Johnson v Proskauer Rose LLP 2015 NY Slip Op 03626 Decided on April 30, 2015 Appellate Division, First Department Mazzarelli, J., J. is the story of heirs who are seduced into an expensive tax avoidance scheme, only to lose millions. Whose fault is it? Is the story merely greedy heirs, or is it fraud by a money-hungry law firm?
“Plaintiffs are individual heirs to the Johnson & Johnson (J & J) fortune, trusts established for the benefit of those individuals, and trustees of the plaintiff trusts. They own many shares of J & J stock, much of it obtained at a low cost basis. One of the trustee-plaintiffs, Robert Matthews, is also a certified public accountant who prepared the tax returns that were challenged by the IRS and give rise to this dispute. Defendant Proskauer Rose LLP (Proskauer) is a law firm that, prior to the events at issue, had represented plaintiffs on a variety of matters, including tax matters. Defendant Jay Waxenberg is a member of Proskauer.
Although plaintiffs had not expressed to anyone at Proskauer that they desired to sell J & J stock, Waxenberg telephoned Matthews several times in September 2000 to discuss a method which, he told Matthews, would permit plaintiffs to sell J & J stock without being subject to a large tax liability. Plaintiffs agreed to hear more about the proposal, and on October 2, 2000, plaintiff John Seward Johnson, Jr. and Matthews met Waxenberg and his partner, defendant Ira Akselrad, at Proskauer’s offices. At the meeting, Waxenberg and Akselrad introduced Johnson and Matthews to James Haber, who was identified as a principal of The Diversified Group, Inc. (TDG). Haber explained to Johnson and Matthews that TDG was in the business of developing tax minimization strategies for individuals and families with high net worths.”
“Haber, Waxenberg and Akselrad then described to Johnson and Matthews the specific scheme they believed would benefit plaintiffs, and instructed them how to execute it. They represented to Johnson and Matthews that the plan would obviate plaintiffs’ need to pay tax on the gains realized by the sale of J & J stock and would withstand IRS scrutiny since it had “a legitimate and bona fide business and economic purpose.” Waxenberg and Akselrad stated that, at a later date, Proskauer would prepare and issue to plaintiffs an opinion letter explaining the legal rationale supporting the scheme, and which would protect plaintiffs from the imposition of any penalties in the “unlikely” event the IRS disagreed with defendants’ opinion that the strategy was a legitimate one. They also told Johnson and Matthews that after the plan was implemented, they would continue to represent plaintiffs in connection with it. In the meantime, however, even though Johnson and Matthews told them that they were in no rush to sell J & J stock, Waxenberg and Akselrad told Johnson and Matthews that they should execute the strategy in the very near future, and would be “foolish” not to. This, Waxenberg and Akselrad said, was because plaintiffs’ opportunity to do so may not be open-ended, because it was being offered to them as favored clients of Proskauer, and because other similarly-situated clients, including members of the Johnson family, had already done so. Finally, Akselrad and Waxenberg told Johnson and Matthews not to discuss the tax avoidance plan with anybody else.
In January 2002, the IRS announced a tax amnesty program which allegedly would have been applicable to plaintiffs’ situation. However, Proskauer did not notify plaintiffs of that program. In April 2006, the IRS sent plaintiffs a letter requesting documents and detailed information about the tax avoidance strategy they had implemented over five years earlier. Plaintiffs sought counsel from Waxenberg, but he informed them that Proskauer was conflicted by its representation of TDG. Concerned that the agency would ultimately challenge the scheme and assess penalties against them, plaintiffs secured a tolling agreement from Proskauer which, after a later extension, tolled the statute of limitations for any claims against Proskauer up to and including July 31, 2011. Ultimately, the IRS ruled the shelter transaction was not entitled to favorable capital gains tax treatment and assessed plaintiffs back taxes, penalties and interest amounting to millions of dollars.”
“Accordingly, the order of the Supreme Court, New York County (Lawrence K. Marks, J.), entered January 29, 2014, which, to the extent appealed from, denied, in part, defendants Proskauer Rose LLP and Jay Waxenberg’s motion to dismiss plaintiffs’ causes of action alleging fraud, excessive legal fee and unjust enrichment, denied that portion of their motion seeking dismissal of plaintiffs’ demand for punitive damages based on the fraud claim, and granted that portion of their motion seeking dismissal of the cause of action for legal malpractice, should be affirmed, without costs. Plaintiffs’ appeal from that portion of the order granting defendant Akselrad’s motion seeking dismissal of the complaint as against him is unanimously withdrawn, without costs, in accordance with the stipulation of the parties dated April 24, 2015.”