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Date: 06-24-2019
Case Style:
Glenn L. Moss v. Dale Duncan
Case Number: D075101
Judge: Benke, Acting P.J.
Court: California Court of Appeals Fourth Appellate District, Division One on appeal from the Superior Court, County of Riverside
Plaintiff's Attorney: Michael S. Geller
Defendant's Attorney: Stephen J. Tully and Brian W. Ludeke
Description:
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Plaintiffs and appellants Glenn L. Moss, Jeri C. Moss, and Moss Bros. Auto
Group, Inc. (collectively, Moss)1 filed a complaint against defendants and respondents
Dale Duncan, CPA, and Rogers, Clem & Company, an accountancy organization
(collectively, Duncan), alleging professional negligence and unfair business practices.
The trial court ruled that these claims were barred by the statute of limitations, resulting
in a judgment in favor of defendants. The Moss plaintiffs appeal. We agree with Moss
that the statute of limitations did not begin to run until Moss settled the tax deficiency
claim with the Franchise Tax Board (FTB), and the complaint was therefore timely.
BACKGROUND
Moss hired Duncan to perform accounting and tax services, including preparation
of its business tax returns. Glenn owned several car dealerships and negotiated the
purchase of four new dealerships in 2005 through 2006. Duncan and other professionals
advised Glenn during these negotiations. Glenn needed a loan to complete the purchases.
To accomplish his goal, he created a new corporation, Moss Auto, as the borrower.
Glenn was the sole shareholder of Moss Auto and of the four new dealerships. A bank
extended a multi-million dollar loan to Moss Auto and the money was distributed to the
four dealerships. On Duncan's advice, Moss Auto accounted for a loan of the entire
multi-million dollar proceeds to Glenn, its sole shareholder. The dealerships made
payments to Moss Auto for loan repayments but these payments were accounted for as
1 When individual reference is necessary, Glenn and Jeri Moss will be referred to by
their first names and Moss Bros. Auto Group will be referred to as Moss Auto. Glenn
and Jeri are married and file joint tax returns. Jeri was therefore obligated for the
eventual tax deficiency.
3
management fees instead of loan repayments. Moss's accountants kept records in
accordance with Duncan's advice on the loan to Glenn and the management fees from the
dealerships to Moss Auto. Duncan prepared tax returns for Moss in 2006 that were
consistent with his advice and Moss's records.
The FTB notified Moss in May 2010 that it was auditing Moss's 2006 tax returns
regarding the loan to Glenn. Duncan responded to the FTB's concerns about the loan, but
the FTB notified Moss on August 5, 2010, that it rejected Duncan's position and
considered the transaction to be a taxable distribution from Moss Auto to Glenn. Glenn
therefore owed more than $1 million in taxes to the FTB. After the August 5 letter, Moss
hired other professionals to contest the tax issue.
The FTB issued a Notice of Proposed Assessment on April 13, 2011, stating a
proposed assessment on Glenn of $1.2 million in taxes for the distribution from Moss
Auto to Glenn. After more than three years of dispute and negotiation with the FTB,
Moss decided to settle rather than continuing to contest the deficiency. Moss reached a
compromise settlement with the FTB on May 19, 2015, and Glenn paid his tax liability to
the FTB. Moss spent about $50,000 on other professionals to resolve this issue.
Moss filed a complaint against Duncan on August 28, 2015, alleging professional
negligence, false advertising, and unfair business practices. Duncan moved for summary
judgment or summary adjudication. The trial court found that the claims for professional
negligence and unfair business practices were barred by the statute of limitations. The
trial court concluded that Moss's claims were based on erroneous tax advice given in
2006 about how to structure the deal. The court ruled the two-year statute of limitation
4
commenced upon discovery of the accounting error in 2010 or, at the latest, when the
FTB issued its proposed tax assessment in 2011. The limitations period therefore expired
before this case was filed in 2015. The trial court granted summary adjudication for
Duncan on his causes of action for professional negligence and unfair business practice.
Moss dismissed its claim for false advertising without prejudice. Judgment was
entered on September 29, 2017, and Moss filed a timely notice of appeal.
DISCUSSION
Moss contends that the trial court erred in determining that the statute of
limitations for accounting negligence commenced in or before April 2011. Moss
contends, and we agree, that the statute began to run when Moss settled the tax deficiency
with the FTB on May 19, 2015, which was the date when actual injury was determined,
pursuant to International Engine Parts, Inc. v. Feddersen & Co. (1995) 9 Cal.4th 606,
621622 (Feddersen). The settlement was within two years before the complaint was
filed on August 28, 2015.
Standard of Review
Commencement of the statute of limitations is usually a factual question, but can
be resolved as a matter of law when, as here, the material facts are not disputed. (Choi v.
Sagemark Consulting (2017) 18 Cal.App.5th 308, 323324 (Choi); Sahadi v. Scheaffer
(2007) 155 Cal.App.4th 704, 714 (Sahadi).) We review the ruling on summary judgment
independently, as a matter of law, because of the lack of factual dispute. (Jackpot
Harvesting Co., Inc. v. Superior Court (2018) 26 Cal.App.5th 125, 142.)
5
Duncan asserts additional claims and contends that we can affirm the ruling on
any ground. (Carnes v. Superior Court (2005) 126 Cal.App.4th 688, 694; California
School of Culinary Arts v. Lujan (2003) 112 Cal.App.4th 16, 22.) We decline to address
these issues because the trial court did not consider these issues and did not determine
whether the facts were disputed. (See Code Civ. Proc. § 437c, subd. (m)(2) [additional
briefing must be permitted to rule on grounds which trial court did not reach].)
The parties agree that the statute of limitations for a claim of an accountant's
negligence is two years under Code of Civil Procedure 339, subdivision (1). (Feddersen,
supra, 9 Cal.4th at p. 608; Choi, supra, 18 Cal.App.5th at p. 315.) They also agree that
the two-year statute of limitations applies to the unfair business practice claim. The
limitations period for an unfair business claim is generally four years (Bus. & Prof. Code,
§ 17208), but "under California's 'primary right' theory of code pleading, we determine
the causes of action alleged in the complaint 'based on the injury to the plaintiff, not on
the legal theory or theories advanced to characterize it.' [Citations.] 'Thus, if a plaintiff
states several purported causes of action which allege an invasion of the same primary
right he has actually stated only one cause of action . . . .' " (Choi, at p. 335; Curtis v.
Kellogg & Andelson (1999) 73 Cal.App.4th 492, 503 (Curtis).) The two-year limitations
period applies to both causes of action for professional negligence and for unfair business
practices because both are based on the alleged professional negligence of Duncan.
(Choi, at pp. 335336; Curtis, at p. 503.) Thus, Moss's claims are barred if the statute of
limitations commenced more than two years before the complaint was filed.
6
Professional Negligence by Accountants
The statute of limitations in professional negligence cases starts to run when all
the elements are complete. The last element to be determined may be the actual injury
caused by the negligence. (Feddersen, supra, 9 Cal.4th at p. 608.) The California
Supreme Court in Feddersen resolved the " 'narrow,' but recurring, issue as to when
actual injury, caused by an accountant's negligent filing of tax returns, occurs so as to
commence the running of the two-year statute of limitations period." (Ibid.) The court
held that actual injury occurred when the tax deficiency was fixed by a final notice of
deficiency assessment by the taxing agency, or by acquiescence in the deficiency by the
taxpayer. (Id. at p. 622; see p. 613 [agreement to pay deficiency equivalent to final
determination by agency].) The agency first notifies the taxpayer of a potential tax
deficiency. This initial notice provides "proposed findings that are subject to negotiation
prior to any determination of tax deficiency." (Id. at p. 612.) The Feddersen court stated,
"The deficiency assessment serves as a finalization of the audit process and the
commencement of actual injury because it is the trigger that allows the IRS to collect
amounts due and the point at which the accountant's alleged negligence has caused harm
to the taxpayer." (Id. at p. 617.) The court explained, "The use of the date of deficiency
assessment to mark the date of actual injury in accountant malpractice cases provides the
parties with a bright line that . . . provides certainty in terms of the statute's
application. . . . [U]niformity in application serves a more important function when
interpreting statutes of limitation than does the identification of the precise point at which
some harm might be said to have occurred, even if negative collateral consequences
7
might arise from the tentative assessment of additional tax liability." (Id. at pp. 621
622.)
Feddersen involved federal taxes but its rule applies as well to state taxes assessed
by the FTB. "[O]ur courts view federal decisions construing comparable laws as
persuasive authority in interpreting state income tax statutes." (Sahadi, supra, 155
Cal.App.4th at p. 733.) The California tax law largely incorporates the Internal Revenue
Code. (Ibid.) The FTB, like the IRS, has a " ' "pay now, litigate later" ' " rule that
requires the taxpayer to pay the contested tax before judicial review of its validity. (Id. at
p. 734.)
The trial court here, like the appellate court in Feddersen, relied on the date of
discovery of some error to commence the statute of limitations instead of the date of final
assessment of actual injury as required by the Supreme Court in Feddersen. Specifically
contrary to Feddersen, the trial court said the FTB's notice of proposed assessment was
the latest triggering event to commence the limitations period. It concluded that the crux
of Moss's malpractice claim was Duncan's erroneous tax advice in 2006 and
distinguished Feddersen as applicable only to preparation of tax returns and not to tax
advice that informed the preparation of those returns. The court said putting the wrong
number on a tax return was an example of error in preparation of a tax return that did not
entail tax advice. On appeal, Duncan similarly contends that Feddersen was limited to
preparation of tax returns and did not apply to the tax advice that resulted in deficient
returns.
8
Feddersen does not discuss, much less depend upon, the nature of the accountant's
negligence or any difference between preparation of tax returns and tax advice that
results in the preparation of tax returns. The Supreme Court focused exclusively on the
"narrow" question of the date of "actual injury" in the case of tax liability. (Feddersen,
supra, 9 Cal.4th at p. 608.) The court discussed the evolution and development of the
commencement of the statute of limitations in cases of professional negligence. (Id. at
pp. 613620.) The California Supreme Court considered various times when damages
due to a tax deficiency occurred: when the taxpayer first learned there could be an error
on his tax filing; when the taxpayer incurred costs in responding to potential liability; and
when the tax deficiency was assessed against the taxpayer. (Id. at pp. 610611.) The
court also reviewed the IRS procedures in determining a potential deficiency, negotiating
and contesting the deficiency, and issuing a final assessment of deficiency. Once the IRS
completed its review and negotiations, it issued a final notice of assessment. At that
point, the tax was due and the government could start collections within 90 days. The
taxpayer could pay the tax and seek a refund in federal tax court, or could acquiesce to
the agency's determination and pay the amount due. (Feddersen, supra, 9 Cal.4th at
pp. 612613.) Determinations before the final assessment were proposed or potential
only. The final notice of assessment was the date of actual injury. (Id. at p. 617.) At that
point, actual injury has occurred and the statute of limitations commences. (Id. at p. 622.)
The court further explained that the delayed accrual conserved judicial
proceedings by not requiring the taxpayer to pursue the malpractice claim at the same
time as contesting the audit results with the agency. It also permitted the taxpayer to use
9
his accountant to assist during the determination phase. Further, it provided certainty for
all similar accounting malpractice cases, promoting uniform application of the rules.
(Feddersen, supra, 9 Cal.4th at pp. 620621; see also Sahadi, supra, 155 Cal.App.4th at
pp. 725726.) Duncan argues the objectives and policies of Feddersen are not applicable
here because Moss disavowed Duncan's tax law interpretation during the audit.
Uniformity of application, however, suffers when the courts must determine in each case
whether and at what time a taxpayer alleges his accountant was negligent. The Sahadi
court discussed the anomalies that would occur if claims were treated differently based
on the taxpayer's suspicion of negligence. (Sahadi, at p. 726.)
Sahadi followed Feddersen in finding that the statute of limitations commenced
when the IRS administrative appeal process concluded. (Sahadi, supra, 155 Cal.App.4th
at pp. 708, 727728.) Duncan contends that "Sahadi solely involved negligent tax return
preparation and representation during an audit." The defendant accountants in Sahadi
prepared and filed the plaintiff taxpayer's tax returns and amended returns. (Id. at pp.
708709.) The error was "the tax treatment of a complicated transaction" in which the
taxpayers transferred an ownership interest to their lender through a deed in lieu of
foreclosure. (Id. at p. 709.) It would seem that the accountants were responsible for
determining the tax treatment that resulted in the audit, as accountants are hired to give
tax advice, not to rotely fill out income tax forms. In any event, nothing in either Sahadi
or Feddersen limits the Feddersen rule to tax return preparation only without the
corresponding tax advice.
10
The appellate court in Curtis v. Kellogg & Andelson applied Feddersen to a case
of negligent tax advice. The defendant accounting firm "gave tax advice to [the plaintiffs
regarding expenses] . . . . and prepared tax returns listing those expenses on the
Corporation's income tax returns for the relevant years." (Curtis, supra, 73 Cal.App.4th
at p. 495, emphasis added.) The Curtis court followed Feddersen in finding that the
statute of limitations accrued when the taxing agency assessed a tax deficiency. (Id. at
pp. 499500.) Duncan cites the section of the case that analyzed tolling of the statute of
limitations while the defendants challenged the tax liability through the tax court. The
court found no tolling throughout the judicial proceedings, but that ruling is not
applicable here. Moss paid the tax deficiency instead of contesting the matter through the
tax court.
Feddersen was distinguished in Van Dyke v. Dunker & Aced (1996) 46
Cal.App.4th 446, 454455, because in that case there was no negotiation or litigation of
the tax liability with the taxing agency. The accountants gave erroneous tax advice about
a land donation but advised the taxpayer of the error before preparing the first tax return
that reflected the donation. The taxpayer paid the full amount due and suffered actual
injury then, the year after the donation. (Id. at p. 452.) The propriety of the tax advice
and resulting injury was not contingent on the outcome of an IRS audit. (Id. at p. 455.)
The court explained that under Feddersen, "if the existence or effect of a professional's
error depends on a litigated or negotiated determination's outcome, 'actual injury' occurs
only when that determination is made." (Van Dyke, at pp. 454455.) The accountant
found the error and the taxpayer paid the excess without any involvement of or
11
determination by the IRS. There was a later audit in Van Dyke, but it was not based on
the erroneous tax advice given to the taxpayer and the payment of the excess already
made. The later audit did not address the defendant accountant's erroneous advice.
(Ibid.)
The actual injury in Feddersen and here depended upon the outcome of a
contested and negotiated disposition with the tax agency. (Feddersen, supra, 9 Cal.4th at
p. 620; see Van Dyke, supra, 46 Cal.App.4th at pp. 455456.) Moss knew of potential
liability by 2010, and incurred expenses challenging that liability, but the actual injury
the final assessment by the FTBoccurred when Moss and the FTB agreed on a
settlement and Moss paid the final amount due. " '[A]ctual injury' represents a legal term
of art which recognizes that an inchoate or potential injury cannot give rise to a
professional malpractice action until there has been an actual determination that the
accountant's alleged negligence is related to the deficiency assessment. Once the audit
process is finalized, however, the harm caused by the accountant's negligence is no
longer contingent and the taxpayer's cause of action in tort for alleged malpractice against
the accountant accrues under [Code of Civil Procedure] section 339, subdivision 1."
(Feddersen, at pp. 619620.) The trial court erred when it found that the statute of
limitations commenced upon the notice of proposed assessment by the FTB. (Ibid.;
Curtis, supra, 73 Cal.App.4th at pp. 499500; Van Dyke, at pp. 454456.)
12
Legal malpractice cases such as Jordache Enterprises, Inc. v. Brobeck, Phleger &
Harrison (1998) 18 Cal.4th 739, 763 and Hensley v. Caietti (1993) 13 Cal.App.4th 1165
are not applicable or helpful because legal malpractice actions have a different statute of
limitations created by the Legislature. That separate statute specifies that the limitations
period commences "one year after the plaintiff discovers, or through the use of
reasonable diligence should have discovered, the facts constituting the wrongful act or
omission . . . ." (Code Civ. Proc., § 340.6, subd. (a); Sahadi, supra, 155 Cal.App.4th at
pp. 728730.) Similarly, a claim of malpractice by financial advisors is not subject to the
bright-line rule established for accounting malpractice. (Choi, supra, 18 Cal.App.5th at
p. 325.) Other accountant malpractice cases are not applicable because the actual injury
in those cases was not determined after dispute and negotiation with another entity. (See
Apple Valley Unified School Dist. v. Vavrinek, Trine, Day & Co. (2002) 98 Cal.App.4th
934, 937 [accountant misrepresentations about an internal audit that resulted in damages
not subject to determination by agency after contesting and negotiation]; Czajkowski v.
Haskell and White (2012) 208 Cal.App.4th 166, 170171 [failure to discover employee
fraud due to negligent auditing].)
Feddersen provides binding authority on this issue. We conclude that Moss's
cause of action for accountant malpractice accrued when Moss reached a settlement with
the FTB on the amount of tax deficiency. That occurred within six months before Moss
filed the complaint. Accordingly, we reverse the trial court's grant of summary
adjudication that was based on the statute of limitations.
Outcome: We reverse the judgment and remand to the trial court with directions to vacate its order granting summary adjudication and to enter an order denying Duncan's motion for summary judgment or, in the alternative, adjudication. Costs on appeal awarded to plaintiffs and appellants Glenn Moss, Jeri Moss and Moss Auto Group, Inc.
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