Reliance on Broker’s Tax Advice Deemed Reasonable

Read the full decision: Coon v. Wood (link is external)

A US district court for the District of Columbia has determined that a real estate broker may be liable for giving a client misleading tax advice related to a real estate transaction.

In 2010, John Coon (“Client”) engaged Edward Wood (“Broker”), an associate broker with City Houses D.C., to assist him in selling an investment property (“First Property”) and using the proceeds to purchase a new investment property.  Broker had had represented Client in the purchase of the First Property ten years prior. 
Client and Broker entered into an agreement (“Brokerage Agreement”) in which the parties agreed that Broker would earn his commission when plaintiff “enters into a sales contract … with any buyer procured by seller … provided that buyer performs and settles on said contract.”  Shortly after executing the Brokerage Agreement, Client executed an agreement (“Sales Agreement”) for the sale of the First Property.   The terms of the Sales Agreement provided that Broker was retained “solely as a real estate agent and not as a … tax advisor …”  The Sales Agreement also provided that Broker could counsel the parties to the Sales Agreement regarding real estate advice, but that they should seek “appropriate professional advice concerning … tax and insurance matters.” 

Ten years earlier, when Broker had assisted Client in purchasing the First Property, Broker had assisted Client in structuring the deal in accordance with 26 U.S.C. §1031, which mandates that “no gain or loss shall be recognized on the exchange of property held for … investment if such property is exchanged solely for property of like kind….”  The transaction was structured accordingly as a “Starker Exchange” – i.e., a transaction that allows for the avoidance of capital gains taxes for the exchange of certain investment properties.

Prior to the sale of the First Property, Client asked Broker whether he could, once again, execute a Starker Exchange, or otherwise avoid capital gains.  Broker advised Client that he could not do so.  This advice was, in fact, incorrect.  As a result of Broker’s advice, Client sold the First Property “without implementing the appropriate transaction to qualify as a Starker Exchange,” and was left owing the IRS over $75,000 in capital gains taxes. 

Client sued Broker to recover damages and attorney’s fees.  His suit included allegations of breach of contract, breach of fiduciary duty, and negligent misrepresentation.  Broker moved to dismiss all counts against him.

The court dismissed the breach of contract claim, finding that “no provision of the Brokerage Agreement created an obligation” on behalf of Broker to furnish tax advice or structure the transaction in order to avoid capital gains taxes.

The court also dismissed the claim of breach of fiduciary duty against Broker, finding that the express disclaimer in the Sales Agreement stating that Client acknowledged that “Broker is being retained solely as a real estate agent and not as an attorney or a tax advisor…” sufficiently limited the Broker’s statutory duties to Client in respect to the botched Starker Exchange advice.

However, the court denied Broker’s motion to dismiss the count of negligent misrepresentation.  Under DC law, a claim of negligent misrepresentation requires that a plaintiff “reasonably rely upon a false statement or omission to his detriment.”  Broker argued that, given his status as a real estate professional, and not a tax expert, it was not reasonable for Client to rely on his tax advice.  The court did not agree, in large part because Broker had, in 2000, successfully structured the purchase of the First Property as a Starker Exchange.  The court stated that “where a real estate agent – experienced in a specific type of transaction – makes an affirmative representation to the principal regarding that same type of transaction, the principal is not unreasonable as a matter of law to rely upon that representation.”

In short, held the court, the count of negligent misrepresentation against Broker could move forward, as Client’s reliance on Broker’s prior experience advising on that kind of transaction was reasonable.

Coon v. Wood, No. 13-1400 (BAH), 2014 WL 4647713 (D.D.C. Sept. 18, 2014).  [NOTE: This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].

Notice: The information on this page may not be current. The archive is a collection of content previously published on one or more NAR web properties. Archive pages are not updated and may no longer be accurate. Users must independently verify the accuracy and currency of the information found here. The National Association of REALTORS® disclaims all liability for any loss or injury resulting from the use of the information or data found on this page.

Advertisement