1. How much contact did Smith have with Dewar?

2. Explain the options that Smith had when Beddall changed the address and forbade further communication about the return.

3. List the things that happened that the court uses to assign a duty of care by Smith to Dewar.

Bradley Beddall, a real estate developer, and Douglas Dewar began a condominium conversion project for the Lea Hill Condominiums. When the local real estate market declined and the project floundered, Beddall owed Dewar $3,900,000 and could no longer meet his obligations. Beddall told Dewar that he wanted out of the project.

Beddall signed a quit claim deed conveying the Lea Hill property to Dewar. Dewar and Beddall signed a settlement agreement, part of which was that Beddall could obtain a large tax refund based upon his losses from the project and would turn that refund over to Dewar. The agreement gave Dewar the right of “review, evaluation, and approval” of the tax return in his “sole and absolute discretion.” Beddall signed an “irrevocable” power of attorney and appropriate IRS Form 2848 authorizing his attorney, Jonathan Hatch, to sign the tax return, receive and negotiate the refund check, and deliver the funds to Dewar.

Kenneth Smith, a CPA, had an engagement letter with Beddall that did not mention Dewar. But Smith knew the content of the settlement agreement and its purpose. During his preparation of Beddall’s tax return, Smith had a copy of the agreement. Consistent with the Hatch–Beddall power of attorney and IRS forms, Smith prepared the return for Hatch’s signature.

Hatch signed the completed tax return, which had Beddall’s address on it. As the settlement agreement required, Smith transmitted the return to Dewar for his review. The same day, Dewar notified Smith that, “The only change I insist on is the address change.” After Smith changed the address, Hatch signed the amended return, which Smith filed the same day.

Shortly after Smith filed the return, Beddall instructed him to stop discussing the matter with Hatch and to communicate about the return only with Beddall. During a call with the IRS with Smith, Beddall asked the IRS representative to change the address on his tax return from Hatch’s address to Smith’s address.

Smith did not tell Dewar or Hatch that Beddall had amended the address on the return. The IRS sent four refund checks totaling $1,206,703.32 to Smith’s office. Smith notified Beddall, who instructed him to deliver the checks to Beddall’s son-in-law, Ron Rubin. Smith did so. Beddall sent an e-mail to Dewar and Hatch to tell them that the tax refund money was in Thailand. When Beddall forwarded this e-mail to Smith, Smith withdrew from his engagement with Beddall.

Dewar sued Kenneth Smith for conversion, civil conspiracy, tortious interference with contractual relationship, breach of implied contract, breach of duty owed to thirdparty beneficiary, and breach of fiduciary duties. The trial court granted Dewar’s motion for partial summary judgment to establish that Smith owed Dewar a duty of care. The court also held that Smith committed negligent misrepresentation when the address on the tax return was changed, he received the checks, and he gave them to Rubin without disclosing these actions to Dewar and Hatch. Smith appealed.

JUDICIAL OPINION

LEACH, Judge … Once Beddall revoked his consent, federal law prohibited Smith from disclosing confidential tax information, including addresses. This federal prohibition preempts any state law tort duty to disclose. But when Dewar requested a copy of Beddall’s return, Smith had choices besides disclosing taxpayer information in violation of federal law or transmitting the misleading original return. He could have requested Beddall’s consent to share the amended return. If, as expected, Beddall refused, Smith could have told Dewar that he couldn’t share any further information because Beddall had revoked his consent to disclosure. Smith could also have made a “noisy withdrawal” of representation after Beddall changed the return address.