Maese v. David Garrett & Wells Fargo Advisors, LLC

• Citation: 329 P.3d 713
• Decision Date: 26 June 2014
• Docket Number: No. 32,260.,32,260.
• Parties: Gerald MAESE and Jacqueline Maese, Plaintiffs–Appellees, v. David GARRETT and Wells Fargo Advisors, LLC, Defendants–Appellants.
• Court: Court of Appeals of New Mexico

329 P.3d 713

Gerald MAESE and Jacqueline Maese, Plaintiffs–Appellees,

v.David GARRETT and Wells Fargo Advisors, LLC, Defendants–Appellants.

No. 32,260.

Court of Appeals of New Mexico.

April 14, 2014.

Certiorari Denied, June 26, 2014, No. 34,704.

Bryan L. Query, P.A., Bryan L. Query, Albuquerque, NM, for Appellees.

Windle Hood Alley Norton Brittain & Jay, LLP, Joseph L. Hood, Jr., El Paso, TX, for Appellants.

OPINION

FRY, Judge.

{1} The formal opinion filed in this case on April 10, 2014, is hereby withdrawn, and this opinion is substituted in its place.

{2} Plaintiff brought suit against Defendants to recover taxes, penalties, and interest Plaintiff incurred in connection with the partial surrender of a deferred variable annuity.¹ Plaintiff alleged that erroneous financial advice he received from Defendants caused him to incur the additional tax liability. The district court agreed with Plaintiff and awarded him damages. Defendants argue on appeal that (1) Plaintiff did not establish that he suffered a compensable loss as a result of the erroneous financial advice; and (2) the Unfair Practices Act (UPA), NMSA 1978, §§ 57–12–1 to –26 (1967, as amended through 2009), does not apply to this case because the transaction at issue did not involve the sale of goods or services. We conclude that Plaintiff established that he suffered a compensable loss by way of the tax liability he incurred due to the misrepresentation. We further conclude that the UPA applied to Defendants' financial advising services. Accordingly, we affirm.

BACKGROUND

{3} Defendants do not challenge the following facts found by the district court. Defendantsprovided financial services to Plaintiff, which included management of Plaintiff's securities account. At all material times, Defendant David Garrett had primary financial advisory responsibility over Plaintiff's account. At Garrett's recommendation, Plaintiff purchased a deferred variable annuity. Plaintiff invested approximately $175,000 in after-tax dollars in the annuity. By October 2007, Plaintiff's contributions and investment gains in the annuity totaled over $300,000.

{4} Around this time, Plaintiff purchased an office building and needed approximately $140,000 to complete remodeling and to purchase equipment for his dental practice. Plaintiff contacted Garrett regarding whether he could withdraw monies from the annuity tax free and without incurring penalties in order to fund the remodeling. Garrett erroneously advised Plaintiff that because the contributions made to the annuity were “after-tax” dollars, Plaintiff could withdraw an amount equal to the amounts he had contributed to the annuity without incurring any additional tax liability. Plaintiff asked Garrett on one or two other occasions whether this advice was correct and was assured by Garrett that the amount he wanted to withdraw from the annuity was “well within” the amount he could withdraw tax free. Based on these representations, Plaintiff decided to withdraw the money needed to complete the remodeling from the annuity.

{5} Garrett's advice was incorrect, however, because withdrawals from the annuity would first be considered withdrawals on gains from investments, not on amounts contributed, and they would therefore be subject to income tax. The advice was also incorrect because any withdrawals from the annuity before Plaintiff reached age fifty-nine-and-a-half were subject to an early withdrawal penalty equal to ten percent of the investment gains withdrawn from the account. Thus, after Plaintiff withdrew money from the annuity, Genworth, the annuity company, filed an IRS form indicating that the entire amount of the withdrawal was taxable income. Plaintiff did not receive the IRS form filed by Genworth and accordingly did not report the withdrawn amount on his income tax returns. Seventeen months later, the IRS notified Plaintiff that it was proposing to increase his tax liability by the amount withdrawn, though it was later modified to a slightly lower amount. As a result of the adjustment, Plaintiff was assessed a total of $77,623.06 in additional state and federal income taxes, interest, and penalties.

{6} After Plaintiff received the IRS notice, he met with Garrett and his accountant to determine why Genworth had reported the money as taxable. The parties spoke to a Genworth representative over the phone during the meeting, who explained why the withdrawal was properly reported to the IRS. After the meeting, Plaintiff and his accountant contacted the IRS to explore whether the IRS would abate the increased taxes, interest, and penalties. The IRS initially denied Plaintiff's request for abatement but later indicated that if Plaintiff could secure confirmation from Defendants that he had relied on erroneous information in withdrawing the money, the IRS would look more favorably on eliminating a portion of the penalties. Plaintiff contacted Defendants to request such a written confirmation. Defendants declined to provide one.

{7} Plaintiff brought suit against Defendants in district court. Following a two-day bench trial, the district court found in favor of Plaintiff on his claims of misrepresentation, breach of fiduciary duty, and violation of the UPA. The district court entered a judgment awarding Plaintiff $77,623 for the additional tax liability, plus attorney fees and costs. Defendants appeal.

DISCUSSIONI. The District Court's Damages Award Was Correct

{8} Plaintiff withdrew approximately $142,000 from the annuity. Of that amount, $128,599 was attributable to investment gains realized by Plaintiff, against which $77,623 was levied in taxes, interest, and penalties. Defendants characterize the approximately $50,976 difference between the taxable investment gains and the tax liability as a “net investment gain” and argue that because Plaintiff realized a net investment gain, he did not sustain a compensable loss as a result of Garrett's misrepresentations regarding the tax consequences of the transaction. Defendantsfurther argue that because they were not responsible for the interest and penalties the IRS assessed against Plaintiff, they should not be liable for those damages. We discuss these issues in turn. Because the parties do not dispute the facts, these issues raise questions of law, which we review de novo. Team Specialty Prods., Inc. v. N.M. Taxation & Revenue Dep't, 2005–NMCA–020, ¶ 8, 137 N.M. 50, 107 P.3d 4.

A. Plaintiff Suffered a Compensable Loss

{9} In arguing that Plaintiff did not suffer a compensable loss, Defendants rely largely on cases holding that plaintiffs are generally precluded from recovering tax liabilities as damages because they have an obligation to pay taxes regardless of whether their failure to do so resulted from negligent financial advice. See DCD Programs, Ltd. v. Leighton, 90 F.3d 1442, 1449 (9th Cir.1996) (denying recovery of back taxes because the plaintiffs' “tax liabilities resulted from the ineluctable requirements of the Internal Revenue Code, rather than from any wrongful conduct on the part of the defendants”); O'Bryan v. Ashland, 2006 SD 56, ¶ 1, 717 N.W.2d 632, 633 (“In ordinary circumstances, when a tax advisor's negligence leads to an underpayment of tax, the taxpayer cannot recover as damages the tax deficiency itself because the tax liability arose not from the negligent advice, but from the ongoing obligation to pay the tax.”). Defendants do not argue that these cases represent an absolute bar to Plaintiff's recovery. Rather, Defendants argue that in addition to Plaintiff establishing the amount of tax liability incurred due to the misrepresentation, Plaintiff was required to also prove (1) that if Plaintiff had delayed his withdrawal from the annuity until sometime in the future, his tax liability would have been less; and (2) that investment gains in the annuity in the future would have been equal to the gains Plaintiff realized at the time of the actual withdrawal. In other words, as we understand the argument, Plaintiff had to prove that future market fluctuations would not have negatively impacted Plaintiff's investment. Thus, Defendants argue that in the absence of such evidence, the district court's judgment results in a windfall: “[Plaintiff] not only received the benefit of a substantial investment gain that [he] would not otherwise have realized, [he is] also relieved of the obligation to pay taxes on that gain—taxes that every other investor would be obligated to pay.”

{10} As explained in more detail below, we are unpersuaded by Defendants' argument for two reasons. First, we conclude that Plaintiff met his burden to establish his damages with reasonable certainty when he established that he would not have incurred the additional tax liability but for Defendants' erroneous advice. Second, to the extent Defendants argue that Plaintiff benefitted from the misrepresentation, we conclude that it was Defendants' burden to prove what effect the tax implications or investment impact of any future withdrawal should have on Plaintiff's ability to recover damages resulting from the tax liability incurred on the actual withdrawal.

{11} We begin by examining the proper measure of damages in cases where negligent financial or tax advice has led to a plaintiff incurring additional tax liability. As O'Bryan and Leighton recognize, even where a plaintiff has received negligent tax advice, the plaintiff cannot recover as damages an otherwise valid tax obligation. O'Bryan, 2006 SD 56, ¶ 1, 717 N.W.2d at 633; see Leighton, 90 F.3d at 1449. However, these cases and others also stand for the proposition that where the tax liability is caused by the negligent advice or wrongful conduct and would not have been incurred but for the negligent advice or wrongful conduct, there is no prohibition on the recovery of the tax liability. See Eckert Cold Storage, Inc. v. Behl, 943 F.Supp. 1230, 1234 (E.D.Cal.1996) (stating that “plaintiffs may be entitled to damages...