TAX WARS: THE CLIENT STRIKES BACK
By: Adam Aptowitzer
On June 30th, 2010, the Ontario Superior Court of Justice released a decision in a case which was likely inevitable.
In Lemberg v Perris (2010 ONSC 3690), husband and wife participants in an art donation program sued their accountant for promoting the plan to them. The art donation program in this case was appealed to the Tax Court and then the Federal Court of Appeal in a group of cases known generally as the Klotz cases. The plan basically required the donor to buy art in bulk from a seller sourced by the promoter and then donate the artwork to an American university, again in a transaction organized by the promoter. The American recipient of the artwork then issued a donation tax receipt for a value much higher than the purchase price. In the final result, the Court found that the valuations used on the receipts were very inflated and only allowed the donors a receipt for the amount that they were actually out of pocket.
In Lemberg, Mr Perris and his accounting firm had recommended to the Lembergs that they participate in the art donation flip and he received a commission from the promoter for the Lemberg's involvement. This was important, because the Court found that it indicated that Mr. Perris acted on behalf of the Promoter and could not have acted in the best interests of his clients. Moreover, because Mr. Perris had a long standing and trusted advisory relationship with the Lemberg family he was found to be in a fiduciary relationship with the Lembergs as opposed to the more typical (and less duty bound one of advisor).
While the decision as to whether or not Mr. Perris was a fiduciary of the Lenbergs is arguably particular to the case at hand, the calculation of the damages has far more precedential value. The parties agreed that the Lembergs were worse off by the amount they paid for the artwork less the amount of the tax credit allowed. To this the Court added the amount of commission that Mr. Perris had received of $7,500 and ordered Mr. Perris to pay the amount to the Lembergs.
This case serves as a warning to any advisors that receive commissions paid by promoters to avoid potentially conflicting situations regardless of their confidence in the shelter. And perhaps more importantly, advisors should hold themselves to the highest fiduciary standards in all cases, even if their relationship with the donor is more fleeting thatn was the one between the Lembergs and Mr. Perris.