Ames & Fischer Co. v. Mcdonald, s. A10–1439

• Decision Date: 09 May 2011
• Docket Number: A10–1447.,Nos. A10–1439,s. A10–1439
• Court: Minnesota Court of Appeals
• Parties: AMES & FISCHER CO., II, LLP, et al., Respondents,v.John R. McDONALD, et al., Appellants (A10–1439), Defendants (A10–1447),Larsen, Larsen & Associates, P.A., et al., Defendants (A10–1439), Appellants (A10–1447).

798 N.W.2d 557

AMES & FISCHER CO., II, LLP, et al., Respondents,

v.John R. McDONALD, et al., Appellants (A10–1439), Defendants (A10–1447),Larsen, Larsen & Associates, P.A., et al., Defendants (A10–1439), Appellants (A10–1447).

Nos. A10–1439

A10–1447.

Court of Appeals of Minnesota.

May 9, 2011.

Syllabus by the Court

A cause of action for professional malpractice based on the allegedly negligent failure to make or advise to make an I.R.C. § 754 (2006) election accrues, and the statute of limitations begins to run, when the income-tax return is filed without making the election.

Steven J. Weintraut, Kristin L. Kingsbury, Siegel, Brill, Greupner, Duffy & Foster, P.A., Minneapolis, MN, for respondents.Richard J. Thomas, Byron G. Ascheman, Burke & Thomas, PLLP, St. Paul, MN, for appellants John R. McDonald, et al.Charles E. Jones, Meagher & Geer, P.L.L.P., Minneapolis, MN, for appellants Larsen, Larsen & Associates, P.A., et al.Considered and decided by HUDSON, Presiding Judge; JOHNSON, Chief Judge; and TOUSSAINT, Judge.

OPINION

TOUSSAINT, Judge.

These interlocutory appeals are taken from the district court's denial of appellants' motions for summary judgment. The case involves respondents' claims of professional malpractice against appellants. The district court certified as important and doubtful the legal question of when the statute of limitations begins to run on a professional-malpractice action based on the allegedly negligent failure to make or advise to make an election under section 754 of the Internal Revenue Code (Section 754 election). We conclude that the cause of action accrues, and the statute of limitations begins to run, at the time the tax return is filed without the election. ¹ We rephrase the certified question and answer in the affirmative.

FACTS

The relationships of the parties are as follows. Respondents Ames & Fischer Co., II, LLP, et al. (collectively Ames & Fischer) are three partnerships; a revocable grantor trust established by Mathias Fischer, the family patriarch; individual family members who own the partnerships; and trusts or trustees with an interest in one of the Fischer entities. Appellants John R. McDonald; John R. McDonald, Ltd.; John R. McDonald, S.C.; J. McDonald, S.C.; and McDonald and Munson (collectively McDonald), are attorney John McDonald and his various law firms that provided business and estate planning legal counsel to Ames & Fischer from 1962 to 2007. Appellants Larsen, Larsen & Associates, P.A.; James Larsen; and Michael Larsen (collectively Larsen) are an accounting firm and two certified public accountants. Larsen provided advice concerning financial matters, including tax preparation, to Ames & Fischer from 1987 to 2007. Larsen prepared Ames & Fischer's 2000 and 2001 income-tax returns.

This action is based on Larsen's failure to make and McDonald's failure to advise Ames & Fischer to make Section 754 elections for the three Fischer partnerships for tax-years 2000 and 2001, and this appeal involves the application of the six-year statute of limitations. See Minn.Stat. § 541.05, subd. 1(5) (2010) (providing six-year statute of limitations for legal or professional malpractice). Ames & Fischer sued Larsen for accounting malpractice on April 4, 2008, and McDonald for legal malpractice on April 10, 2009. The district court later consolidated the cases.

In the Larsen complaint, Ames & Fischer alleged that Mathias Fischer's death in July 2000 was a qualifying transfer permitting Section 754 elections to be made for tax-year 2000. Ames & Fischer also alleged that sales of partnership interests in 2001 were qualifying transfers permitting Section 754 elections to be made for tax-year 2001. Ames & Fischer alleged that Larsen breached a duty of reasonable care by failing to “provide services and advice that resulted in the making of proper Section 754 Elections ... for the tax years of 2000 and 2001.” Ames & Fischer sought

without limitation damages relating to loss of tax deductions to all or some of the Plaintiffs, increased taxes on sale of partnership assets, increased taxes on the future sale of partnership assets, and professional fees and expenses expended to correct the accounting errors resulting from the failure to effectuate the Section 754 elections ... for tax years 2000 and 2001.

In the McDonald complaint, Ames & Fischer alleged that McDonald breached the standard of care “by not telling Larsen or Plaintiffs to make Section 754 Elections ... for the tax years of 2000 and 2001,” as well as “by not telling Larsen or Plaintiffs to take steps to make 754 Elections ... for the tax returns that had already been filed for the 2000 and 2001 tax years.” Ames & Fischer sought similar damages as against Larsen.

In October 2008, Thomas Boesen, a certified public accountant, prepared an expert report on behalf of Ames & Fischer concerning Larsen's alleged negligence. Boesen estimated damages of approximately $2.5 million as of August 1, 2009. Boesen explained that if a qualified event—such as the death of a partner or the transfer of a partnership interest—occurs, a Section 754 election may be made. This allows the partnership to increase the tax basis of its assets, thereby reducing its taxable income when the related assets are sold or depreciated. Boesen opined that Larsen's breaches of the standard of care occurred “when [Larsen] prepared and signed” the entities' tax returns, among other incidents and opportunities. Later in the report, Boesen stated that Larsen “should have recommended” making Section 754 elections for tax-years 2000 and 2001 and the election “should have been included with [the entities'] 2000 or 2001 tax returns.” Boesen stated that Larsen's breach occurred “as [it] prepared” the partnerships' 2000 and 2001 tax returns, explaining that timely Section 754 elections “would have enabled [the] entities to step-up the basis of their assets by millions of dollars,” which would have reduced taxable income and increased depreciation deductions. Boesen's calculation of damages included overpaid taxes and interest on the overpaid taxes.

In an August 2009 affidavit, Boesen stated that his expert report “does not focus on when the damage occurred, nor does it consider if damage can be ‘incurred’ before it is paid or discovered.” Boesen then opined that “the potential impact of the failure to make the 754 elections and obtain the potential tax benefits for the 2000 and 2001 tax years did not occur until, at the earliest, one year beyond the original due date of April 15 of the year after that tax year.” He asserted that during the 12–month extension period “election would have still obtained all of the tax benefits and prevented any damage to any of the owners of the entities” because an adjustment “will always relate back to the tax year that requires revision.” Boesen also asserted that Mathias Fischer's death on July 22, 2000, and transfers of partnership interests on May 1, 2001, were “separate and distinct events” allowing Section 754 elections to be made for the 2000 and 2001 tax years.

Boesen submitted another affidavit in November 2009, in which he explained: “Obtaining a stepped-up basis in partnership assets is financially advantageous because additional depreciation deductions may be available to the partner(s), which reduces the taxable income, and if partnership assets are sold, income taxes resulting from the sale will be reduced due to the stepped-up basis.” But, he acknowledged, a Section 754 election is not advisable in all circumstances—specifically when there is a stepped-down basis because the market value of partnership assets is lower than the tax basis of those assets. Boesen then alleged: “Larsens' negligence wasn't their original preparation of the tax returns without the Elections. It was their failure to ensure that the 754 Elections were timely made.” Boesen attached a supplemental report to the affidavit, in which he calculated more than $1.9 million in damages that were limited to the failure to make Section 754 elections for tax-year 2001.

Thomas Woessner, an attorney and certified public accountant, prepared an expert report for Ames & Fischer concerning McDonald's alleged negligence. Woessner opined that reasonable care required McDonald to recommend to Larsen and to Ames & Fischer that the three Fisher entities make Section 754 elections for tax-years 2000 and 2001. Woessner stated that this “caus[ed] the owners of the three entities to incur unnecessary income taxes,” and he agreed with Boesen's calculation of damages. Because a Section 754 election is eligible for an automatic 12–month extension, the elections “could have been made by April 15, 2002, for the 2000 tax year” and “could have independently been made by April 15, 2003, for the 2001 tax year.” According to Woessner: “There is very little, if any, downside to making a 754 Election, and the benefit of reducing future income-tax liability greatly outweighs any potential downside.”

After McDonald moved for summary judgment on the basis of the statute of limitations, the district court initially agreed that the claims against McDonald were time barred. After Larsen moved for summary judgment, the court reconsidered its ruling, concluding that the statute of limitations did not begin to run until the end of the 12–month automatic extension period. The court denied Larsen's motion for summary judgment and vacated its earlier dismissal of the claims against McDonald. These interlocutory appeals are taken from the district court's order certifying as important and doubtful the question of when the cause of action accrues and the statute of limitations begins to run.

ISSUES

I. When does the limitations period for a professional-malpractice action based on allegations of negligent failure to make or advise to make a Section 754 election begin to run?

II. Is the certified question properly before this court as a doubtful question of law?

ANALYSIS

An...