J.D. Warehouse v. Lutz & Co.

In this professional liability action, a partnership and its general partners seek damages resulting from incorrect advice given by a certified public accountant with respect to the tax consequences of a real estate transaction. Following a bench trial based on stipulated facts, the district court for Douglas County concluded that the accountant and his firm were negligent and therefore liable for some, but not all, of the damages claimed. The partnership and its partners perfected this appeal in which they contend that the district court erred in not awarding the additional damages which they had claimed.

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The undisputed facts of this case were submitted to the district court by a written stipulation, which we summarize here. J.D. Warehouse (the partnership) is a Nebraska general partnership with its principal place of business located in Omaha, Nebraska. Paul J. Weiss, Laurence J. Esch, and Dennis L. Esch, all Nebraska residents, are its general partners. Lutz & Company, P.C., is a professional corporation authorized to practice public accounting, with its principal place of business located in Omaha. Lutz, Friedman & Associates, P.C., the predecessor in interest to Lutz & Company, P.C. (hereinafter the accounting firm), performed accounting services for the partnership and its individual partners prior to 1986. Since that time, accounting services have been provided by a certified public accountant, James D. Honz, a Nebraska resident and shareholder of the accounting firm.

The partnership was initially formed for the purpose of acquiring real property known as the John Deere Warehouse located in downtown Omaha. It purchased this property in 1982 for $808,952. Sometime in 1986, the partners learned that the city of Omaha had included the property in an area designated as part of a redevelopment plan. The partners were contacted by a representative of the Omaha Development Foundation, who informed them that the foundation was interested in acquiring the warehouse and that while it had the power of eminent domain, it preferred to negotiate a purchase of the property. In December 1987, the foundation and the partnership executed a purchase agreement for the sale of the John Deere Warehouse to the foundation for $3,150,000 in cash. The transaction was closed on May 4, 1988, and the partnership realized a capital gain of $2,444,252.18 at that time.

From their prior experience, the partners knew generally that the Internal Revenue Code would permit deferral of taxation on the capital gain if the partnership acquired like-kind property in the manner prescribed by the code. The partners considered the acquisition of several properties located in Nebraska and other states in order to effectuate deferral of the gain. Some time during 1989, Dennis Esch, acting on behalf of the partnership, made inquiry of Honz as to the amount of the proceeds from the sale of the John Deere Warehouse required to be invested in like-kind property in order to defer all of its capital gains tax under the code. Honz advised that only the gain from the sale had to be reinvested. Relying upon this advice, the partnership purchased the “ParkFair Mall” property in Omaha in January 1991 for $2,501,284.75. This purchase price represented a negotiated reduction of the asking price of approximately $3.4 million.

The parties now agree that Honz’ advice was in error in that all of the proceeds from the sale of the John Deere Warehouse were required to be reinvested in like-kind property in order to defer taxation on the entire gain. In a 1992 audit, the Internal Revenue Service (IRS) correctly determined that the portion of the sale proceeds not reinvested was subject to capital gains tax for the year 1988. The IRS adjusted the partnership’s 1988 tax return to reflect a capital gain of $522,715 and made corresponding adjustments in the tax returns of the partners, causing each of them to incur additional tax liability and interest but no penalties. The partnership incurred attorney fees of $10,000 in connection with the tax audit.

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The sole issue presented in this appeal is whether the capital gains tax and interest paid to the IRS, and the value of the lost investment tax credit, are recoverable as damages in this action. The principle underlying allowance of damages is to place the injured party in the same position, so far as money can do it, as he or she would have been had there been no injury or breach of duty, that is, to compensate for the injury actually sustained. O’Connor v. Kaufman, 260 Neb. 219, 616 N.W.2d 301 (2000). Damages, like any other element of a plaintiff’s cause of action, must be pled and proved, and the burden is on the plaintiff to offer evidence sufficient to prove the plaintiff’s alleged damages. Gagne v. Severa, 259 Neb. 884, 612 N.W.2d 500 (2000); Ruble v. Reich, 259 Neb. 658, 611 N.W.2d 844 (2000); World Radio Labs. v. Coopers & Lybrand, 251 Neb. 261, 557 N.W.2d 1 (1996). While damages need not be proved with mathematical certainty, neither can they be established by evidence which is speculative and conjectural. Home Pride Foods v. Johnson, 262 Neb. 701, 634 N.W.2d 774 (2001); Sack Bros. v. Tri-Valley Co-op, 260 Neb. 312, 616 N.W.2d 786 (2000).

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In their brief, the partnership and partners refer to damage calculations which are set forth in an exhibit which was offered in support of a pretrial motion for partial summary judgment, which the district court denied. While this exhibit is included in the bill of exceptions, the record does not reflect that it was offered at trial or considered by the district court in arriving at its judgment. In King v. Crowell Memorial Home, 261 Neb. 177, 183-84, 622 N.W.2d 588, 595 (2001), we stated that “[e]vidence offered in summary judgment proceedings, but not offered at trial, cannot be considered in determining whether the evidence adduced at trial is sufficient to preclude a directed verdict.” It follows that evidence offered in summary judgment proceedings, but not offered at a trial on stipulated facts or included in the stipulation, cannot be considered in determining whether the facts warranted the judgment.

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Affirmed

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