New York’s Law of Tax Malpractice Damages: Balanced or Biased?

Abstract

In this article Professor Todres focuses on two common elements of damages often incurred by plaintiffs who are the victims of negligently rendered incorrect tax advice – additional, avoidable taxes, and interest on underpaid taxes. Both of these types of damages appear not to be recoverable under current New York law that traces its roots to Alpert v. Shea Gould Climenko and Casey, 160 A.D.2d 67, 559 N.Y.S.2d 312 (1st Dept. 1990).

As to the non-recovery of additional taxes that could have been avoided with correct advice, Professor Todres argues that current New York law is incorrect. It is based upon Alpert, supra, which held such amounts are not recoverable as damages in a fraud case. While Alpert is correct under New York’s fraud measure of damages, it simply has no bearing on amounts recoverable under New York’s traditional measure of damages for negligence in attorney malpractice cases, which is broader than the fraud measure of damages. Professor Todres argues that later negligence cases that simply followed Alpert ignored the fact that they were unwittingly transporting the fraud measure of damages into the negligence arena.

With respect to the non-recoverability of interest incurred on a tax underpayment, Professor Todres argues that while this approach made sense when initially promulgated by Alpert, a newer approach that developed recently in other states is much more discerning and just and should be adopted by New York. Under Alpert interest was not recoverable because the plaintiff had use of the underpaid tax money for the period of time interest was accruing to the government. Alpert held it would be an unwarranted benefit for the plaintiff to have both use of the money and to recover the interest charge for the use of this money. An assumption underlying Alpert’s reasoning is that the plaintiff is always able to earn a rate of return on the money equal to the underpayment rate charged by the government. Under the modern approach, a plaintiff would be able to recover any difference between the amount actually earned with the money and a higher interest rate imposed by the government.

Both of these positions of New York law benefit defendant professionals at the expense of injured plaintiffs. This is consistent with several other aspects of New York law. Professor Todres wonders, in conclusion, whether New York is yet again being overly protective of its errant professionals rather than having a more even-handed policy.