LIMITATIONS ON LEGAL MALPRACTICE CLAIM BEGINS TO RUN WHEN IRS ISSUES ITS “30-DAY NOTICE” AND IMPOSES PENALTY

J.A. Green Development Corp. v. Grant Thornton, LLP
Dallas Court of Appeals, No. 05-15-00029-CV (June 28, 2016)
Justices Bridges, Evans, and O’Neill (Opinion)

Kelli Hinson

J.A. Green hired Akin Gump and Grant Thornton to represent it in connection with an IRS audit. The audit involved Green’s participation in a tax investment plan referred to as a “distressed debt strategy.” Akin Gump and Grant Thornton both advised Green that “its tax positions taken pursuant to the distressed debt strategy were strong and likely to be upheld as legal.” On their advice, Green rejected a 2005 settlement offer by the IRS. Following a period of “aggressive prosecution,” the IRS issued its Examiner’s Report and 30-Day Notice on December 18, 2008, disallowing the entire loss claimed by Green and imposing penalties substantially above what had been proposed in 2005.  Green appealed the 30-Day Notice, but the appellate conference with the IRS in November 2009 “did not go well.” Akin Gump and Grant Thornton began to back away from their position that Green would ultimately prevail, citing a much more “hostile environment.” Green ultimately settled with the IRS in March 2010 on terms significantly less favorable than those offered in 2005.

Green sued Akin Gump and Grant Thornton in January 2014. (It had previously sued the accountants who recommended the distressed debt strategy in the first place.) The trial court granted summary judgment to both defendants based on the two-year statute of limitations for legal malpractice and negligence claims. 

Green appealed, arguing that limitations did not begin to run until it became clear at the appellate conference that it would not be able to settle its tax liability in a more favorable manner. It also argued its claims were tolled by the Hughes Tolling Rule. The Dallas Court of Appeals disagreed, noting that “a cause of action accrues when a wrongful act causes some legal injury, even if the fact of injury is not discovered until later, and even if all resulting damages have not yet occurred.” Green tried to argue that it suffered separate legal injuries from the advice to participate in the distressed debt strategy on the one hand, and the advice that it would prevail against the IRS on the other, and that the latter injury could not have been discovered before the appellate conference in 2009. But the Court found a “single continuous injury,” which accrued no later than the date Green received the IRS 30-Day Notice and learned its strategy would be disallowed.

The Court also refused to give Green the benefit of the Hughes Tolling Rule, which tolls limitations in legal malpractice cases arising from the prosecution or defense of a claim that results in litigation until the litigation is resolved. The Court noted that it has previously declined to apply the Hughes Tolling Rule to cases arising out of administrative proceedings as opposed to litigation. Summary judgment on limitations was therefore affirmed.