Metropolitan News-Enterprise


Friday, August 27, 2010


Page 1


Employers’ Accountants Owed No Duty to Employees, C.A. Rules

Panel Rejects Theory That Firm May Be Liable to Workers for Over-Reporting Their Income




An accounting firm hired by a restaurateur to prepare its employees’ W-2 forms cannot be held responsible for allegedly overstating employees’ tip income and causing them to incur liability for taxes on money they never received, the Court of Appeal for this district has ruled.

Div. Four Wednesday affirmed the dismissal of a suit by three waiters who worked at Ago Restaurant in West Hollywood. Los Angeles Superior Court Judge Ann Jones sustained a demurrer by Gumbiner Savett, Inc, and Michael Rieff, a CPA at the firm, rejecting claims of professional negligence, conspiracy, and intentional infliction of emotional distress.

The plaintiffs—who dismissed their claims against the restaurant’s owners and managers while their appeal from the judgment in favor of the accountants was pending—alleged that a portion of their tip money was taken by the managers, but was reported to the IRS as income to them. The result, they claimed, was that their income was over-reported by as much as $30,000 each.

One of the plaintiffs, Emanuele Giacometti, said he was audited by the IRS and forced to litigate the issue of his tax liability, and that the accountants did not correct the misstatement of his income despite his request.

Presiding Justice Norman Epstein, writing for the Court of Appeal, said the trial judge ruled correctly because the employees and the accountants were not in privity of contract.

Lack of Privity

The presiding justice distinguished Biakanja v. Irving (1958) 49 Cal.2d 647, which held that lack of privity did not preclude the beneficiary of a will from recovering damages from the notary public who prepared the will but negligently failed to have it properly attested.

The court said that extending the field of persons to whom the notary owned a duty, so as to include the beneficiary, was reasonable because the will was drawn in order to benefit the plaintiff, and it was foreseeable that negligence in the attestation of the will would damage the beneficiary.

Other factors to be considered in such a case, the court said, included “the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant’s conduct and the injury suffered, the moral blame attached to the defendant’s conduct, and the policy of preventing future harm.”

Later cases, Epstein said, rejected efforts to expand the holding, expressing concerns about the cost and availability of auditing services if auditors had to assume broad liability to third parties who might be foreseeable victims of their negligence.

Case Cited

The jurist cited Richard B. LeVine, Inc. v. Higashi (2005) 131 Cal.App.4th 566, in which the court held that an accountant hired by a partnership to, among other things, calculate each partner’s share of the profits and prepare K-1 forms, and who followed the partnership’s instructions as to the method of allocation, was not liable to an individual partner who alleged the method was wrong.

Analyzing the claim based on the Biakanja factors, the court held that the accountant owed no duty to the plaintiff because he was not hired for the plaintiff’s individual benefit, and had no reason to foresee harm to the plaintiff because he did not know, and had no reason to believe, that the plaintiff did not know, or did not approve of, the method of allocation specified by the partnership.

Epstein wrote:

“Similarly, in our case, the employees characterized the transaction as the restaurant hiring accountants to provide accounting services, including preparation of W-2 forms for the employer. The employees do not allege the accountants were hired to compile or verify the numbers upon which their work was based, or that they failed to properly analyze payroll records. Nor are there allegations the accountants knew or had reason to believe the documents they prepared were based on incorrect information. The only notice came when employee Giacometti complained that the numbers were wrong. This was after the forms had been prepared and, apparently, after they had been filed. Like the accountant in LeVine who filled out the partner’s K-1 according to the partnership’s instructions, there is no allegation that the accountants were the sources of the inaccurate numbers or that they had an obligation to ascertain the accuracy of the income reported for each employee. Nor are there allegations in the charging pleading that the accountants knew of the errors or that they were in collusion with the restaurant. The only allegation was that accountants were retained to prepare forms. The employees claim that it is foreseeable that incorrect information on their W-2 forms would harm them, but that alone does not create a duty.”

Attorneys on appeal were Albert F. Coombes for the plaintiffs and , Randall J. Dean and J. Andrew Wright of Chapman, Glucksman, Dean, Roeb & Barger for the defendants.

The case is Giacometti v. Aulla, LLC, 10 S.O.S. 5073.


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