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January 19, 1999


The opinion of the court was delivered by: Greenaway, District Judge.



This matter comes before the Court on several motions: (1) Defendants David S. Talesnick and Gikow, Bierman & Talesnick's ("GBT") motion for summary judgment, dismissing Plaintiffs Kenneth B. Ronson and Karen B. Ronson's professional malpractice action; (2) Defendants' motion in the alternative for leave to file a Third-Party Complaint against Joseph Paluscio; and (3) Plaintiffs' cross-motion for summary judgment finding Defendants liable for accounting malpractice. The Court heard oral argument on the motions on December 10, 1998. For the reasons set forth below, Defendants motion for summary judgment and Plaintiffs cross-motion for summary judgment are denied. Also, Defendants motion for leave to file a Third-Party Complaint is denied.


Plaintiff Kenneth B. Ronson held an ownership interest in a New Jersey corporation known as Bard Overseas Corporation ("Bard") from approximately 1968 to 1983. Plaintiff was a resident of New York, but maintained the Bard office in New Jersey. Plaintiff met with GBT, a New Jersey accounting firm, at the Bard office and discussed having GBT perform accounting and tax services for Bard as well as for Plaintiff and his wife personally. GBT agreed and performed such services for Plaintiffs and Bard from 1980 through December 1, 1989. David S. Talesnick, a GBT partner, served as the partner personally responsible for providing services to Plaintiffs. GBT's work for Plaintiffs included the preparation of their tax returns. Morris Pinkowitz and Joseph Paluscio were the GBT accountants who worked on Plaintiffs tax returns. GBT performed all of their work for Plaintiffs in New Jersey.

GBT determined that if the IRS disqualified the reported losses, then the IRS would find that Plaintiffs underpaid their taxes by $91,293*fn1 for the period from 1980 to 1983. In mid-1986, Plaintiffs asked GBT how they could stop the accrual of interest on the amount owed to the IRS. In June 1986, GBT sent Plaintiffs a letter recommending that Plaintiffs forward a $91,300 cash bond to the IRS to stop the IRS from accruing further interest on the back taxes that Plaintiffs owed. On June 30, 1986, Plaintiffs posted the recommended $91,300 payment bond with the IRS.

In 1986, GBT also calculated that Plaintiffs had a $60,145 interest liability with the IRS in addition to the $91,293 tax liability arising from their investments.*fn2 On December 1, 1986, GBT sent Plaintiffs a letter regarding their $60,145 interest liability. The letter provided:

   This letter will confirm our conversation with regard
   to payments of interest on your pending tax shelter
   cases. A review of your file indicates that you are
   an investor in Pine Coal, Winchester Coal and White
   Rim Oil & Gas, all of which are under examination by
   the Internal Revenue Service. As a result of their
   examination, the Internal Revenue Service is
   proposing disallowances which will substantially
   increase your tax liabilities in the years 1980
   through 1983. The interest on those deficiencies
   through December 15, 1986 approximates $60,145. Under
   the Tax Reform Act of 1986, interest payable to the
   Internal Revenue Service constitutes other consumer
   interest and is subject to the phase out provisions
   of this new law. Based on that fact, the Internal
   Revenue Service recently issued pronouncements on how
   taxpayers, in situations such as yours, i.e. —
   tax shelter cases and other audits, can make a
   payment of tax and/or interest in order to avail
   themselves of a deduction in 1986. Due to the
   magnitude of the interest and considering your annual
   income for the past few years, we were not sure
   whether you would benefit from a payment in 1986. In
   our conversation you confirmed that your income for
   1986 would not be at a level to benefit from the
   interest payment. Accordingly, you have opted not to
   make any payments in 1986 with respect to this matter
   and defer payment to possibly 1987 where only 65% of
   the interest paid will be deductible as you may
   obtain a better tax benefit.

Supplemental Decl. Morris Pinkowitz Ex. A. In addition, the letter invited Plaintiffs to contact GBT should they decide to make the interest payment before December 31, 1986. Plaintiffs opted not to make the interest payment in 1986. Furthermore, although Plaintiffs possibly owed an unidentified amount to the State of New York, GBT did not advise Plaintiffs to post a bond with New York because of the small amount owing to the state.*fn3

Paluscio resigned from GBT effective December 1, 1989 to start his own accounting firm. As of that date, Paluscio, individually as a solo accountant, began providing accounting services to Plaintiffs, and GBT ceased providing such services. In approximately 1996, the IRS audited Plaintiffs and addressed the amount due in owing issue. The IRS advised Plaintiffs of the continued accrual of interest on the unpaid $60,145 interest liability owed in 1986. Plaintiffs contend that the amount presently owed to the IRS is approximately $235,063.

In this matter, Plaintiffs argue that GBT should have advised them to forward a cash bond to the IRS for $182,323, rather than for $91,300, a difference of $91,023.*fn4 Plaintiffs seek to recover the interest that the IRS charged them on the $91,023 from 1986 through the present and an as yet determined amount owed to the State of New York.



[1] Defendants seek summary judgment dismissing Plaintiffs' accounting malpractice action. Defendants argue that Plaintiffs cannot establish the damages element in this negligence action because Plaintiffs are not permitted by law to recover interest paid to the IRS as damages. Whether Plaintiffs are permitted to recover interest due and owing to the IRS as damages is a question of state law.*fn5

Choice of Law

[2-4] This action is brought pursuant to the diversity jurisdiction of the Court, 28 U.S.C. § 1332.*fn6 Therefore, the Court must engage in a choice of law analysis to determine the appropriate state law that governs this action. A federal court exercising its diversity jurisdiction must apply the choice of law rules of the forum state in determining which state's laws should govern a given action. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Because this action was filed in New Jersey, the Court must apply New Jersey choice of law rules. See id. New Jersey has adopted the "governmental interest analysis in choice-of-law decisions." Veazey v. Doremus, 103 N.J. 244, 247, 510 A.2d 1187 (1986). "Under that analysis, the determinative law is that of the state with the greatest interest in governing the particular issue." Id. at 248, 510 A.2d 1187.

[5] "The first step in the analysis is to determine whether a conflict exists between the law of the interested states." Id. "If an actual conflict exists, the next step is to identify the governmental policies underlying the law of each state and how those policies are affected by each state's contacts to the litigation and to the parties." Id. Defendants contend that New York law should govern because that is Plaintiffs' domiciliary state. On the other hand, ...

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