Frank v. Lockwood

749 N.W.2d 443

275 Neb. 735

Roger FRANK et al., Appellees, v. Fred A. LOCKWOOD and Fred A. Lockwood & Co., P.C., a Nebraska corporation, Appellants.

No. S-06-731.

Supreme Court of Nebraska.

May 23, 2008.

David A. Domina and Claudia L. Stringfield-Johnson, of Domina Law Group, P.C., L.L.O., and Kevin J. Dostal, Omaha, for appellants.

Jarrod P. Crouse, of Sorensen, Mickey & Hahn, P.C., and Anthony Viorst, of Viorst Law Offices, P.C., Denver, CO, for appellees.

HEAVICAN, C.J., CONNOLLY, GERRARD, STEPHAN, McCORMACK, and MILLER-LERMAN, JJ.

MILLER-LERMAN, J.

NATURE OF CASE

Fred A. Lockwood and Fred A. Lockwood & Co., P.C., appeal the order of the district court for Scotts Bluff County overruling their motion for judgment notwithstanding the verdict. A jury had found in favor of Roger Frank (Frank) and his wife, Connie Frank, on their claim for accounting malpractice in connection with their 2001 personal federal and Nebraska income tax returns and awarded damages of $37,879 against Lockwood. We reverse in part, and remand for a new trial.

STATEMENT OF FACTS

Frank owns and operates various business ventures. In 1997, Frank purchased land near Scottsbluff, Nebraska, and titled the land in the name of one of his businesses, Frank Enterprises, Inc., an S corporation that for tax purposes passes its income and deductions through to its owners, Frank and his wife. In February 2001, Frank, on behalf of the corporation, entered into a contract to sell a portion of the land. After signing the contract, Frank explored possibilities for deferring taxation of gain on the sale of the land by use of a like-kind exchange pursuant to the Internal Revenue Code, I.R.C. § 1031 (2000).

In June 2001, Frank consulted an attorney who specialized in § 1031 exchanges. The attorney advised Frank that, among other things, he should consult a tax professional regarding tax implications of a § 1031 exchange. Frank's accountant at the time was Lockwood. Frank testified at trial in this present case that on occasions in June and September 2001, he spoke with Lockwood, and that Lockwood told him the Franks had $225,000 in tax credits that could be used to offset taxes that may be incurred as a result of the land sale. Frank's attorney testified that he spoke with Lockwood in September and that Lockwood also told him such tax credits were available. Lockwood testified at trial that he might have stated the Franks had tax credits, but he denied that he advised Frank such credits could be used to offset tax on the sale because such a calculation would require knowledge of financial information that was not available at that time.

The sale closed on October 9, 2001, and Frank Enterprises received proceeds of $1,296,781.20. Of this amount, $1 million was deposited with a qualified intermediary that would hold the proceeds for purposes of the anticipated § 1031 exchange. The remaining proceeds, less closing costs, were transferred to the Franks. Frank testified that his decision to retain the remaining proceeds rather than using the entire proceeds in a § 1031 exchange was based on Lockwood's advice regarding the availability of tax credits. Subsequent to the sale, on October 15 Frank met with Lockwood to review the Franks' 2000 personal tax returns, the filing of which had been extended and which are not directly at issue in this case. Frank testified that at the October 15 meeting, Lockwood provided greater detail regarding the tax credits and again advised him that the credits could be used to offset tax from the sale. In contrast, Lockwood testified that he gave Frank information regarding the tax credits on October 15 but that he did not tell Frank that the credits could be used to offset tax from the land sale.

In early 2002, after using part of the land sale proceeds to purchase replacement properties for a § 1031 exchange, Frank determined that he had purchased sufficient replacement property and that he could withdraw the remaining proceeds of approximately $500,000 being held by the qualified intermediary. Frank testified that he made this decision based on Lockwood's advice that he could use tax credits to offset any capital gains tax resulting from failure to use the entire proceeds to buy replacement property.

On April 15, 2002, the date when the Franks' 2001 personal tax return was due, Frank met with Lockwood regarding his 2001 income taxes. On that day, Lockwood informed Frank, for what Frank testified was the first time, that Frank would not be able to use any of the tax credits to offset the capital gains tax from the land sale and that as a result, the Franks would owe a large tax liability for 2001. Lockwood advised Frank to file an extension, but Lockwood had not estimated the Franks' 2001 tax liability and did not advise Frank to pay an estimate of taxes due. Frank testified that if Lockwood had advised him to pay estimated taxes on April 15, 2002, he would have done so.

On October 4, 2002, Lockwood provided the Franks with a 2001 tax return. Filing instructions included with the return stated that the return was to be mailed on or before October 15, 2002. After receiving the return, Frank decided to consult with another accountant to review the return. After reviewing the return, the other accountant gave Frank a list of suggestions for reducing the tax liability, which list Frank gave to Lockwood. Lockwood incorporated most of the suggestions into revised tax returns which were completed in November. Frank did not file the returns and pay the tax liability until some time in December. Frank consulted with his attorney prior to filing the tax returns. Frank testified at trial that in December, prior to filing the returns, he was aware that penalties and interest were accruing. A letter dated December 12, 2002, from Frank's attorney to Lockwood was entered into evidence at trial. Frank had authorized the attorney to write the letter. The attorney stated in the letter that although penalties and interest were accruing, it was important to take time to ensure that "whatever is filed is the best result you can prepare."

After the Franks filed the tax returns and paid the taxes for 2001, both the Internal Revenue Service (IRS) and the Nebraska Department of Revenue provided the Franks notices that penalties and interest were due with respect to the 2001 returns. Penalties were approximately $2,925 for the federal and $2,291 for the state; interest was approximately $6,285 for the federal and $1,378 for the state. Penalties and interest related to both returns totaled approximately $37,879.

On July 15, 2003, the Franks and Frank Enterprises filed a complaint against Lockwood and Fred A. Lockwood & Co., P.C. (hereinafter referred to collectively as "Lockwood"). The Franks asserted a cause of action for accounting malpractice. Trial in the matter was held February 13 through 16, 2006. After the Franks rested their case, Lockwood moved for directed verdict, arguing that there was no proof of damages and no proof of proximate cause of damages. The court sustained the motion for directed verdict as to Frank Enterprises on the basis that all income and deductions were passed through to the Franks and therefore the damage, if any, was to the Franks and not to Frank Enterprises. The court also sustained the motion for directed verdict to the extent that the Franks claimed lost profits because any such damages were not definite. The court overruled the remainder of the motion for directed verdict, and the defense presented its case. Lockwood renewed the motion for directed verdict at the close of all the evidence, and the court overruled the renewed motion.

On February 16, 2006, the jury returned a verdict in favor of the Franks and awarded damages in the amount of $37,879. Lockwood filed a motion for judgment notwithstanding the verdict. The court overruled the motion. The court noted that the jury's damage award was equal to the amount the evidence established as penalties and interest paid by the Franks with respect to their 2001 federal and Nebraska tax returns. The court therefore determined that "the jury awarded nothing in actual income taxes paid" and that the verdict "represents the exact amount the jury concluded was paid in penalties and interest." The court noted that there was evidence from which the jury could find that (1) Lockwood gave Frank erroneous advice regarding the availability of tax credits to offset any tax due on the 2001 returns that might result from the land sale; (2) Frank's decision to forgo reinvesting the entire proceeds of the land sale in a like-kind exchange was based on such erroneous advice; (3) if Frank had known that the tax credits could not be used to offset tax and that he would have a large tax liability for 2001, he would have paid estimated taxes in order to avoid penalties and interest for late payment of such tax liability; and (4) Lockwood's erroneous advice caused the Franks to incur penalties and interest that they would not otherwise have incurred. The court concluded that "the verdict represents an appropriate item of damage that was proximately caused by negligent professional advice, and the verdict should stand."

Lockwood appeals.

ASSIGNMENTS OF ERROR

Lockwood generally asserts, restated, that the district court erred in overruling his motions for directed verdict and his motion for judgment notwithstanding the verdict because there was insufficient evidence that the Franks suffered damages as the result of his advice in connection with the preparation and filing of the Franks' 2001 income taxes.

STANDARDS OF REVIEW

Concerning the overruling of a motion for a directed verdict made at the close of all the evidence, appellate review is controlled by the rule that a directed verdict is proper only when reasonable minds can draw but one conclusion from the evidence, where an issue should be decided as a matter of law. Bellino v. McGrath North, 274 Neb. 130, 738...