January Transp., Inc. v. Comm'r

T.C. Memo. 2008-268

UNITED STATES TAX COURT

JANUARY TRANSPORT, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14484-06. Filed December 3, 2008.

Jon H. Trudgeon, for petitioner.

William F. Castor, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent issued a notice of deficiency

with respect to petitioner’s 2002 Federal income tax. Respondent

determined that petitioner was liable for an $18,035 accuracy-

related penalty under section 6662(a).1 The only issue for

1
Unless otherwise indicated, all section references are to
(continued...)
 - 2 -

decision is whether petitioner is liable for the accuracy-related

penalty as determined by respondent.

FINDINGS OF FACT

Some of the facts have been stipulated. We incorporate the

stipulated facts into our findings by this reference. When the

petition was filed, petitioner was an Oklahoma corporation with

its principal place of business in Oklahoma.

I. Background

A. Petitioner’s Business

Petitioner began operations as an unincorporated business in

1952. It incorporated sometime between 1983 and 1986.

Petitioner is a trucking company that handles hazardous and

nonhazardous waste. It removes waste from oil and water

separators at its clients’ tire and lube locations and transports

the waste to one of the recycling facilities owned by January

Environmental Services, Inc. (JES), a related corporation.

Chris Allen January (Mr. January) started working for

petitioner in 1976 after graduating from high school. He became

petitioner’s president when it incorporated. During 2002 Mr.

January was petitioner’s president, and he owned 80 percent of

1
(...continued)
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. All amounts are rounded to the nearest dollar.
 - 3 -

petitioner’s stock. During 2002 Mr. January’s sister, Carol

January (Ms. January),2 also worked for petitioner.

B. Petitioner’s Bookkeeping, Financial Statements, and
Return Preparation

In about 1984 petitioner retained Stone & Koskie, CPAs, P.C.

(Stone & Koskie), to provide accounting and tax preparation

services. In 1992 Jenyle Koskie (Ms. Koskie), a certified public

accountant (C.P.A.), joined Stone & Koskie as a partner. On the

date of trial Ms. Koskie owned a 75-percent interest in Stone &

Koskie.

One of the services Stone & Koskie provided to petitioner

was data entry into petitioner’s computerized books of account.

Stone & Koskie entered such information as receipts, expenses,

bank statements, and relevant transactions, including asset

purchases. Stone & Koskie then produced financial statements

using the computerized information. Before March 2002 Steve

Jansing (Mr. Jansing), a Stone & Koskie employee, was involved in

data entry for petitioner. Ms. Koskie was responsible for

reviewing petitioner’s financial statements and preparing its

final books and tax returns. Ms. Koskie also prepared tax

returns for JES, Mr. January and his wife, and their children, if

necessary.

2
During the relevant period Ms. January also used the last
names Reavis and Flowers.
 - 4 -

Approximately once a month Ms. January brought petitioner’s

records to Stone & Koskie’s office. Often information was

incomplete, and either Mr. Jansing or Ms. Koskie telephoned Ms.

January with questions or requested additional information, such

as copies of receipts for major purchases. If Ms. January could

not answer a question, Ms. Koskie would ask Mr. January.

In March 2002 in addition to performing her own duties, Ms.

Koskie assumed Mr. Jansing’s duties until a new employee could be

hired.3

II. Sale of the Rockwell and Purchase of a Cessna Airplane

A. Sale of the Rockwell

In 2000 petitioner acquired a one-third interest in a 1976

Rockwell airplane (Rockwell) subject to a loan. On March 31,

2002, petitioner signed over its interest in the Rockwell to the

remaining two owners, who assumed petitioner’s obligation on the

loan. When the sale occurred, petitioner’s general ledger showed

that petitioner’s share of the outstanding loan was $213,901.4

B. Enactment of the Job Creation Act

On March 9, 2002, the Job Creation and Worker Assistance Act

of 2002 (Job Creation Act), Pub. L. 107-147, 116 Stat. 21

(codified as amended in scattered sections of U.S.C.), was signed

3
Mr. Jansing was diagnosed with a terminal illness and could
no longer perform his duties.
4
Respondent subsequently determined the balance of
petitioner’s note payable was $227,054.
 - 5 -

into law. As part of the Job Creation Act, Congress enacted

section 168(k) to allow an additional first-year depreciation

deduction equal to 30 percent of the adjusted basis of qualified

property (bonus depreciation). Job Creation Act sec. 101(a), 116

Stat. 22. The Job Creation Act generally defined qualified

property as property that met all of the following requirements:

(1) The property was modified accelerated recovery system (MACRS)

property with an applicable recovery period of 20 years or less,

unless it was certain computer software, water utility property,

or qualified leasehold improvement property; (2) the original

use5 of the property commenced with the taxpayer after September

10, 2001; (3) the taxpayer acquired the property within a

specified period; and (4) the taxpayer placed the property in

service before specified dates. Id. The bonus depreciation

provision was effective for property placed in service after

5
The legislative history of the Job Creation and Worker
Assistance Act of 2002, Pub. L. 107-147, 116 Stat. 21, explains
that original use means the first use to which the property is
put. See S. Prt. 107-49, at 5 n.7 (2001), 2002-3 C.B. 180, 186;
H. Rept. 107-251, at 20 n.2 (2001), 2002-3 C.B. 44, 63. The
General Explanation of Tax Legislation Enacted in the 107th
Congress published on Jan. 24, 2003, states that sec. 1.48-2,
Income Tax Regs., applies for evaluating whether property
qualifies as original-use property. Staff of Joint Comm. on
Taxation, General Explanation of Tax Legislation Enacted in the
107th Congress (general explanation), at 218-219 n.208 (J. Comm.
Print 2003), 2002-3 C.B. 263, 275-276. The general explanation
contains an example involving the purchase of a used asset by a
taxpayer and states that no part of the purchase price qualifies
for bonus depreciation. Id.
 - 6 -

September 10, 2001, in taxable years ending after such date. Id.

sec. 101(b), 116 Stat. 25.

C. Purchase of the Cessna

On April 24, 2002, petitioner bought a used Cessna Citation

50 airplane (Cessna) from an unrelated party. Around the time of

the purchase, Mr. January obtained a two-page article titled “30%

Immediate Bonus Depreciation for New and Used Aircraft Approved

by House Ways and Means Committee” (article). The article was

subtitled “Anticipated Passage into Law within Two Weeks”. The

article was ostensibly written by a C.P.A. and was dated October

14, 2001.

The article stated that the House of Representatives

Committee on Ways and Means had passed H.R. 3090, 107th Cong.,

1st Sess. (2001) (bill), which would have allowed bonus

depreciation for the year in which the taxpayer placed qualified

property in service.6 The article noted that “Qualified property

[included] new and used aircraft acquired after September 10,

2001, and before September 11, 2003.”7 The first paragraph of

6
The article referred to H.R. 3090, 107th Cong., 1st Sess.
(2001) (bill) (enacted), introduced in the House of
Representatives and referred to the Committee on Ways and Means
on Oct. 11, 2001. 147 Cong. Rec. 19426 (2001). As of the date
of the article, the Committee on Ways and Means had not yet
reported the bill. H. Rept. 107-251, supra at 1, 2002-3 C.B. at
44 (reporting the bill on Oct. 17, 2001).
7
The bill as introduced defined qualified property as inter
alia, original use property only. See H.R. 3090, sec. 101(a) (as
(continued...)
 - 7 -

the article stated that “Although this is far from complete, this

is a very substantial first step toward this significant

legislation.” Mr. January read the article and understood that

the legislation was not complete and that the article described a

possible tax benefit consisting of an additional 30-percent

depreciation deduction for airplanes.

In 2002, around the time of the Cessna purchase, Mr. January

initiated a conversation with Ms. Koskie regarding bonus

depreciation for the Cessna. During the conversation Ms. Koskie

told Mr. January that her understanding was that bonus

depreciation could be claimed only with respect to new (original-

use) assets. Mr. January stated he had read an article about an

exception for used airplanes and subsequently sent it to Ms.

Koskie. Mr. January told Ms. Koskie that he would like to claim

bonus depreciation. Although they knew the Cessna was a used

airplane, Mr. January and Ms. Koskie decided to claim bonus

7
(...continued)
introduced in the House of Representatives, Oct. 11, 2001). The
original use requirement remained in all versions of the bill
that provided for bonus depreciation. See H.R. 3090, sec. 101(a)
(as concurred in by the Senate, Mar. 8, 2002); H.R. 3090, sec.
101(a), 148 Cong. Rec. 2715, 2736 (2002) (as agreed and passed by
the House of Representatives, Mar. 7, 2002); H.R. 3090, sec.
201(a) (as reported by the S. Comm. on Fin., Nov. 9, 2001); H.R.
3090, sec. 101(a), 147 Cong. Rec. 20479, 20526 (2001) (as passed
by the House of Representatives, Oct. 24, 2001); H.R. 3090, sec.
101(a), H. Rept. 107-251, supra at 4, 2002-3 C.B. at 47 (as
reported by H.R. Comm. on Ways and Means, Oct. 17, 2001); H.R.
3090, sec. 101(a) (as introduced in the House of Representatives,
Oct. 11, 2001).
 - 8 -

depreciation on petitioner’s financial statements. Neither Mr.

January nor any other employee of petitioner had further

conversations with Ms. Koskie regarding the article.

III. Preparation of Petitioner’s 2002 Financial Statements and
Return

Stone & Koskie received petitioner’s records for April 2002,

the month when petitioner purchased the Cessna, but because of

the busy tax season, Ms. Koskie did not prepare petitioner’s

financial statements until approximately a month later. On

October 21, 2002, Stone & Koskie prepared a set of adjusting

journal entries for April 2002. An adjusting entry recorded the

monthly depreciation of $117,195, which included fractional bonus

depreciation for the Cessna.

On February 20, 2003, Stone & Koskie prepared a final

internal depreciation schedule that Ms. Koskie used to prepare

petitioner’s 2002 Form 1120, U.S. Corporation Income Tax Return

(2002 return). The final depreciation schedule reflected bonus

depreciation claimed for the Cessna and other assets.8 On May

16, 2003, Ms. Koskie prepared 2002 yearend adjustments but did

not correct the erroneously claimed bonus depreciation.9

8
Besides the Cessna, in 2002 petitioner purchased other used
and new (original-use) assets.
9
If any depreciation deductions were erroneously claimed
during the year, Ms. Koskie would normally correct the error
through yearend adjustments to petitioner’s depreciation account
“Accumulated Depreciation”.
 - 9 -

Ms. Koskie subsequently prepared petitioner’s 2002 return

on the basis of the financial statements. Petitioner’s 2002

return claimed a depreciation deduction of $586,803 including

bonus depreciation of $298,413, of which $225,000 related to the

Cessna. Petitioner also reported on Form 4797, Sales of Business

Property, gain of $79,671 on the sale of petitioner’s interest in

the Rockwell, computed by subtracting from the amount realized of

$213,901 an adjusted basis of $134,230. When she prepared the

adjusting entries, final depreciation schedule, and 2002 return,

Ms. Koskie did not research whether the Cessna qualified for

bonus depreciation.

During the return preparation process, Stone & Koskie’s

return preparation computer software program generated a

diagnostics report notifying Ms. Koskie that the program had

computed additional depreciation on assets. The diagnostics

report stated that the program defaulted to the bonus

depreciation deduction for assets with an MACRS method of 20

years or less that were placed in service after September 10,

2001. The diagnostics report further read: “Caution: This

deduction is only available when the original use of the property

commences with the taxpayer.” Ms. Koskie read the report but did

not check whether the bonus depreciation claimed for the Cessna

and other used assets purchased in 2002 was proper. Ms. Koskie

did not give the diagnostics report to petitioner or notify
 - 10 -

petitioner whether the Cessna and other used assets purchased in

2002 qualified for bonus depreciation claimed on its 2002 return.

On June 13, 2003, Stone & Koskie sent petitioner its 2002

return with attachments for signature. The cover letter advised

petitioner to carefully review the return, and Ms. Koskie offered

to answer any questions. Neither Mr. January nor any other

employee of petitioner asked questions about the 2002 return.

Mr. January, on behalf of petitioner, signed the return without

inquiring whether the Cessna and other used assets purchased in

2002 qualified for bonus depreciation. On July 19, 2003,

petitioner timely filed its 2002 return.

IV. Audit and Respondent’s Adjustments

In January 2005 respondent commenced an examination of

petitioner’s 2002 return. Examining Officer Amy Dunford was

originally assigned to the examination, but in March 2005

Examining Officer Karen Robinson (Ms. Robinson) was assigned to

petitioner’s case. Ms. Koskie served as petitioner’s

representative during the examination.

During the examination respondent made several adjustments.

First, respondent decreased petitioner’s claimed depreciation

deduction by $252,075,10 computed as follows:

10
The parties stipulated the total depreciation-related
adjustments of $252,075. However, as indicated by the table, the
depreciation-related adjustments totaled $251,270. Respondent
used the $252,075 amount in the notice of deficiency and,
(continued...)
 - 11 -

Bonus Bonus Other Other
deprec. deprec. deprec. deprec.
per as per as Total
Asset return adjust. return adjust. adjust.

1 Trailer $8,512 $8,512 $3,973 $1,986 $1,987
2 Lawnmower 750 750 350 175 175
3 Golf cart 1,650 -0- 770 550 1,870
4 Trailer 180 -0- 84 60 204
5 Computer 387 -0- 181 129 439
6 Trailer 996 -0- 464 332 1,128
7 Computer 667 -0- 312 222 757
8 Vac. trailer 9,051 9,051 4,223 2,112 2,111
9 Vac. trailer 7,628 7,628 3,559 1,780 1,779
10 Tank 7,110 7,110 3,318 1,659 1,659
11 Copy machine 1,609 1,609 751 376 375
12 Icemaker 233 233 109 55 54
13 Electric
motor 240 240 112 56 56
14 Computer 410 356 191 83 162
15 1999 Ford 4,920 -0- 2,296 1,640 5,576
16 1999 Ford 4,920 -0- 2,296 1,640 5,576
17 Cessna 225,000 -0- 52,500 75,000 202,500
18 Ford F150 -0- -0- 1,145 572 573
19 Freightliner 13,800 -0- 10,733 15,332 9,201
20 1999 truck 10,350 -0- 8,050 11,499 6,901
21 Time-share
condominium -0- -0- 1,007 -0- 1,007
22 Sunnyvale
building -0- -0- 9,397 2,217 7,180
Total 251,270

Respondent adjusted depreciation on items 1 and 2, 8 through 14,

and 18 by changing the depreciation method from the MACRS double

declining balance (DDB) to the MACRS straight-line (SL) method.

Respondent adjusted depreciation on items 3 through 7 and 15

through 17 by changing the depreciation method from the MACRS DDB

to the MACRS SL method and disallowing bonus depreciation.

10
(...continued)
accordingly, for the penalty calculation.
 - 12 -

Respondent adjusted depreciation on items 19 and 20 by computing

depreciation using the MACRS DDB method and disallowing bonus

depreciation. Respondent disallowed bonus depreciation because

the assets were used when placed in service by petitioner.

Respondent disallowed a depreciation deduction for the time-share

condominium (item 21) because the property was nonbusiness

property. Respondent adjusted depreciation claimed for the

Sunnyvale building (item 22) by changing the class life of the

building from MACRS 31-1/2-year property to MACRS 39-year

property. In addition to the depreciation-related adjustments,

respondent determined that petitioner realized $227,054 on the

disposition of the Rockwell, resulting in a $13,153 adjustment to

Form 4797 gain reported on the 2002 return.

The adjustments discussed above resulted in an income tax

deficiency of $90,177, which petitioner agreed to and paid.

However, petitioner did not agree that it was liable for an

accuracy-related penalty under section 6662(a). On May 5, 2006,

respondent issued petitioner a notice of deficiency for 2002

determining a section 6662(a) accuracy-related penalty of $18,035

with respect to the entire deficiency.
 - 13 -

OPINION

Respondent contends that petitioner is liable for the

accuracy-related penalty11 under section 6662(a) on alternative

grounds: (1) The underpayment of tax was attributable to

negligence or disregard of rules or regulations under section

6662(b)(1), or (2) there was a substantial understatement of

income tax under section 6662(b)(2).12

11
In the notice of deficiency respondent calculated the
$18,035 accuracy-related penalty on the basis of the $90,177
underpayment of tax, which in turn was calculated on the basis of
the $265,228 total adjustment to income. This adjustment derives
from the $252,075 decrease to the claimed depreciation deduction,
see supra note 10, and the $13,153 increase in income related to
the underreported Form 4797 gain. The decrease to the claimed
depreciation resulted from three types of adjustments: (1) The
disallowance of bonus depreciation claimed with respect to the
Cessna and other used assets; (2) the change of the depreciation
method from the MACRS DDB to the MACRS SL method, computing
depreciation on the basis of the MACRS DDB method, and change to
the class life of a building; and (3) disallowance of a
depreciation deduction on the time-share condominium. During
trial and on briefs the parties focused on the penalty portion
attributable to the bonus depreciation deduction for the Cessna.
However, because petitioner contests the entire penalty and
respondent calculated the penalty on the basis of all
adjustments, we address the issue of whether petitioner is liable
for the sec. 6662(a) penalty as it pertains to each of the
different types of adjustments.
12
In schedule 3 attached to the notice of deficiency
respondent determined that petitioner was liable for an accuracy-
related penalty because of a substantial understatement of income
tax. On brief, however, respondent argues that petitioner is
alternatively liable for the accuracy-related penalty under sec.
6662(b)(1) because of negligence. Because petitioner addressed
the issue in its reply brief, we find no surprise or prejudice to
petitioner. See Bissonnette v. Commissioner, 127 T.C. 124, 137
(2006). Accordingly, we address both grounds for the accuracy-
related penalty.
 - 14 -

Section 6662(a) and (b)(1) authorizes the Commissioner to

impose a 20-percent penalty on the portion of an underpayment of

income tax attributable to negligence or disregard of rules or

regulations. The term “negligence” includes any failure to make

a reasonable attempt to comply with the provisions of the

internal revenue laws, and the term “disregard” includes any

careless, reckless, or intentional disregard. Sec. 6662(c); sec.

1.6662-3(b)(1) and (2), Income Tax Regs. Disregard of rules or

regulations is careless if “the taxpayer does not exercise

reasonable diligence to determine the correctness of a return

position” and is reckless if “the taxpayer makes little or no

effort to determine whether a rule or regulation exists, under

circumstances which demonstrate a substantial deviation from the

standard of conduct that a reasonable person would observe.”

Sec. 1.6662-3(b)(2), Income Tax Regs.; see also Neely v.

Commissioner, 85 T.C. 934, 947 (1985) (stating that negligence is

lack of due care or failure to do what a reasonable person would

do under the circumstances).

Section 6662(a) and (b)(2) also authorizes the Commissioenr

to impose a 20-percent penalty if there is a substantial

understatement of income tax. An understatement is substantial

in the case of a corporation when it exceeds the greater of 10

percent of the tax required to be shown on the return, or

$10,000. Sec. 6662(d)(1).
 - 15 -

Respondent bears the burden of production with respect to

petitioner’s liability for the section 6662(a) penalty and must

produce sufficient evidence indicating that it is appropriate to

impose the penalty. See sec. 7491(c). Once respondent meets his

burden of production, petitioner must come forward with

persuasive evidence that respondent’s determination is incorrect

or that petitioner had reasonable cause or substantial authority

for its position. See Higbee v. Commissioner, 116 T.C. 438, 447

(2001).

Respondent has met his burden of production. Respondent

established that the amount of understatement exceeds the greater

of 10 percent of the tax required to be shown on the return or

$10,000 and that petitioner claimed bonus depreciation deductions

to which petitioner concedes it was not entitled. See sec.

168(k). Because respondent has met his burden of production,

petitioner must produce sufficient evidence to prove that

respondent’s determination is incorrect. See Higbee v.

Commissioner, supra at 446-447. Petitioner concedes as much but

argues that the reasonable cause exception under section

6664(c)(1) applies.

Section 6664(c)(1) provides an exception to the section

6662(a) accuracy-related penalty with respect to any portion of

an underpayment if the taxpayer shows that there was reasonable

cause for such portion and that the taxpayer acted in good faith
 - 16 -

with respect to such portion. The determination of reasonable

cause and good faith is made on a case-by-case basis, taking into

account all pertinent facts and circumstances. Sec. 1.6664-

4(b)(1), Income Tax Regs. The most important factor is the

extent of the taxpayer’s effort to assess the proper tax

liability. Id. In order for the reasonable cause exception to

apply, the taxpayer must prove that it exercised ordinary

business care and prudence as to the disputed item. See

Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 98

(2000), affd. 299 F.3d 221 (3d Cir. 2002). Petitioner bears the

burden of proving that it meets the requirements for relief under

the section 6664(c)(1) reasonable cause exception. See Higbee v.

Commissioner, supra at 446-447.

Reliance upon the advice of a tax professional may establish

reasonable cause and good faith for the purpose of avoiding

liability for the section 6662(a) penalty. See United States v.

Boyle, 469 U.S. 241, 250 (1985). Reliance on a tax professional

is not an “absolute defense”, but merely “a factor to be

considered.” Freytag v. Commissioner, 89 T.C. 849, 888 (1987),

affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S. 868 (1991).

Whether reasonable cause exists when a taxpayer has relied on a

tax professional to prepare a return must be determined on the

basis of all of the facts and circumstances. See Neonatology

Associates, P.A. v. Commissioner, supra at 98. The taxpayer
 - 17 -

claiming reliance on a tax professional must prove by a

preponderance of evidence each prong of the following test: “(1)

The adviser was a competent professional who had sufficient

expertise to justify reliance, (2) the taxpayer provided

necessary and accurate information to the adviser, and (3) the

taxpayer actually relied in good faith on the adviser’s

judgment.” Id. at 99. Reliance on a return preparer is not

reasonable where even a cursory review of the return would reveal

inaccurate entries. See Pratt v. Commissioner, T.C. Memo. 2002-

279.

For purposes of this opinion, we accept that Ms. Koskie was

a competent tax professional and that she had sufficient

expertise to justify petitioner’s general reliance on her. We do

not accept, however, that petitioner reasonably relied in good

faith on Ms. Koskie’s judgment regarding whether to claim bonus

depreciation on used assets. Our analysis is set forth below.

A. Bonus Depreciation Claimed With Respect to Used Assets

When Mr. January signed petitioner’s 2002 return and

petitioner filed it, section 168(k) unambiguously limited bonus

depreciation to original-use assets. See sec. 168(k)(2)(A)(ii).

The Job Creation Act authorizing bonus depreciation was signed

into law on March 9, 2002, more than 1 year before petitioner

filed its 2002 return. The article which Mr. January brought to

Ms. Koskie’s attention was dated October 14, 2001, and clearly
 - 18 -

stated that the bill was not final. At trial Mr. January could

not recall whether at the time of the conversation with Ms.

Koskie he understood that the article described a pending bill.

Because the article, which was his only source of information on

bonus depreciation, referred to pending legislation, we find that

Mr. January knew that the article referred to a pending bill

rather than final legislation. This finding is supported by Ms.

Koskie’s testimony that Mr. January told her that airplanes “were

going to be exempt”.

Mr. January and Ms. Koskie testified in detail at trial

about their conversation. Mr. January could not recall whether

Ms. Koskie ever told him that only original-use assets qualified

for bonus depreciation although on cross-examination he recalled

her comment that bonus depreciation was limited to first-time use

of assets. Mr. January also testified that his understanding at

the time was that the asset had to be new to the owner. Mr.

January remembered discussing with Ms. Koskie whether a used

airplane could be considered new if petitioner added a new engine

to it. Ms. Koskie credibly testified that she told Mr. January

bonus depreciation was for new (original-use) assets only. She

also testified that Mr. January replied “there was going to be an

exception” for used airplanes, on the basis of the article he had

read. We find (1) that Ms. Koskie warned Mr. January regarding

her understanding that bonus depreciation applied only to new
 - 19 -

(original-use) assets, and (2) that Mr. January was put on notice

by the article that legislation regarding bonus depreciation was

in a state of flux.

Despite the warnings he received, Mr. January gave Ms.

Koskie the 2001 article written before the legislation was

enacted with the expectation that she would rely on it to claim

on petitioner’s financial statements bonus depreciation for used

assets acquired during 2002. At trial Mr. January denied ever

directing Ms. Koskie to claim bonus depreciation on petitioner’s

financial statements although he acknowledged stating to Ms.

Koskie that he would like to claim bonus depreciation. Ms.

Koskie credibly testified that Mr. January and she decided to

claim bonus depreciation on petitioner’s books. Ms. Koskie used

the article as the basis for recording bonus depreciation on the

used assets in petitioner’s financial statements,13 and she

prepared the return on the basis of petitioner’s financial

statements. Both the financial statement entries and the

preparation of petitioner’s 2002 return occurred after the Job

Creation Act was signed into law.

13
Ms. Koskie relied on the article without further research.
On Oct. 21, 2002, Ms. Koskie prepared adjusting journal entries
for April 2002 recording the monthly depreciation, which included
bonus depreciation for the Cessna. On Feb. 20, 2003, Stone &
Koskie prepared a final depreciation schedule that again claimed
bonus depreciation.
 - 20 -

On June 13, 2003, Stone & Koskie sent petitioner its 2002

return with attachments. Although Mr. January as petitioner’s

president had a duty adequately to examine petitioner’s return,

Mr. January failed to do so. A cursory review of the 2002

Federal Depreciation Schedule attached to the 2002 return would

have revealed bonus depreciation claimed for the Cessna. Bonus

depreciation claimed for the Cessna was a large item on

petitioner’s depreciation schedule. On the 2002 return

petitioner claimed a depreciation deduction of $586,803 of which

almost 40 percent ($225,000) related to bonus depreciation for

the Cessna. A prudent person under the circumstances would have

inquired before filing the return whether the bill containing the

bonus depreciation provision had been enacted. Given Ms.

Koskie’s initial hesitation on the basis of her understanding

that bonus depreciation was only available for new (original-use)

assets, a prudent person also would have followed up with Ms.

Koskie or another source regarding whether bonus depreciation

could be claimed on used assets before filing a return that

claimed a substantial bonus depreciation deduction on used

assets.

Mr. January, however, turned a blind eye to the issue and

did not act as a prudent person would have acted. Despite his

knowledge of the uncertainty of petitioner’s bonus depreciation

position, Mr. January failed to ask Ms. Koskie what she had done
 - 21 -

about bonus depreciation on the 2002 return. Petitioner’s claim

that it relied in good faith on its accountant is undermined when

petitioner’s president knew before the return was filed that the

article on which he and the accountant were relying referred to a

pending bill.

Evidence in the record supports an inference that petitioner

and Ms. Koskie may have agreed to play the audit lottery on this

point. The inference is bolstered by Ms. Robinson’s notes in

Form 9984, Examining Officer’s Activity Record (activity record),

a stipulated exhibit.14 An entry dated April 28, 2005, describes

Ms. Robinson’s telephone conversation with Ms. Koskie about the

bonus depreciation positions on petitioner’s 2002 return:

[I] explained the article was written in late 2001.
The law was enacted in April of 2002. Therefore, many
changes to the bill could have occurred subsequent to
the article. I asked if they checked out any changes
or what the final position was. * * * [Ms. Koskie]
stated that Mr. January was aware of the article. They
discussed the reliance on it. They knew it was an
aggressive position and opted to use it anyway.

At trial Ms. Robinson credibly testified that she wrote down

Ms. Koskie’s specific words because she found it unusual

14
The activity record was introduced into evidence by the
parties as stipulated Exhibit 15-J. The parties filed the
stipulation of facts subject to the “right to object to the
admission of any such facts and exhibits in evidence on the
grounds of materiality and relevancy”. Petitioner did not
reserve any objections to the activity record under Rule 91(d).
Petitioner also raised no objections at the commencement of the
trial when the Court admitted all exhibits, including the
activity record, into evidence.
 - 22 -

that Ms. Koskie did not answer the question whether they had

researched “the final position”. She also testified that

she understood the word “they” referred to Ms. Koskie and

Mr. January. Although petitioner asserts on brief that Ms.

Robinson’s statements are “prefabrications” because neither

Ms. Koskie nor Mr. January recalled at trial the

conversations described by Ms. Robinson, we have no reason

to doubt the credibility of Ms. Robinson’s contemporaneous

entry in her activity record.

The preponderance of the evidence on the issue of the

penalty as it pertains to bonus depreciation favors

respondent’s position that petitioner did not reasonably

rely on its return preparer or act in good faith by doing

so.15 We conclude that petitioner did not reasonably rely

on the return preparer in good faith and therefore sustain

the section 6662(a) penalty attributable to bonus

depreciation erroneously claimed on used assets.16

15
Even if we were to assume the evidence on this issue is
absolutely equal, the burden of proof is on petitioner, see
Higbee v. Commissioner, 116 T.C. 438, 447 (2001), and we would
have to conclude that petitioner has not met its burden of proof.
16
Although most of the discussion focuses on the bonus
depreciation claimed for the Cessna, bonus depreciation was also
erroneously claimed for other used assets. As to the other used
assets, petitioner did not introduce any evidence to show the
basis for the bonus depreciation deduction or offer any argument
why our conclusion regarding the applicability of the sec. 6662
(continued...)
 - 23 -

B. Gain From the Rockwell Sale

We reach a different conclusion, however, with respect

to the portion of the underpayment resulting from the

underreporting of petitioner’s Form 4797 gain. Ms. Koskie

testified that respondent’s adjustment of the amount of gain

resulted from the fact that the balance of the note payable

recorded in petitioner’s general ledger which she used to

calculate the amount of the gain on the return was incorrect

as it did not properly account for interest. Although

petitioner handled a small amount of bookkeeping, the record

indicates Stone & Koskie was responsible for the general

ledger. Ms. Koskie testified that “[petitioner] would

provide * * * [any information] that I asked for”. She

further testified that “There were a lot of notes payable

that we had to keep up with, so we had to make sure that we

had all the statements from the bank, saying how much

interest and principal there was on each note”. We are

satisfied that petitioner provided all necessary and

accurate information to Stone & Koskie and that petitioner

relied in good faith on Ms. Koskie’s expertise with respect

to proper reporting of the Form 4797 gain from the Rockwell

16
(...continued)
penalty should differ depending on the identity of the used
asset.
 - 24 -

sale.17 Accordingly, we conclude that petitioner has

established that it had reasonable cause and that it acted in

good faith with respect to the calculation of the Form

4797 gain, and we hold that petitioner is not liable for the

section 6662(a) penalty with respect to this portion of the

underpayment.

C. Other Depreciation-Related Adjustments

We also conclude that petitioner had reasonable cause

and acted in good faith with respect to other depreciation-

related adjustments such as changing the depreciation method

from the MACRS DDB to the MACRS SL method, computing

depreciation using the MACRS DDB method, and changing the

class life of an asset. The errors were not the result of

any negligence on petitioner’s part and would not have been

readily apparent to petitioner even if petitioner had

carefully examined the return. We conclude that petitioner

provided necessary and accurate information to Ms. Koskie

and actually relied in good faith on her expertise with

respect to these items.

17
The mistake regarding the calculation of the Form 4797
gain that resulted from an error in the general ledger would not
be apparent to petitioner even if petitioner had reviewed the
general ledger and the return.
 - 25 -

D. Adjustment Related to the Time-Share Condominium

Respondent disallowed a depreciation deduction on a

time-share condominium (item 21) because it did not

constitute business property. Petitioner presented no

evidence that it supplied to Stone & Koskie all information

relevant for establishing whether a depreciation deduction

with respect to the time-share condominium was appropriate,

including the business use of the asset. We do not need to

address whether petitioner relied in good faith on Ms.

Koskie’s proper treatment of the item on the 2002 return, as

we conclude petitioner failed to show that it provided all

necessary and accurate information regarding the asset.

Accordingly, we sustain respondent’s determination to impose

a section 6662(a) penalty as it pertains to the adjustment

with respect to this item.

To reflect the foregoing,

Decision will be entered

under Rule 155.