Academic journal article Journal of Accountancy

Court Rules on Statute of Limitations

Academic journal article Journal of Accountancy

Court Rules on Statute of Limitations

Article excerpt

In a ruling detrimental to accountants in California, the state's Supreme Court ruled that the statute of limitations in an accounting malpractice case does not commence until the tax deficiency is assessed by the Internal Revenue Service.

The plaintiff, International Engine Parts Inc. (IEP), had hired defendant Feddersen and Co., a CPA firm, to prepare the 1983 and 1984 income tax returns of its subsidiary, IEPO, an export company incorporated as a domestic international stock corporation (DISC). Among the requirements to maintain DISC status is the proper documentation of certain loans and intercompany pricing agreements. The firm failed to provide this documentation for the 1983 and 1984 tax returns.

In 1984 the IRS audited IEPO's tax returns and in 1986 advised IEPO that because the firm had failed to provide proper documentation for certain loans, it would disqualify the company as a DISC. Soon thereafter, the firm, which was representing IEPO before the IRS, informed IEPO that its federal tax liability for 1983 and 1984 could be approximately $300,000. This was an increase due to the IRS position in the case. At about the same time, in anticipation of the IRS assessment, IEPO's bank reduced its line of credit from $600,000 to $400,000.

After a June 1987 preliminary audit report to the accounting firm in which the IRS confirmed that it was disqualifying IEPO's DISC status and imposing additional tax, a penalty and interest, IEPO sued the firm for accounting malpractice on May 15, 1990. …

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