Clark v. Deloitte & Touche LLP

• Decision Date: 19 October 2001
• Docket Number: No. 990772.,990772.
• Citation: 2001 UT 90,34 P.3d 209
• Court: Utah Supreme Court
• Parties: Deveaux CLARK and Marjorie Clark, Plaintiffs and Appellants, v. DELOITTE & TOUCHE LLP, formerly known as Touche Ross & Co., Defendants and Appellees.

34 P.3d 209

2001 UT 90

Deveaux CLARK and Marjorie Clark, Plaintiffs and Appellants, v. DELOITTE & TOUCHE LLP, formerly known as Touche Ross & Co., Defendants and Appellees.

No. 990772.

Supreme Court of Utah.

October 19, 2001.

Steven P. Simpson, Bluff, Jesse C. Trentadue, Salt Lake City, for plaintiffs.

William M. Smith, Washington DC, Gary F. Bendinger, Wesley D. Felix, Karen Martinez, Robert J. Sonne, Salt Lake City, for defendants.

DURHAM, Justice:

¶ 1 Plaintiffs Deveaux and Marjorie Clark (the Clarks), husband and wife, appeal the dismissal of their professional negligence action against defendant Deloitte & Touche LLP (Deloitte). The district court held that the Clarks' action is barred by the four-year statute of limitation set forth in section 78-12-25(3) of the Utah Code. We reverse.

BACKGROUND

¶ 2 Because this is an appeal from a motion to dismiss under rule 12 of the Utah Rules of Civil Procedure, this court "`accept[s] the factual allegations in the complaint as true and consider[s] all reasonable inferences to be drawn from those facts in a light most favorable to the plaintiff[s].'" Educators Mut. Ins. Ass'n v. Allied Prop. & Cas. Ins. Co., 890 P.2d 1029, 1029 (Utah 1995) (quoting Prows v. State, 822 P.2d 764, 766 (Utah 1991)).

¶ 3 Applying this standard, we accept the following operative facts from the Clarks' amended complaint. Beginning in 1965, the Clarks operated a Farmers Insurance Company (Farmers) agency in Salt Lake City, Utah. The Clarks' business relationship with Farmers was governed by a District Manager's Appointment Agreement, which provided that upon termination, the Clarks had the option of receiving a lump sum payout from Farmers or obtaining a purchaser with Farmers's approval. Their interest in the agency constituted the bulk of the Clarks' retirement assets.

¶ 4 Nearing retirement age, the Clarks sought tax advice from defendants Vernon Calder (Calder) and Dexter Snow (Snow), both accountants for defendant Grant Thornton & Company. The Clarks specifically requested assistance in retirement planning, as well as advice on the options available to them for avoiding unnecessary taxes. They were advised to accept a lump sum payment from Farmers and retire by December 31, 1986, in order to claim the lump sum payment as capital gain for tax purposes. Calder and Snow also advised the Clarks that the tax law regarding capital gain would change by January 1, 1987, and that the new law would not be as beneficial to them.

¶ 5 Shortly thereafter, Calder moved to Deloitte where he continued to act as the Clarks' accountant and tax advisor. Relying on Calder's advice, the Clarks sold their interest in the agency to Farmers for a lump sum payment of $748,410 on December 31, 1986. In April 1987, defendant Gary C. Hayes, an accountant for Deloitte, prepared and signed the Clarks' 1986 federal tax return. The tax return treated the Clarks' lump sum payment as capital gain.

¶ 6 Unknown to the Clarks, in 1973 the United States Tax Court held that upon termination of a Farmers Agency Agreement, the lump sum payment is treated as ordinary income and not capital gain. Deal v. Commissioner, 32 T.C.M. (CCH) 216 (1973). In March 1988, the Clarks received notice from the Internal Revenue Service (IRS) that their 1986 tax return was being audited; specifically, the treatment of the lump sum payment was being challenged. Upon receipt of that notice, the Clarks contacted Calder, who assured them the capital gain treatment of the lump sum payment was accurate and that the 1986 tax returns had been properly prepared. He advised the Clarks to contest the IRS's position that the lump sum payment was ordinary income rather than capital gain.

¶ 7 Following the audit, the Clarks received a letter from the IRS in January 1990 advising them that because the IRS characterized the lump sum payment as ordinary income, they were being assessed $262,298 in additional taxes and $32,361 in penalties. This letter also informed them that the assessment would become final unless they appealed it within thirty days. Calder continued to assure the Clarks that the tax advice and tax return preparation were correct, and to advise them to appeal the additional assessment and penalties.

¶ 8 Relying on Calder's advice, and unable to pay the additional taxes and penalties, the Clarks protested the assessment and proceeded through the administrative appeals process. In September 1991, the Clarks received a letter from the IRS informing them that their appeal had been rejected, and that they had ninety days to challenge the assessment by appealing to the United States Tax Court; otherwise the assessment would become final.

¶ 9 Again, relying on Calder's advice, the Clarks appealed the assessment to the Tax Court. On June 16, 1994, the Tax Court issued its opinion rejecting the IRS's claim for $262,298 in additional taxes, but nevertheless upholding the IRS's position on ordinary income and assessing the Clarks $129,443 in additional taxes and $32,361 in penalties. See Clark v. Commissioner, 67 T.C.M. (CCH) 3105 (1994).¹ The final judgment was entered on or about September 16, 1994.

¶ 10 Based on the above-described allegations, the Clarks asserted three claims against defendants: one for professional malpractice, one for punitive damages, and one for breach of contract.² The Clarks alleged in their complaint that they provided defendants all the necessary records and information to properly advise them on their retirement options and tax consequences. According to the Clarks, the defendants held themselves out as accounting and tax professionals possessing the experience and expertise in financial and tax affairs necessary to advise them concerning the best manner in which to exercise their rights under the agreement. Furthermore, the Clarks alleged that defendants were fiduciaries, who were paid for the services they provided, and who were trusted and depended upon by the Clarks to provide them with sound accounting and tax advice. As judgment, the Clarks requested among other things, "the additional taxes, interest, and penalties paid or found owing to the IRS and/or State tax authorities as a consequence of Defendants' negligence and/or breach of contract," "general damages for . . . emotional distress," and "the amount of fees and charges paid . . . to Defendants for their services."

¶ 11 Deloitte moved to dismiss under rule 12 of the Utah Rules of Civil Procedure. In its motion, Deloitte argued that as a matter of law the Clarks' malpractice claim was barred by the applicable four-year statute of limitation because the claim arose when the erroneous return was filed in April 1987, or at the latest on September 19, 1991, when the Clarks received the ninety-day letter from the IRS. Deloitte further argued that the discovery rule was inapplicable because it was not mandated by statute, there was no fraudulent concealment or exceptional circumstances, and the Clarks knew of the Tax Court's decision prior to the expiration of the statute of limitation. If the discovery rule applied, Deloitte nevertheless argued the claim would still be time barred as a matter of law. With respect to the claim for punitive damages, Deloitte argued it was not a separate legally cognizable claim. As to the claim for breach of contract, Deloitte argued it was a rephrased negligence claim.

¶ 12 In response, the Clarks argued their malpractice claim did not arise until June 16, 1994, when the United States Tax Court rendered its opinion. According to the Clarks, prior to the Tax Court's final decision, their damages were too remote and speculative to be the subject of a lawsuit. In the alternative, the Clarks contended that if their claim had arisen prior to the Tax Court's ruling, the statute of limitation was tolled by Calder's representations that the tax advice and 1986 tax return were correct; as well as his advice to appeal the assessment of taxes and penalties. The Clarks also argued the statute of limitation had been tolled under the exceptional circumstances doctrine of Utah's discovery rule because they relied on the defendants' superior knowledge and training.

¶ 13 The district court dismissed the plaintiffs' malpractice claim holding that under section 78-12-25(3) of the Utah Code the applicable statute of limitation is four years. The court concluded that the action accrued, at the latest, in September 1991, when the Clarks received the ninety-day letter. In addition, the court found that the discovery rule did not apply in this case, and that no exceptional circumstances existed to toll the running of the statute of limitation. Because plaintiffs failed to respond to Deloitte's arguments regarding the claims for punitive damages and breach of contract, the court also dismissed these claims. Therefore, the only claim on appeal is the claim for professional malpractice.³

STANDARD OF REVIEW

¶ 14 Under rule 12 of the Utah Rules of Civil Procedure, a motion to dismiss is proper "only where it clearly appears that the plaintiff or plaintiffs would not be entitled to relief under the facts alleged or under any state of facts they could prove to support their claim." Prows v. State, 822 P.2d 764, 766 (Utah 1991). Accordingly, we will affirm the district court's dismissal "`only if it is apparent that as a matter of law, the plaintiff[s] could not recover under the facts alleged.'" Educators Mut. Ins. Ass'n., 890 P.2d at 1030 (citing Lowe v. Sorenson Research Co., 779 P.2d 668, 669 (Utah 1989)). "Because we consider only the legal sufficiency of the complaint, we grant the [district] court's ruling no deference and review it for correctness." Id.

ANALYSIS

I. OVERVIEW OF TAX APPEAL PROCESS

¶ 15 When a federal tax return is selected for audit, an examination is performed by an IRS examiner. At the conclusion of the examination, the taxpayer is informed of the examiner's findings and any proposed deficiency assessments. If the...