Island Farm, Inc. v. Master Sidlow & Assoc., 2007 Del.

Island Farm granted a conservation easement to the Delaware Agricultural Land Preservation Foundation. The fair market value of the easement was appraised at approximately $1.7 million, and the purchase price was approximately $1,000,000, resulting in a donation of $700,000.

However, on Island Farm's 1999 tax return, the grantor's accountant incorrectly noted the purchase price at $1.7 million, and failed to properly reduce the remaining basis in the land. Consequently, Island farm overpaid its federal income tax by $234,000 and its Delaware taxes by a similar amount. Island Farm did not learn of the error until 2005, when it was discovered by a new accountant. Island Farm filed a malpractice action against the former accountant. In a motion for summary judgment, the accountant argued that Island Farm should have known about the error at the time it was made, and therefore the statute of limitations had expired on the lawsuit.

Holding: The court denied summary judgment, leaving open the question whether the donor should have discovered the accountant's error at the time it was made.

Analysis and Notes: A key question before the court was whether Island Farm's in-house accountant's use of the term 'bargain sale' in communications to the donor was enough to cause a prudent person to discover the outside accountant's tax error. The court concluded that it did not have enough information about whether this term was ever used, and if so, what its import might have been.