Lewin v. Miller Wagner & Co., Ltd., 1

CourtCourt of Appeals of Arizona
Citation151 Ariz. 29,725 P.2d 736
Docket NumberNo. 1,CA-CIV,1
PartiesBurton J. LEWIN and Jackie N. Lewin, Plaintiffs-Appellees, v. MILLER WAGNER & CO., LTD., Leonard Miller and Phyllis Miller, his wife; J. Carl Dornan and Marilyn Dornan, his wife; Carlos E. Wagner and Ann Wagner, his wife; Terry L. Hothem and Sally Hothem, his wife; Defendants-Appellants. MILLER WAGNER & CO., LTD., Counterclaimant, v. Burton J. LEWIN, and Jackie N. Lewin, Counterdefendants. 7809.
Decision Date25 March 1986


This is an appeal from a jury verdict awarding the plaintiffs, Burton J. Lewin and Jackie N. Lewin damages for accountant malpractice regarding their 1980 income taxes.

Burton J. Lewin owned and operated Pioneer Plumbing Supply Co., a wholesale plumbing supply business, for some 30 years. In 1976, Lewin engaged the accounting firm of Miller Wagner & Co., Ltd. to provide accounting and tax planning services for his business and personal financial affairs. The person primarily responsible for providing Lewin with tax advice was Carl Dornan, who had joined the firm in 1979 to head its tax department.

During the latter part of the 1970's, Lewin began planning for his retirement. In May of 1979, Lewin sold Pioneer Plumbing to Amfac Distribution, Inc. The sale was structured as a tax-free exchange of stock whereby Lewin exchanged all of his Pioneer Plumbing stock for shares of Amfac stock. In September of 1979, Lewin sold approximately half of his Amfac shares to the securities firm of Goldman Sachs & Company on an installment sale basis, which allowed him to receive $16,567 in 1979 and the balance of $1,242,128 in January of 1980.

Lewin wished to dispose of the balance of the Amfac stock, but was concerned with proceeding with a sale that would result in a large tax liability in 1980. He needed to know how he could affect a sale and yet minimize his tax liability.

With these concerns in mind, in February, 1980, Lewin and Dornan began meeting in regard to tax planning for the 1980 tax year. They discussed the differing tax consequences if Lewin sold the other half of the stock on a cash basis versus an installment basis. Lewin attempted to communicate his goal of paying no more than $32,000 in taxes for 1980. This was the amount that was being withheld from his earnings that year. Dornan advised Lewin that he could proceed with a cash sale of the rest of the Amfac stock in 1980 and that his taxes for the year could be decreased through charitable donations, stock option straddles, and investments in oil and gas ventures. Lewin then sold the balance of the Amfac stock in April and May of 1980, receiving $1,295,347 in cash. The capital gains Lewin realized in 1980 from the two stock sales were $1,189,478 from the 1979 installment sale and $1,251,183 from the 1980 cash sale.

Lewin chose to use stock option straddles as the major means of lowering his 1980 taxes. 1 Dornan advised Lewin that if he was going to use the stock option straddles to achieve his tax goals, he needed to acquire $750,000 in straddle losses for 1980. Lewin acquired only $554,000 in such losses, and therefore expected a tax liability of approximately $10,000 to $15,000 more than the originally anticipated $32,000 figure.

On April 13, 1981, two days before the 1980 tax returns were due, Lewin learned from personnel at Miller Wagner that his tax liability would be more than $300,000 above the amount of his withholdings. Lewin was visably shaken by this news and met immediately with Dornan and Miller to discuss his tax liability. According to Lewin, Dornan confessed he had forgotten that Lewin would be subject to the alternative minimum tax 2 which made up $208,838 of Lewin's total tax liability of $333,921 for 1980. Because Lewin believed his tax liability would not be much more than the $32,000 withheld from his earnings, he did not have funds available to pay the taxes. After obtaining an extension from the Internal Revenue Service, Lewin borrowed money to pay $100,000 of the tax liability by April 15.

After leaving the meeting with Dornan and Miller, Lewin went directly to the office of his longtime friend and attorney, Harry Cavanagh, located in the same building. Because Lewin appeared very ashen and disturbed, Cavanagh saw him immediately even though he had no appointment. Among other things, Lewin told Cavanagh that Dornan had admitted forgetting the alternative minimum tax, and that the news that his tax liability was more than $300,000 had caught Lewin totally off guard.

Lewin subsequently retained the accounting firm of Toback & Company to review his tax returns. Howard Kesselman, a certified public accountant with Toback & Company concluded that the return was accurate and that little could be done to reduce the 1980 tax liability since the 1980 tax year had ended.

Lewin filed suit against Miller Wagner, alleging accountant malpractice. At trial, Howard Kesselman and Harold Toback rendered expert testimony that Miller Wagner failed to provide proper advice under the circumstances. They testified that the 1980 Amfac stock sale should have been structured as an installment sale, rather than a cash sale, to attain Lewin's tax goals. Kesselman testified that once the cash sale of the stock took place, over $1,800,000 in stock option straddle losses would have been needed to achieve Lewin's tax goals rather than the $750,000 in losses recommended by Dornan. He testified that the cost of acquiring such a large amount of straddle losses would not have been justified. Kesselman also described the disadvantages in using tax straddles to decrease taxes, because these devices are likely to precipitate an audit and be disallowed by the Internal Revenue Service.

Dornan testified that he had no recollection that Lewin had ever let him know he was expecting to limit his tax liability for 1980 to $32,000. Dornan maintained that he had given Lewin accurate information regarding what his tax liability would be if he sold the stock on a cash basis as compared to a sale on an installment basis. He indicated that Lewin chose on his own to make the cash sale, fully aware of the implications for his 1980 tax liability. He stated that he discussed the stock option straddles and other devices with Lewin merely as means of lowering the tax liability, not as a means of decreasing it to the amount of the withholdings. He also denied forgetting the alternative minimum tax or telling Lewin he had forgotten it. Besides denying any negligence on their part, the defendants also defended on the grounds that Lewin had been contributorily negligent.

Expert witnesses for both parties testified, and Dornan himself admitted, that if he overlooked or forgot the consequences of the alternative minimum tax, his advice fell below the accepted standard of practice for accountants. All experts agreed that if Dornan knew Lewin's tax goal for 1980 was to pay no more than $32,000, the advice to sell on a cash basis fell below the accepted standard of practice. Furthermore, defendants' expert acknowledged that a tax planner has an affirmative obligation to discover his client's tax goal, and that failure to make inquiry in that regard would indicate the tax planner was not acting in a competent manner.

Lewin requested damages in the amount of $399,313.68 consisting of the following kinds of expenses Lewin had incurred: (1) $104,885.71 in interest charges on the money borrowed to pay unexpected taxes; (2) $73,281.00 for stock option straddles which he would not have needed if an installment sale had been used; (3) $44,034.51 in interest incurred due to the stock option straddles; (4) $87,881.61 in additional taxes which would not have been incurred if the installment sale of the stock had been used; (5) $6,047.86 as a penalty for late payment of the taxes; (6) $81,204.00 in anticipated additional taxes because, in Mr. Kesselman's opinion, the Internal Revenue Service agent would disallow the straddles; and (7) $2,000.00 in fees for Mr. Kesselman's assisting in the audit in process because Lewin used stock option straddles.

The defendants filed a counterclaim requesting fees for the services rendered. The unpaid fees totaled $4,450.00. The jury was instructed both on the complaint and the counterclaim.

The jury returned a verdict for the Lewins on their malpractice claim in the amount of $200,000.00. The jury also found that the defendants were entitled to recover on their counterclaim for nonpayment of accounting fees, and awarded them $4,450.00. The trial court also granted Lewin's request for $61,806.10 in attorney's fees.

The defendants appeal from the judgment for the plaintiffs, raising the following issues:

(1) Whether the evidence presented by the Lewins was outside the scope of the pleadings and inadmissible on the issue of damages.

(2) Whether the trial court erred in the admission of prejudicial speculative damage evidence regarding an IRS audit of the 1980 tax return.

(3) Whether the trial court abused its discretion in admitting the hearsay testimony of Harry Cavanagh under the excited utterance exception to the hearsay rule.

(4) Whether the trial court abused its discretion in denying defendants' motion for new trial, where the verdicts rendered by the jury were irreconcilably inconsistent.

(5) Whether the trial court abused its discretion in granting the Lewins' application for attorney's fees pursuant to A.R.S. § 12-341.01 in an action founded solely in tort.


We first consider defendants' argument that the trial court erred in admitting evidence outside the scope of the...

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