Academic journal article Journal of Accountancy

Privity, Statute of Limitation in Tax Case

Academic journal article Journal of Accountancy

Privity, Statute of Limitation in Tax Case

Article excerpt

The New York County Supreme Court ruled investors who are limited partners have standing to sue the limited partnership's accounting firm if the accountants' relationship to the partnership approaches privity.

The case began when the IRS disallowed certain interest deductions taken by the general partners for several limited partnerships. Price Waterhouse prepared the partnerships' tax returns and K-1s from the partnership's inception in 1980 through 1988.

During this period, Price applied the "rule of 78s," which allocates greater interest in the early years of a debt relative to later years. In 1983, an IRS revenue ruling disallowed the rule of 78s on any amount exceeding the economic accrual of interest.

The partnerships' tax counsel, consulted by Price, said the revenue ruling would more than likely fail if challenged in court. Based on this opinion, Price continued to apply the rule of 78s through 1988. That year, in an unrelated case, the Tax Court held the disallowance valid. The court said the rule had no legal or accounting authority to justify its use for computing long-term loans.

As a result, the limited partners were required to pay substantial added tax, penalty and interest to the IRS. A group of limited partners sued the partnerships and received a settlement of approximately $40 million. The limited partners then sued Price for negligence in calculating interest on the partnership debt. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.