Ackerman v. Price Waterhouse

• Decision Date: 06 December 1994
• Citation: 84 N.Y.2d 535,644 N.E.2d 1009,620 N.Y.S.2d 318
• Parties: , 644 N.E.2d 1009, 63 USLW 2369 Carolyn ACKERMAN et al., Respondents, v. PRICE WATERHOUSE, Appellant. (And One Other Action and a Third-Party Action.)
• Court: New York Court of Appeals Court of Appeals

Page 318

620 N.Y.S.2d 318

84 N.Y.2d 535, 644 N.E.2d 1009, 63 USLW 2369

Carolyn ACKERMAN et al., Respondents, v. PRICE WATERHOUSE, Appellant (And One Other Action and a Third-Party Action.)

Court of Appeals of New York.

Dec. 6, 1994.

[84 N.Y.2d 536] Debevoise & Plimpton, New York City (David W. Rivkin, John G. Koeltl and Lorna

[644 N.E.2d 1010] G. Schofield, of counsel), and Rodman W. Benedict, for appellant

Stamell, Tabacco & Schager, New York City (Richard J. Schager, Jr., Jared B. Stamell and Michelle Rago, of counsel), Levy Sonet & Siegel and Camhy Karlinsky & Stein, for respondents.

[84 N.Y.2d 537] Willkie Farr & Gallagher, New York City (Louis A. Craco, Richard L. Klein, James H. Bicks and Joanne Chormaski, of counsel), and Richard I. Miller, for American Institute of Certified Public Accountants, amicus curiae.

Vedder, Price, Kaufman, Kammholz & Day, New York City[84 N.Y.2d 538] (Dan L. Goldwasser, Michael J. Crisafulli and Salvatore G. Gangemi, of counsel), for New York State Soc. of Certified Public Accountants, amicus curiae.

OPINION OF THE COURT

CIPARICK, Judge.

In a malpractice action against an accountant, the Statute of Limitations begins to run on the date the accountant's work product is received by the client since this is the first time the client can rely on the alleged negligent work product. Therefore, in this case, we conclude that only those claims relating to defendant's negligence in connection with its advice and preparation of plaintiffs' limited partnerships' financial statements and tax returns, including Schedules K-1, arising in the three years prior to the commencement of this action are timely under CPLR 214(6).

I.

By complaint dated April 10, 1990, plaintiffs, individuals who purchased limited partnership tax shelters in real property partnerships sponsored by Commercial Properties Group, Inc. (CPG), instituted this action against defendant, an accounting partnership, alleging negligence and professional malpractice in the preparation of annual returns for the tax years 1980-1987 for their limited partnership interests. CPG engaged defendant to render annual accounting services and prepare the partnerships' tax returns and Schedules K-1, which reported each limited partner's pro rata share of partnership income and expenses. Defendant transmitted the annual tax returns to CPG, and was aware that each limited partner received such tax documents, including Schedules K-1, for filing with their Federal and State income tax returns.

Plaintiffs assert that since 1979 they relied on defendant's advice regarding the availability of an accrued interest deduction, calculated under the "Rule of 78's", ¹ which was employed in the tax returns prepared by defendant and submitted by plaintiffs for each tax year from 1980-1988. Plaintiffs contend that defendant's use of the Rule of 78's caused each limited partner to report a tax deduction far in excess of the actual allowable deduction. Plaintiffs allege that from the outset, defendant knew, or reasonably should have known, that use of the Rule of 78's was improper, since it was not approved by the Internal Revenue Service (IRS) for long-term transactions, such as limited partnerships.

Indeed, plaintiffs claim that, in 1983, after the IRS released Revenue Ruling 83-84, which specifically barred the use of the Rule of 78's in cases where the resulting deduction exceeded the true economic accrual of interest, defendant ceased using the Rule of 78's to calculate accrued interest on all real estate partnerships, except CPG partnerships. Plaintiffs aver that included in their tax documents for the 1983 tax year was an opinion letter, dated March 1984, stating that interest expense deductions pursuant to the Rule of 78's comports with

"the existing case law and Revenue Rulings in effect at the time the transaction was entered into. * * * [I]t is the practice of the [IRS] that [Revenue R]ulings are generally not retroactive with respect to transactions entered into prior to the effective date of the ruling, particularly where, as here, the transaction was structured in accordance with the existing ruling policy. Notwithstanding this, [defendant] has * * * been furnished with an opinion of tax counsel * * * that it is more likely than not that the interest deductions, as reported, will be upheld if challenged by the IRS based on research which indicates that the Commissioner cannot properly assert that Revenue Ruling 83-84 has retroactive effect".

Nevertheless, plaintiffs allege that defendant, in breach of "its duty to exercise the skill and knowledge normally possessed by members of its profession," continued to utilize the Rule of 78's in preparing the tax returns and Schedules K-1 for each limited partner for the years 1984-1988.

In 1983, the IRS began auditing partnerships in which plaintiffs held interests. In 1984, plaintiffs began receiving 30- or 60-day letters, advising them of tax deficiencies for specified years, and requiring either remittal of the deficiency amounts or commencement of an administrative challenge within the time period specified. Plaintiffs elected to administratively protest. By 1986, however, the avenues of administrative review were exhausted and no settlements were reached. Accordingly, the IRS instituted the last phase in the deficiency assessment process and issued 90-day statutory notices of deficiency to the limited partners. Upon receipt of this notice, plaintiffs had 90 days to satisfy one of two options: pay the deficiency sum or protest the determination to the United States Tax Court. Some plaintiffs filed petitions in the United States Tax Court, while others stayed the protest period pending a decision by the Tax Court on a test case. Subsequently, in December 1988, the United States Tax Court upheld the retroactive application of Revenue Ruling 83-84 by the IRS (see, Prabel v. Commissioner of Internal Revenue, 91 T.C. 1101, 1988 WL 138769). In August 1989, the Third Circuit Court of Appeals affirmed this determination (see, Prabel v. Commissioner of Internal Revenue, 882 F.2d 820). Consequently, this action ensued.

Plaintiffs characterize defendant's extended use of the Rule of 78's in calculating their limited partnerships' interest deduction as negligent and reckless and in breach of the duty of care owed by an accountant to its clients. They allege that defendant failed to warn them of the risks and consequences of interest deductions calculated under the Rule of 78's and reported on Schedules K-1 for the years 1980-1988. Plaintiffs seek damages, including the amount of penalty interest assessed by the IRS, and legal fees.

Defendant moved to dismiss the complaint, inter alia, as barred by the Statute of Limitations. In an interim order, Supreme Court, inter alia, directed the parties to consider application of the limitations period articulated in the Texas Supreme Court case of Atkins v. Crosland, 417 S.W.2d 150 (1967), which held that a cause of action against an accountant for negligent preparation of a tax return accrues at the time the IRS assesses a tax deficiency. Thereafter, by decision dated November 10, 1992, Supreme Court departed from established New York principles and adopted the rule articulated in Atkins v. Crosland holding that "the Statute of Limitations on a claim of negligence and malpractice against an accountant for acts relating to Federal income tax preparation shall commence upon a reference point based on IRS action" (156 Misc.2d 865, 873, 591 N.Y.S.2d 936).

The Appellate Division affirmed on the decisions below, with one Justice dissenting (see, Ackerman v. Price Waterhouse, 198 A.D.2d 1, 604 N.Y.S.2d 721). The Appellate Division granted leave to appeal and certified the following question: "Was the order of the Supreme Court, as affirmed by this Court, properly made?" For the reasons that follow, we now reverse the order of the Appellate Division and answer the certified question in the negative.

II.

A cause of action charging that a professional failed to perform services with due care and in accordance with the recognized and accepted practices of the profession is governed by the three-year Statute of Limitations applicable to negligence actions (see, CPLR 214[6]. A malpractice cause of action sounds in tort and, therefore, absent fraud, accrues when an injury occurs, even if the aggrieved party is then ignorant of the wrong or injury (see, Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 94, 595 N.Y.S.2d 931, 612 N.E.2d 289; Schwartz v. Heyden Newport Chem. Corp., 12 N.Y.2d 212, 216, 218, 237 N.Y.S.2d 714, 188 N.E.2d 142; Schmidt v. Merchants Desp. Transp. Co., 270 N.Y. 287, 300-301, 200 N.E. 824, rearg. denied 271 N.Y. 531, 2 N.E.2d 680). As a...