Sunday, May 25, 2008
Nebraska Supreme Court reverses accounting malpractice verdict that was against accountant in 1031 exchange dispute. Frank v. Lockwood, S-06-731, 275 Neb. 735 A Western Nebraska businessman sued his accountant after he sold some real estate but decided not to escrow the entire sale amount for a section 1031 exchange for other property. The accountant earlier advised him that he would be able to offset some of his gain from the real estate sales with his corporation's losses. The businessman was not able to offset the real estate sale income. The IRS gave the plaintiff an extension to file his tax return until October at the accountant's request but the accountant failed to advise the businessman to pay estimated taxes by the regular April 15 due date. The businessman incurred substantial penalties and interest because he did not file and pay his return until December, almost 2 months later than the extended due date. The Scotts Bluff County District Court jury awarded the businessman a verdict of $37000, all of his IRS penalties and interest. Nebraska Supreme Court reverses, holding the plaintiff businessman failed to prove that the IRS interest payment damaged him. The plaintiff should have proven that he could not have borrowed the unpaid tax amount at a rate lower than the IRS rate. While the Nebraska Supreme Court upholds the verdict for the IRS penalties, the court sends it back to the District Court to determine and award only for penalties related to failing to pay the taxes. Justice Connolly dissents. Frank v. Lockwood, S-06-731, 275 Neb. 735 The plaintiff's failure to file the return on time is not the accountant's fault. The penalties incurred by the Franks in this case appear to have been of two types—those incurred because the Franks failed to pay taxes when due on April 15, 2002, and those incurred because the Franks failed to file their returns when due as extended to October 15. Under federal law, I.R.C. § 6651 (2000) provides in subsection (a)(1) that a taxpayer may be assessed a penalty for failure to timely file a return and provides in subsection (a)(2) that a taxpayer may be assessed a separate penalty for failure to timely pay taxes due. In addition, I.R.C. § 6654 (2000) provides that penalties may be assessed for underpayment of estimated taxes. Nebraska law provides for similar penalties for failure to timely file returns, Neb. Rev. Stat. § 77-2789 (Reissue 2003), and for underpayment of estimated taxes, 316 Neb. Admin. Code, ch. 20, § 007 (1998). there was sufficient evidence from which the jury could find that L ockwood was negligent in failing to advise the Franks to pay an estimate of their 2001 tax liability on April 15, 2002. the district court did not err in denying L ockwood’s motion for judgment notwithstanding the verdict with respect to any portion of the damages award that was attributable to penalties for the Franks’ failure to timely pay taxes.to the extent such penalties are penalties for failure to timely file returns, under the facts of this case, they are not recoverable as damages. However, to the extent such penalties are penalties for failure to timely pay the taxes, under the facts of this case, they are recoverable as damages. Because the evidence in the record does not allow us to determine what portion of the penalties are for late payment of the taxes which are recoverable, we find it necessary to remand this cause to the district court for a new trial limited to a determination of the portion of damages attributable to penalties imposed for failure to timely pay taxes and, upon a proper showing, awarding the Franks an amount of damages equal to penalties for failure to timely pay taxes.