Opinion ID: 1757194
Heading Depth: 1
Heading Rank: 1

Heading: The Status of the Claim Based on the Plaintiffs' Potential Tax Liability

Text: In their fraud claims the plaintiffs sought compensatory damages, including damages for mental anguish, based on a claim that they had incurred a potential income tax liability; they also claimed compensatory damages based on the fact that they purchased universal life policies when they thought they were purchasing retirement plans. As for the claims based on the alleged potential tax liability, it is uncontroverted that under the I.R.C. a § 125 cafeteria plan may not be used to purchase a benefit that defers the receipt of compensation or that accumulates cash value. I.R.C. § 125(d)(2)(A). Thus, because the Life of Georgia life insurance policies paid for by the plaintiffs through pre-tax payroll deductions accumulated a cash value, the cafeteria plans established for the plaintiffs by Winsett and Life of Georgia were invalid. Accordingly, when the plaintiffs filed federal tax returns for the 1991 and 1992 tax years, they incurred the potential for a tax liability to the IRS should that agency one day attempt to collect additional taxes for those years. The merit of the plaintiffs' claims based on their potential tax liability was a major issue in the trial court. In its motion for a summary judgment, Life of Georgia argued that an action for damages based on a tax liability does not accrue until the IRS makes a tax assessment, and Life of Georgia contended that no assessment had been made. Before trial, Life of Georgia filed a motion in limine, seeking to exclude the plaintiffs' evidence of an alleged tax liability. However, before trial, Life of Georgia established a trust for the benefit of persons for whom it had established invalid cafeteria plans, in order to guarantee payment of any tax liability those persons might suffer as a result of the invalidity of the plans. The trial court denied Life of Georgia's motion in limine, and during trial it admitted evidence of the plaintiffs' alleged tax liability, on the basis that it was relevant to the plaintiffs' claims for damages for mental anguish. During trial, Life of Georgia argued that because it had established the trust the plaintiffs had suffered no damage. In System Dynamics Int'l, Inc. v. Boykin, 683 So.2d 419, 421 (Ala.1996), this Court held that in the context of a potential tax liability there is no completed wrong until the IRS assesses the taxpayer for taxes and penalties. However, in Jackson v. Secor Bank, 646 So.2d 1377 (Ala.1994), this Court had held that the plaintiff's claim based on potential tax liability accrued when the tax return was filed, under the circumstances of that case. Because the defendants have not raised on appeal the issue of the sufficiency of the evidence to support the plaintiffs' claim arising from the invalidity of the cafeteria plan, we treat the plaintiffs' claims for damages based on a potential tax liability as actionable pursuant to the doctrine of the law of the case. See Brooks v. Goldhammer, 608 So.2d 394 (Ala.1992) (holding that an unappealed summary judgment becomes the law of the case); Sellers v. Dickert, 194 Ala. 661, 69 So. 604 (1915) (holding, in a second appeal, that a matter that had occurred before the first appeal, but that was not raised in the first appeal, was the law of the case).