Academic journal article Journal of Accountancy
Magazine Article Not a Penalty Defense
The Tax Court upheld penalties against a corporation that ignored its CPA's advice against claiming bonus depreciation on a used airplane. The corporation instead had relied on a magazine article anticipating a possible law change that would have permitted the deduction. Congress, however, failed to pass the provision.
On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 was enacted, allowing an additional 30% depreciation deduction (bonus depreciation) on the purchase of certain qualified property. Requirements for qualified property under IRC [section] 168 included that "the original use of the property commenced with the taxpayer" after Sept. 10, 2001.
On April 24, 2002, January Transport Inc. (JTI) purchased a used Cessna Citation to use in its trucking company Later that year, JTI's president told its accountant he wanted to claim a deduction for bonus depreciation for 2002 on the purchase of the aircraft. The accountant said she believed bonus depreciation could be claimed only with respect to new (original-use) property The president, however, presented her with a two-page article written by a CPA, titled "30% Immediate Bonus Depreciation for New and Used Aircraft Approved by House Ways and Means Committee." The article was subtitled "Anticipated Passage into Law Within Two Weeks" and was dated Oct. 14, 2001.
Despite her earlier expressed doubts, however, the accountant agreed to incorporate the bonus depreciation deduction into JTI's financial statements and ultimately into its tax return for 2002. The law, however, was never adopted for used aircraft, and upon an audit by the IRS, the corporation conceded that it was not entitled to the deduction. The Service adjusted JTI's tax liability and assessed a 20% accuracy-related understatement penalty in spite of JTI'S reliance on the article to justify its tax position.
Section 6662 authorizes the penalty on underpayments attributable to negligence or to the disregard of rules and regulations. Under Treas. Reg. [section] 1.6662-3(b)(1) and (2), the term "negligence" generally includes any failure to make a reasonable attempt to comply with the tax laws, and the term "disregard" includes any careless, reckless or intentional disregard of the law. …