One of the more difficult issues attorneys and courts wrestle with in a professional negligence case is when, exactly, is the client damaged sufficiently to put him or her on notice to start the running of the statute of limitations. Division I of the Washington State Court of Appeals, recently ruled in a published decision that in a professional negligence matter against a CPA, the statute of limitations did not accrue until a decision by the Washington State Department of Revenue (DOR) became final, binding, and due for payment. See John Murphey v. Charles D. Grass, CPA & Associates, P.S., No 65919-I, October 31, 2011.
In the Murphey case, Murphey originally hired Grass to prepare payroll and tax returns for his construction business. By 2000, Murphey's business had expanded, and Grass managed all bookkeeping and accounting services for Murphey's businesses. In 2004, the DOR initiated random audits of Murphey's two businesses. Grass could not come up with documentation requested by the DOR at the audit. At this same time, Murphey learned that the Internal Revenue Services (IRS) had issued tax liens against his business for unpaid employment taxes. When Grass was confronted about this, he initially lied and said it was a mistake. Murphey later learned that Grass had numerous unopened tax notices from the IRS related to the unpaid taxes. Murphey ultimately confirmed the liens were accurate, and he owed approximately $100,000 in employment taxes, interest and penalties.
Murphey fired Grass, and Murphey's attorney sent a letter where he warned Grass that the penalties imposed by the IRS were a result of his errors and omissions, and that once Murphey assessed all his damages, he would make demand upon Grass for repayment. Murphey's counsel suggested that Grass tender the claim to his errors & omissions carrier. The DOR, in the meantime, completed its audits of Murphey's businesses in 2006, finding Murphey owed significant taxes and penalties to the State of Washington. Murphey filed several petitions for correction with the DOR. On February 13, 2009, the appeals division of the DOR issued a determination denying Murphey's petitions for correction. Murphey then appealed this to the board of tax appeals.
In November 2009, Murphey filed suit against Grass. Grass moved for summary judgment, arguing that the statute of limitations began to run in 2005 and 2006. The lower court granted Grass's motion. On appeal, the Court of Appeals reversed. It noted that the statute of limitations begins to run when "all elements necessary to the claim exist and the plaintiff has a right to seek relief in the courts." Grass argued that the latest the statute of limitations could have begun to run was in March of 2006, when the DOR issued its first tax assessment. The written assessment set forth the amount of money due, and warned that failure to pay the same by the date due would result in additional penalties.
While the Court of Appeals acknowledged that the written notice supported Grass's position, it observed that in this case the statute governing the assessment, RCW 82.32.160, permitted the taxpayer 30 days to file a petition for correction, at which point the assessment would become final if a petition was not filed. Citing to both out-of-state and Washington legal malpractice cases that were relied upon by Grass, the Court found that in all cases the statute of limitations began to run when the "plaintiffs learned of injury that was certain." In Murphey, the Court found that damages became "certain" when "the appeals division made the assessments, final, binding and due for payment."