Edwards v. Demedis

EYLER, Judge. The principle issue before us is whether the discovery rule, which determines when a cause of action accrues, requires that a formal notice of deficiency be issued by the Internal Revenue Service in order for a claim based on alleged negligent tax advice to accrue. We hold that it does not. ⁵⁴⁵ Facts The four appellants, Francis Thelen, George Sourlis, George Antonas, and Nicholas DiGiacomo, are retired Baltimore County school teachers. Each was a member of the Maryland State Retirement System (Retirement System), and consequently, a percentage of their gross earnings was paid to the Retirement System during their working years.

The contribution was not tax deductible. In 1990, the State closed the Retirement System to new employees and replaced it with the Pension System. The Pension System was non-contributory but provided a lower benefit at retirement and required longer service before eligibility for retirement. Members of the Retirement System were given an option to transfer to the Pension System.

To encourage transfer, the State offered to refund all or part of each employee’s contribution to the Retirement System, depending on the facts of each case, plus interest. In 1990, Pandelis Demedis, appellee, a financial planner and registered representative of Chubb Securities Corporation, also an appellee, presented an investment plan to teachers, including each appellant. The plan envisioned that each teacher would accept a transfer refund from the Retirement System and roll over the interest portion of the refund into an individual retirement account that would be managed by Demedis. Demedis and each appellant obtained a legal opinion from Edward L. Blanton, Jr., another appellee, an attorney, that the interest portion of the refund was eligible for a tax-free rollover.

The legal opinions were issued between February and November, 1990. Each appellant transferred from the Retirement System to the Pension System and invested funds in individual retirement accounts managed by Demedis. Sometime prior to January 1990, 1 the State requested a revenue ruling from the Internal Revenue Service on the ⁵⁴⁶ eligibility of the interest portion of the refund for tax-free treatment. The Internal Revenue Service issued a ruling on July 28, 1990, holding that the refund did not qualify for tax-free treatment.

Thelen, Sourlis, and Antonas received notice of the Internal Revenue Service ruling in the summer of 1990. Unlike the other appellants who had transferred their funds in early 1990, DiGiacomo did not transfer funds from the Retirement System to the Pension System until after the revenue ruling. In conjunction with that transfer, DiGiacomo was advised in November 1990 that the Internal Revenue Service had ruled that the refund could not be rolled into an individual retirement account and qualify for tax-free treatment. In the fall of 1990, Thelen, Sourlis, and Antonas received one or more letters from state and federal legislators concerning the tax issue.

The three appellants understood that the legislators had been contacted because of the revenue ruling and with regard to a possible effort to seek legislative change. One or more of the legislators advised appellants that they had received inaccurate advice regarding the tax consequences resulting from the transfer of funds. On April 2, 1991, the executive director of the Maryland State Retirement Agency issued a memorandum directed to persons who had received a transfer refund in 1990. In that memorandum, the executive director stated that taxes could be imposed on transfer refunds and advised recipients to close individual retirement accounts and withdraw the transferred amounts prior to April 15, 1991.

Similar advice was repeated in a memorandum dated April 8, 1991. Stronger advice was contained in a memorandum dated April 12,1991, in which the executive director stated that recipients who had rolled refunds into individual retirement accounts “must” withdraw such funds prior to April 15,1991, in order to minimize the tax consequences. ⁵⁴⁷ Sourlis, Antenas, and DiGiacomo acknowledged receipt of the April 2 memo and Sourlis and Antenas acknowledged receipt of all three memos. On April 10,1991, the Retirement System issued an “Announcement” to former members who had accepted transfer refunds after the revenue ruling in July, 1990, stating that such persons would receive no tax relief. The Retirement System noted that it had disseminated the ruling promptly and there was no “confusion” after that time.

After the revenue ruling in July 1990, and again after the Retirement System’s communications in April 1991, Blanton and Demedis advised appellants that, in their opinion: (1) the ruling did not apply to them, (2) it would be overturned in court, and (3) they would be better off financially with their monies in the individual retirement accounts. Consequently, there was nothing that they needed to do. On October 1, 1992, the Internal Revenue Service District Director issued a report of income tax changes for the calendar year 1990 directed to Thelen, showing a deficiency and balance due based on receipt of the transfer refund and rollover into an individual retirement account. This report was received by Thelen no later than October 14, 1992.

On June 18, 1992, the Internal Revenue Service District Director sent a similar report to Sourlis, received no later than July 24. On August 18,1992, a revised report showing a deficiency and balance due was sent to Sourlis and received no later than October 8. On July 16, 1992, the Internal Revenue Service District Director sent a similar report to Antenas showing a deficiency and balance due. A revised report was sent to Antenas on August 25.

Both reports were received by him no later than September, 1992. On December 17, 1993, a similar report was sent to and received by DiGiacomo. After receipt of the proposed changes, each appellant retained Blanton to represent him in contacts with the Internal Revenue Service and in any subsequent litigation. Blanton advised appellants that they could either (1) wait for a formal ⁵⁴⁸ notice of deficiency assessment 2 to be issued and litigate the issue in Tax Court, or (2) pay the tax and request a refund.

In the event that the refund was denied, appellants could then sue in the United States District Court for the District of Maryland. Blanton advised appellants to take the latter route because it would enable them to recover attorney’s fees and interest if successful in the underlying claim. Each appellant paid the deficiency claimed and filed a refund claim. Specifically, Thelen paid the tax on March 22, 1993, and filed a refund claim on March 28, 1993; Sourlis paid the tax on December 18, 1992, and filed a refund claim on January 9, 1993; Antonas paid the tax on January 22, 1993, and filed a refund claim in February, 1993; and DiGiacomo paid the tax on August 18,1994, and filed a refund claim on the same date.

Blanton did not advise appellants that, prior to the filing of the refund claims, and in connection with his representation of Demedis, he had been attempting to obtain a private ruling from the Internal Revenue Service. Blanton also failed to advise appellants that the request for a ruling had been rejected by the Internal Revenue Service. In rejecting the request, the Internal Revenue Service had informed Blanton that the Internal Revenue Code section relied on by him in making his request was not applicable. 3 Blanton failed to relate this information to appellants. The Internal Revenue Service, between May 1993 and May 1995, denied appellants’ claims for refunds.

After the refund claims were denied, appellants, represented by Blanton, filed suit in the United States District Court. In February 1995, the Internal Revenue Service made a settlement proposal to various teachers, including appellants. Blanton and Demedis advised appellants not to accept the ⁵⁴⁹ offer. The offer was not accepted by appellants, and they subsequently lost their refund suits. 4 Procedural History The complaint herein was filed in the Circuit Court for Baltimore County on October 17, 1995, and contained counts entitled “Malpractice,” “Breach of Warranty,” and “Conflict of Interest.” 5 An amended complaint was filed on February 27, 1996, which added counts entitled “Negligent Misrepresentation,” “Fraud,” “Negligent Supervision,” and “Violation of the Maryland Securities Act.” Additionally, Chubb Securities Corporation, alleged employer of Demedis, was added as a defendant.

In December 1996, Blanton filed a motion for partial summary judgment with respect to the claim of negligent advice that the refunds would be tax free. The motion asserted that the claim was barred by limitations. In January 1997, Demedis and Chubb filed motions for summary judgment on the same ground. On March 14, 1997, the trial court filed an opinion and order, in which it held that “the statute of limitations bars any action brought by the plaintiffs.” In March 1997, Blanton filed a motion to alter or amend judgment, requesting clarification of the court’s opinion and order.

Blanton pointed out that, while the amended complaint contained claims for negligent tax advice which were the subject of his motion for partial summary judgment, it also contained claims for negligent advice in connection with the settlement offer by the Internal Revenue Service. The latter occurred in February, 1995, within three years prior to the filing of the complaint, and was not the subject of the motion. ⁵⁵⁰ Also in March, appellants filed a motion to alter or amend judgment and a motion requesting reconsideration of the entry of summary judgment. Appellants agreed with Blanton that the negligent settlement advice claim was not barred by limitations. Additionally, with respect to the latter claim, appellants argued that Demedis and Chubb should not be granted summary judgment because they participated with Blanton in giving the negligent settlement advice.

On May 8, 1997, the trial court entered an order granting Blanton’s motion and denying appellants’ motions. This action by the court had the effect of leaving open the negligent settlement advice claim as to Blanton. In the interim, on May 2,1997, appellants filed a motion for partial voluntary dismissal, without prejudice. The trial court subsequently denied appellants’ motion for voluntary dismissal and confirmed the previously scheduled trial date of June 2, 1997.

At trial, the court reconfirmed its earlier denial of appellants’ motion for voluntary dismissal without prejudice. Appellants presented no evidence at trial, and the trial court entered judgment in favor of Blanton. This appeal followed. Questions Presented In essence, appellants pose two questions for our review, which we state as follows: 1.

Did the trial court err in entering summary judgment on the ground that appellants’ claims were barred by limitations? 2. Did the trial court abuse its discretion in denying appellants’ motion for partial voluntary dismissal of the negligent settlement advice claim? Discussion I. Appellants contend that their claims for negligent tax advice are not barred because a cause of action for such claims does not accrue until a notice of deficiency assessment is received from the Internal Revenue Service pursuant to 26 U.S.C. ⁵⁵¹ § 6212. Appellants argue that, because such a notice of deficiency was not issued in the case before us, the cause of action did not accrue until the claims for refund were denied by the Internal Revenue Service.

Appellants explain that, conceptually, the denial of a claim for refund has the same effect as the issuance of a notice of deficiency, i.e., the Internal Revenue Service has the right to collect the taxes claimed at either point in time, subject to judicial review. Finally, appellants point out that a notice of deficiency was never issued because of advice by Blanton and Demedis to pay the taxes claimed and to seek a refund, as opposed to contesting the proposed assessment prior to payment. Alternatively, appellants argue that if a notice of deficiency or denial of a claim for refund is not required in order for a cause of action to accrue, the earliest it could accrue was when appellants paid the taxes. Appellants argue that if this Court declines to apply a bright line rule that a cause of action accrues when a notice of deficiency is issued or a claim for refund is denied, or alternatively when the taxes are paid, at the very least the question of when a cause of action accrues is a fact question to be decided by a jury.

As alternatives to the above arguments, appellants contend that the statute of limitations was tolled because: (1) appellees continued to represent and provide negligent advice to appellants, and (2) appellees’ conduct constituted constructive fraud. Appellees contend that the discovery rule applies on a case-by-case basis and that a notice of deficiency is not necessarily required in order for a cause of action based on negligent tax advice to accrue. They point out that in the case before us, appellants had actual knowledge of the position taken by the Internal Revenue Service more than three years prior to the filing of the malpractice suit. Alternatively, appellees argue that the new claims against the original defendants and the claims against the new defendant, Chubb, contained in the amended complaint, do not relate back to the date of the original filing. ⁵⁵² Based on the facts of this case, we hold that (1) a cause of action for malpractice accrued more than three years prior to the filing of this malpractice action, 6 (2) the continuous representation by appellees did.not toll the period of limitations, and (3) there was no legally sufficient evidence of constructive fraud.

As a result, we need not discuss appellees’ relation back argument. A. In addressing appellants’ first contention, it is important to keep in mind the basic options available to a taxpayer when an Internal Revenue Service examiner audits a tax return and proposes an adjustment. If the taxpayer disagrees with the proposed adjustment, it may appeal to the Internal Revenue Service Appeals Division. If the taxpayer loses on appeal, the Internal Revenue Service issues a notice of deficiency pursuant to 26 U.S.C. § 6212 .

The assessment is then final insofar as the Internal Revenue Service is concerned, but it is subject to judicial review in the United States Tax Court. Alternatively, a taxpayer may pay the tax claimed without pursuing an appeal within the Internal Revenue Service and seek a refund. If the refund is denied, the taxpayer can sue in the United States District Court for a refund, interest, and attorney’s fees. Appellants rely primarily on Feldman v. Granger, 255 Md. 288 , 257 A.2d 421 (1969), and Leonhart v. Atkinson, 265 Md. 219 , 289 A.2d 1 (1972), as standing for the proposition that a cause of action for. malpractice based on negligent tax advice does not accrue until a notice of deficiency is issued.

Appellants further assert that this result is the same as that reached by courts in various other jurisdictions, and they cite cases to that effect. We will begin our discussion with a review of Maryland law, apply that law to the facts of this case, and then turn ⁵⁵³ our attention to the law of other jurisdictions. Under Maryland law, assuming that the elements of a cause of action are present, the discovery rule applies in determining when a cause of action accrues for limitations purposes. The discovery rule, first applied in medical malpractice cases and later extended to all professional malpractice cases, now applies in all tort actions.

Poffenberger v. Risser, 290 Md. 631, 636 , 431 A.2d 677 (1981). Under the discovery rule, a cause of action accrues when a claimant knows or should have known of the wrong. The discovery rule, as applied in Maryland, is clearly distinguishable from the maturation of harm rule applied in some jurisdictions. A legal wrong must be sustained, but a precise amount of damages need not be known.

American Home Assurance Co. v. Osbourn, 47 Md.App. 73, 86-87 , 422 A.2d 8 (1980). A cause of action accrues when knowledge of facts and circumstances are sufficient to put a claimant on notice to make inquiry. Lutheran Hospital of Maryland v. Levy, 60 Md.App. 227, 237 , 482 A.2d 23 (1984). Once on inquiry notice, a claimant has a duty to seek out facts supporting a cause of action.

Pennwalt Corp. v. Nasios, 314 Md. 433 , 550 A.2d 1155 (1988). When there is no genuine issue as to a material fact relative to the accrual of a cause of action, the date of accrual may be determined as a matter of law. See Bennett v. Baskin & Sears, 77 Md.App. 56, 67-68 , 549 A.2d 393 (1988) (citing O’Hara v. Kovens, 305 Md. 280 , 503 A.2d 1313 (1986)). Appellants rely on Feldman and Leonhart as standing for the proposition that, in a case of malpractice based on negligent tax advice, there is a bright line rule as to when a cause of action accrues, i.e., upon receipt of a notice of deficiency from the Internal Revenue Service.

Courts in some jurisdictions, while acknowledging that states have applied different rules of law with respect to the issue in question, have cited Feldman and Leonhart for the proposition that the period of limitations does not begin to run until the issuance of the statutory notice of deficiency. See, e.g., Mills v. Garlow, 768 P.2d 554, 556 (Wy.1989). We read Feldman and Leonhart differently. ⁵⁵⁴ Feldman involved a malpractice action against an accountant for damages arising out of an assessment of taxes by the Internal Revenue Service. Summary judgment was entered in favor of the accountant, and the issue on appeal was the date of accrual of the cause of action for malpractice.

The claimants argued that the cause of action did not accrue until the United States Tax Court sustained the deficiency assessed by the Appeals Division of the Internal Revenue Service. The accountant, relying on the discovery rule, argued that the cause of action accrued earlier when (1) the claimants discovered the act of negligence in that case, specifically, the late filing of a form with the Internal Revenue Service, or (2) when the claimants were advised of the deficiency by the Appeals Division. The Court of Appeals applied the discovery rule, distinguished the maturation of harm rule, affirmed the summary judgment, and stated: Again, focusing attention on the date of July 22, 1964, when the appellant received the notice of the tax deficiency in the amount of $25,428.06 from the Appellate Division of the Internal Revenue Service, we are of the opinion that any reasonable and prudent man, being in the place of the appellants, would have known or certainly should have known at that time, that he had sustained legal harm as of that date, if not before. The appellants had by this time discharged the appellees as their accountants and they had known for over three and a half years that the Internal Revenue Service disagreed with their position.

Certainly, when they received notice of the tax deficiency assessment on July 22,1964, if they had not before, it became necessary for them to incur the expense of retaining legal counsel. We think, at the very least, from the date of this assessment of the tax deficiency by the Internal Revenue Service the statute of limitations began to run adversely to their action against their accountants. It is true that in an income tax case, such as is involved in the present litigation, the exact amount of deficiency may be subject to negotiation at various conference levels so that the damage might be altered prior to the notice or assess ⁵⁵⁵ ment of deficiency, but as in the Mattingly [v. Hopkins, 254 Md. 88 , 253 A.2d 904 (1969)] case, and as in other tort cases, the exact amount of damages sustained may not be known at the time of the discovery of the wrong. However, in our opinion this is not a sufficiently sound reason to postpone the accrual of the action or toll the running of limitations when other reasons grounded in public policy are considered. 255 Md. at 296 , 257 A.2d 421 .

Leonhart involved a malpractice action against an accountant for a tax deficiency caused by a change in accounting method. Summary judgment was entered for the accountant. The accountant argued that the cause of action accrued when the claimant first received notice of an adjustment or, alternatively, no later than receipt of the notice of deficiency. The claimant argued that the cause of action did not accrue until the Tax Court affirmed the assessment.

The Court of Appeals, based on FeldmoM, determined that limitations began to run when the notice of the deficiency assessment was received by the claimant and, consequently, affirmed the summary judgment. First, we note that neither of these cases involved payment by a taxpayer of a disputed claim for taxes followed by a claim for refund. Second, our reading of these cases is that they are merely fact specific applications of the general discovery rule. The Court did not purport to adopt a bright line rule applicable to malpractice actions for damages arising out of negligent acts resulting in the assessment of additional taxes.

Based on the facts in Feldman and Leonhart and the way the issues were presented, it was not necessary for the Court of Appeals, in either case, to look at a point in time earlier than the date of receipt of the notice of deficiency in order to find sufficient notice and affirm the summary judgments. We acknowledge that there is language in Leonhart which facially is consistent with appellants’ reading of the case. The Court of Appeals stated: “Accordingly, as directed by Feldman , the date the notice of the tax deficiency assessment was ⁵⁵⁶ received by the Leonharts, April 27, 1965, is the date limitations began to run adversely against appellants’ cause of action.” Leonhart, 265 Md. at 226 , 289 A.2d 1 . We are confident, however, that the Court of Appeals was only reciting the facts in support of its application of the discovery rule and did not intend to adopt a bright line rule for determining the date of accrual of all malpractice actions against tax advisors.

In the case before us, appellants claimed, based on various legal theories, that Blanton and Demedis advised them in 1990 to accept a transfer distribution from the Retirement System and invest the interest portion of the distribution in an individual retirement account. Appellants also claimed that, in addition to bad tax advice, the nature of the investments made by Demedis, after the funds were deposited into the individual retirement accounts, were inappropriate. Appellants claimed as damages taxes, interest, penalties, litigation costs, attorney’s fees, mental,