Ruling: Out-of-state firm can be sued in AZ tax case

Man who received bum advice, incurred IRS costs can file suit
2013-05-15T00:00:00Z Ruling: Out-of-state firm can be sued in AZ tax caseHoward Fischer Capitol Media Services Arizona Daily Star

PHOENIX - Out-of-state professionals who give tax advice to Arizonans can end up having to defend themselves in courts here, the state Court of Appeals has ruled.

The ruling involved a suit against attorneys who were in Connecticut and did their work there. The judges said that fact is legally irrelevant to the question of whether they can be sued in Arizona. Instead, the judges said the issue is whether defendants in a case "engaged in purposeful conduct for which they reasonably could expect to be hauled into an Arizona court."

The appellate court concluded the facts of this case met that test.

The case involves plaintiff Bill Beverage, who said he heard from his local accountant of an opportunity to invest in a tax shelter promoted by Chenery Associates, a financial services firm.

In mid-2001, according to the lawsuit, an accountant on behalf of Beverage and Chenery employees phoned Robert Morris, managing partner of the Connecticut law firm of Pullman & Comley, to discuss whether that firm would issue an opinion letter to him supporting the tax shelter. Eventually a 58-page opinion letter was issued, and the law firm was paid $50,000.

Saying he was relying on that letter, Beverage declared substantial losses on his federal income tax return related to the tax shelter.

After an audit, the IRS disallowed the losses, assessing deficiencies of more than $3 million, not counting the legal fees during the audit. Beverage then sued the Connecticut firm and the accountant.

The law firm, however, got a Maricopa County Superior Court judge to dismiss the case against it, ruling Arizona courts had no jurisdiction.

But Appellate Judge Diane Johnsen said the fact that the law firm drafted and issued a letter to Beverage in Arizona, knowing he would rely on that letter in filing a federal tax return from Arizona, means the firm can be sued in this state.

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