When a tax advisor’s negligence causes the client to pay additional taxes, interest, and penalties, the majority view in the United States is that the client may recover those payments as damages in a malpractice action. Not necessarily so in New York. In Alpert v. Shea Gould Climenko & Casey, 559 N.Y.S.2d (1st Dept. 1990) the First Department held that a taxpayer could not recover from his lawyer back taxes arising from a failed tax shelter because the client, who chose to enter into the tax shelter relying on the allegedly faulty advice, was not entitled to be restored to a position as if the transaction successfully avoided the tax because that would place him in a better position than if he never had invested in the tax shelter in the first place. Alpert was a fraud case. Although negligence actions involve a different measure of damages, subsequent New York courts have applied the Alpert holding in malpractice (i.e., negligence) cases without analyzing that difference. As a result, New York courts routinely hold that additional taxes occasioned by negligent advice are not recoverable as damages in malpractice actions.
In Bloostein v. Morrison Cohen (S. Ct., NY Cty 651242/2012), plaintiffs sued Morrison Cohen for legal malpractice in a transaction that resulted in plaintiffs’ having to pay the very taxes that the transaction was structured to avoid. Morrison Cohen moved for summary judgment, arguing the Alpert proscription against the recovery of taxes. The court (Borrok, J.) denied summary judgment. This article will examine the disconnect between the Alpert analysis and negligence (malpractice) cases, the Bloostein result, and how plaintiffs may obtain the additional taxes that they had to pay due to their advisor’s negligence.
