PUBLISHED OPINION
Case No.: 95-2925
Complete Title
of Case:
LOGEMANN BROTHERS COMPANY,
Plaintiff-Appellant,
v.
REDLIN BROWNE, S.C.,
MICHAEL J. BROWNE,
STEVEN J. SYRING,
RALPH R. REDLIN,
GREGORY J. KSICINSKI and
NORMAN R. ROLLER,
Defendants-Respondents.
Submitted on Briefs: August 12, 1996
COURT COURT
OF APPEALS OF WISCONSIN
Opinion Released: October 2, 1996
Opinion Filed: October 2, 1996
Source of APPEAL Appeal
from an order
Full Name JUDGE COURT: Circuit
Lower Court. COUNTY: Waukesha
(If "Special", JUDGE: Roger P. Murphy
so indicate)
JUDGES: Brown,
Nettesheim and Snyder, JJ.
Concurred:
Dissented:
Appellant
ATTORNEYSOn
behalf of the plaintiff-appellant, the cause was submitted on the briefs of Richard
E. Braun of Milwaukee.
Respondent
ATTORNEYSOn
behalf of the defendants-respondents Steven J. Syring, Gregory J. Ksicinski and
Norman R. Roller, the cause was submitted on the brief of Michael J. Hentzen
of Hentzen & Styles S.C. of Mequon.
On
behalf of the defendant-respondent Michael J. Browne, the cause was submitted
on the brief of John Theiler Bode and Christopher A. Duesing of Bode,
Schroeder & Carroll, S.C. of Waukesha.
COURT OF APPEALS DECISION DATED AND RELEASED October 2, 1996 |
NOTICE |
A party may file with the
Supreme Court a petition to review an adverse decision by the Court of
Appeals. See § 808.10 and
Rule 809.62, Stats. |
This opinion is subject to
further editing. If published, the
official version will appear in the bound volume of the Official Reports. |
No. 95-2925
STATE
OF WISCONSIN IN COURT OF
APPEALS
LOGEMANN BROTHERS
COMPANY,
Plaintiff-Appellant,
v.
REDLIN BROWNE, S.C.,
MICHAEL J. BROWNE,
STEVEN J. SYRING,
RALPH R. REDLIN,
GREGORY J. KSICINSKI
and
NORMAN R. ROLLER,
Defendants-Respondents.
APPEAL from an order of
the circuit court for Waukesha County:
ROGER P. MURPHY, Judge. Affirmed.
Before Brown, Nettesheim
and Snyder, JJ.
BROWN, J. Logemann
Brothers Company believes that its former accountants, who we refer to
collectively as Redlin Browne, made several errors when it completed the
company's past tax returns. However,
Logemann did not discover the alleged errors until 1993 when its new
accountants were conducting an audit.
Although the federal and state tax authorities have not yet reviewed
Logemann's returns or assessed any penalties or interest, Logemann has filed
suit against Redlin Browne to recoup these possible fines and other related
damages. The circuit court awarded
summary judgment to Redlin Browne, reasoning that the tax authorities had to
actually assess fines before Logemann could assert its malpractice claim.
While we have not
identified any Wisconsin case law addressing when a party may initiate an
accounting malpractice claim involving an alleged faulty tax return, based on
our review of decisions from other jurisdictions, we determine that the circuit
court was essentially correct in analyzing the issue. We hold that a party asserting such an action must identify some
type of official action taken by a taxing authority which indicates that the
return was faulty before the party may bring the related accounting malpractice
claim. We affirm the order awarding
summary judgment to Redlin Browne.
Logemann retained Redlin
Browne to prepare its 1990 federal and state tax returns and to file amendments
to its 1989 and 1988 returns. In the
following years, however, Logemann had different firms do its auditing and tax
preparation work.
In 1993, one of these
other firms became concerned about some of the work performed by Redlin
Browne. This auditor believed that
Redlin Browne had improperly valued Logemann's inventory. Most importantly, this auditor thought that
the miscalculated inventory values, which were also used in the two audits
subsequent to the one that Redlin Brown did in 1990, caused Logemann's reported
tax liability to be artificially low.
Thus, in April 1994,
Logemann initiated this lawsuit against Redlin Browne. Logemann premised its case on the expert
testimony that its current auditor would provide. Its complaint included claims of negligence and breach of contract. Logemann's itemized list of damages
“estimates” the tax penalties and interest at $78,000 and the ongoing
accounting fees associated with correcting the alleged error at $8400.
Redlin Browne responded
by moving for summary judgment. In its
motion, Redlin Browne noted that neither the state nor federal taxing
authorities had imposed any penalties or interest against Logemann, nor had
either of the authorities filed notice that it intended to do so. Redlin Browne argued that Logemann had not
experienced any compensable damages and therefore Logemann had not met an
essential element of its two claims.
The circuit court
accepted Redlin Browne's argument and entered an order granting it summary
judgment, although it did not dismiss the claim with prejudice. Because no taxing authority had supplied a
determinative answer to whether Redlin Browne had improperly calculated
Logemann's tax liability, the circuit court reasoned that Logemann's claim was
not yet ripe.
Logemann now appeals the
circuit court's ruling and presents this court with the question of whether
this claim against its former accountants may go forward absent an indication
that a taxing authority will impose a penalty, fine or some other assessment. This issue solely involves a legal question
and we therefore owe no deference to the circuit court's analysis. See Old Republic Sur. Co. v. Erlien,
190 Wis.2d 400, 410, 527 N.W.2d 389, 392 (Ct. App. 1994).
We have reviewed cases
from other jurisdictions which discuss when a tax-related malpractice claim
accrues and initially observe that, compared to these cases, this dispute
involves somewhat unique circumstances.
These decisions generally involve claims that the plaintiff moved too
slowly, contrary to this case where Redlin Browne is asserting that Logemann's
claim is premature.[1]
For example, in Mills
v. Garlow, 768 P.2d 554 (Wyo. 1989), the plaintiffs claimed that their
attorney committed malpractice when he gave them bad advice concerning the tax
treatment of a real estate transaction.
While the IRS first informed the plaintiffs in March 1985 that an
examining officer was questioning their tax returns and believed that more
taxes were owed, the plaintiffs pursued an administrative appeal with the IRS
and did not finalize the ultimate sum owed until December 1986. At that time, the plaintiffs completed an
IRS Form 870, which is one of several forms that the IRS uses to close and
compromise cases.[2] Id. at 555.
After the plaintiffs
settled the IRS's claims, they filed suit against their attorney in September
1987. Although their attorney tried to
defend the claim by arguing that the two-year statute of limitations started
running in 1985 when the IRS first informed the plaintiffs about the possible
errors, the Wyoming Supreme Court ruled that the plaintiffs did not suffer
actual harm until they entered into the final settlement in 1986. See id. at 558.
Not surprisingly, Redlin
Browne strenuously urges that we follow the reasoning of the Mills
court. Although Redlin Browne
specifically points to International Engine Parts, Inc. v. Feddersen,
888 P.2d 1279, 1288 (Cal. 1995), in which the California Supreme Court set out
a bright-line rule that injury in tax-related malpractice claims does not
accrue until the IRS actually assesses a “deficiency” pursuant to 26 U.S.C.A.
§ 6212 (West 1989), we observe that this California decision relied
heavily on the Mills decision.
Logemann complains,
however, that adopting such a bright-line rule is bad policy. Logemann believes that this rule will
discourage taxpayers who think they have filed faulty returns from voluntarily
approaching the IRS. It describes how
the above reasoning would encourage taxpayers to play “Russian Roulette” and
hope that the IRS never questions the return.
However, Logemann's tax
expert correctly explains that the taxpayer who learns that he or she has filed
an erroneous return has “an affirmative obligation to correct the mistake and
pay the additional tax owed.” Indeed,
Logemann cites to this “affirmative obligation” as the basis for its decision
to have its new accountants get to the bottom of the problem allegedly caused
by Redlin Browne.
We acknowledge that a
risk-taking taxpayer may try to skirt the law and play “Russian Roulette” with
the IRS or state tax authorities.[3] But the law-abiding taxpayer who is truly
interested in correcting a past tax return, like Logemann, will simply file an
amended return and pay the taxes that are believed owing. As important, the IRS's review and acceptance
of the amended return will provide an answer to whether the taxpayer's
suspicions about his or her earlier return were correct. If the IRS accepts it, then the taxpayer
will know that the old return was flawed.
Thus, contrary to Logemann's claim, a taxpayer who voluntarily pays past
due taxes is not prejudiced by a rule that the IRS must first assess the
allegedly faulty return before the related accounting malpractice claim is
permitted to go forward.
Since we can set aside
these concerns about taxpayers who voluntarily approach the IRS, we believe
that the reasoning of the Mills and International Engine
Parts decisions is essentially correct. Still, our concerns about taxpayers who follow the course of
submitting an amended return prevents us from expressly adopting the stated “conclusion”
of International Engine Parts, that only an IRS deficiency notice
is a sufficient mark of a tax-related malpractice injury. See International Engine Parts,
888 P.2d at 1288. In fact, the Mills
decision recognizes that taxpayers who file an erroneous return may not
always be notified of a deficiency because the taxpayer may instead enter into
a compromise agreement with the IRS. See
Mills, 768 P.2d at 558.
Hence, we adopt a middle course and hold that a tax-related malpractice
claim does not accrue until the IRS files a deficiency notice, enters into a
compromise agreement with the taxpayer, or accepts an amended
return, which definitively reveals the
amount of tax liability that was actually misstated on the allegedly erroneous
return.
In adopting this rule we
reject Logemann's further argument that because Wisconsin state courts have
general jurisdiction over state and federal matters, our trial courts “have
authority to interpret provisions of the Internal Revenue Code” and can
therefore make a proper assessment of whether a taxpayer has filed an improper
return and if he or she will owe a penalty.
While our state's trial courts have jurisdiction to address tax issues,
Logemann's concept would require our trial courts to make findings based on
speculation, or at best “educated guesses” about the tax code and
regulations. In fact, the trial court's
decision would most likely be grounded on its assessment of competing expert
testimony. However, justice is better
served to simply permit the IRS to make the call. By following the rule we set out above, our trial courts are
assured that society's most qualified expert in tax law will be making
the definitive determination about whether the subject tax return was actually
flawed.
Finally, we reject
Logemann's argument that “[t]axes, penalties and related interest are not the
issue in this case.” Here, Logemann
describes how it may never pay any back taxes because the IRS might not conduct
an audit, nor (we observe) will Logemann decide to fulfill its obligation to
voluntarily submit an amended return.
Still, Logemann argues that it will suffer a loss because of the
expenses associated with correcting the errors that Redlin Browne allegedly made.
Nevertheless, our
recognition that the IRS should be the party to make the ultimate determination
about whether an accountant's practices actually resulted in an erroneous
return also demands that we reject this argument. Based on the opinion of professional experts, a taxpayer, such as
Logemann, may think that its books, and thus its past tax returns, are
flawed. But whether corrective auditing
is compensable requires a finding of a condition precedent that the original
work was wrong. And the best party to
decide whether this condition precedent has been fulfilled is the IRS, which in
this case has not yet had the opportunity to make that determination. Because we have no evidence thus far that
the IRS has any problem with Logemann's past returns, Logemann must wait.
By the Court.—Order
affirmed.
[1] For a collection of cases, see Michael J. Weber, Annotation, Application of Statute of Limitations to Actions for Breach of Duty in Performing Services of Public Accountant, 7 A.L.R.5th 852 (1992).
[2] An IRS “closing agreement” is designed to settle issues of taxpayer liability. See Jacob Mertens, Jr., Mertens Law of Federal Income Taxation § 52.01 (1996). Other forms that the IRS uses for closing agreements include Form 866 and Form 906. The IRS uses Form 656 to record “compromises” of criminal or civil litigation involving taxpayers. See id.
[3] In the remainder of this opinion, we will refer only to the IRS and not the IRS or a state taxing authority. Nonetheless, our analysis applies equally to both. As an example, with State of Wisconsin returns, the Department of Revenue is required to notify taxpayers when it assesses back taxes and thus such notice serves as a mark when a related accounting malpractice action begins to accrue. See § 71.80(2), Stats.