to toll the statute of limitations by claiming that Berley's assurances that the tax controversy would be resolved in Levin's favor constituted fraudulent concealment.
The statute of limitations also was an issue in Key Trust Co. of Maine v. Doherty, Wallace, Pillsbury and Murphy, P.C., 811 F. Supp. 733 (D.Mass. 1993), which involved the Massachusetts inheritance tax on future interests.
Doherty asserted two theories in support of its statute of limitations argument:
1. The three-year time period began when Canal (predecessor to Key Trust) received the inheritance tax closing letter in 1978 informing Canal that it had overpaid the Harrimans' inheritance taxes and that $21,000 was being withheld on account for future taxes. Canal should have then known that Doherty had not settled the tax on future interests.
2. The statute of limitations began to run, at the latest, when Jerry Simpkins sent out the form letter to Key Trust in June 1986 informing Key Trust that inheritance taxes had not been assessed on the future interests. Key Trust did not begin its suit against until April 25, 1991. Doherty asserted that he was entitled to judgment as a matter of law.
Key Trust argued that it did not suffer appreciable harm until February 1989, when the Massachusetts Tax Bureau formally requested tax information from Key Trust, and that before that time Key Trust had no reason to know that an inheritance tax was due on future interests. The court viewed Key Trust's claim as being without merit, accepted Doherty's argument, and granted summary judgment in favor of Doherty.
In Estate of Callahan v. Allen, 97 Ohio App.3d 749, 647 N.E.2d 543 (Ohio App. 4 Dist. 1994), the defendant attorney argued that the statute of limitations applied and that the estate waived any action against him in settling the dispute with the IRS without appeal. The trial court found that the estate's settlement with the IRS and its malpractice suit were not inconsistent, and the estate was not estopped from bringing the malpractice action. The court held the settlement barred the malpractice claim.
L. Multi-jurisdictional issues
Estate taxation is becoming interstate and international, and estate tax malpractice is becoming interstate and international. Jurisdiction, choice of law, and conflicts of law are now part of the estate tax practice, making it necessary for practitioners to review these same issues in the malpractice context. Most courts dealing with estate malpractice have not adequately addressed these multijurisdictional issues.
The Paparodis heirs in Nellas v. Loucas, 191 S.E.2d. 160 (W.Va. 1972) were Ohio residents, the lawyer was a West Virginia resident, and the West Virginia Supreme Court of Appeals applied conflict of law principles in ascertaining the statute of limitations. In Ohio, an action by a client against the client's lawyer for breach of the relationship is treated as a malpractice action, and this action is governed by a one-year statute of limitations. West Virginia provides that the shorter limitation period applies, whether West Virginia or foreign, where a claim accrues beyond state boundaries. Ohio case law provides that a cause of action against the attorney for malpractice accrues, at the latest, when the attorney-client relationship changes. As a result, such action might not be time-barred under Ohio law.
In Levin v. Berley, 728 F.2d 551 (1st. Cir. 1984), Irving M. Levin, a Massachusetts resident, hired attorney David R. Berley, a Florida resident, to prepare the will of Levin's wife, Evelyn, in 1972. Levin instructed Berley to take full advantage of the marital deduction in drafting this will. Evelyn had a New York stock account that was subject to a trust rather than having the stock pass outright to Irving. The court applied the Massachusetts "notice" rule to determine the inception of the limitations period (see Part II.K. supra), not the date of the Tax Court decision or the court of appeals' affirmation of that decision. Florida would have used the date of the latter event, making Levin's claim timely.
In Wirtz v. Switzer, 586 So.2d 775 (Miss. 1991), Lena Watson Whitley lived in Mississippi and owned oil and gas income-producing property in Louisiana. The executrix hired an accountant in Mississippi in conjunction with her estate, but the accountant neglected the windfall profits tax. The defendant raised no conflicts provisions or choice of law issues, and the accountant, presumably a Mississippi resident, did not assert that he was unfamiliar with Louisiana oil and gas taxation.
In Schmitz v. Crotty, 528 N.W. 2d 112 (Iowa 1995) Julia Schmitz died on February 10, 1985, in Iowa. The estate was "substantial," according to the Iowa Supreme Court, including tracts of farmland in two Iowa counties and in Canada, but the court made no reference to the Canadian property.
The court in Key Trust Co. of Maine v. Doherty, Wallace, Pillsbury and Murphy, P.C., 811 F.Supp. 733 (D.Mass. 1993), did not address lurking conflict of laws issues. It appears that Canal National Bank, the predecessor trustee, may have been a Massachusetts corporation, but its successor trustee, Key Trust Company of Maine, was a Maine corporation. David E. Harriman was a Massachusetts domiciliary, but his widow, Helen C. Harriman, transferred her domicile to Connecticut in 1982, two years before her death on May 7, 1984.
In Smith v. St. Paul Fire & Marine Insurance Company, 344 F.Supp. 555 (M.D.La. 1972), reversed and remanded 471 F.2d 840, 366 F.Supp. 1283 (1973), the decedent was a citizen of Louisiana, her children were citizens of Arkansas, and the insurance company had its situs in Texas. The case was brought in U.S. courts because of diversity. Neither the court nor the parties raised multijurisdictional issues.
M. Damages and prejudgment interest
A successful plaintiff in an estate tax malpractice action may be entitled to punitive damages or damages for mental anguish or mental distress, but these damage awards are given infrequently and only under special circumstances.
An executrix hired an accountant to prepare the estate's fiduciary income tax return, but the accountant excluded windfall profits taxes and the executrix sued the accountant, seeking punitive damages. The accountant notified the attorney when the accountant discovered his omission. The court denied punitive damages because the evidence did not show ruthless disregard. Here the accountant's behavior after the fact was salutary, a point noted by the court. In Wirtz v. Switzer, 586 So.2d 775 (Miss. 1991), the Mississippi Supreme Court rejected the punitive damages claim, stating that punitive damages are awarded to "serve as an example to others" and should be awarded only "in extreme cases." The opinion implicitly suggests that Mississippi would award punitive damages when a professional fails to voluntarily reveal error made.
The court rejected claims for mental anguish and mental distress. Such damages evoke "outrage or revulsion," which was not present here.
An executor hired an attorney who prepared and filed federal estate tax returns, Illinois tax returns, and Illinois inheritance tax returns, but the attorney failed to apply the less-than-fair-market-value valuation permitted by section 2032A. The attorney admitted his mistake and agreed to reimburse the estate $300,000. The executor brought suit, claiming that the estate was entitled to receive damages for prejudgment interest (the loss of the use of the extra tax money), attorney fees, and damages from losses caused by a forced sale in addition to the reimbursement. These damage claims were denied in Wilson v. Cherry, 244 Ill.App. 632, 184 Ill.Dec. 77, 612 N.E.953 (III. 1993).
The magnitude of the damages was under dispute in Gable v. Resnick, 183 Ill.App. 171, 131 Ill.Dec. 769, 538 N.E.2d. 1325 (Ill. 1989). Section 2032A provides benefits for farmers who continue farming. The attorney-defendant argued that he had an equitable interest in subrogating himself to a right that the IRS would have had if the alternative valuation and the consent agreement had been filed. The court rejected the defendant attorney's approach as it would give the attorney a negative covenant obligating the co-executors to continue farming for 15 years.
A principal issue in Estate of Hartz v. Nelson, 437 N.W.2d 749 (Minn.App. 1989), was the magnitude of the punitive damages where the attorney made false accusations to various public agencies concerning the estate's personal representative. The trial court awarded $700,000 in damages against the defendant attorney. The appellate court viewed an award of punitive damages to reflect the factors that justly bear on the purpose of punitive damages, including the following:
1. the seriousness of the hazard to the public arising from the defendant's misconduct;
2. the profitability of the misconduct to the defendant;
3. the duration of the misconduct;
4. any concealment of the misconduct;
5. the degree of the defendant's awareness of the hazard and of its excessiveness;
6. the attitude and conduct of the defendant upon discovery of the misconduct;
7. the financial condition of the defendant; and
8. the total effect of other punishments.
The court, in reviewing the above factors, determined that punitive damages were excessive, and did not reach the threshold needed to sustain a $700,000 punitive damage award. The court noted the attorney's lack of remorse and his attempt to justify his conduct, but recognized that the attorney has been suspended from the practice of law. The case was remanded to the trial court to order a remittitur.
In Wilson v. Cherry, 244 Ill.App.3d. 632, 184 Ill.Dec. 77, 612 N.E.2d 953 (Ill.App. 4 Dist. 1993), an executor brought suit against the attorney for failing to make a less-than-market valuation for farmland, causing the estate to pay extra taxes. The attorney acknowleged his error and agreed to pay $300,000, but the plaintiff sought three additional damage awards:
1. prejudgment interest on the $300,000 settlement;
2. damages for expenses of a forced sale; and
3. reimbursement for interest paid to the federal government.
The court ruled against the executor on the prejudgment interest claim, holding that prejudgment interest is not allowed in cases at law unless the damages are liquidated or subject to being easily ascertained, which was not the case here. The court denied the executor's claim to recoup expenses resulting from the forced sale caused by the attorney's error, holding the loss was caused by a general decrease in farmland. The court denied the executor's claim for reimbursement for interest paid to the federal government because the executor failed to plead this claim.
In Sorenson v. Fio Rito, 90 Ill.App.3d 368, 45 Ill.Dec. 714, 413 N.E.2d 47 (Ill.App.4 Div. 1980), the attorney failed to file inheritance tax forms and estate tax forms on a timely basis. Here the widow sought the recoupment of penalties and interest paid to Illinois and to the United States. The court addressed the distinction between legal expenses, which are recoverable as ordinary damages, and attorney fees, which are not recoverable as costs of litigation. The court concluded that Illinois law does not preclude the court from awarding attorney's fees when these fees constitute nothing more than ordinary losses resulting from the defendant's conduct.
N. Waiver and failure to appeal
A failure to appeal an IRS determination may constitute a waiver of the malpractice claim. Such was the case in Estate of Callahan v. Allen, 647 N.E.2d 543 (Ohio.App. 4 Dist. 1994). The malpractice plaintiff and the malpractice defendant may need to continue their dispute for many years.
In Estate of Callahan v. Allen, the estate sought to maximize a marital deduction under section 2056(a) by disclaiming 60 percent of the inheritance under section 2018, but the IRS denied that claim. The court of appeals held that the estate waived any claim of legal malpractice relating to the attorney's handling of the estate's tax matters when the estate failed to appeal the IRS's denial of the marital deduction. The court held that, because the estate did not appeal the IRS determination, there was no definitive ruling as to whether the disclaimers were qualified. The court suggests that the IRS could have decided that the "direction" language in the disclaimers was precatory in nature that satisfied the legal requirements.
This article will be continued in the next issue of this newsletter.
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© Copyright 1999 Tax Analysts. Used with permission.
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