Title: Mills v. Garlow

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Mills v. Garlow1989 WY 23768 P.2d 554Case Number: 88-162Decided: 01/25/1989Supreme Court of Wyoming
JOHN MILLS 
AND TONI MILLS, HUSBAND AND WIFE, APPELLANTS (PLAINTIFFS),

 
 
v.

 
 
WILLIAM C. 
GARLOW, APPELLEE (DEFENDANT).

 
 
Appeal from 
the DistrictCourtofParkCounty, John T. Dixon, 
J.

 
 
John W. 
Davis of Davis, Donnell, Worrall & Bancroft, P.C., Worland, for appellants.

 
 
Steven 
Cranfill and Margaret Sommers of McCarty & Cranfill, Cody, for appellee.

 
 
Before CARDINE, C.J., and THOMAS, URBIGKIT, MACY 
and GOLDEN, JJ.

 
 

MACY, 
Justice.

 
 

[¶1.]     This is an accountant 
malpractice case. Appellants John Mills and Toni Mills filed suit against 
appellee William C. Garlow essentially alleging that appellee's negligent advice 
regarding a property exchange resulted in increased tax liability for 
appellants. The district court granted summary judgment to appellee on the basis 
of the statute of limitations.

 
 

[¶2.]     We 
reverse.

 
 

[¶3.]     Appellants describe the 
issue as:

 
 
     WHETHER OR NOT THE 
PARK COUNTY DISTRICT COURT ERRED WHEN IT HELD THAT THE STATUTE OF LIMITATIONS 
RELATING TO ACCOUNTING MALPRACTICE HAD RUN UPON THE PLAINTIFFS' CLAIM AGAINST 
DEFENDANT.

 
 

[¶4.]     The relevant facts in 
this case are not in dispute. In July 1982, appellee, as a certified public 
accountant, assisted appellants with a real estate transaction in which the 
desired result was a tax-free exchange of real property, known as a 1031 
like-kind exchange.1 Due to certain aspects of the 
property transaction, appellee expressed some reservations as to its tax-free 
nature, but he indicated to appellants that he thought it would go through. 
Subsequently, appellee prepared appellants' 1982 income tax return which 
involved the 1031 exchange. In February 1984, the parties discontinued their 
business relationship, and appellants retained a new 
accountant.

 
 

[¶5.]     In March of 1985, 
appellants were notified by the Internal Revenue Service (IRS) that their 1982 
tax return was to be examined with respect to the property exchange. Appellant 
Toni Mills met with the examining officer on April 4, 1985, and on July 10, 
1985, appellants received a form 4549, Income Tax Examination Changes, 
indicating the examining officer's proposed disallowance of tax-free (1031) 
treatment for the property exchange and asserting a corresponding tax deficiency 
of $6,600 for the year 1982. Pursuant to IRS procedures, appellants were given 
the choice of either agreeing with the proposed changes or, alternatively, 
pursuing a protest. During July and August of 1985, appellants contacted both 
appellee and their current accountant regarding the asserted deficiency. 
Appellants' current accountant indicated they probably owed the tax. Appellee, 
however, advised that he believed there were grounds for contesting the proposed 
deficiency. He further advised that appellants should not agree to the 
deficiency and stated that he would pursue an internal appeal within the IRS on 
their behalf.

 
 

[¶6.]     On August 30, 1985, 
appellee filed a protest/appeal of the findings of the examining officer with 
the district director of the IRS. On December 4, 1986, an appeals officer 
notified appellee that the appeal was denied and requested that appellee have 
appellants sign and return an agreement form (form 870) by December 15, 1986, 
which agreement was signed and returned by said date. The IRS notified 
appellants on March 9, 1987, that, on the basis of the agreement, the case was 
closed, and on April 13, 1987, appellants were billed for the additional tax due 
plus interest. Appellants initiated the present action by filing a complaint in 
the district court on September 30, 1987. By decision letter and order, the 
district court entered summary judgment in favor of appellee upon a finding that 
the applicable statute of limitations had run in relation to appellants' cause 
of action. This appeal followed.

 
 

[¶7.]     The parties agree that 
the controlling statute of limitations in this case is Wyo. Stat. § 1-3-107 
(1977), which provides in pertinent part:

 
 
(a) A cause 
of action arising from an act, error or omission in the rendering of licensed or 
certified professional or health care services shall be brought within the 
greater of the following times:

 
 
     (i) Within two (2) 
years of the date of the alleged act, error or omission, except that a cause of 
action may be instituted not more than two (2) years after discovery of the 
alleged act, error or omission, if the claimant can establish that the alleged 
act, error or omission was:

 
 
     (A) Not reasonably 
discoverable within a two (2) year period; or

 
 
     (B) The claimant 
failed to discover the alleged act, error or omission within the two (2) year 
period despite the exercise of due diligence.

 
 

[¶8.]     Wyoming is a "discovery" 
state, which means that the statute of limitations is not triggered until the 
plaintiff knows or has reason to know the existence of the cause of action. 
Olson v. A.H. Robins Company, Inc., 696 P.2d 1294, 1297 (Wyo. 1985); Duke v. Housen, 589 P.2d 334 (Wyo. 1979), cert. denied 
444 U.S. 863, 100 S. Ct. 132, 62 L. Ed. 2d 86 (1979). In this case we must 
determine the question, novel to this jurisdiction, of when a taxpayer, whose 
tax return has been challenged by the IRS, knows or has reason to know that he 
has a cause of action against his accountant. Appellants argue that the district 
court erred in concluding that the statute of limitations began to run in 
July/August 1985 when appellants received notice of the proposed changes in 
their 1982 income tax. We agree.

 
 

[¶9.]     Ordinarily the question 
of whether or not a cause of action is barred by a statute of limitations is a 
mixed question of law and fact, but where the facts are not in dispute, as here, 
the question is one of law. 54 C.J.S., Limitations of Actions § 301 (1987), and 
cases cited therein. Additionally, we have stated that the determination of when 
a limitation period commences involves a balancing of policy considerations. 
Olson, 696 P.2d  at 1297. In a summary judgment context, where the facts are not 
in dispute and the question is one of law, we accord no special deference to and 
are not bound by the decision of the trial court. St. Paul Fire and Marine 
Insurance Co. v. Albany County School District 
No. 1, 763 P.2d 1255 (Wyo. 1988); Farr v. Link, 
746 P.2d 431 (Wyo. 1987).

 
 

[¶10.]  Resolution of the issue presented 
requires that we look to cases from other jurisdictions where the question has 
arisen and also to the particular procedures employed by the IRS in determining 
and assessing tax deficiencies. The number of cases addressing alleged 
accountant malpractice and later developing tax difficulties in relation to 
statutes of limitation is remarkably limited, and the decisions are not in 
harmony. Some courts have held, as appellee here contends, that the statute 
starts to run upon the first indication from the IRS of a disagreement with the 
taxpayer's return. See Isaacson, Stolper & Co. v. Artisan's Savings Bank, 
330 A.2d 130 (Del.Supr. 1974) (applying the "discovery" rule, the court held 
that, upon receipt of the first notice of an alleged deficiency from the IRS, 
the statute began to run); and Brower v. Davidson, Deckert, Schutter & 
Glassman, P.C., 686 S.W.2d 1 (Mo. App. 1984) (statute began to run upon issuance 
of the examining agent's notice of a proposed deficiency).

 
 

[¶11.]  Other courts have held that the statute 
of limitations does not begin to run until the issuance of the statutory notice 
of deficiency,2 a formal notice of deficiency 
issued by the IRS at a later point in the deficiency procedure. Illustrative of 
this approach is Feldman v. Granger, 255 Md. 288, 257 A.2d 421 (Ct.App. 1969). That 
case involved a malpractice action against an accounting firm for the late 
filing of a tax document with the IRS, resulting in an increased tax liability 
for the taxpayers. The Feldman court, although affirming the lower court's grant 
of summary judgment in favor of the defendants under the facts of that case, 
applied the discovery rule and concluded that the statute of limitations began 
to run upon the receipt of the statutory notice of deficiency. The court noted 
that the taxpayers in that case had known for more than three and one-half years 
that the IRS disagreed with their position, and the court stated that a 
reasonable and prudent man in their position would have known or should have 
known that he had sustained harm on the date of the notice of deficiency, if not 
before. Although the court in Feldman seemed to leave open the possibility that, 
in some cases, the statute could start to run prior to receipt of the statutory 
notice, it reaffirmed its Feldman holding in Leonhart v. Atkinson, 265 Md. 219, 
289 A.2d 1 (Ct.App. 1972). See also Chisholm v. Scott, 86 N.M. 707, 526 P.2d 1300 (Ct. App. 1974) (statute commences upon notice of assessment of 
deficiency). Streib v. Veigel, 109 Idaho 174, 706 P.2d 63 (1985), and Atkins v. 
Crosland, 417 S.W.2d 150, 26 A.L.R.3d 1431 (Tex. 1967), reached the same result 
on grounds other than the discovery rule, holding that the statute does not 
begin to run until a tax deficiency is assessed because there is no injury to 
the plaintiff prior to that time; i.e., there is not a completed tort until the 
IRS assesses a deficiency.

 
 

[¶12.]  In determining which of the two 
approaches indicated by the above cases is preferable, a brief review of IRS 
procedures for examination of tax returns and assessment of deficiencies is 
helpful. Certain federal tax returns are selected for examination or audit, and 
the examination is generally done by examiners in the district offices of the 
IRS. 20 Fed.Proc., L.Ed., Internal Revenue § 48:305 (1983). At the conclusion of 
the examination, the taxpayer is sent a report of the examiner's findings, 
indicating any proposed adjustments in tax liability. Id. at § 48:389. At this 
point the taxpayer is given the opportunity to agree with the findings of the 
examiner by signing a form agreement (form 870) or, alternatively, the taxpayer 
is informed of his appeal rights if he does not agree. Id. If the taxpayer signs 
the agreement form, he thereby waives the required statutory notice of 
deficiency pursuant to 26 U.S.C. § 6212 (1982) (the ninety-day letter) and the 
corresponding prohibition on collection for ninety days under 26 U.S.C. § 6213 
(1982), and the taxpayer is precluded from litigating the proposed deficiency in 
Tax Court. J. Chommie, Federal Income Taxation § 295 (2d ed. 1973). If the 
taxpayer does not agree with the examiner's proposed findings, the findings will 
be reviewed in the district office, and the taxpayer will be sent a "30-day 
letter" instructing him that he has thirty days to file a protest. 20 Fed.Proc., 
supra at § 48:392. If the taxpayer fails to respond within the thirty days, a 
notice of deficiency will be issued. Id. at § 48:393. If the taxpayer timely files 
a protest, he will be accorded an appeals office conference. Id. at §§ 48:392 and 
48:406. The appeals office has broader negotiation and settlement authority than 
does the district office. Id. at §§ 48:401 and 48:411. If a settlement 
is reached, the taxpayer will again be requested to sign the agreement form 870. 
Id. at § 
48:412. A determination by the appeals office, however, is final insofar as the 
taxpayer's appeal rights within the IRS, and if the taxpayer continues to 
disagree, the statutory notice of deficiency will be sent giving the taxpayer 
ninety days to file a petition in the Tax Court before collection actions are 
begun. Id. at 
§§ 48:440 and 48:463. See also J. Chommie, supra at § 295, for an overview of 
the described procedure.

 
 

[¶13.]  Thus, it can be seen that the preliminary 
findings of the examiner are merely proposed findings, subject to review and 
negotiation prior to any determination of a deficiency, unless the taxpayer 
agrees with such findings or fails to pursue the internal review provided by the 
IRS. An agreement by the taxpayer with the proposed adjustment at any point in 
this procedure results in a binding determination of tax liability upon which 
enforcement actions may immediately commence and precludes the necessity for the 
statutory notice of deficiency. It would seem, therefore, given the provisional 
nature of the examining officer's proposed deficiency, that a reasonable 
taxpayer would not know or have reason to know that he had a cause of action 
against his accountant until such time as the notice of deficiency issues or, 
alternatively, when the taxpayer has indicated his agreement with the IRS. We 
conclude that IRS procedures support a policy of starting the statute of 
limitations at the time of the statutory notice of deficiency or, in the 
alternative, at the equivalent time of taxpayer agreement with the IRS, 
precluding the otherwise required notice.

 
 

[¶14.]  Other policy considerations support this 
approach. Use of the date of the notice of deficiency as the point of 
"discovery," although somewhat arbitrary, at least has the advantage of 
providing some certainty. In addition, commencing the statute at this point 
would not abrogate the policy underlying statutes of limitation of preventing 
stale claims because, pursuant to 26 U.S.C. § 6501(a) (1982), the IRS must file 
any notice of deficiency and assess the deficiency within three years from the 
date the tax return was filed, unless both the taxpayer and the IRS consent in 
writing to extend the assessment period. 26 U.S.C. § 6501(c)(4) (1982). See also 
20 Fed.Proc., supra at §§ 48:429 and 48:441.3 This interplay of the IRS statute 
of limitations with a state statute limiting actions against accountants was 
noted by the Texas Supreme Court in Atkins, 417 S.W.2d  at 
154.

 
 

[¶15.]  Although we do not know how many 
adjustments proposed by IRS examiners are reversed or altered upon further 
review, we think it is a better policy to discourage the filing of lawsuits 
until such time as the likelihood of accountant error is established by the IRS 
at some point beyond the initial examiner's preliminary conclusions. We 
anticipate that this approach would also comport with the response of the 
average taxpayer to an examiner's proposed adjustments. The first step by such a 
taxpayer, as in the instant case, is likely to be the contacting of the 
accountant for assistance in sorting out his tax difficulties with the IRS. This 
effort would be frustrated if the taxpayer was required to immediately file a 
lawsuit against the accountant.

 
 

[¶16.]  For the above reasons, we adopt what we 
perceive to be the better rule and hold that the statute of limitations in an 
accountant malpractice case involving increased tax liability begins to run when 
the taxpayer receives the statutory notice of deficiency, § 6212, or at the 
equivalent time when the taxpayer registers his agreement with the IRS by 
signing the agreement form 870. In the instant case, no notice of deficiency was 
sent because, after the December 4, 1986, adverse decision of the appeals 
officer, appellants signed and submitted the agreement form by December 15, 
1986. Accordingly, the two-year statute of limitations provided in § 1-3-107 
began to run on December 15, 1986, and this suit, filed September 30, 1987, was 
not time barred by the statute.4

 
 

[¶17.]  Reversed and remanded for further 
proceedings.

 
 
FOOTNOTES

 
 

1 See 26 
U.S.C. § 1031 (1982).

 
 

2 26 U.S.C. 
§ 6212 (1982) authorizes the sending of the notice of deficiency upon the 
determination that there is a deficiency in tax. See 20 Fed.Proc., L.Ed., 
Internal Revenue § 48:440 (1983). The notice is known as the "90-day letter" 
because, pursuant to 26 U.S.C. § 6213 (1982), the IRS may not initiate 
collection actions for ninety days after the notice, within which time the 
taxpayer may petition the Tax Court for a redetermination. 20 Fed.Proc., supra 
at §§ 48:440 and 48:463.

 
 

3 In the 
instant case, appellant Toni Mills signed an agreement in October of 1985 
extending or waiving the IRS statute of limitations. This extension enabled the 
parties to continue the review procedure beyond the three-year period provided 
by § 6501(a), which otherwise would have expired on April 15, 1986. See 26 
U.S.C. § 6501(b)(1) (1982).

 
 

4 Appellants 
additionally contend that the "course of treatment" rule adopted by this Court 
in medical malpractice cases should be applicable to the statute of limitations 
as applied to accountants. See Metzger v. Kalke, 709 P.2d 414 (Wyo. 1985). This 
contention is premised on appellee's continued representation of appellants in 
their dispute with the IRS. Our holding in this case, however, precludes the 
necessity of addressing this argument.