Beverage, an Arizona resident, heard about an opportunity to invest in a tax shelter from his local accountant. On beverage’s behalf, the accountant contacted Pullman & Comley, LLC, a Connecticut law firm, and asked whether the firm would issue an opinion letter to Beverage supporting the tax shelter. Pullman agreed to investigate the shelter and sent Beverage a representation letter. Beverage invested in the shelter, executed the representation letter, and paid the firm $50,000. The firm issued Beverage a fifty-eight page letter concluding that the tax shelter was legitimate, and Beverage and his wife declared substantial losses on their federal tax return. When it subsequently audited Beverage, the IRS concluded that the shelter was not legitimate, and assessed deficiencies of more than $3,000,000. The Beverages filed suit against Pullman in Arizona, which the Superior Court dismissed for lack of personal jurisdiction.
The Court of Appeals relied on Arizona’s “long-arm” statute to reverse. Arizona may exert personal jurisdiction over a defendant when that defendant 1) demonstrates personal conduct targeting Arizona, 2) there is a nexus between that conduct and the asserted claim, and 3) the exercise of jurisdiction is reasonable. The Court of Appeals distinguished cases in which other states had declined to exercise jurisdiction over out-of-state law firms, such as when the out-of-state law firm represented an in-state client in a matter in a third state, or when a client forwarded an opinion letter from his lawyer to an adversary in a third state. Instead, the court relied upon the fact that the law firm had known that Beverage was an Arizona resident, had sent its opinion letter to Arizona, and had known that Beverage intended to rely on the letter when filing his taxes in Arizona. The court relied on Beverage’s representation that he relied upon the opinion when declaring losses to find a nexus between Pullman’s act and the loss. It finally found that exercising jurisdiction was therefore reasonable. It therefore concluded that under the facts alleged, Arizona could exercise personal jurisdiction over Pullman.
Judge Johnsen authored the opinion; Judges Brown and Winthrop concurred.
Posted by: Andrew Case