Tax Shelter Malpractice Case Held Barred by Statute of Limitations

Steinmetz v. WOLGAMOT, Ill: Appellate Court, 1st Dist., 1st Div. 2013 – Google Scholar.

In 1997, Dr. Steinmetz enrolled in a program known as AEGIS, which the defendants informed him would protect his assets and reduce his tax liabilities. The IRS disagreed and sent Dr. Steinmetz a deficiency notice on December 31, 1999. Years later the doctor sued the promoters of the tax shelter for fraud and his lawyer for legal malpractice.

The trial court granted the lawyer’s motion for summary judgment and the appellate court affirmed. In Illinois, the discovery rule applies. The plaintiff must bring his case within two years of the discovery of the legal malpractice. Here, the plaintiff claimed that he was unaware of the problem for many years (while his tax controversy with the IRS was being resolved). The Court disagreed. It held that the statute of limitations was triggered on December 31, 1999, when he received the Notice of Deficiency from the IRS. Because the doctor did not bring his case until December 2005, his claim was barred.

The appellate court then considered whether the lawsuit was barred if the doctor did not learn that he had a cause of action against the defendants until October 2003, when he retained other counsel to resolve his dispute with the Illinois Department of Revenue. The appellate court explained its reasoning as follows:

“¶ 39 In sum, all these notifications and subpoenas from 1999 to 2003 informed plaintiff that, far from reducing his tax liability as promised by defendants, his participation in the AEGIS program was increasing his tax liabilities and subjecting him to potential criminal prosecution and loss of his medical license. By the time plaintiff retained Meyer Capel on October 10, 2003, to handle any proceedings brought against him by the Illinois Department of Professional Regulation in connection with his failure to pay taxes under AEGIS, he reasonably should have known that he was injured by his participation in the AEGIS program, that his injury was wrongfully caused, and that he had an actionable claim against defendants. Plaintiff still did not file suit for legal malpractice until more than two years later, December 22, 2005. Thus, even under plaintiff’s reading of Khan as holding that the two-year limitations period does not begin to run until plaintiff realizes he has an actionable claim, plaintiff’s legal malpractice action against defendants still was not timely filed. Accordingly, the trial court correctly found plaintiff’s legal malpractice action was time-barred as a matter of law.”

Comment: this is an unfortunate situation where the plaintiff paid the defendants to participate in a program to reduce his taxes that, in reality, increased his taxes and put him in jeopardy of criminal prosecution and the loss of his medical license. The key question was when he should have discovered that the lawyers were negligent. In this case, the retention of a new lawyer to resolve the tax disputes indicated that the plaintiff was aware that he had been injured by participating in the tax shelter.

In sum, this is a classic statute of limitations defense.