saddled it with actual damages. The Court held that the statute of limitations accrues on claims of accounting malpractice in contested federal tax proceedings when the Tax Commissioner issues the deficiency notice. The FSAA is the Commissioner’s final act and from that point the taxpayer owes a legal debt. Accordingly, it ruled that it is not until a deficiency notice is issued that there is actual damage to the client. Here, the FSAA was issued in 2004 and, thus, the corporation’s negligence action was brought less than six years after the date the action accrued.

In determining whether the individual family and trust members could sue the accounting firm under the Act, it noted that the Act defines a “client” as “the party directly engaging an accountant to perform a professional accounting service.” It agreed with the accounting firm that neither the individual family members nor the trust members directly engaged the accounting firm to provide services. Although the statute permits claims by clients who can show that the accountant knew that the claimant intended to rely upon the professional accounting service in connection with the specified transaction, the Court held, in this case, the individual family members and trust members failed to identify a particular transaction between them and the corporation that would have allowed them to bring this action.

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