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District Court of Appeal, Second District, Division 3, California.


Civ. 18177.

Decided: November 06, 1951

Sheppard, Mullin, Richter & Balthis, Gordon F. Hampton and E. Talbot Callister, Los Angeles, for appellant. Walter G. Danielson and H. Spencer St. Clair, Los Angeles, for respondent.

Defendant Mitchell, a certified public accountant, appeals from a judgment for plaintiff in the amount of $17,428.83 rendered after a trial to the court.

The complaint, filed December 7, 1948, alleged defendant was specially employed to prepare plaintiff's tax returns for each of the calendar years 1943 and 1944, that defendant negligently failed to prepare and file proper returns until 1946, and as a result plaintiff was damaged in having to pay interest and late filing penalties for federal taxes, as well as counsel fees for negotiations with the Treasury Department. These grievances are stated in the form of five causes of action: (1) For interest and penalties resulting from late filing of 1943 federal returns; (2) for interest resulting from late filing of the 1943 state return; (3) for interest in penalties resulting from late filing of 1944 federal returns; (4) for interest resulting from late filing of the 1944 state return; (5) for counsel fees incurred in negotiating a settlement with the Treasury Department. For some purposes of the discussion that follows the claims on account of interest charges will be considered together, likewise the claims based upon the penalties paid. The conclusions we have reached have application to both state and federal returns for both years.

Defendant is a certified public accountant who has conducted his own practice in Los Angeles since 1935. He held himself out as a specialist in tax matters and had prepared returns for plaintiff in 1941 and 1942. On February 7, 1944, defendant wrote a letter to plaintiff agreeing to conduct an income tax review of plaintiff's books and prepare state and federal tax returns for the year 1943. A similar agreement was made in January, 1945, covering the 1944 tax returns. On March 15, 1944, defendant filed ‘tentative’ 1943 returns which consisted of entries of $20,000 for ‘net income’ and $5,300 for income tax due, which amount was paid by plaintiff at that time. These entries were estimates based on the corresponding figures on the corporation's 1942 tax return. Mitchell asked for and was granted an extension of time until May 15, 1944, to file an amended or completed return. A second extension was granted until June 15, 1944, at which time he filed another return which was identical with the ‘tentative’ return previously filed. Thus in 1944 no 1943 return fully listing income and deductions was filed but the estimated tax was paid on time. In 1945 the same ‘tentative’ and ‘completed’ procedure was followed, with the indicated tax being paid. Finally, in March, 1946, defendant filed ‘amended’ returns for 1943 and 1944 which clearly contained the necessary information. The additional indicated tax was paid by plaintiff at the time the ‘amended’ returns were filed. A similar procedure was followed with respect to the California franchise returns for 1943 and 1944. In the margin we have set out the estimates and payments made over the two-year period as well as the figures composing the damages as found by the trial court.1

On January 9, 1947, after the ‘amended’ returns were filed, an Internal Revenue agent made an audit of plaintiff's books and determined that there should be an assessment for additional taxes and penalties in the amount of $52,386.46. A portion of Mrs. Olson's salary for each year was disallowed. The agent stated to defendant that since the Olsons owned all the stock excessive salary might be, in part, regarded as dividends, and as such, not deductible from the corporation income. The agent also informed defendant there would probably be a late filing penalty unless reasonable cause for such delay in filing completed returns were shown. Defendant prepared a comprehensive affidavit stating that the late filing was not due to an intent to evade the law, and that the final returns were late because the corporation relied on defendant and he was unable to do the work because of insufficient accounting assistance due to the manpower shortage. Olson, president of the plaintiff corporation, refused to sign the affidavit. His reason was that it presented the Swedish officers of the corporation in an unfavorable light. Defendant later prepared and filed his own late filing affidavit. On behalf of plaintiff a protest was filed by defendant to parts of the proposed additional assessment of $52,386.46, and he later met with the Conference Section of the Internal Revenue Agent in Charge, Los Angeles Division. The protest was denied and in June, 1947, defendant requested a hearing before the Conference Section of the Technical Staff, Pacific Division, Bureau of Internal Revenue. The hearing was set for March 15, 1948, and when notified defendant informed Mr. Olson who immediately called his attorney, Mr. Danielson. They dismissed defendant and turned the negotiations over to Alva Baird, an attorney and tax practitioner. A compromise settlement was reached regarding penalties and the proposed deficiency assessments, and plaintiff paid the amount agreed upon. (See note 1.) It is this compromise sum which is the major element of damage in this action.

The complaint stated a cause of action for negligence. It alleged that defendant represented himself to be an expert on all tax matters and a specialist in the field of federal and state tax practice admitted to practice before the United States Treasury Department and the United States Court of Tax Appeals, and that plaintiff in reliance upon the representations employed defendant as alleged and that all the specified acts of defendant pursuant to the employment were negligently performed.

Plaintiff contends that its action is for breach of contract; defendant insists that it is for negligence. This is the important question in the case, upon which depend defendant's claims that the evidence was insufficient to prove negligence, and that the action is barred by the statute of limitations.

In support of its contention that the action is for breach of contract, plaintiff claims complete failure of performance on the part of defendant. It contends that the ‘tentative’ returns were nullities and that their preparation and filing and all defendant's subsequent efforts in its behalf amounted to not even partial performance by defendant. The court found that the returns were ‘nullities' and of no force or effect whatever. It also was found that defendant breached his contracts of employment and that his failure to perform was due solely to his own negligence. We will agree that if there was complete failure of performance on defendant's part, recovery would necessarily have been for breach of contract. But we think the designation of the returns as ‘nullities' was a mere generalization which does not furnish an answer to the question of partial performance. We agree with defendant that the filing of the ‘tentative’ and ‘completed’ returns constituted partial performance, that the filing of the ‘amended’ returns constituted full performance except for the delay, and that the incompleteness of the ‘tentative’ and ‘completed’ returns, and the delay in filing the ‘amended’ returns are elements of performance which go to the question of negligence. At the proper times, plaintiff filed returns and paid taxes, although the returns were incorrect and incomplete and thus did not comply with section 52 of the Internal Revenue Code, 26 U.S.C.A. § 52. Plaintiff now says, in effect, that it was in the position of one who had filed no returns at all. We must disagree. The two defaults and their consequences are dissimilar. The incomplete returns, although not legally sufficient, were recognized by the Bureau of Internal Revenue as giving notice of possible tax liability and plaintiff was not, and could not have been accused of having wilfully failed to file returns. Also, as we shall see, the element of wilfulness had a decisive influence in the matter of the assessment of penalties and the filing of the first returns furnished evidence of plaintiff's good faith. The legal conclusion that the returns were ‘nullities' does not detract from the fact that defendant was attempting to utilize his skill in performing the contract under adverse circumstances. It should be noted that although the penalty is nominally for late filing it is actually for late payment of taxes. If defendant had made sufficient estimates of taxes on the ‘tentative’ returns, and they had been paid, there would have been no penalties even though the returns were legally insufficient. Moreover, it is reasonable to suppose that the attempted compliance with the law was an important factor in the compromise settlement, under which the penalties were reduced to one-half of the amounts that could have been assessed. If defendant was guilty of any breach of duty it was because his imperfect performance constituted negligence, not because he altogether failed to perform. We conclude that the action was for negligent breach of professional duty.

The courts have uniformly based recovery upon principles of negligence where there has been failure to employ the knowledge, skill and judgment which is engaged to be rendered in professional employment, or other employment of a highly specialized nature. A member of the learned professions, and for that matter any one who undertakes employment because of his possession of exceptional skill, impliedly represents that he possesses and will employ the degree of learning and skill usually possessed by those in good standing practicing their specialties in the same locality. He impliedly agrees to use his best judgment but does not guarantee results. Roberts v. Parker, 121 Cal.App. 264, 8 P.2d 908. ‘In all those employments where peculiar skill is requisite, if one offers his services, he is understood as holding himself out to the public as possessing the degree of skill commonly possessed by others in the same employment, and if his pretensions are unfounded, he commits a species of fraud upon every man who employs him in reliance on his public profession. But no man, whether skilled or unskilled, undertakes that the task he assumes shall be performed successfully, and without fault or error; he undertakes for good faith and integrity, but not for infallibility, and he is liable to his employer for negligence, bad faith, or dishonesty, but not for losses consequent upon mere errors of judgment.’ Cooley on Torts (4th ed.), vol. 3, p. 335. Lawyers are in this category. Hays v. Ewing, 70 Cal. 127, 11 P. 602; Gambert v. Hart, 44 Cal. 542; 3 Cal.Jur. 670. The rule has been applied to abstractors, architects and financial agents, Cooley, supra, p. 336; also to engineers, Cowles v. City of Minneapolis, 1915, 128 Minn. 452, 151 N.W. 184; explosive experts, Jackson v. Central Torpedo Co., 1926, 117 Okl. 245, 246 P. 426, 46 A.L.R. 338; oculists, Price v. Ga Nun, 1895, 11 Misc. 74, 32 N.Y.S. 801, 802; river pilots, The Tom Lysle, D.C.Pa. 1891, 48 F. 690, 693; threshers, Van Nortwick v. Holbine, 1901, 62 Neb. 147, 86 N.W. 1057; and accountants, Smith v. London Assur. Corp., 1905, 109 App.Div. 882, 96 N.Y.S. 820; see, also, In re Kingston Cotton Mill Co. (1896), 2 Ch. 279, 288.)

While the failure to achieve a guaranteed result is actionable, independently of negligence, this is not true where there is no guaranty of the result. Where the undertaking is to employ special skill there is no breach of duty if such skill and the operator's best judgment are put forth. Under such circumstances, mere errors of judgment are not actionable. Where the duty is breached by negligent performance the cause of action is for negligence alone. In Harding v. Liberty Hospital Corp., 177 Cal. 520, 524, 171 P. 98, 100, after reviewing the California cases the court said: ‘Notwithstanding the conflict of authority from other jurisdictions, we are satisfied that it has become the settled rule in California that actions for injuries caused by the negligent acts of another or his agent must be commenced within the period of one year from the date of the alleged injury, and that the fact that the parties stand in contractual relation to each other does not operate to change the rule or extend the time for the commencement of such actions.’ See Denning v. State, 123 Cal. 316, 55 P. 1000; Basler v. Sacramento, etc., Ry. Co., 166 Cal. 33, 134 P. 993; Krebenios v. Lindauer, 175 Cal. 431, 166 P. 17; Marty v. Somers, 35 Cal.App. 182, 169 P. 411. In the Denning case the theory of the action was breach of contract on the part of the employer to furnish a safe place for work, and in holding the action was in tort, the court said, 123 Cal. at page 323, 55 P. at page 1002: ‘Here the contract of employment has nothing whatever to do with the liability, except to create a duty on the part of the employer,—a duty not expressed in the contract, and for the violation of which the contract of employment furnishes no rule or standard for the estimation of damages. Nor is the action grounded upon the contract, but upon the duty springing from the relation created by it, viz, that of employer and employe, and under the old system of pleading was always classed as an action ex delicto.’

As previously stated, the court found that defendant had been negligent in failing to prepare and file proper returns on time. The next question in the case is whether this finding of negligence has support in the evidence. Since the cause of action was for negligence it was necessary that negligence be proved by competent evidence, or such evidence as the law requires to establish breach of professional duty. If it can be said to be of common knowledge, under the facts in evidence, that defendant did not employ the learning, skill and care usually employed by those in the same profession in like matters, and that defendant's dereliction involved an unreasonable risk of loss to his client, the finding is supported. Upon the other hand, if the question was one as to which expert evidence was required, the finding is without support, inasmuch as there was no expert testimony introduced by plaintiff.

In determining whether defendant was negligent, the test is whether defendant realized or should have realized that there was an unreasonable risk involved in what he was doing, under the rule that ‘When an act is negligent if done without reasonable skill, the skill which the actor is required to exercise to avoid being negligent in the doing of the act is that which he, as a reasonable man, should recognize as necessary to prevent the act from creating an unreasonable risk of harm to another.’ Rest., Torts, sec. 299, p. 803.

It is not enough to say that defendant failed to file sufficient returns on time, that this was the basis of the claim for penalties, and that plaintiff compromised the claim, yet in final analysis no more than this was proved. It cannot be denied that the dereliction involved some risk of harm to plaintiff through the imposition of penalties. That would be true of any default for which no acceptable excuse was given under the penalty provisions. But it is clear that it cannot be held, as a matter of law, that every failure of an agent to file completed income tax returns on time is a negligent breach of duty. In the inquiry whether defendant was negligent, numerous factual elements were to be taken into consideration. Defendant's work was handicapped by the absence of his four men accountants who were in military service, and defendant was unable to fill their positions. The account books of plaintiff were inaccurate, showing for the year 1943 a profit of $30,554.37, which was later shown by defendant's audit to be $41,526.73. As soon as defendant obtained additional help in December, 1945, he made an audit of the books, which took six weeks of continuous work. The failure to file completed returns on the due date, or within the time extended, would not necessarily have resulted in the imposition of penalties. The matter rested largely within the discretion of the personnel of the taxing authorities. This was an important fact bearing upon the question whether the matter of delay was, under the circumstances of the case, a material departure from standard practice.

Section 291(a) of the Internal Revenue Code, 26 U.S.C.A. § 291(a), provides that the penalty shall be exacted ‘In case of any failure to make and file [a] return required by this chapter, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, * * *.’ The commissioner's general interpretation of the exception in the statute is that if the delinquency occurs notwithstanding the exercise of ordinary care and caution, the penalty will not be charged. Many cases under this section hold that no penalties will be imposed where a taxpayer in good faith relies on the advice of a tax expert. See, Orient Invest. & Finance Co. v. Commissioner of Internal Revenue, 83 U.S.App.D.C. 74, 166 F.2d 601, 3 A.L.R.2d 612. It would have been material to inquire whether Mitchell had reasonable cause for believing that the facts stated in the affidavit which he prepared for the signature of Olson would be accepted as sufficient to relieve plaintiff from the payment of penalties, and if so, whether such belief and reliance would accord with standard practice of accountants, under the same or similar circumstances. In this connection Mitchell testified that he informed Olson that it was his opinion the filing of ‘tentative’ returns under the circumstances would be accepted as evidence of good faith and that a sufficient showing could be made to secure a waiver of penalties. He testified that he so believed. He had filed returns for Taylor Soap & Chemical Company, Inc., a subsidiary of plaintiff, for 1944. The accounts of the subsidiary were confused with those of plaintiff. ‘Tentative,’ and later ‘amended,’ returns were filed for the subsidiary in the identical manner followed in filing plaintiff's returns. Mitchell represented the company when the circumstances of the case were reviewed and no late filing penalties were assessed. It was in evidence that Mitchell had likewise filed ‘tentative’ and later ‘amended’ returns for another corporation, and that although a penalty had been recommended, it was eventually waived. This testimony, if believed, indicated that he was exercising his best judgment and believed he was following a safe practice.

The intricacies of income tax laws, regulations, policies and practices are not within common knowledge. Only those versed and experienced in that field would be qualified to judge whether defendant's conduct failed to measure up to standard practices, or, in other words, whether among competent accountants and tax specialists it would be deemed to involve unreasonable risk. Expert testimony was required for the reasons that it is required in malpractice cases where resort must be had to technical knowledge in order to pass judgment on the questioned conduct. Perkins v. Trueblood, 180 Cal. 437, 443, 181 P. 642; Engelking v. Carlson, 13 Cal.2d 216, 221, 88 P.2d 695. In the absence of evidence which would support a finding of negligence under the rules stated a reversal of the judgment is required.

While insufficiency of the evidence was the principal ground of our original reversal, we repeat it in the present opinion for the reason that we deem it to be of considerable importance. The remainder of the opinion will be devoted to a separate ground for reversal which results from our holding that the action is ex delicto.

Defendant pleaded the statute of limitations. If, as plaintiff claims, the action is one for damages resulting from breach of written contracts of employment, the four-year statute applies and none of the claims are barred. Code Civ.Proc., sec. 337(1). Under our holding that the gravamen of the action is negligent performance of the contracts, that is, failure to use the skill of the profession, the two-year tort statute applies to bar all causes of action. Code Civ.Proc., sec. 339(1).

It is clear from the evidence that if Mitchell was guilty of breach of duty, such breach occurred not later than March 22, 1946. When the ‘amended’ 1943 and 1944 returns were filed on that date their filing constituted the final act required of Mitchell under his employment to prepare and file returns for those years. If he was guilty of a breach of duty it was then known to plaintiff, and if detriment was suffered at or prior to that time a cause of action then arose for the recovery of damages due to negligence. It cannot be questioned that detriment was suffered by plaintiff by reason of its fixed liability for the payment of interest on the sums due as taxes which, by the returns, were shown to be in excess of those that had been paid. The finding on that point is conclusive in the absence of evidence that the use of the money was worth what it cost plaintiff to retain it. It is of no consequence that the interest was not paid until later, a portion of it in January, 1947, and the remainder when the settlement was made with the Government in November, 1948. One who has incurred a liability as the result of the negligence of another has sustained recoverable damage and may sue therefor even though he has not satisfied the obligation. Church v. Payne, 35 Cal.App.Supp.2d 752, 92 P.2d 406; Nelson v. Kellogg, 162 Cal. 621, 123 P. 1115; 25 C.J.S. Damages, § 47, page 527. Plaintiff could have maintained an action against Mitchell at least as early as March, 1946, for damages consisting of the amount of its interest obligation. The remaining question is whether it could also have claimed in that action damages that might be suffered by reason of the exaction of penalties for late filing of returns and late payment of taxes. The question requires an affirmative answer. In considering the applicability of the statute of limitations plaintiff must be deemed to have had but one action for damages. Although there may have been separate breaches of duty with respect to the 1943 and the 1944 returns, this would be immaterial under the facts of the case. The breaches occurred at least as early as March, 1946, and none occurred thereafter. While it is true there were different elements of damage, this would not split a single cause of action into a separate cause of action for each type of damage.

It is well settled that where damage is suffered as a result of breach of duty amounting to a tort there is but a single cause of action for the recovery of damages, past, present and future. Hawthorne v. Siegel, 88 Cal. 159, 25 P. 1114; Kidd v. Hillman, 14 Cal.App.2d 507, 58 P.2d 662.

Whenever damage is sustained in more than a nominal amount as a result of tortious conduct the statute of limitations is set in motion. Lattin v. Gillette, 95 Cal. 317, 30 P. 545; cf. Miller v. Bean, 87 Cal.App.2d 186, 196 P.2d 596. Here the statute commenced to run at least as early as March, 1946, and was not tolled by the fact that the amount of defendant's liability was in some respects uncertain or incapable of exact ascertainment. Under such circumstances recovert may be had not only for damages already sustained, but also for future damages which can be established with reasonable certainty. Exactness in the ascertainment of future damages is never required. Once it is made certain that liability exists and damage will be suffered, the wrongdoer may not complain of uncertainty where the court acts upon the best evidence available and the award is supported by the reasonable probabilities with respect to the amount of damage. Hacker Pipe & Supply Co. v. Chapman Valve Mfg. Co., 17 Cal.App.2d 265, 271, 61 P.2d 944; 25 C.J.S., Damages, § 162, page 816.

The court found that the statute of limitations was tolled as to all five alleged causes of action. This amounts to a finding that the statute was tolled as to the single cause of action which we are discussing. It rests upon certain additional findings, namely, that defendant represented to plaintiff from time to time that said tax returns had been prepared and filed by him on time, that the representations were known to be false, and were relied upon by plaintiff. If these findings are construed to mean that the representations were made or were relied on subsequent to March, 1946, they are directly contrary to the admitted facts. It is certain that as early as March 22, 1946, when the ‘amended’ returns were filed showing additional taxes due, plaintiff knew that defendant had not filed proper returns on their respective due dates and that the proper amounts of taxes had not been paid. What plaintiff knew or believed prior to that time is of no consequence. It is unnecessary to refer to other evidence, standing uncontradicted, that plaintiff's officers well knew more than two years prior to bringing suit that returns had not been filed in the manner and form required by law.

There was a further finding that defendant is estopped from asserting the defense of the statute of limitations. This finding is based upon the last mentioned finding that defendant concealed the facts with relation to the incompleteness of the returns that had been filed; and also upon the finding that plaintiff, its officers or attorneys, had no knowledge that insufficient returns had been filed and that late filing penalties were sought to be imposed upon plaintiff, until on or about March 15, 1948. The findings upon which the conclusion of estoppel is based have no support in the evidence. Plaintiff had been compelled to pay penalties in the past for late filing of income tax returns and this fact was well known to plaintiff's president, Olson. Even if plaintiff's officers had believed, prior to the filing of the ‘amended’ returns in March, 1946, that the ‘tentative’ returns were sufficient, the finding that they were in ignorance as to the deficiencies of those returns cannot stand in the face of their admission of liability for interest as shown by the 1946 returns. They knew that the liability was due to the defects in the earlier returns which reported less than the taxable income. Plaintiff did not know what the penalties would be until the settlement was made, but uncertainty as to the extent of its probable liability did not affect the running of the statute of limitations from the date when plaintiff knew of defendant's breach of duty. See, Jensen v. Sprigg, 84 Cal.App. 519, 258 P. 683. No facts were established which furnished a basis for an estoppel of defendant to plead the statute of limitations.

The views we have expressed render it unnecessary to pass upon the other points urged by defendant.

Inasmuch as the evidence of the parties was complete and conclusive as to the defense of the statute of limitations it would serve no purpose to retry the case.

The judgment is reversed with directions to make new findings with respect to the defense of the statute of limitations in accordance with the foregoing views, and to enter judgment for defendant.


1.  The various tax figures involved in this case are as follows:12345678Paid at time tentative return filedIndicated tax March 22 1946Paid at time amended return filed 3–22–46Interest Due March 22 1946Additional taxes due after Treasury AuditTotal taxes paidStatutory Penalties ProposedCompromise payments in addition to deficienciesFederal Income: 19435300.004908.55(391.45)0.00(refund)4908.551227.21613.61 19445300.006255.29955.2958.8869.936325.221581.30790.65Decl Val Excess Profits 19430. 19440.001064.101064.1065.69415.531479.63369.91184.95Excess Profits 19430.0018606.1418606.142352.745265.4723871.615967.902983.95 19440.0044047.2444047.242715.075066.2249113.4612278.366139.18State 1943766.121324.99558.8767.710.001324.990.000.00 1944705.0424433.111727.07106.500.002433.110.000.005366.5910817.1521424.6810712.34c5(4)c6(5)c8(7)c9(8)The judgment awarded by the court below is composed of:The interest paid (column 4)$ 5366.59The compromise payment (col. 8)10712.34Counsel fees (not shown above)1350.00                  Total$17428.93The amounts listed in column 5 were paid by plaintiff at the time of the settlement and are not directly involved in this lawsuit.The total of column 7 is the statutory penalty which was not imposed but rather a compromise sum as indicated by the total of column 8 was paid by plaintiff.

SHINN, Presiding Justice.

PARKER WOOD and VALLÉE, JJ., concur.

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