Tort/Negligence – Breach of Fiduciary Duty – Damages – No Evidence – Taxation – Illegal Tax Shelters

Loftin v. QA Investments, LLC (Lawyers Weekly No. 020-013-18, 40 pp.) (James Gale, C.J.) 2018 NCBC 11

Holding: Even though defendant executed the trades for a tax shelter that was later found to be illegal, plaintiff has not forecasted any evidence of damages proximately caused by defendant.

The court denies plaintiff’s motion for additional discovery and grants defendant’s motion for summary judgment.

Facts

In 1997, plaintiff expected capital gains of approximately $30 million from the sale of stock. When plaintiff asked his bank for advice, the bank put him in touch with a creator of tax shelters.

Plaintiff invested in those tax shelters, and they were later found to be illegal. Plaintiff was required to pay back taxes, penalties and interest.

Plaintiff has settled his claims against several parties. He now seeks to recover $107,187,582 against defendant, the entity that executed the investment trades for one of the tax shelters.

Analysis

First, plaintiff failed to use the time allotted for discovery, so the court declines to grant him additional time for discovery.

Plaintiff’s remaining claims – civil conspiracy, fraud, breach of fiduciary duty, and constructive fraud – all require proof of damages.

North Carolina appears to allow plaintiffs to recover back taxes as damages when tax liability is incurred as a direct result of wrongful conduct, such as professional negligence.

Plaintiff contends that, if he had known that the tax shelters – Foreign Leveraged Investment Program (FLIP) and Bond Linked Issue Premium Structure (BLIPS) – were illegal tax shelters, he would have made alternative investments to avoid taxation on his capital gains. However, he has offered no fact or expert evidence of other investments he could have pursued that would have generated losses that the IRS would allow.

With no fact evidence or expert opinion to support plaintiff’s conclusory argument, there is no basis for a jury to find that he would not have owed back taxes but for defendant’s wrongful conduct. As a matter of law, plaintiff cannot recover from defendant the federal or state back taxes he incurred in connection with FLIP and BLIPS.

Because plaintiff has failed to demonstrate that he is entitled to recover back taxes, he has also failed to establish that there is a triable issue on whether he is entitled to recover interest and penalties.

Plaintiff’s claims related to North Carolina state tax assessments also fail because he failed to present sufficient evidence that he actually incurred North Carolina back taxes, penalties, and interest. Despite defendant’s discovery demands, plaintiff has not produced his relevant North Carolina tax returns, deficiency notices, or audits. He has further failed to produce any bank records showing that he has made such payments to the State of North Carolina.

Plaintiff’s complaint makes no allegations tying defendant to BLIPS, and plaintiff has come forward with no evidence suggesting otherwise. He claims that, had he “known of FLIP’s true nature,” he would not have invested in BLIPS. These conclusory allegations are too speculative to allow plaintiff to recover BLIPS-related damages from defendant based on general rules of proximate cause.

Summary judgment for defendant.