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HEADNOTE: Betty Brown Edwards, et al. v. Pandelis Demedis, et al., No. 564, September Term, 1997

_________________________________________________________________ STATUTE OF LIMITATIONS -The discovery rule applies to a professional malpractice action based on negligent tax advice. The date of accrual of the cause of action depends on the facts of each case and is not necessarily tied to the date of issuance of a notice of deficiency by the Internal Revenue Service.

REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 564 September Term, 1997

BETTY BROWN EDWARDS, et al.

v.

PANDELIS DEMEDIS, et al.

Wenner, Eyler, Thieme, JJ. Opinion by Eyler, J. Filed: December 22, 1997

The principal issue before us is whether the discovery rule, which determines when a cause of action accrues, requires that a formal notice of deficiency be issued by the Internal Revenue Service in order for a claim based on alleged negligent tax advice to accrue. We hold that it does not. Facts The four appellants, Francis Thelen, George Sourlis, George Antonas, and Nicholas DiGiacomo, are retired Baltimore County school teachers. Each was a member of the Maryland State

Retirement System (Retirement System), and consequently, a percentage of their gross earnings was paid to the Retirement System during their working years. deductible. The contribution was not tax

In 1990, the State closed the Retirement System to The

new employees and replaced it with the Pension System.

Pension System was non-contributory but provided a lower benefit at retirement and required longer service before eligibility for retirement. Members of the Retirement System were given an

option to transfer to the Pension System. To encourage transfer, the State offered to refund all or part of each employee's contribution to the Retirement System, depending on the facts of each case, plus interest. In 1990, Pandelis Demedis, appellee, a financial planner and registered representative of Chubb Securities Corporation, also an appellee, presented an investment plan to teachers, including

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each appellant.

The plan envisioned that each teacher would

accept a transfer refund from the Retirement System and roll over the interest portion of the refund into an individual retirement account that would be managed by Demedis. Demedis and each

appellant obtained a legal opinion from Edward L. Blanton, Jr., another appellee, an attorney, that the interest portion of the refund was eligible for a tax-free rollover. The legal opinions Each appellant

were issued between February and November, 1990.

transferred from the Retirement System to the Pension System and invested funds in individual retirement accounts managed by Demedis. Sometime prior to January 1990,1 the State requested a revenue ruling from the Internal Revenue Service on the eligibility of the interest portion of the refund for tax-free treatment. The Internal Revenue Service issued a ruling on July

23, 1990, holding that the refund did not qualify for tax-free treatment. Thelen, Sourlis, and Antonas received notice of the

Internal Revenue Service ruling in the summer of 1990. Unlike the other appellants who had transferred their funds in early 1990, DiGiacomo did not transfer funds from the

In January 1990, Antonas and DiGiacomo each received a memorandum from the Teachers Association of Baltimore County discussing the differences between the Retirement Plan and the Pension System. The memorandum stated that the State of Maryland had requested a ruling from the Internal Revenue Service as to the taxability of the refund but that, as of that date, the ruling had not yet been issued. -2-

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Retirement System to the Pension System until after the revenue ruling. In conjunction with that transfer, DiGiacomo was advised

in November 1990 that the Internal Revenue Service had ruled that the refund could not be rolled into an individual retirement account and qualify for tax-free treatment. In the fall of 1990, Thelen, Sourlis, and Antonas received one or more letters from state and federal legislators concerning the tax issue. The three appellants understood that the

legislators had been contacted because of the revenue ruling and with regard to a possible effort to seek legislative change. or more of the legislators advised appellants that they had received inaccurate advice regarding the tax consequences resulting from the transfer of funds. On April 2, 1991, the executive director of the Maryland State Retirement Agency issued a memorandum directed to persons who had received a transfer refund in 1990. In that memorandum, One

the executive director stated that taxes could be imposed on transfer refunds and advised recipients to close individual retirement accounts and withdraw the transferred amounts prior to April 15, 1991. Similar advice was repeated in a memorandum Stronger advice was contained in a

dated April 8, 1991.

memorandum dated April 12, 1991, in which the executive director stated that recipients who had rolled refunds into individual retirement accounts "must" withdraw such funds prior to April 15,

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1991, in order to minimize the tax consequences. Sourlis, Antonas, and DiGiacomo acknowledged receipt of the April 2 memo and Sourlis and Antonas acknowledged receipt of all three memos. On April 10, 1991, the Retirement System issued an

"Announcement" to former members who had accepted transfer refunds after the revenue ruling in July, 1990, stating that such persons would receive no tax relief. The Retirement System noted

that it had disseminated the ruling promptly and there was no "confusion" after that time. After the revenue ruling in July 1990, and again after the Retirement System's communications in April 1991, Blanton and Demedis advised appellants that, in their opinion: (1) the ruling did not apply to them, (2) it would be overturned in court, and (3) they would be better off financially with their monies in the individual retirement accounts. that they needed to do. On October 1, 1992, the Internal Revenue Service District Director issued a report of income tax changes for the calendar year 1990 directed to Thelen, showing a deficiency and balance due based on receipt of the transfer refund and rollover into an individual retirement account. This report was received by On June 18, 1992, the Consequently, there was nothing

Thelen no later than October 14, 1992.

Internal Revenue Service District Director sent a similar report to Sourlis, received no later than July 24. On August 18, 1992,

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a revised report showing a deficiency and balance due was sent to Sourlis and received no later than October 8. On July 16, 1992,

the Internal Revenue Service District Director sent a similar report to Antonas showing a deficiency and balance due. revised report was sent to Antonas on August 25. A

Both reports On December

were received by him no later than September, 1992.

17, 1993, a similar report was sent to and received by DiGiacomo. After receipt of the proposed changes, each appellant retained Blanton to represent him in contacts with the Internal Revenue Service and in any subsequent litigation. Blanton

advised appellants that they could either (1) wait for a formal notice of deficiency assessment2 to be issued and litigate the issue in Tax Court, or (2) pay the tax and request a refund. In

the event that the refund was denied, appellants could then sue in the United States District Court for the District of Maryland. Blanton advised appellants to take the latter route because it would enable them to recover attorney's fees and interest if successful in the underlying claim. Each appellant paid the Specifically,

deficiency claimed and filed a refund claim.

Thelen paid the tax on March 22, 1993, and filed a refund claim on March 28, 1993; Sourlis paid the tax on December 18, 1992, and filed a refund claim on January 9, 1993; Antonas paid the tax on January 22, 1993, and filed a refund claim in February, 1993; and

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See Internal Revenue Code 26 U.S.C.

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