When Does the Clock Start?

The application of the statute of limitations affirmative defense is theoretically simple, yet practically complex.  Often, the issue is when does the clock start; i.e. when does the claim accrue. The result varies by state and may come down to the specific fact pattern. The water may be muddied further if the plaintiff incurs more than one injury. This is relevant to the professional malpractice community. Take for example a recent California accountant malpractice case involving state and federal audits and $10 million on the line.

In the underlying case a taxpayer is seeking damages related to a tax shelter rejected first by the IRS, and then by the State of California.  The taxpayer alleged that its outside accountant recommended a tax shelter that led to audits, and eventually stiff penalties, from both federal and state agencies. However, the IRS audit concluded significantly before the state audit, and the taxpayer did not file suit within the statutory period.  However, he did file suit within the statute of limitations for the state audit which followed. Query: does this amount to a second bite of the apple for the plaintiff?

The defense has filed a motion to dismiss based on the statute of limitations, arguing that the IRS audit was sufficient to put the plaintiff on notice that a potential malpractice claim existed.  The taxpayer countered that the two separate agencies cannot be considered the same audit and, as a result, that he incurred separate harms and in any case did not have any damages until a final decision was rendered.

The judge presiding over oral argument also pressed defense counsel on damages, noting that it did not appear the taxpayer was sufficiently injured until a final decision had been rendered by the state tax board. The judge concluded argument by taking the matter under consideration, while commenting that the issue was not clear-cut and suggesting a review by the appeals court may be necessary.

This will be an interesting decision. On the one hand, the taxpayer was aware that a malpractice claim existed after the IRS audit was complete, and by filing the current suit was able to get a “second shot” at his claim. However, it is also true that the IRS audit was not necessarily determinative of the state audit, and the taxpayer is only seeking damages related to the latter. This uneasiness from the presiding judge and extensive liability at stake, $10 million, suggests that an appeal from the losing party is fairly likely so we may not have a final decision for some time.


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