Opinion ID: 2543385
Heading Depth: 1
Heading Rank: 10

Heading: May the court award a judgment for damages against the defendants based in part on losses claimed due to the filing of an incorrect or fraudulent tax return of the plaintiffs?

Text: [¶ 19] This issue is founded in the testimony of the buyers' expert, Richard Shamley, CPA. Mr. Shamley estimated the buyers' tax loss at $50,086.00. He admitted, however, that this estimate was based upon the corporation's 1997 and 1998 tax returns, which were not completed in accordance with IRC § 382. The sellers' expert, Dennis Howard, CPA, agreed that the tax returns did not follow the Internal Revenue Code. Nevertheless, the trial court utilized the $50,086.00 figure in determining the buyers' damages. That is the error now alleged. [¶ 20] The sellers' expert, using the same $160,633.00 NOL carry forward reduction relied upon by the buyers' expert, but using what he considered to be the correct IRS procedures, calculated the buyers' damages to be $12,101.31. The trial court found that both opinions were based upon valid and thoughtful accounting approaches to the projection of any loss attributable to the reduction of the said net operating loss carry forward of Rocky Mountain Cementers, and therefore, should be given equal consideration. The trial court then averaged the two computations, awarding damages in the amount of $31,093.65. [¶ 21] We agree with the sellers that this computation was in error. When evaluating the validity of a trial court's judgment, we consider only the evidence and inferences favorable to the party for whom the judgment was rendered. Sun Land & Cattle Co. v. Brown, 394 P.2d 387, 389 (Wyo. 1964). When this Court does not have a properly authenticated transcript before it, it must accept the trial court's findings of fact upon which it bases any decisions regarding evidentiary issues. Salt River Enterprises, Inc., 663 P.2d at 520. On the other hand, [t]he factual findings of a judge are subject to a broader scope of review than a jury verdict, and the appellate court may examine all of the properly admissible evidence in the record. R.C.R., Inc. v. Rainbow Canyon, Inc., 978 P.2d 581, 586 (Wyo.1999). [¶ 22] The trial court found that, [t]he reduction in the net operating loss carry forward of Rocky Mountain Cementers resulting from the Internal Revenue Service audit directly and proximately caused a loss to the Schiecks/Kerns and Rocky Mountain Cementers. It went on to find that, [t]he testimonies of E. Tim Schieck and John D. Kerns, the President and Vice President/Treasurer of Rocky Mountain Cementers respectively, reflect the Schiecks/Kerns' calculation of their loss to be approximately $50,000, based upon a reduction in the net operating loss carry forward of approximately $160,000. The trial court concluded: Competent and persuasive evidence was presented at trial to establish that the Schiecks/Kerns and Rocky Mountain Cementers have proven by a preponderance of the evidence that they suffered a loss as a result of the reduction of the net operating carry forward represented to be available to Rocky Mountain Cementers in its 1994 U.S. Corporation Income Tax Return for the tax year beginning August 1, 1994, ending July 31, 1995; that the Capshaws expressly agreed to indemnify the Schiecks/Kerns and Rocky Mountain Cementers from any loss or damage occasioned by any act of the corporation, its officers, directors and shareholders; and that accordingly, the Capshaws are liable to the Schiecks/Kerns and Rocky Mountain Cementers for a reasonable value to be attributed to the loss sustained by the reduction of the net operating loss carry forward.... (Emphasis in original.) [¶ 23] There was sufficient evidence in the record that allowed the trial court to conclude as it did as to future profits. The buyers' CPA expert testified that the corporation's tax returns showed a profit for three of the last four years. He further testified that the one year showing a loss was due to extensive equipment purchase. Based on this past performance, the CPA expert expected the corporation to be profitable in the future. The corporate officers provided similar testimony. It was reasonable for the trial court to conclude that the corporation would have future profits, and that it would suffer a loss as a result of the NOL carry forward reduction. [¶ 24] It was not reasonable, however, to accept the buyers' expert's damage computation where even the buyers' expert agreed that the computation was based on an improper application of the Internal Revenue Code by the corporate accountant. IRC § 382 states, in part: (a) General rule.The amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section 382 limitation for such year. (b) Section 382 limitation.For purposes of this section (1) In general.Except as otherwise provided in this section, the section 382 limitation for any post-change year is an amount equal to (A) the value of the old loss corporation, multiplied by (B) the long-term tax-exempt rate.    (e)    (1) In general.Except as otherwise provided in this subsection, the value of the old loss corporation is the value of the stock of such corporation .... 26 U.S.C.A. § 382 (1988). [¶ 25] Applying the above to the instant case, the value of the corporation equals the value of the stock, which is $250,000.00. If this amount is multiplied by the long-term tax exempt rate of 5.65% for 1996, [3] the maximum amount of NOL carry forward that could be utilized in a tax year would be $14,125.00, prorated in the first year (1996 tax return) to $5,885.00. [4] For each successive year, the exemption amount would be $14,125.00. [¶ 26] For the 1996 tax year ending July 31, 1997, the corporation's accountant improperly applied a NOL carry forward amount of $88,346.00 rather than the prorated amount of $5,885.00 as allowed by the federal government. The buyers' CPA expert testified that the reduction of the NOL carry forward resulted in a tax loss of $50,086.00. This testimony was based upon the manner in which the corporation's accountant prepared the 1996 and 1997 tax returns. Because the corporation accountant's methods were incorrect (for the 1996 tax return he should have applied a NOL carry forward of $5,885.00 not $88,346.00, and for the 1997 return, he should have applied $14,125.00 rather than $5,702.00), the CPA expert's calculations of $50,086.00 cannot be accurate. We find that the trial court erred in concluding that the CPA expert's accounting methods and calculations were correct, and his analysis should not have been utilized in calculating the damage award. The balance of the evidence leads to the conclusion that the opinion of the sellers' expertthat, assuming $160,633.00 as the NOL carry forward reduction, the buyers' loss would be $12,101.31is correct. The judgment must be reduced to that amount. [5]