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Douglas, a certified public accountant, prepared
petitioners' 1982 Federal income tax return. He was licensed in
California and, since 1977, a partner in the firm of Jassoy,
Graff & Douglas. Henry was introduced to Douglas by Hendrickson,
who informed him that Douglas was an "excellent, very careful
accountant". Between 1968 and 1974, Douglas worked in the tax
department of Price Waterhouse. While at Price Waterhouse,
Douglas was an instructor in its national tax course. Between
1974 and 1977, Douglas practiced with George Peterson & Co.
As petitioners' accountant, Douglas prepared their 1977
through 1982 joint Federal income tax returns. Petitioners'
1978, 1979, and 1980 returns were audited by respondent. Douglas
represented petitioners in these audits, which resulted in minor
adjustments to petitioners' returns. Generally, Henry was
satisfied with the manner in which Douglas handled the audits.
Henry informed Douglas that IMED had been sold, and that it
was Henry's understanding that Monaghan, as IMED's counsel, had
structured the stock options as long-term capital gain. Henry
also advised Douglas that if there were any questions regarding
the handling of the options to contact Monaghan or Hendrickson.
Douglas agreed with his partner, Robert W. Jassoy Jr., that
the option proceeds should be classified as long-term capital
gain on the income tax returns he prepared for petitioners. In
reaching this decision, Douglas considered as a factor that there
were no Forms W-2 or 1099, nor any other form, issued by either
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