Agents’ questions & answers

Agents’ questions & answers

Q For seven years, a partner in an accounting firm prepared the joint tax return for a couple in their 70s. Following the death of the husband, the accountant was contacted by the estate planning attorney who requested the accountant prepare the estate tax return. The accountant complied and subsequently transferred the estate to the wife per the husband’s will. The estate totalled $1,260,000.

Two years later the wife died, having made gifts amounting to $400,000 to her two children, with an estate valued at $1,245,000. The estate taxes, which amounted to $254,000, were paid by the beneficiaries, the two children.

The following year, the children filed a lawsuit against the CPA, his firm, and the estate planning attorney claiming that the CPA failed to properly advise the couple on estate planning strategies and the tax implications of those strategies.

The CPA never represented himself as being knowledgeable in matters of estate planning. (He did in fact, routinely insist that his clients see an estate planning expert.) However, he never narrowed his scope of engagement to exclude estate planning.

What steps could the CPA have taken to prevent this situation?

The following material is excerpted from Impact, a newsletter covering practice and risk management issues of CPAs, produced by CAMICO for its policyholders as a part of a comprehensive loss prevention program. CAMICO, a mutual insurance company, located in Redwood City, California, provides professional liability insurance for CPAs.

A Any professional in a predicament such as this would have a hard time arguing that his service didn’t go beyond simply following his clients’ orders. It is likely that this CPA’s files would indicate that he did, indeed, provide some advice to the couple during the seven years he served as their CPA–that he was more than just a compliant CPA.

He should have had a formal engagement letter. The letter confirming the engagement to prepare estate tax returns contained no scope-limiting language.

If the CPA did offer advice on estate planning issues, he should have advised the beneficiaries of all options available to them.

The CPA should have confirmed the client’s choices in writing, specifying whether a particular type of trust had been selected or if some other form of estate administration had been chosen.

The CPA should have confirmed the scope of duty he would be undertaking, preferably in writing in an engagement letter. If he were not to be providing any advice regarding estate tax planning, this should have been stated in the engagement letter.

If another professional, such as an attorney, was involved in making arrangements, written confirmation should have specified who would be responsible for what.

When forwarding the final product to the attorney and/or client, the CPA should have included a cover letter that confirmed that the product was prepared and positions were taken based on instructions from the estate planning attorney.

Q Upon audit, a general liability carrier picked up as “payroll” amounts paid to four employees who use their personal vehicle for business purposes. The four employees are job superintendents for a construction company and the vehicles (pickup trucks) sustain heavy business use for five days a week and incur high mileage as well.

The flat monthly automobile allowances are modest ($400, $350, $325, and $350) and probably do not fairly compensate the employees for the depreciation, costs, etc., associated with the operation of these vehicles. Whatever the case, it is the responsibility of each employee receiving an automobile allowance to report it as personal income and to claim an “auto expenses” deduction to which they are entitled.

Inasmuch as the Commercial Lines Manual lacks any wording whatsoever regarding auto allowances, one can, I think, reasonably conclude that the intention is for reasonable automobile allowances not to be included as payroll. What is your opinion?

(In case it is helpful in drafting your response, the Texas Workers Compensation Manual does specifically indicate that automobile allowances are to be included as payroll but only such allowances in “excess of IRS guidelines.”)


Street & Associates

Dallas, Texas

The following reply was prepared by the staff of the American Institute for CPCU and the Insurance Institute of America in Malvern, Pennsylvania.

A Your last paragraph is the direction most auditors turn when questions regarding general liability payroll arise. With few exceptions, the definitions for payroll and remuneration are the same under general liability and workers compensation. Those exceptions relate primarily to the differences in coverages.

The most recent revisions to the National Council Basic Manual clarify the treatment of employee expense reimbursements moreso than previous editions. Rule V. B. 2 states that remuneration includes “expense reimbursement to employees to the extent that an employer’s records do not substantiate that the expense was incurred as a valid business expense.” The exclusions state the reverse of this. Remuneration excludes “expense reimbursements to employees to the extent that an employer’s records substantiate that the expense was incurred as a valid business expense.”

This means that the insurer was correct in picking up the expense allowances in this case since the employer had no records of actual expenses. However, if these amounts are so inadequate that they do not fairly compensate the employee, the employer does have an alternative. By requiring employees to provide some documentation about actual expenses (mileage or gas receipts, repair bills, depreciation, and so on) by month, the employer would have records showing that the expenses were valid business expenses, and the auditor would not include them.

The “by month” documentation requirement is important since this is how the employer pays the allowance. At $0.30 per mile, an employee would have to show at least 1,333 business miles per month to justify the largest of the reimbursements you listed. The employees probably already have these records if they are claiming the tax deduction on their federal tax returns.

The Basic Manual included this rule to capture as payroll those cases in which an employer gives an employee a flat allowance that exceeds the expenses the employee would likely incur. Such allowances are little more than extra income to the employee and therefore should be treated as payroll. In your case, the opposite appears to be true.

The one possible problem here is Texas. The Texas workers compensation manual does not have this new wording. However, I would interpret the manual in the same manner in Texas as the rest of the country.

Q Environmental laboratories usually store and analyze various types of hazardous wastes and/or materials. If the laboratory is large enough, it may treat or neutralize wastes prior to storage, discharge or disposal. Regardless, the laboratory will have an on-site contamination exposure which could lead to bodily injury to a third-party visiting the facility or property damage to the facility resulting from the improper handling or storage of hazardous wastes and materials. What are some of the typical pollution and professional exposures which laboratories face? Are these exposures covered by a standard general liability policy?

The following material was prepared by William J. North, underwriter, environmental professional liability department, Environmental Compliance Services, Inc., Exton, Pennsylvania. It is excerpted from Update, a bimonthly publication of ECS Underwriting, Inc.

A An example might be a drum of mixed solvent waste generated from sample preparation operations which leaks or is damaged and subsequently contaminates the underlying soil and the shallow groundwater table underneath the facility. This clean-up would be excluded under a normal general liability policy. A similar situation may occur if a visitor was overcome by fumes generated by laboratory operations or equipment malfunction. This type of exposure would also be excluded from coverage on a standard general liability policy.

The same set of circumstances (i.e. release of pollutant or chemical) could represent an off-site or third-party exposure for a laboratory. A noxious gas released from distillation or digestion operations, which are normally vented by laboratory fume hoods, could potentially injure a contractor working on the roof of an adjacent building. Similarly, groundwater contamination which originated underneath the facility could move off-site and contaminate the well of a neighboring facility. In either case, a typical general liability policy would not address claims associated with the bodily injury or cleanup exposures.

Professional liability claims may arise out of a variety of situations. Laboratory data or samples that are analyzed incorrectly may lead to false assumptions and conclusions regarding whether or not a facility’s contamination levels are under minimum regulatory clean-up levels. If it is discovered that a report based on an analytical laboratory’s results is suspect, both the individuals and the laboratory involved may be drawn into litigation. Even if it is proven that the laboratory was not negligent there still may be substantial defense costs associated with the claim.

Copyright Rough Notes Co., Inc. Apr 1995

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