Procedural Posture

Procedural Posture

Appellant clients sought review of a judgment from the Superior Court of Santa Clara County (California), which dismissed their negligence action against respondent accountants as untimely.

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Overview

The clients retained the accountants to prepare and file their federal and state income tax returns. Separate audits resulted in federal and state notices of deficiency. After more than five years of negotiation, the clients obtained a withdrawal of the proposed federal assessment and a refund. The clients’ state refund proceedings, which had been suspended during the negotiations, resulted in a refund based on the federal adjustments. The clients brought a negligence suit against the accountants less than two years after the withdrawal of the proposed assessment. The court found the action timely because the two-year statute of limitations under Code Civ. Proc., § 339, subd. 1, for negligent preparation of tax returns commenced when the federal audit was complete. The complaint, liberally construed under Code Civ. Proc., § 452, alleged negligence both in the preparation of tax returns and in the audit process. Although the clients sustained costs associated with the audit prior to its conclusion, actual injury in law occurred for limitations purposes on the date when the assessment was withdrawn. The claims based upon the preparation of state income tax returns were also timely.

Outcome

The court reversed the trial court’s judgment.