The beneficiaries of a multimillion-dollar trust have sued an estate-planning attorney, his firm and an accounting firm, alleging professional malpractice related to a tax plan that led to litigation with the Internal Revenue Service.
But in an unusual twist, the beneficiaries also sued the firm and lawyers to whom their estate-planning attorney referred them for representation in that litigation before the U.S. Tax Court against the IRS. That Tax Court litigation allegedly cost the plaintiffs more than $1 million in legal fees.
“As a result of the Defendants’ representations, negligence and misconduct, Plaintiffs have incurred exorbitant fees and costs in the tax transactions, legal fees in pursuing litigation before the Tax Court, other expenses, and taxes, penalties and interest that otherwise would not have been owed,”according to the petition in G. Michael Hurford, et al. v. Joseph B. Garza, et al.
Three adult children of the late Gary T. Hurford filed the petition in Dallas’ 193rd District Court on Dec. 26, 2012. Defendants named in the suit include: Joseph B. Garza and his Dallas firm Garza & Staples (the petition calls them the Garza defendants); Edward Turner, John Stone and the Turner Stone & Co. accounting firm (the petition calls them the Turner & Stone defendants); and Lisa Roberts and Kyle Coleman of Dallas’ The Law Office of William A. Roberts and The Law Office of William A. Roberts itself (the petition calls them the Roberts defendants). The original petition in Hurford alleges malpractice against all of the defendants in the case.
“It’s more than a lawyer offering bad tax advice. We’ve got the accountants and the litigation attorneys also involved,” Robert Tobey, a partner in Dallas’ Johnston ♦ Tobey who represents the plaintiffs in Hurford, says of the allegations in the petition.
“One of the allegations is: They were negligent in picking their battles to fight. There were fights that should have been avoided. That’s a big one,” Tobey says of the malpractice allegations against the litigation attorneys.
Garza and his attorney, William Akins, a partner Wilson Elser Moskowitz Edelman & Dicker in Dallas, deny the allegations in the petition.
“Joe Garza strongly disagrees with the plaintiffs’ allegations, some of which rely on issues already litigated in the Tax Court,” Garza says, reading from a prepared statement. “In the Tax Court, the plaintiffs litigating on behalf of the estate raised an issue with Mr. Garza’s advice. Mr. Garza believes that the tax court’s adverse finding was motivated, in part, by plaintiffs’refusal to produce 100 pages of conversation with Garza until the third week of the tax court trial, after telling the government they had no such notes. Even though the tax court was displeased with delayed production, it reviewed the notes but even then did not assess tax penalties as to the estate.”
Tobey responds: “The tax court opinion was extremely critical of Mr. Garza’s tax planning done for plaintiffs.”
Thomas Culpepper, a partner in Dallas’ Thompson, Coe, Cousins & Irons who represents Turner, Stone, and Turner Stone & Co., did not return a call seeking comment. Turner declines comment, and Stone did not return a call for comment.
Roberts and Coleman also did not return calls for comment.
G. Michael Hurford was a native of West Texas who began working on oil rigs at a young age and later became a petroleum engineer for Hunt Oil. He “rose steadily and after 25 years because the company’s first president not named Hunt. He prospered and became rich,” according to the Dec. 11, 2008, U.S. Tax Court decision in Estate of Thelma G. Hurford et al. v. Commissioner of Internal Revenue.
He died in 1999 after amassing a $14.2 million estate. In 2000, his widow, Thelma G. Hurford, hired Joe Garza of Dallas’ Garza & Staples to advise her on estate planning, according to the Tax Court decision. She died in 2001. “She lost her life to cancer. We must decide now how much of her estate will be lost to taxes,” according to the 2008 Tax Court decision.
Garza and his firm had advised the Hurford plaintiffs and arranged for various transactions, including establishing partnerships, transferring various assets, establishing a private annuity and arranging for a digital option tax strategy. On Garza’s recommendation, the plaintiffs sought professional accounting from Turner & Stone, according to the plaintiff’s original petition in Hurford.
In 2007, the IRS sent notices of deficiency to the each of the plaintiffs, informing them that the IRS was disregarding certain entities involving the plaintiffs and disallowing the deductions they claimed. The deficiencies informed them that each plaintiff owed hundreds of thousands of dollars in taxes and penalties, according to the petition.
The petition alleges that the Garza defendants “improperly manipulated the year of reporting income as tax year 2000 on the sale of ‘phantom stock’ in Hunt Oil.”
Phantom stock, according to the 2008 tax court opinion, “is not actually stock, but instead a form of deferred compensation that Hunt Oil gave to employees — letting them share in the company’s growth without the Hunt family’s having to dilute their own equity.”
The plaintiffs allege in their petition that the Garza defendants “knew or should have known of the IRS’s position on these investments but failed to properly consider the IRS’s position and advise Plaintiffs.”
The petition also alleges that the Turner & Stone defendants “described the recommended investments as acceptable and failed to warn Plaintiffs of this negligent tax planning.”
As for the Roberts defendants, the plaintiffs allege that they were negligent by: “failing to assert timely defenses to the claims made by the IRS in the tax court litigation against the Estate of Thelma Hurford; Failing to dispute the IRS valuation given to the ‘phantom stock’ and other assets; . . . [and] Failing to advise Plaintiffs that they had viable claims against the Garza Defendants and the Turner & Stone Defendants for negligent estate and income tax planning. . .,” among other things.