Professional courtesy claims.

A Wisconsin court of appeals upheld the dismissal of claims against two accounting firms that tried to assist a third accountant in preparing an estate tax return. This case began when Carl Merow, trustee of his father's estate, contacted the firm of Roberts, Ritschke & McNeely for advice on trust and estate matters. The firm referred the matter to Joseph Kox, an accountant who was working for Roberts at the beginning of the engagement. (Merow says the firm was retained to prepare the estate tax return, but the firm disputes this.) Kox left the firm early in November 1992, before the November 24, 1992, deadline for filing the estate tax return. In December, Merow contacted Kox at his home. Based on this conversation, Merow believed Kox was still working on the return. (Kox did prepare the return but not until well after the due date.)

It is undisputed that, during the course of Kox's engagement, he was employed by the firm of Shinners, Hucovski & Co. During that time, he sought advice on the Merow matter from Kenneth Lardinois, an accountant at the firm. Although Kox had left Shinners in June 1993, he continued to meet with Lardinois to review the return. Kox was contemplating making a qualified terminable interest property (QTIP) election on the return to avoid penalties and reduce taxes. According to Kox, Lardinois advised him "how to go about claiming a QTIP election should it be the most advantageous way to go." There was no understanding between the parties that Lardinois would have further involvement in completing the return.

On July 8, 1993, Kox met with Dean McNeely, a partner of Roberts, to discuss the return. According to Kox, McNeely immediately disagreed with him that the trust was "a QTIP trust eligible for the marital deduction." Kox then met again with Lardinois, who confirmed that Kox was properly considering a QTIP election and that the trust assets were eligible for the QTIP election. When Kox prepared the estate tax return in August 1993, he elected to treat all the trust assets as QTIP eligible property.

All parties agree that Kox should have made a partial--not a full--QTIP election. This error produced a liability in excess of $147,000. In July 1994, the trust brought an action against Kox and Shinners to recover the damages caused by the improper election. Shinners then filed a third-party complaint against Roberts alleging that it had been negligent in handling the return. Both firms moved for summary judgment, which the trial court granted in their favor.

On appeal, the court first reviewed the Roberts firm's conduct and dismissed the trust's argument that had Kox prepared the return while still at Roberts it was probable that firm would have caught and corrected Kox's mistake. The court said that even if the firm had negligently failed to see the return was filed on time, Kox's subsequent negligence in taking the full QTIP election, after he had left the firm, was the superseding cause of the trust's damages. In short, the firm's alleged failure to notify Kox of the filing deadline did not create or contribute to Kox's improper QTIP election. Also dismissed was the trust's argument that the subsequent meeting with McNeely gave rise to negligence for the firm: Roberts did not have an accountant-client relationship at the time McNeely met with Kox. Furthermore, no one disputes that Kox did not rely on McNeely's advice that the property was not eligible for the QTIP election.

The court then reviewed Shinners' conduct. The trust argued that that firm, through Lardinois, had a duty to advise Kox on how to use the QTIP election after Lardinois had informed Kox that it could be used. The court disagreed with this, saying the trust did not allege that Lardinois's information was incorrect. Rather, the trust's contention was that Lardinois had a duty to provide more information and to supervise Kox's completion of the return. The court rejected the contention that Shinners, acting through Lardinois, should be liable to the trust for offering correct advice as a professional courtesy to Kox. Thus, the appeals court upheld the trial court's granting of summary judgment to both firms.

The case holds several lessons for accounting firms:

* It is instructive on the danger of giving informal advice to other professionals.

* It highlights the need to delineate the scope of the firm's engagement.

* It points out the danger of dealing with sole practitioners or part-time accountants who may not have insurance or other assets to pay a judgment. In such cases, the plaintiff will target firms with insurance or other assets to satisfy an award.

(Carl E. Merow v. Shinners, Hucovski & Company, S. C. et al. Wisconsin Court of Appeals, District 11, no. 96-1756, July 23,1997.)

Edited by Wayne Baliga, CPA, JD, CPCU, CFE, president of Aon Technical Insurance Services.