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A New York federal judge agreed to toss a housing partnership's suit accusing accounting firm CohnReznick LLP of professional negligence and fraud, finding that the district court doesn't have jurisdiction over the dispute.

U.S. District Judge Naomi Reice Buchwald said Tuesday that the court lacks subject matter jurisdiction over the case brought by AMTAX Holdings 227 LLC, rejecting AMTAX's argument that the action raises substantial issues that relate to federal tax law. Rather, the judge said the issues are related to a right of refusal and purchase option agreement.

AMTAX was formed exclusively to build 185 affordable housing units in Boston in exchange for low-income tax credits. The partnership sued in early 2023, claiming CohnReznick had violated its fiduciary duty when it created a secret calculator of the project's mandated selling price to benefit the general partner.

CohnReznick's calculation threatens to shift an $8.5 million tax burden from the general partner's nonprofit parent company in Boston, Tenants Development Corp., to the partnership in a case before a state court in Massachusetts that has cost the partnership $500,000 in legal fees, AMTAX said at the time.

The partnership said it's governed by rules surrounding affordable housing tax credits, and that means it can offer its general partner's parent the rights to purchase the housing when it goes up for sale, typically after 15 years, when the partnership has used up all the tax credits. The regulated minimum price for such a sale to a parent company must include all taxes triggered by the sale, AMTAX said.

A related case was filed in federal court in Massachusetts as well.

In arguing that the case should be tossed, CohnReznick pointed to the test established by the U.S. Supreme Court in Grable & Sons Metal Products Inc. v. Darue Engineering & Manufacturing for determining whether federal question jurisdiction exists. AMTAX had met none of the four factors in that test, and thus the court lacks jurisdiction, the firm argued.

On top of that, CohnReznick said the related action in Massachusetts federal court has already made its way to the First Circuit, which held that disputes related to the partnership's right of refusal and purchase option agreement with the nonprofit don't support federal question jurisdiction.

Judge Buchwald said Tuesday that AMTAX hasn't "sustained its burden of proving by a preponderance of the evidence that its claims depend on federal tax law rather than the parties' interpretation of a sui generis contract."

Specifically, Judge Buchwald said, AMTAX had argued that a federal issue is raised because its claims require the interpretation of Section 42(i)(7) and other related Internal Revenue Code provisions. For one, the partnership said its breach of fiduciary duty claim stems from the firm's calculation of the purchase price in a manner that it said was "inconsistent" with federal tax law. On top of that, AMTAX said its professional negligence claim is related to the same calculation, according to the opinion.

However, the judge said it's clear that the purchase price was in fact calculated based on language contained in the right of refusal agreement, not based on the law.

"Thus, AMTAX's argument that its claims rest on the interpretation of Section 42(i)(7), rather than the ROR agreement, is too tenuous to support federal jurisdiction," Judge Buchwald said.

And that means AMTAX hasn't satisfied the first prong of the Grable test: whether a state law claim necessarily raises a question of law, according to the opinion.

Judge Buchwald said her analysis under Grable could end there, but she opted to also examine whether the federal law issue is disputed by the parties. That's the one factor that AMTAX does satisfy, she added.

"The court does not doubt that the parties dispute the meaning of Section 42(i)(7) and whether CohnReznick acted in accordance with the statute," the judge said. "Regardless, the other three Grable requirements have not been satisfied."

For those reasons, the case must be dismissed, Judge Buchwald said. However, she noted that the case is dismissed without prejudice because finding a case lacks federal subject matter jurisdiction means the court also lacks the power to dismiss a case with prejudice.

According to AMTAX's suit, it relied on CohnReznick to calculate the minimum price in anticipation of selling the units. The firm had worked as AMTAX's tax preparers and auditors since the housing project's beginnings in 2003, AMTAX said.

In 2017, 2018 and 2019, the firm estimated that the sale would trigger millions of dollars in tax liability, based on the partnership's negative capital account balance and projected corresponding gain realized at sale, AMTAX said. But then CohnReznick created a separate calculation in 2020 for the general partner, according to the complaint. That calculation factored out the taxes by ignoring the negative account balance, AMTAX asserted.

The Boston nonprofit used the new calculation to claim it could purchase the scattered housing units for $17.1 million, AMTAX claimed. When the partnership refused to sell the property, saying the price excluded the money the partnership would need to settle taxes due at sale, the nonprofit sued them in state court for refusing to sell, AMTAX said.

CohnReznick intentionally hid its 2020 calculation, as well as its competing engagement with the general partner, from the partnership, which learned about it during discovery in the state court case, AMTAX contended.

The partnership was blindsided, it said, adding that it had been "lulled into believing that CohnReznick would continue to provide impartial, independent, and accurate tax work to protect AMTAX's tax status or, at the very least, not abuse its position of trust to directly harm AMTAX for the benefit of another partner."

Counsel for the parties didn't immediately respond to requests for comment late Wednesday.

AMTAX is represented by L. Reid Skibell, Olga Lucia Fuentes Skinner and Avelino A. Garcia of Glenn Agre Bergman & Fuentes LLP.

CohnReznick is represented by Melissa A. Peña and Benjamin D. Schwartz of Norris McLaughlin PA.

The case is AMTAX Holdings 227 LLC v. CohnReznick LLP, case number 1:23-cv-01124, in the U.S. District Court for the Southern District of New York.