Vernon J. Rockler & Co. v. GLICKMAN, ETC.

Decision Date08 December 1978
Docket NumberNo. 47850.,47850.
Citation273 NW 2d 647
CourtMinnesota Supreme Court
PartiesVERNON J. ROCKLER & CO., INC., Appellant, v. GLICKMAN, ISENBERG, LURIE & CO., et al., Respondents.

Dorfman, Katz, Taube, Lange & Davis and Steven C. Davis, Minneapolis, for appellant.

Richards, Montgomery, Cobb & Bassford and L. Hamilton May, Jr., Minneapolis, for respondents.

Heard before ROGOSHESKE, PETERSON and SCOTT, JJ., and considered and decided by the court en banc.


This is an appeal from an order and judgment in favor of defendants and from an order denying plaintiff's motion for a new trial or a reopening of evidence.

Plaintiff, a closely held corporation, is registered as a broker-dealer in securities with the Securities Exchange Commission and is licensed by the State of Minnesota. Defendant Glickman, Lurie, Eiger & Co.1 is a partnership comprised of certified public accountants engaged in the business of providing accounting, auditing, business planning, and tax planning services to the public, and has provided such services to plaintiff from 1961 to 1972.

Beginning in 1962 plaintiff maintained an investment account for which it purchased securities to be held as capital assets. These securities were segregated from those held in its inventory account for sale to customers in the ordinary course of business. Plaintiff reported profits realized from the sale of securities held in its investment account for more than 6 months at capital gains rates for income tax purposes. Plaintiff also maintained an inventory account through which it transacted approximately 95 percent of its business. Plaintiff maintained a separate inventory account for securities sold but not yet purchased. Such transactions are referred to by the parties as "short sales."2 Plaintiff hoped it would be able to purchase securities for this account in the marketplace for less than plaintiff had sold them. When plaintiff was able to do so, it realized gains; if it had to purchase the securities at a higher price, it suffered a loss. Plaintiff had lost considerable amounts on "short sales" at least three times between 1961 and 1967. Plaintiff reported all gains and losses from transactions in securities held in these accounts at ordinary income tax rates.

During the time in issue, plaintiff held many of the same securities in its investment account that it was selling short. Because of the rising market in many of these securities, plaintiff was in danger of losing money on its "short sales." Hence, plaintiff considered the possibility of transferring securities from its investment account to its inventory account to cover its short sales. Plaintiff's president, Vernon Rockler, claims he spoke with Mr. Serber of defendant firm concerning such transfers and their income tax effect some months prior to the end of the fiscal year ending June 30, 1968. Mr. Rockler testified that Mr. Serber advised him to transfer the securities by means of a general bookkeeping entry which would preserve their capital gains treatment. Mr. Serber denied that this conversation ever occurred.

In May or June 1968 Mr. Rockler directed plaintiff's bookkeeper to make general bookkeeping entries transferring certain securities from the investment account to the inventory account. When defendants audited plaintiff's books in the summer of 1968 in preparing plaintiff's income tax return, defendants relied on the schedules prepared by plaintiff and did not challenge such transfers.

In December 1968 Mr. Rockler met with Mr. Ephraim of defendant firm to discuss the possibility of "borrowing" securities which had not been held for 6 months from the investment account to cover certain "short sales." Mr. Ephraim told him there was no way to "borrow" such securities and maintain their capital asset status. He did advise Mr. Rockler that pursuant to Internal Revenue Code, 26 U.S.C.A. § 1236, there were two ways to preserve capital gains treatment — by direct sale from the investment account to the open market and by a general journal entry transferring securities from the investment account to the inventory account. He testified at trial:

"THE WITNESS: Well, my answer to it would be that I would have to know how long, or I would have to see what happened to the stocks that were then transferred into inventory. If the stocks were transferred into inventory and then right out on to the street, that would be one thing.
"Q. Would that be okay?
"A. Yes, I think that would be okay. But that is just my thinking on it.
"Q. And that would not violate Section 1236 A-2, in your opinion?
"A. Yes, sir, that is correct; and they went directly out.
"Q. And they went directly out. You mean by that, suppose they went out against an account such as securities sold but not yet purchased?
"A. Well, as long as they weren\'t thereafter held.
"Q. In inventory?
"A. In inventory. If they went from the investment account to the inventory account to the street, I wouldn\'t like it as well as if they had gone directly to the street; but I would think that would be all right.
"Q. But that is in fact, exactly what you told Mr. Rockler in December of 1968, isn\'t it?
"A. Yes, I would think that probably is what I told Mr. Rockler. However, I would tell him that he has a very safe way of doing it, and that\'s to go directly to the street. But if he chooses to go through his inventory account, I just don\'t know what the results are going to be. I do know what the results are going to be if he goes directly to the street."

Between December 1968 and June 1969 plaintiff made numerous transfers from its investment account to its inventory account. Defendants audited plaintiff's records in the summer of 1969 in preparing plaintiff's income tax return. Defendants relied on schedules prepared by plaintiff and did not challenge these transfers.

In 1971 the Internal Revenue Service audited plaintiff's 1969 income tax return. The IRS disallowed capital gains treatment of these transfers and assessed a deficiency. Upon the advice of Walter Rockler, a tax attorney, plaintiff negotiated with the IRS and eventually settled the deficiency by paying capital gains tax rates on one-half the gain and ordinary income tax rates on the other half.

Plaintiff then brought suit against defendants to recover the amount of the deficiency assessment, interest and penalties, and for reimbursement of attorneys fees and costs incurred in protesting and settling the deficiency. The trial court found that the advice given by defendants did not constitute professional malpractice; that it did not warrant action in reliance thereon by plaintiff; that plaintiff did not actually rely on such advice; that plaintiff made the transfers because of the need to cover its "short sales" not because of defendants' advice; and that plaintiff had failed to establish its damages because it settled with the IRS.

The sole issue in this case is whether these findings are clearly erroneous. Under Rule 52.01, Rules of Civil Procedure, factual findings can be held clearly erroneous only if upon a review of the entire evidence we are left with the definite and firm conviction that a mistake has been made. In re Trust known as Great Northern Iron Ore Properties, 308 Minn. 221, 225, 243 N.W.2d 302, 305 (1976); In re Estate of Balafas, 293 Minn. 94, 96, 198 N.W.2d 260, 261 (1972).

Accountants are held to the same standard of reasonable care as lawyers, doctors, architects, and other professional people engaged in furnishing skilled services for compensation. Gammel v. Ernst & Ernst, 245 Minn. 249, 253, 72 N.W.2d 364, 367 (1955). Plaintiff in an accounting malpractice action must prove the elements delineated for a legal malpractice action in Christy v. Saliterman, 288 Minn. 144, 150, 179 N.W.2d 288, 293 (1970). Thus, to recover in this case plaintiff would need to prove a duty (the existence of an accountant-client relationship), the breach of that duty (the failure of the accountants to discharge their duty of reasonable care), factual causation (that "but for" the advice plaintiff would not have made transfers), proximate causation (that plaintiff's increased tax liability was a foreseeable consequence of defendants' advice), and damages (that plaintiff actually suffered increased tax liability due to defendants' advice). The trial court specifically relied on Christy v. Saliterman, supra, in making its findings and, therefore, did not apply the wrong legal standard. The trial court's finding on reliance was merely another way to discuss the element of factual causation.


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