Orsini v. Bratten, s. S-700
| Decision Date | 24 January 1986 |
| Docket Number | S-701,Nos. S-700,s. S-700 |
| Parties | Larry ORSINI, individually, and Larry Orsini Associates, Inc., Appellants, and Cross-Appellees, v. Donald BRATTEN and Elaine Bratten, Appellees, and Cross-Appellants. |
| Court | Alaska Supreme Court |
James S. Magoffin, Jr., Fairbanks, for appellants and cross-appellees.
Lloyd I. Hoppner, Rice, Hoppner, Brown & Brunner, Fairbanks, for appellees and cross-appellants.
Before RABINOWITZ, C.J., and BURKE, MATTHEWS and MOORE, JJ.
Larry Orsini of Larry Orsini Associates provided investment advice to Donald and Elaine Bratten. Thereafter the Brattens sued Orsini seeking damages for negligent misrepresentations and breach of contract. The superior court awarded the Brattens $59,276.86 in damages together with prejudgment interest. Orsini appeals certain facets of the damage award as well as the superior court's award of prejudgment interest. The Brattens cross-appeal, claiming that the damages awarded are inadequate.
In 1977, Donald and Elaine Bratten sought investment advice for money received from the sale of a motel they owned. They contacted Larry Orsini of Larry Orsini Associates, Inc., a management consulting firm whose services included "tax planning" and "investment analysis and management."
Orsini recommended investing in a purchase-lease-back of equipment (mostly furniture) with Wilmer Preising, doing business as the "Roaring 20's Hotel" in Fairbanks. 1 Orsini furnished the Brattens with a statement projecting the return on their investment with Preising. The statement indicated that an investment of $54,000 would produce a direct cash flow of $57,200 ($235,200 in rental income less the down payment, interest and other expenses) and an indirect cash flow, consisting of tax savings of $69,985 over the seven year leaseback period. According to Orsini's calculations, the total return on the Brattens' investment would be $158,085 or 41.8 percent.
Based on Orsini's recommendation, the Brattens invested $54,000 in the Roaring 20's purchase-leaseback arrangement. Orsini prepared the Brattens' 1977 income tax return and amended their 1974 and 1975 tax returns to claim investment tax credits for those years.
In 1980, the Internal Revenue Service (IRS) audited the Brattens' 1974, 1975, and 1977 returns and determined that the Roaring 20's investment did not qualify for an investment tax credit. Under the Internal Revenue Code it is clear that the Brattens' investment does not qualify for investment tax credits. 2 Because of the disqualification, a total of $15,000 in federal credits and $1,194 in state credits was disallowed for the years 1974, 1975 and 1977. In addition, the IRS and the State of Alaska assessed $8,082 and $2,310 in interest penalties respectively. The state also assessed a failure to file penalty of $719.
According to the Brattens, in addition to his erroneous advice regarding investment tax credits, Orsini failed to consider the tax consequences of the lease rental payments the Brattens would be receiving from the Roaring 20's. Orsini does not deny that the rental income was excluded by "mistake" from the statement he furnished the Brattens. 3
As indicated previously the Brattens then brought a tort action for negligent misrepresentation against Orsini, claiming that as a result of Orsini's errors their total investment return was only $14,745, which was $143,340 less than the projected return of $158,085. They further claimed that had Orsini correctly projected the tax consequences of the purchase-leaseback investment, they would not have entered into an agreement with Preising and would likely have invested in Fairbanks rental property.
At trial the Brattens argued that the true measure of damages was either $143,340--the difference between what Orsini told them they would receive ($158,085) and what they claim to have actually received ($14,745), or $123,059--the difference between what they would have received had they invested in Fairbanks real estate ($137,804) 4 and what they actually received.
After a non-jury trial, the superior court entered judgment in favor of the Brattens in the amount of $59,276.86. The superior court found that the Brattens entered the purchase-leaseback agreement on Orsini's advice, that they would not have done so if Orsini had correctly projected the return on investment, and that Orsini had been negligent. Damages were awarded to the Brattens as follows:
Fees billed to Brattens by Orsini $ 1,594.59
Amount of tax credit repaid to the
State of Alaska plus interest
penalties ........................... $ 4,038.00
Amount of tax credit repaid to the
federal government plus interest
penalties for 1977 .................. $18,324.27
"Prospective tax liability" ......... $35,320.00
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Total ............................... $59,276.86
The superior court also awarded the Brattens prejudgment interest from November, 1977. Orsini's motion for reconsideration was denied and this appeal and cross-appeal followed.
On appeal Orsini argues that the superior court erred by awarding damages and prejudgment interest contrary to the undisputed evidence. However, Orsini does not dispute that part of the award constituting the fees he billed Bratten ($1,594.59) and concedes that the Brattens should be awarded $1,914 for state tax investment credits and $15,000 for federal investment tax credits that were disallowed for the years 1974, 1975 and 1977. He does challenge the "prospective tax liability" portion of the superior court's award and the award for state and federal interest penalties. The Brattens, in turn, contend that the damages awarded are inadequate.
The Brattens note that the $18,324.27 awarded by the superior court for the tax credits and interest penalties repaid to the federal government is only for the year 1977, even though they had to repay the IRS a total of $12,823.40 for investment tax credits and penalties that were disallowed for 1974 and 1975. They argue that the $12,823.40 should have been included in the award, and thus the trial court should have awarded at least $35,185.67, which would include the investment tax credits disallowed in all three years, plus interest penalties.
The Brattens correctly observe that there are logical difficulties with the superior court's award. Were the Brattens entitled to receive damages for the disallowance of federal investment tax credits for 1977, they also should have received damages for the 1974 and 1975 tax years. Arguably, the Brattens should receive no recovery at all for lost investment tax credits, as the investment scheme was invalid and therefore they were never entitled to the return promised them by Orsini. However, since Orsini has conceded that he must pay the Brattens $15,000 in federal and $1,914 in state lost investment tax credits, we will not consider whether these amounts are properly recoverable. Further, we agree with Orsini that the Brattens are not entitled to receive damages for interest repaid to either the federal government or to the state government. The Brattens had the use of the these monies and, presumably, were able to earn interest while they held it. Therefore, paying the interest penalties...
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