No. 52584-1-I.The Court of Appeals of Washington, Division One.
Filed: May 24, 2004. UNPUBLISHED OPINION
Appeal from Superior Court of King County. Docket No: 03-2-19919-2. Judgment or order under review. Date filed: 05/09/2003. Judge signing: Hon. Gregory P Canova.
Counsel for Appellant(s), Stuart Charles Morgan, Attorney at Law, 1201 Pacific Ave Ste 1200, Tacoma, WA 98402-4395.
Counsel for Respondent(s), Robert Joseph Bocko, Attorney at Law, 1301 5th Ave Ste 1515, Seattle, WA 98101-2625.
PER CURIAM.
Appellant Air Commodities, Inc., sued respondent American Express Financial Advisors, Inc. (AEFA), for negligence in conjunction with AEFA’s advice about company pension plans. The trial court found that the action was time-barred and dismissed it on summary judgment. Concluding that AEFA has failed to demonstrate that the action was time-barred as a matter of law, we reverse the order of dismissal and remand for further proceedings.
For purposes of this appeal, the relevant facts are undisputed. In 1996, Air Commodities hired American Express Financial Advisors to review retirement plan options for Air Commodities’ employees. AEFA was aware that Air Commodities already had a profit sharing plan in place. Based on AEFA’s recommendation, Air Commodities directed AEFA to establish a Salary Reduction Simplified Employees Pension (SARSEP) plan. In 1999, Air Commodities hired accountants to review its SARSEP plan. Upon review, the accountants advised Air Commodities that the plan had been in violation of several Internal Revenue Service regulations since its inception in 1996.
By letter dated December 30, 1999, Air Commodities informed the IRS of the apparent violations and made specific proposals to correct the violations under the IRS’s “Closing Agreement” and “Voluntary Compliance Agreement” programs. Among other things, Air Commodities proposed distributing excess deferrals plus any attributable income and depositing “the top-heavy minimum contribution amounts to either the SARSEP or the profit sharing plan, as determined through negotiation with the IRS pursuant to this Application.” Clerk’s Papers, at 31.
On February 20, 2002, Air Commodities and the IRS entered into a Closing Agreement that settled all outstanding issues and specified various corrective actions that Air Commodities was to undertake. The Closing Agreement incorporated several of the proposals contained in Air Commodities’ December 1999 letter.
On March 11, 2003, Air Commodities filed this action against AEFA, alleging that AEFA had negligently advised Air Commodities to establish a SARSEP plan in addition to an already existing profit sharing plan. Air Commodities further alleged that as a result of AEFA’s negligence, it had been required to make $47,527.00 in “corrective contributions” to employee retirement plans and pay more than $16,000 in accounting and legal fees. AEFA moved for summary judgment, arguing that Air Commodities’ negligence action had accrued no later than December 1999, when it advised the IRS of the SARSEP violations, and that the action was therefore barred by the three-year limitation of RCW 4.16.080. On May 9, 2003, the trial court granted summary judgment and dismissed the action.
On appeal, Air Commodities contends that its cause of action accrued no earlier than February 20, 2002, when the IRS entered into the Closing Agreement. Air Commodities argues that it suffered no actual and appreciable damages until the IRS, by means of the Closing Agreement, recognized the existence of violations in the SARSEP plan and specified how Air Commodities would be required to correct those violations.
When reviewing a grant of summary judgment, this court undertakes the same inquiry as the trial court and considers the evidence and the reasonable inferences therefrom in the light most favorable to the nonmoving party. Schaaf v. Highfield, 127 Wn.2d 17, 21, 896 P.2d 665
(1995). Summary judgment is appropriate “if the pleadings depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” CR 56(c); White v. State, 131 Wn.2d 1, 9, 929 P.2d 396
(1997).
The statute of limitations for Air Commodities’ negligence claim is three years. RCW 4.16.080(2). Generally, the statute of limitations begins to run from the time an action accrues, that is, when a party has a right to apply to a court for relief. U.S. Oil Refining Co. v. State Dep’t of Ecology, 96 Wn.2d 85, 91, 633 P.2d 1329 (1981). The right to apply for relief requires that each element of the cause of action be susceptible of proof. Haslund v. Seattle, 86 Wn.2d 607, 619, 547 P.2d 1221
(1976). Consequently, a plaintiff cannot maintain a negligence action — and the statute of limitations will not begin to run — until the plaintiff has suffered “actual and appreciable” damage. Haslund, 86 Wn.2d at 620. The determination of when a plaintiff suffers actual and appreciable damage is usually a question of fact. Haslund, 86 Wn.2d at 620.
AEFA argues that as a matter of law, Air Commodities was aware of all of the elements of its negligence claim, including actual damage, no later than December 1999, when it informed the IRS of the apparent SARSEP violations, calculated the total excess deferrals and top-heavy minimum expenses, incurred legal and accounting costs, and paid the IRS a $500 application fee. But AEFA has failed to establish that Air Commodities had any practical legal remedy for its negligence claim until the IRS recognized the alleged violations and determined that some corrective action was required.
It is undisputed that accountants advised Air Commodities in 1999 that its SARSEP plan was in violation of IRS regulations. In response, Air Commodities formally notified the IRS of the apparent violations, proposed corrections for the violations, and requested a settlement or closing agreement. But AEFA has not demonstrated or even suggested that Air Commodities incurred any legal obligations arising from the violations of IRS regulations until the IRS entered into the Closing Agreement, which specified the steps that Air Commodities was required to undertake in order to close the case. In an uncontroverted declaration, Devitt Barnett, a tax attorney who represented Air Commodities during its negotiations with the IRS, described the process as follows:
During the [negotiation] procedures, one never knows what penalty and/or corrective action, if any will be imposed by the IRS until the very end of the process when a closing agreement is proposed in writing by the IRS. In my experience, penalties have ranged from no penalty, or $0.00 to $63,000. In some circumstances, the IRS has waived or reduced penalties that are mandatory according to the plain language of the statute or regulation that imposes the penalty. This has occurred even though the taxpayer has proposed paying the seemingly mandatory penalty. One simply does not know what the IRS will do with regard to penalties and corrective action until the end of the process when a closing agreement is reached.
Clerk’s Papers, at 42.
In sum, AEFA has made no showing that Air Commodities was subject to anything other than potential liability until such time as the IRS formally responded to Air Commodities’ letter. “[P]otential liability is not the equivalent of actual harm.” Sabey v. Howard Johnson Co., 101 Wn. App. 575, 595, 5 P.3d 730 (2000). Reasonable persons could differ as to whether Air Commodities suffered any actual harm, including the expenditure of accounting and attorney fees, as a result of AEFA’s alleged negligence until the IRS signed the Closing Agreement on February 20, 2002.
Accordingly, the trial court erred in entering summary judgment. Air Commodities’ arguments are supported by this court’s decision in Sabey v. Howard Johnson Co., 101 Wn. App. 575, 5 P.3d 730 (2000). In Sabey, the plaintiff formed a company in 1989 to purchase the Frederick
Nelson Acquisition Company (FNAC) after receiving assurances from an actuarial firm that FNAC’s pension plan was in compliance with federal regulations. After the purchase was completed, the Pension Benefits Guaranty Corporation (PBGC) advised the plaintiff that the pension plan was underfunded and that the plaintiff was liable for the shortfall of $3.75 million. In 1998, the plaintiff agreed to pay $1.95 million to the PBGC to settle the claim. The plaintiff then filed a negligence and indemnification action against the actuarial company. The trial court dismissed the plaintiff’s claims on summary judgment.
On appeal, this court reversed the summary judgment, concluding, among other things, that the plaintiff’s negligence claim was not time barred. In reaching this decision, the court noted that the underfunding of FNAC’s pension plan was known in 1989, that the PBGC had notified the plaintiff in 1995 that he was potentially liable for the underfunding, and that the PBGC had notified the plaintiff in 1997 that it would seek to recover $3.75 million from him personally. But the court concluded that any harm was “purely speculative” until the plaintiff agreed to pay the PBGC in 1998, and that the defendants had therefore failed to demonstrate that the plaintiff’s negligence action accrued before he agreed to settle PBGC’s claim. See Sabey, 101 Wn. App. at 594-95.
In this case, any injury that Air Commodities suffered as a consequence of AEFA’s alleged negligence was purely speculative until the IRS made some determination on liability, which did not occur until the Closing Agreement. Contrary to AEFA’s assertion, the Sabey court’s analysis is not restricted to the plaintiff’s indemnification claim but applies equally to the negligence claim. See Sabey, 101 Wn. App. at 594-95; cf. Johnson v. Reehoorn, 56 Wn. App. 692, 784 P.2d 1301 (1990) (material factual issue existed as to whether accountant malpractice action accrued before IRS notified taxpayer of loss of special use valuation).
Our decision also finds support in cases from other jurisdictions, which have held that tax-related negligence actions do not accrue, and the statute of limitations does not begin to run, until the IRS or other taxing authority provides some indication of a penalty, fine, or other assessment.[1] Indeed, as the Sabey court recognized, a plaintiff who files a negligence action based solely on potential liability faces the very real risk that the action will be dismissed as premature. See Sabey, 101 Wn. App. at 595 (plaintiff’s federal claim, which was filed before the PBGC assigned liability, was dismissed without prejudice); see also Logemann Bros. Co. v. Redlin Browne, S.C., 205 Wis.2d 356, 556 N.W.2d 388 (Wis.Ct.App. 1996) (trial court properly dismissed accountant malpractice action that was filed before federal and state taxing authorities had reviewed taxpayer returns or assessed any penalties).
Streifel v. Hansch, 40 Wn. App. 233, 698 P.2d 570 (1985), and Janicki Logging Constr. Co. v. Schwabe, Williamson Wyatt, P.C., 109 Wn. App. 655, 37 P.3d 309 (2001), relied upon by AEFA, are factually distinguishable. In Streifel, the facts clearly established that the buyers of real property had sustained appreciable damage when they learned, after the transaction, that the sellers had failed to disclose a due-on-sale provision. At that point, the buyers could have elected to rescind the contract or apply for a different loan. Streifel, 40 Wn. App. at 237. In this case, AEFA has failed to establish Air Commodities suffered anything more than potential harm before entering into the Closing Agreement. Similarly, in Janicki, the attorneys’ alleged negligence “[left] in place a judgment that denied Janicki the relief it had sought.” Janicki, 109 Wn. App. at 660-61. The plaintiff was therefore aware that it had suffered appreciable harm from the alleged negligence.
We reverse the order of summary judgment and remand for further proceedings.
ELLINGTON and KENNEDY, JJ.
(Wyo. 1989) (action for accountant negligence that results in increased tax liability accrues at the time of statutory notice of deficiency or when taxpayer enters into agreement with IRS); International Engine Parts, Inc. v. Feddersen and Co., 9 Cal.4th 606, 888 P.2d 1279, 38 Cal.Rptr.2d 150 (1995) (action for accountant malpractice action alleging negligent preparation of tax return accrues when IRS assesses tax deficiency).