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earnings tax for TYE 8/31/89, TYE 8/31/90, and TYE 8/31/91 in the
amounts of $26,105, $159,153, and $93,515, respectively (see
Appendix Table 2).
Issue 3: Additions to Tax and Penalties
Background
During the taxable years at issue petitioner retained Modern
Bookkeeping, Inc. (Modern), to provide bookkeeping services and
to prepare petitioner’s tax returns. In late 1987 Modern had
hired Certified Public Accountant David Shindel (Shindel) to
oversee tax compliance with respect to five of Modern’s clients.
Shindel supervised the preparation of work papers and tax returns
and signed the returns when satisfied that they reasonably
complied with the tax laws. The scope of Shindel’s engagement
was extended to petitioner by 1989. In the course of his review,
he soon became concerned that petitioner’s sizeable retained
earnings might subject it to liability for the accumulated
earnings tax. He attempted to determine whether the
accumulations were reasonable. At some time in 1989 he brought
this problem to Mohney’s attention, because he knew Mohney was
actively involved in petitioner’s management.
Shindel prepared and signed petitioner’s Forms 1120 for each
of the taxable years at issue. The Forms 1120 for TYE 8/31/89,
TYE 8/31/90, and TYE 8/31/91 were filed on November 14, 1990,
December 11, 1991, and June 3, 1992, respectively. In her notice
of deficiency, respondent determined that petitioner was liable
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