The Accountant/Attorney Liability Reporter: April 2008
Inside this Issue
Deductibility of Investment Advisory Costs for Estates and Trusts After Knight
By Cheryl A. Waterhouse, Esq.
In January of this year, the United States Supreme Court ruled on the deductibility of investment advisory fees for estates and trusts under Section 67(e)(1) of the Internal Revenue Code. In Knight v. Commissioner, 128 S. Ct. 782 (2008), the Court held that investment advisory fees are generally not fully deductible, but are only deductible to the extent the deductions exceed 2% of adjusted gross income (the “2% floor”).
Accountants Prevail in Enforcing Limitation of Liability Clause in Engagement Letter
A Massachusetts Court has once again emphasized the importance of engagement letters. In Rohtstein Corporation v. KPMG, LLP, the Suffolk Superior Court issued a Memorandum and Order granting partial summary judgment to KPMG, and enforcing a limitation of liability clause contained in KPMG’s engagement letters with the Rohtstein Corporation (“Rohtstein”).
The Importance of Defining the Scope of the Engagement
By Cheryl A. Waterhouse, Esq.
In two recent New York cases, the Court focused on language in the accountants’ engagement letters in determining whether to dismiss professional malpractice claims against the accountants. In each case, the issue was whether the statute of limitations, the time within which a plaintiff may bring a claim after the claim arises, barred the claim or whether the claim survived because the accountant may have continued to provide services related to the alleged malpractice and the “continuous representation” doctrine applied. Where the engagement letter language was more precise, the claims were dismissed. When the language indicated possible future services that related to the original services could be performed, the Court allowed the plaintiff to continue to assert its claims against the accountant.
Work Product Doctrine Protection for Tax Accrual Papers on Appeal
By Mark D. Szal, Esq. & Cheryl A. Waterhouse, Esq.
In the case of United States v. Textron, Inc., 507 F. Supp. 2d 138 (D.R.I. 2007), in which the United States District Court for the District of Rhode Island denied enforcement of an IRS administrative summons seeking “tax accrual workers” from a financial services subsidiary of Textron, Inc. is now on appeal to the First Circuit. The District Court held that the workers were protected by the work product doctrine. Although the court found the “tax practitioner privilege” and attorney-client privileged were applicable, the court also found that that privileges were waived when the workers were provided to an independent auditor. Only the argument that the documents were prepared in anticipation of litigation protected the workers from being disclosed to the IRS.
Auditor May Be Primarily Liable for Securities Fraud for Failure to Correct False or Misleading Financial Opinions
By Douglas M. Marrano, Esq.
The Second Circuit Court of Appeals recently ruled that an auditor has a “duty to correct” false or materially misleading statements contained in its reports on a company’s financial statements in certain circumstances. The court ruled that a certified public accountant acting as an auditor may be primarily liable for securities fraud under §10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 even if the auditor is unaware that his opinion is false or misleading at the time it is made, if the auditor later learns of the false or misleading opinion and takes no action.
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