84 N.Y.2d 535 (1994)

In a malpractice action against an accountant, the statute of limitations begins to run when the client receives the accountant’s work product because that is when the client relies on the allegedly negligent work.

Summary

Plaintiffs, limited partners in real property tax shelters, sued defendant, an accounting partnership, for negligence and professional malpractice in preparing annual tax returns and Schedules K-1 from 1980-1987. Plaintiffs claimed defendant’s use of the “Rule of 78’s” to calculate interest deductions was improper. The IRS audited the partnerships and assessed tax deficiencies. The New York Court of Appeals held that the statute of limitations began to run when plaintiffs received the accountant’s work product, not when the IRS assessed a deficiency, because that is when the client relies on the accountant’s work. Only claims for the three years prior to the commencement of the action were timely.

Facts

Plaintiffs were limited partners in real property tax shelters. Defendant, an accounting partnership, prepared annual tax returns and Schedules K-1 for these partnerships. Plaintiffs allege they relied on defendant’s advice regarding the “Rule of 78’s” for calculating interest deductions from 1980-1988. Plaintiffs claimed defendant knew this method was improper for long-term transactions. After the IRS issued Revenue Ruling 83-84, barring the Rule of 78’s where the deduction exceeded the true economic accrual of interest, defendant continued to use the Rule for plaintiffs’ partnerships, providing an opinion letter stating its use was still defensible.

Procedural History

Plaintiffs sued defendant in 1990, alleging negligence and malpractice. Defendant moved to dismiss based on the statute of limitations. The Supreme Court adopted the rule from Atkins v. Crosland, stating the statute of limitations begins when the IRS assesses a tax deficiency. The Appellate Division affirmed. The Court of Appeals reversed, holding that the statute of limitations begins when the client receives the accountant’s work product.

Issue(s)

Whether the statute of limitations in a malpractice action against an accountant begins to run upon the client’s receipt of the accountant’s work product or upon the IRS’s assessment of a tax deficiency?

Holding

No, the statute of limitations begins to run upon the client’s receipt of the accountant’s work product because this is when the client reasonably relies on the accountant’s skill and advice and, as a consequence of such reliance, can become liable for tax deficiencies.

Court’s Reasoning

The Court of Appeals reasoned that a malpractice cause of action accrues when an injury occurs, even if the aggrieved party is ignorant of the wrong. In the context of accountant malpractice, the claim accrues when the client receives the accountant’s work product. The court rejected the argument that the statute of limitations should begin when the IRS assesses a deficiency, stating that the policies underlying a statute of limitations—fairness to the defendant and society’s interest in adjudicating viable claims—demand a precise accrual date that can be uniformly applied. Basing the limitations period on potential IRS action would create uncertainty and be subject to manipulation. The court emphasized the importance of a definite statutory period governing negligence actions and adhered to the principle that the limitations period is measured from when the taxpayer receives and relies on the accountant’s advice and work product. As Justice Wallach stated, “[f]or us to adopt th[e] minority [Atkins] rule would mean turning our backs on certainty and predictability, and proceeding along an indistinct trail with random and uncertain markings”.