Ronson v. Talesnick

• Decision Date: 19 January 1999
• Docket Number: No. CIV.A. 97-1024(JAG).,CIV.A. 97-1024(JAG).
• Citation: 33 F.Supp.2d 347
• Parties: Kenneth B. RONSON and Karen Ronson, Plaintiffs, v. DAVID S. TALESNICK, CPA, and Gikow, Bierman & Talesnick, a New Jersey Partnership, Defendants.
• Court: U.S. District Court — District of New Jersey

33 F.Supp.2d 347

Kenneth B. RONSON and Karen Ronson, Plaintiffs, v. DAVID S. TALESNICK, CPA, and Gikow, Bierman & Talesnick, a New Jersey Partnership, Defendants.

No. CIV.A. 97-1024(JAG).

United States District Court, D. New Jersey.

January 19, 1999.

COPYRIGHT MATERIAL OMITTED

Jay J. Freireich, Poe & Freireich, P.A., Florham Park, NJ, for Plaintiffs.

Gerald T. Ford, Landman Corsi Ballaine & Ford, Newark, NJ, for Defendants.

OPINION

GREENAWAY, District Judge.

INTRODUCTION

This matter comes before the Court on several motions: (1) Defendants David S. Talesnick and Gikow, Bierman & Talesnick's ("GBT") motion for summary judgment dismissing Plaintiffs Kenneth B. Ronson and Karen B. Ronson's professional malpractice action; (2) Defendants' motion in the alternative for leave to file a Third-Party Complaint against Joseph Paluscio; and (3) Plaintiffs' cross-motion for summary judgment finding Defendants liable for accounting malpractice. The Court heard oral argument on the motions on December 10, 1998. For the reasons set forth below, Defendants' motion for summary judgment and Plaintiffs' cross-motion for summary judgment are denied. Also, Defendants' motion for leave to file a Third-Party Complaint is denied.

FACTS

Plaintiff Kenneth B. Ronson held an ownership interest in a New Jersey corporation known as Bard Overseas Corporation ("Bard") from approximately 1968 to 1983. Plaintiff was a resident of New York, but maintained the Bard office in New Jersey. Plaintiff met with GBT, a New Jersey accounting firm, at the Bard office and discussed having GBT perform accounting and tax services for Bard as well as for Plaintiff and his wife personally. GBT agreed and performed such services for Plaintiffs and Bard from 1980 through December 1, 1989. David S. Talesnick, a GBT partner, served as the partner personally responsible for providing services to Plaintiffs. GBT's work for Plaintiffs included the preparation of their tax returns. Morris Pinkowitz and Joseph Paluscio were the GBT accountants who worked on Plaintiffs' tax returns. GBT performed all of their work for Plaintiffs in New Jersey.

From 1980 through 1983, Plaintiffs invested in the following tax advantaged limited partnerships: White Rim Oil & Gas, Pine Coal and Winchester Coal (the "Investments"). During those years, Plaintiffs reported losses on their tax returns resulting from the Investments. Subsequently, GBT determined that the IRS could find that the Investments were not qualifying investments and, as a result, that the IRS may decide not to recognize the losses from the Investments reported on Plaintiffs' tax returns during the years 1980 to 1983.

GBT determined that if the IRS disqualified the reported losses, then the IRS would find that Plaintiffs underpaid their taxes by $91,293¹ for the period from 1980 to 1983. In mid-1986, Plaintiffs asked GBT how they could stop the accrual of interest on the amount owed to the IRS. In June 1986, GBT sent Plaintiffs a letter recommending that Plaintiffs forward a $91,300 cash bond to the IRS to stop the IRS from accruing further interest on the back taxes that Plaintiffs owed. On June 30, 1986, Plaintiffs posted the recommended $91,300 payment bond with the IRS.

In 1986, GBT also calculated that Plaintiffs had a $60,145 interest liability with the IRS in addition to the $91,293 tax liability arising from their investments.² On December 1, 1986, GBT sent Plaintiffs a letter regarding their $60,145 interest liability. The letter provided:

This letter will confirm our conversation with regard to payments of interest on your pending tax shelter cases. A review of your file indicates that you are an investor in Pine Coal, Winchester Coal and White Rim Oil & Gas, all of which are under examination by the Internal Revenue Service. As a result of their examination, the Internal Revenue Service is proposing disallowances which will substantially increase your tax liabilities in the years 1980 through 1983. The interest on those deficiencies through December 15, 1986 approximates $60,145.

Under the Tax Reform Act of 1986, interest payable to the Internal Revenue Service constitutes other consumer interest and is subject to the phase out provisions of this new law. Based on that fact, the Internal Revenue Service recently issued pronouncements on how taxpayers, in situations such as yours, i.e. — tax shelter cases and other audits, can make a payment of tax and/or interest in order to avail themselves of a deduction in 1986. Due to the magnitude of the interest and considering your annual income for the past few years, we were not sure whether you would benefit from a payment in 1986. In our conversation you confirmed that your income for 1986 would not be at a level to benefit from the interest payment. Accordingly, you have opted not to make any payments in 1986 with respect to this matter and defer payment to possibly 1987 where only 65% of the interest paid will be deductible as you may obtain a better tax benefit.

Supplemental Decl. Morris Pinkowitz Ex. A. In addition, the letter invited Plaintiffs to contact GBT should they decide to make the interest payment before December 31, 1986. Plaintiffs opted not to make the interest payment in 1986. Furthermore, although Plaintiffs possibly owed an unidentified amount to the State of New York, GBT did not advise Plaintiffs to post a bond with New York because of the small amount owing to the state.³

Paluscio resigned from GBT effective December 1, 1989 to start his own accounting firm. As of that date, Paluscio, individually as a solo accountant, began providing accounting services to Plaintiffs, and GBT ceased providing such services. In approximately 1996, the IRS audited Plaintiffs and addressed the amount due in owing issue. The IRS advised Plaintiffs of the continued accrual of interest on the unpaid $60,145 interest liability owed in 1986. Plaintiffs contend that the amount presently owed to the IRS is approximately $235,063.

In this matter, Plaintiffs argue that GBT should have advised them to forward a cash bond to the IRS for $182,323, rather than for $91,300, a difference of $91,023.⁴ Plaintiffs seek to recover the interest that the IRS charged them on the $91,023 from 1986 through the present and an as yet determined amount owed to the State of New York.

DISCUSSION

I.

Defendants seek summary judgment dismissing Plaintiffs' accounting malpractice action. Defendants argue that Plaintiffs cannot establish the damages element in this negligence action because Plaintiffs are not permitted by law to recover interest paid to the IRS as damages. Whether Plaintiffs are permitted to recover interest due and owing to the IRS as damages is a question of state law.⁵

Choice of Law

This action is brought pursuant to the diversity jurisdiction of the Court, 28 U.S.C. § 1332.⁶ Therefore, the Court must engage in a choice of law analysis to determine the appropriate state law that governs this action. A federal court exercising its diversity jurisdiction must apply the choice of law rules of the forum state in determining which state's laws should govern a given action. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Because this action was filed in New Jersey, the Court must apply New Jersey choice of law rules. See id. New Jersey has adopted the "governmental-interest analysis in choice-of-law decisions." Veazey v. Doremus, 103 N.J. 244, 247, 510 A.2d 1187 (1986). "Under that analysis, the determinative law is that of the state with the greatest interest in governing the particular issue." Id. at 248, 510 A.2d 1187.

"The first step in the analysis is to determine whether a conflict exists between the law of the interested states." Id. "If an actual conflict exists, the next step is to identify the governmental policies underlying the law of each state and how those policies are affected by each state's contacts to the litigation and to the parties." Id. Defendants contend that New York law should govern because that is Plaintiffs' domiciliary state. On the other hand, Plaintiffs argue that New Jersey law controls because New Jersey is the state with the most contacts to the instant action.

In this instance, there is no conflict between the laws of New York and New Jersey. Although New York prohibits the recovery of IRS interest as damages in accounting malpractice actions,⁷ New Jersey has never addressed the issue. Nevertheless, the Court must determine which state has the greatest governmental interest in having its laws apply to this matter. Based on New Jersey's compelling interest in regulating its licensed accountants and the state's significant contacts with the subject matter of this litigation, this Court concludes that New Jersey has the greater governmental interest in having its substantive law govern this case.

New Jersey has established the New Jersey Board of Certified Public Accountants which regulates the licensing and practice of accountants in the state. See N.J. Stat. Ann. § 45:1-1 to -27 (West 1997); N.J. Admin. Code tit. 13, § 29-1.1 to -4.1 (1997). Clearly, New Jersey has a compelling state interest in regulating the practice of its accountants. On the other hand, New York has no interest in regulating the practice of licensed New Jersey accountants. In this matter, the only possible New York state interest would be in protecting its citizens from out-of-state accountants. However, because New York would not allow Plaintiffs to recover IRS interest as damages, the Court finds the notion of protecting its citizens from out-of-state accountants unpersuasive.

Furthermore, the only contact that New York has with this litigation is the fact that Plaintiffs are New York residents. On the other hand, New Jersey has significant contacts with the subject matter of this litigation. Defendants are a New Jersey accountant and a New Jersey accounting firm. Plaintiffs met and hired Defe...