Bick v. Peat Marwick and Main

• Decision Date: 21 September 1990
• Docket Number: No. 64211,64211
• Parties: Richard T. BICK, Appellee, v. PEAT MARWICK AND MAIN, Appellant.
• Court: Kansas Court of Appeals

Page 94

799 P.2d 94

14 Kan.App.2d 699

Richard T. BICK, Appellee, v. PEAT MARWICK AND MAIN, Appellant.

No. 64211.

Court of Appeals of Kansas.

Sept. 21, 1990.

Review Denied Nov. 13, 1990.

Syllabus by the Court

1. Pursuant to K.S.A.1989 Supp. 60-513(b), the statute of limitations starts to run in a tort action at the time a negligent act causes injury if both the act and the resulting injury are reasonably ascertainable by the injured party.

2. A taxpayer's constructive knowledge that potential interest can be assessed on underpayment of income tax does not equate to knowledge of the negligent act that would trigger the taxpayer's liability for interest.

3. Where there is evidence in dispute as to when the plaintiff's injury first became reasonably ascertainable, the question is one for the trier of fact.

4. A taxpayer cannot commence a negligence action against a tax preparer until the taxpayer has been damaged by the tax preparer's negligent conduct. Assessment of the negligence penalty is the essential factor completing the wrong and the statute of limitations cannot commence until the tort complained of is completed.

5. Although a tax preparer's negligence may not exonerate the taxpayer from his own negligence, a taxpayer can recover from the tax preparer the proportionate share of a penalty resulting from the tax preparer's negligence.

6. Penalties imposed under various Internal Revenue Code sections are not criminal penalties. Rather, they are civil penalties imposed as a means of insuring that the taxes owed the government are paid and paid promptly. They are merely collection devices.

7. Public policy does not prohibit the taxpayer's filing of a separate negligence action against a tax preparer for indemnification for negligence penalties assessed.

8. K.S.A. 60-421 provides that evidence of prior convictions used for impeachment purposes is inadmissible unless the prior crime involves dishonesty or false statement.

9. Harmless errors, not prejudicing the substantial rights of the complaining party, must be disregarded on appeal.

Christopher W. O'Brien and Calvin D. Wiebe, of Triplett, Woolf & Garretson, Wichita, and Andrew D. Hurwitz and Helen Perry Grimwood, of Meyer, Hendricks, Victor, Osborn & Maledon, Phoenix, Ariz., for appellant.

John W. Johnson, of Render, Kamas & Hammond, Wichita, for appellee.

Before LARSON, P.J., BRISCOE, J., and HARRY G. MILLER, District Judge Retired, Assigned.

BRISCOE, Judge:

Defendant Peat Marwick and Main (Peat Marwick) appeals a jury verdict awarding plaintiff Richard Bick $170,250 in an accounting malpractice case. Our reference throughout this opinion to Peat Marwick will also encompass its predecessor corporation, which merged with Peat Marwick in 1987.

In 1981, Bick resigned his position as president of Koch Exploration. As part of the resignation package, he was entitled to ten annual payments of $84,461 from the Koch Industries shadow stock program and was required to sell Koch his shares of common stock. Upon the advice of Alvin Marcus, a partner with Peat Marwick, Bick sold the stock in October 1981 and received $884,115 for the common stock and $84,461 from the shadow stock program.

In late December, Peat Marwick prepared fourth quarter estimated tax payments for Bick totalling $249,065, which Bick paid. In early 1982, Peat Marwick prepared Bick's 1981 tax returns but did not include the sale of the common stock or the shadow stock payment. As a result, Bick received a tax refund of $194,793.

In 1986, the IRS audited the Koch Industries shadow stock program. Peat Marwick discovered the error in Bick's 1981 tax returns and prepared amended returns. On August 15, 1986, Bick filed the amended returns, paying additional tax of $227,588 and statutory interest totalling $170,662. Bick received a "30-day letter" from the IRS dated March 2, 1987, proposing imposition of a negligence penalty pursuant to I.R.C. § 6653(a) (1986). On November 3, 1987, the IRS issued a Notice of Deficiency to Bick assessing negligence penalties in the amount of $29,600.40. Bick filed a formal protest but ultimately conceded the negligence penalties.

On February 19, 1988, Bick filed this case against Peat Marwick, alleging accounting malpractice. The jury found Peat Marwick to be 75 percent at fault. The jury also found Bick did not know or should not have known of the omission in his 1981 tax returns before February 18, 1986, the date Peat Marwick discovered the omission and reported it to Bick.

Peat Marwick raises three issues: (1) Whether Bick's action is barred by the statute of limitations; (2) whether Bick can recover a negligence penalty from a defendant tax preparer; and (3) whether the court erred in prohibiting evidence of Bick's prior conviction.

1. Statute of Limitations

K.S.A.1989 Supp. 60-513(a)(4) provides a two-year statute of limitations for a cause of action alleging negligence. Subsection (b) states the Kansas discovery rule:

"Except as provided in subsection (c), the causes of action listed in subsection (a) shall not be deemed to have accrued until the act giving rise to the cause of action first causes substantial injury, or, if the fact of injury is not reasonably ascertainable until some time after the initial act, then the period of limitation shall not commence until the fact of injury becomes reasonably ascertainable to the injured party, but in no event shall an action be commenced more than 10 years beyond the time of the act giving rise to the cause of action."

Peat Marwick relies on both prongs of 60-513(b). First, it contends Bick's negligence cause of action accrued on April 16, 1982, because he suffered substantial injury at that point. Second, it argues Bick's injury was reasonably ascertainable when he signed his tax returns on April 15, 1982. It contends Bick should have known as a matter of law that Peat Marwick was negligent in preparing the tax returns on April 15, 1982, and that he was injured and had an actionable claim on April 16 when the statutory interest penalty began accruing.

Peat Marwick cites Roe v. Diefendorf, 236 Kan. 218, 689 P.2d 855 (1984), for the proposition that Bick incurred an actionable injury on April 16. In Roe, plaintiff sued Diefendorf for negligently driving her car into his motorcycle. Diefendorf argued the two-year statute of limitations had run because Roe filed the petition more than two years after the accident. The trial court accepted Roe's argument that the statute of limitations was tolled because his doctor did not detect a significant injury until over one year after the accident. The Supreme Court reversed, stating it is the discovery of the fact of injury rather than the extent of injury that begins the statute of limitations running. The issue in Roe was whether 60-513(b) requires the injured party to know the extent of the injury before the statutory time limitation begins running. In the present case, the issue is not whether Bick knew the extent of his injury prior to February 18, 1986. The issue is whether he knew or had reason to know he had been injured at all. Roe is therefore distinguishable from the present case.

Peat Marwick cites Knight v. Myers, 12 Kan.App.2d 469, 748 P.2d 896 (1988), for the proposition that Bick should have known of the injury "as a matter of law." Knight was a legal malpractice case in which plaintiffs sued their attorney, alleging he failed to advise them that their cause of action in the underlying case was subject to a statute of limitations. The trial court ruled their action was time barred and this court agreed. Applying the discovery rule set forth in Pancake House, Inc. v. Redmond, 239 Kan. 83, 87 716 P.2d 575 (1986), the court held the plaintiffs' cause of action accrued when they reasonably should have discovered the material facts necessary to prove their claim. They suffered actionable injury when the statute of limitations in the underlying case ran. The court then ruled plaintiffs had constructive knowledge of the statute of limitations because "[e]veryone is presumed to know the law." Knight, 12 Kan.App.2d at 475, 748 P.2d 896. Thus, the legal malpractice claim filed more than two years after this constructive knowledge of the injury was time barred.

Peat Marwick contends Bick should be charged with constructive knowledge of I.R.C. § 6601(a) (1986). That code section provides for daily accrual of interest applied to income tax underpayments. The interest begins to accrue on the date the tax return and payment are due. Peat Marwick contends that, under Knight, the court must hold as a matter of law that Bick's first substantial injury (the accruing of an interest penalty on April 16, 1982) was reasonably ascertainable on April 15 because Bick constructively knew the provisions of § 6601(a). This contention is not persuasive. A taxpayer's constructive knowledge that potential interest can be assessed on underpayment of income tax does not equate to knowledge of the negligent act that would trigger the taxpayer's liability for interest.

Here, the jury was asked:

"Do you find that plaintiff knew, or reasonably should have known any time before February 18, 1986, that his 1981 income tax return did not include sums received by him from Koch Exploration that he received in 1981?"

The jury responded: "No." Special interrogatories are permitted in Kansas and the decision to submit them to the jury rests in the sound discretion of the trial court. K.S.A. 60-249(b); Schaeffer v. Kansas Dept. of Transportation, 227 Kan. 509, 520, 608 P.2d 1309 (1980). Further, failure to object to the special question precludes appellate review. See Hall v. High, 214 Kan. 489, 490, 520 P.2d 1283 (1974). In the present case, Peat Marwick failed to object to the special interrogatory but, on appeal, asks this court to disregard as a matter of law the interrogatory and the jury's response to it.

Where there is evidence in dispute as to when the plaintiff's...