The Impact of Filing a CPA Malpractice Case
The YA Global Investments, L.P. v. RSM McGladrey, Inc.Docket No. A-2152-15T3 (2016), case addresses the difficult situation whereby a taxpayer sues their CPA firm in state court for incorrect tax advice, while at the same time arguing that the tax advice and position is correct in the U.S. Tax Court.
This situation arises given the relatively short time to bring a civil suit against a CPA firm and the relatively long period of time it takes to resolve a case before the U.S. Tax Court. The time to bring a civil suit for CPA malpractice will often expire before the underlying tax litigation ends.
This is an important, but seldom discussed, decision that has to be considered when trying to resolve tax disputes that involve malpractice by CPA firms.
The facts and procedural history of the case are as follows: YA Global Investments, L.P. is a hedge fund. The hedge fund filed its CPA malpractice case against RSM McGladrey in the New Jersey Superior Court in March of 2015. According to the opinion, the plaintiff is alleging that the IRS determined it owed $100 million in taxes and penalties due to RSM’s tax and accounting advice.
As noted in the opinion, the underlying tax matter at issue is still being litigated in the U.S. Tax Court. The U.S. Tax Court petition was filed in November of 2015–six months after the CPA malpractice case was filed.
The hedge fund indicated that the CPA malpractice case was a protective claim to prevent the statute of limitations from running and that the trial court should stay the proceedings pending the outcome of the U.S. Tax Court litigation:
… [YA Global Investments] asserted that they commenced this malpractice action without knowing the accuracy or adequacy of defendants’ advice — to be determined in the United States Tax Court — out of concern for the possibility that the statute of limitations on the claims against defendants would expire. Plaintiffs claimed the need for a stay because the simultaneous prosecution of the tax litigation and the malpractice action would put them in the unenviable position of supporting defendants’ tax advice in the tax litigation while attacking it in the malpractice action.
So the issue addressed in the opinion issued in the YA Global Investments CPA malpractice case was whether the trial court should stay the proceedings pending the outcome of the U.S. Tax Court litigation.
The court initially denied the hedge fund’s request for a stay.
The court’s decision was overturned on appeal. On remand, the court noted the New Jersey precedent which says that “because a cause of action on a legal-malpractice claim may accrue while the underlying claim is being litigated, a plaintiff can avoid maintaining inconsistent positions by moving to stay the malpractice suit pending completion of the appeal on the underlying action.”
This led the trial court to conclude that:
…we agree that forcing the unimpeded litigation of this action on its merits may have a tendency to compel plaintiffs to litigate two inconsistent theories in two different fora contrary to the principles enunciated in … [the prior case law]. That is simply unfair to plaintiffs and wasteful of our judicial resources.
As a result, the trial court issued the stay of the CPA malpractice case pending resolution of the tax litigation in U.S. Tax Court.
In thinking through the decision to file the CPA malpractice suit, one cannot help but wonder whether the CPA malpractice suit will impact the U.S. Tax Court case. Will it send a signal to the U.S. Tax Court that the underlying tax position that is being litigated is incorrect? Even if the U.S. Tax Court does not cite or rely on the CPA malpractice suit in its tax case, will it–or its law clerks–be entirely objective knowing that the suit was brought in the first place? What if the tax issue that is being litigated is a close call?