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We must therefore determine whether it was appropriate to
impose the “substantial understatement” penalty for 1991 and the
“negligence” penalty for 1992.
a. Accuracy-Related Penalty for 1991 With Respect to
$32,755 of Income Reported by Corporation for Period
Prior to Formation
The testimony of the witnesses at trial and the parties’
briefs focused on the portion of the 1991 accuracy-related
penalty relating to income erroneously reported by Tesco.
Respondent and petitioner agree that petitioner failed to include
on Schedule C of his 1991 tax return $32,755 of income
attributable to the Tesco business for the period August 1
through November 14, 1991. Petitioner contends, however, that
this income was erroneously included on Tesco’s corporate return
due to an error of fact or law by his accountant. Respondent, in
the notice of deficiency, admitted that the income was
erroneously allocated to Tesco rather than entirely omitted:
It is determined that Schedule C net income of
$32,755.00 for the period of August 1, 1991 through
November 14, 1991 was improperly omitted from the
return. You reported the net income from this period
on the corporate return of Tesco Driveaway Co., Inc.
However, Tesco Driveaway Co., Inc. was not
incorporated until November 15, 1991 and therefore
did not exist until that date. Per your books the
net income for the period of August 1, 1991 through
November 14, 1991 is $32,755.00. Therefore, your
taxable income is increased $32,755.00 for 1991.
Respondent argues that petitioner knew or should have known
that the State of Missouri had rejected Tesco’s incorporation
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