Randall v. United States

89-2 USTC ¶9498] Randall S. Goulding, Plaintiff v. United States of America, Defendant

U.S. District Court, No. Dist. Ill., East. Div., 83 C 5692, 8/8/89


FINDINGS OF FACT AND CONCLUSIONS OF LAW


CONLON, District Judge:


After hearing the testimony of the witnesses, reviewing the exhibits and stipulation of facts offered by both parties, and considering the arguments of counsel, the court enters the following findings of fact and conclusions of law, in compliance with Rule 52(a) of the Federal Rules of Civil Procedure.


FINDINGS OF FACT


1. Plaintiff Randall S. Goulding ("Goulding") filed this action against the United States ("the government") to recover penalties imposed on him by the Internal Revenue Service ("IRS") for violations of 26 U.S.C. §6694(a) .


2. The government contends that Goulding negligently prepared a substantial portion of the tax returns filed by the limited partners of three research and development partnerships: Mercon, Ltd. ("Mercon"), LaSala, Ltd. ("LaSala") and Jonquil, Ltd. ("Jonquil") (collectively, "the partnerships").


3. Following an earlier Trial in these bifurcated proceedings, this court found that Goulding was the paid preparer of the limited partners' returns. The court hereby incorporates the prior trial record and its findings of fact. Goulding v. United States [89-1 USTC ¶9309 ], 63 AFTR 2d 89-1292 (N.D. Ill. 1989).


4. The second trial addresses the question whether Goulding negligently violated IRS rules and regulations by causing the limited partners to claim excessive deductions on their federal income tax returns for the years 1979 through 1981. The deductions claimed by the limited partners are the result of losses generated by the partnerships.


5. The partnerships were formed in 1979. Goulding participated in their formation in his capacity as general counsel to each partnership.


6. Goulding caused the partnerships to enter into acquisition agreements, exclusive license agreements, and research and development agreements. Id. at ¶17. Goulding negotiated and drafted these agreements. 1


7. The acquisition agreements enabled the partnerships to acquire newly developed technologies from various inventors. Goulding Ex. 33.


8. Goulding claims he relied on independent appraisal letters to determine the purchase price of each technology. Goulding Ex. 14-26. None of these appraisal letters provided an opinion of the fair market value of any of the technologies acquired by the partnerships. Id. They contained nothing more than a brief description of each technology and an unsubstantiated assessment of its potential market value. Id.


9. The aggregate price of the technologies, all acquired by the partnerships on the same day, exceeded $21,000,000. Stipulation ¶28-30. Of this amount, Mercon entered into agreements priced at $7,000,000, LaSala entered into agreements priced at $8,800,000 and Jonquil entered into agreements priced at $5,302,000. Patent searches were not conducted on any of the technologies. Id. Trial II Tr. at 133-34.


10. The partnerships' out-of-pocket costs actually fell far short of the amounts reflected in the acquisition agreements. This is because payment of the total contract price of each technology was contingent upon warranty agreements executed by each of the inventors. These warranty agreements provided for sales revenues in 1982 to reach multimillion dollar levels. Goulding Ex. 33, 38. If the inventors' projected sales levels did not materialize, the acquisition agreements relieved the partnerships of making any payments beyond the $2500 paid to each inventor from 1979 through 1981. Id.


11. The limited partners agreed to honor the partnerships' contingent liability by signing assumption agreements. Stipulation ¶18. However, the limited partners' assumption agreements also hinged on realization of the inventors' sales warranties:


[I]n the event that sales as defined in each of the [Acquisition] Agreements, do not reach the levels as warranted by the Assignor . . . then and in such event, the Primary Obligor (the limited partner) shall be relieved of all further liability hereunder and this Agreement shall be null and void and without further force or effect.


Goulding Ex. 12.


12. The partnerships entered into research and development agreements and exclusive license agreements with the National Patent Development Corporation ("National Patent"). Goulding Ex. 34-37, 39.


13. The research and development agreements provided for National Patent to use its best efforts to render each technology commercially viable. Goulding Ex. 36 ¶1. Under the terms of these agreements, National Patent's services terminated on June 30, 1981. Id.


14. The license agreements provided for National Patent to make annual royalty payments to the partnerships in the amount of 30 percent of a declining balance of applicable net sales revenue. Goulding Ex. 37 ¶6. The license agreements defined "applicable net sales revenue" as revenue realized from the sale of patented technologies, or technologies that had patents pending. 2 Id.


15. There is no reliable evidence that any of the technologies purchased by Goulding were patented or had patents pending.


16. After Goulding negotiated and drafted the partnerships' acquisition, research and development, and license agreements, he assumed responsibility for preparing the partnerships' tax returns. Goulding Ex. 1-9.


17. From 1979 through 1981, the partnerships reported aggregate losses of $13,357,134. Id. Goulding computed these losses and allocated them among the limited partners. Id. During this period, the limited partners made the following capital contributions:


Limited Partner Contributions

Partnership 1979 1980 1981

Mercon ............................... $ 400,000 $ 352,000 $ 348,000
LaSala ............................... 500,000 437,500 437,500
Jonquil .............................. 300,000 262,500 262,000
---------- ---------- ----------
Total ................................ $1,200,000 $1,052,000 $1,047,500


Stipulation ¶¶25-27.


The ratio of total partnership losses to the limited partners' invested capital from 1979 to 1981 is approximately 4 to 1. This is the amount of tax write-off earlier promised to the limited partners in the partnership offering memorandum. Goulding Ex. 11 at 44, "Projection of Profit, Loss and Cash Flow Table."


18. The losses computed by Goulding are attributable primarily to four types of expenses deducted on the partnerships' tax returns: amortization expense, accounting fees, legal fees and management fees. Goulding Ex. 1-9. The testimony of the witnesses focused almost exclusively on the propriety of these deductions.


19. Goulding, who is an attorney, a certified public accountant and a former Internal Revenue Service Agent, acknowledged his familiarity with the rules and regulations of the Internal Revenue Code, including Section 6694(a) . Trial II Tr. at 40, 45. Goulding testified that he computed the partnership deductions by relying on the acquisition agreements, research and development agreements, license agreements, partnership offering memorandum, appraisal letters and other unspecified sources. During his testimony at this trial, Goulding first disclaimed any role in preparing these documents. Id. at 380. The court does not find Goulding's testimony on this issue credible. On cross-examination, the government impeached Goulding with excerpts of his deposition testimony and his testimony at the earlier trial in this case. Id. at 382-84; Trial I Tr. at 93; Goulding Dep. at 86. In the face of his prior contradictory statements, Goulding then admitted that he negotiated, drafted and reviewed the various agreements entered into by the partnerships. Trial II Tr. at 382-84. After equivocating, Goulding also admitted preparing the tax section of the partnerships' offering memoranda. Id. at 384.


20. Norton Gold testified that his law firm, Hirschtritt, Hirschtritt & Gold, prepared the partnerships' offering memoranda. Although Gold was called as a witness by Goulding, he stated that Goulding prepared the initial drafts of the memoranda, Goulding assisted in the preparation of the memoranda's tax section and Goulding reviewed all final drafts. Gold also stated that the memoranda provided an opinion only as to the legal status of the partnerships, but not as to any tax matters. Gold's testimony is corroborated by the offering memoranda. Goulding Ex. 10.


21. Morris Ziegler was called as a witness by the government. Ziegler is a certified public accountant and a partner in the accounting firm of Morris D. Ziegler & Company. His firm billed the partnerships for accounting services in excess of $300,000. Ziegler testified that his firm provided no accounting services to the partnerships. He acknowledged that the services provided by his firm, which included preparation of partnership agreements and solicitation of investors, were nondeductible syndication expenses. On cross-examination, Ziegler conceded that his firm sent invoices to Goulding requesting payment for accounting services. Trial II Tr. at 321-22. But on redirect, he reiterated that his firm in fact provided the partnerships with no accounting services. Id. at 322-23.


22. Goulding called Ray E. Snyder as a rebuttal witness specifically to show the care Goulding exercised in evaluating the partnership technologies. Snyder testified that Goulding provided him with a sampling of the appraisal letters. He opined that these appraisal letters provided Goulding with a reasonable basis to place a value on the technologies. But on cross-examination, Snyder conceded that he made no independent inquiry into the assumptions and conclusions set forth in these letters, including the projected sales revenues. Id. at 349-52. Snyder also stated that he had no idea how the inventors and appraisers reached their conclusions. Id. at 350. Finally, Snyder conceded that he did not know if the appraisal letters represented the fair market value of the technologies. Id. at 347-48, 354.


23. Each side produced expert testimony. Both experts testified about the standard of care applicable to Goulding and, specifically, whether Goulding acted in good faith and had a reasonable basis for deducting the amortization expense and legal, accounting and management fees.


24. Fred R. Harbecke provided expert testimony for Goulding. Harbecke graduated in 1978 from the University of Illinois with a bachelor of science degree in accounting. Goulding Ex. 7. He received his law degree in 1981 from DePaul University College of Law. At present, Harbecke is associated with the firm of Robbins, Rubinstein, Salomon & Greenblatt, Ltd. His practice involves general commercial litigation, chancery litigation, tax planning and litigation, and bankruptcy.


25. Harbecke testified that Goulding acted in good faith and had a reasonable basis on which to compute the partnership deductions. He based this opinion on the assumption that Goulding relied on information prepared by others and contained in the various partnership agreements, offering memoranda and appraisal letters. On cross-examination, Harbecke conceded that the legal expenses deducted by Goulding on the partnerships' 1979 tax returns should have been classified as nondeductible syndication costs. Trial II Tr. at 192, 199-200. He also stated that it was not reasonable for Goulding to base the purchase price of the technologies solely on marketing studies. Id. at 203. After making these concessions, Harbecke admitted to a conflict of interest. He acknowledged that he filed the complaint in this case in 1983 and that he is working with Goulding on several unrelated tax matters. Id. at 188-90.


26. William L. Raby provided expert testimony for the government. Raby received a bachelor of science degree from Northwestern University in 1949, a master's degree in business administration from the University of Arizona in 1961 and a doctorate in business administration from the University of Arizona in 1971. He is also an accomplished practitioner in the field of accounting. Raby became a certified public accountant in 1950. From 1950 to 1969, Raby founded and managed his own accounting firm. In 1970, Raby joined Laventhol and Horwath as a national tax partner and member of its National Council. In 1977, Raby became a partner in Touche Ross & Co. He served as National Director of Tax Services and Tax Function Member of that firm's executive committee from 1977 to 1982 and as managing partner of the firm's Phoenix, Arizona office from 1981 to 1986. In 1986, Raby became Touche Ross' senior partner. He retired in 1987. In addition to his achievements as a practicing accountant, Raby taught courses in taxation and controllership for over thirty years at the University of Arizona, Ohio University, New York University and Arizona State University. He published eight books and several hundred journal and newspaper articles concerning taxation, tax practice management and tax accounting. Raby is presently a member of the Editorial Advisory Board, Taxation for Accountants; a member of the Advisory Board of Tax Analysts; and a member of the United States Income Tax Advisory Board.


27. Raby testified that Goulding did not act in good faith when he based his deductions on information contained in the offering memorandum, appraisal letters and various partnership agreements. In Raby's opinion, Goulding relied on his own work product. Raby's opinion is consistent with the credible evidence in this case demonstrating that Goulding negotiated and drafted virtually all agreements entered into by the partnerships, including the offering memoranda.


28. Raby also testified that the amortization expense claimed by Goulding lacked a reasonable basis from an independent accounting standpoint. Raby stated that a reasonably prudent person with Goulding's education and professional experience would not have amortized the contingent portion of the purchase agreements. He emphasized that it was highly unusual for an inventor to execute a warranty guaranteeing future sales, especially here since these technologies had little, if any, prospect of commercial success. Raby's opinion is supported by the testimony of Joseph Barrows, an inventor, and David A. Rappaport, a senior vice president of National Patent. Barrows Dep. at 15-18; Rappaport Dep. at 15, 39, 53. Raby also noted that Goulding's reliance on the appraisal letters was unreasonable. In Raby's opinion, based on years of experience evaluating research and development partnerships as an accountant, these letters did not constitute valid appraisals because they did not provide an assessment of each technology's fair market value on the date of purchase. Finally, Raby also criticized the amortization rate applied by Goulding. He testified that technology usually is not amortized until it is patented, at which time an equal percentage of the technology's cost basis is amortized over the remaining life of the patent. Goulding amortized the cost basis of these technologies by applying a rate based on the percentage declines in the contingent royalty revenues set forth in the license agreements. Raby concluded that insofar as these technologies were not producing any revenue, Goulding used a wholly arbitrary method of amortization that lacked any economic justification.


29. Next, Raby criticized Goulding's decision to deduct legal, accounting and management fees. He premised his criticism on the assumption that the partnerships did not commence business until the last week of December 1979. Relying on this assumption, Raby stated that it was impossible for the partnerships to incur $200,000 in deductible management fees in 1979 for just one week's work. Goulding Ex. 1, 4, 7. In addition, Raby saw no evidence that the partnerships incurred $180,000 of deductible management expenses in 1980 and 1981 because during this period the partnerships contracted out the research and development work to National Patent. Id. at Ex. 2, 3, 5, 6, 8, 9. Similarly, Raby saw no evidence that Morris D. Ziegler & Co. in fact performed any accounting services. Finally, Raby stated that the legal services performed by Goulding occurred before the partnerships commenced business and should have been capitalized as nondeductible syndication expenses.


30. Raby concluded his testimony by opining that Goulding did not meet the standard of care required by Section 6694(a) . He stated that Goulding failed to exercise independent judgment, investigate the facts or provide reasonable, objective support for any of the deductions claimed by the partnerships for the years 1979 through 1981. In Raby's estimation, Goulding created the partnership deductions by using his own work product in order to provide the limited partners with the four-to-one tax write-off promised in the offering memoranda.


31. Goulding failed to impeach any of Raby's testimony. The court finds that Raby was knowledgeable and experienced in the matters at issue in this trial. Raby based his testimony on the credible evidence. Because Raby has no vested interest in the outcome of this action or any conflict of interest, the court finds his testimony reliable. By contrast, Harbecke's demonstrated conflict of interest undermines his credibility. In addition, Harbecke conceded that Goulding did not act reasonably in deducting his legal fees and relying on marketing studies to establish fair market value. The court finds no merit in Harbecke's undifferentiated conclusion that Goulding acted reasonably.


CONCLUSIONS OF LAW


1. The jurisdiction of this court is invoked pursuant to 28 U.S.C. §1346(a)(1).


2. Section 6694(a) imposes a penalty of $100 against any income tax return preparer whose negligent disregard of IRS rules and regulations results in an understatement of tax liability. 3 26 U.S.C. §6694(a) ; Brockhouse v. United States [84-2 USTC ¶10,005 ], 749 F.2d 1248, 1251 (7th Cir. 1984); Sansom v. United States [88-2 USTC ¶9422 ], 703 F.Supp. 1505, 1510 (N.D. Fla. 1988). The purpose of Section 6694(a) is to deter preparers from engaging in abusive practices that reduce taxable income. Brockhouse, 749 F.2d at 1252; Swart v. United States [83-2 USTC ¶9545 ], 568 F.Supp. 763, 765 (C.D.Cal. 1982). Because Section 6694(a) imposes a penalty, its terms must be construed strictly. Commissioner v. Acker, [59-2 USTC ¶9757 ], 361 U.S. 87, 91 (1959); F.C.C. v. American Broadcasting Co., 347 U.S. 284, 296 (1954).


3. The negligence penalties imposed on Goulding are presumptively valid. United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 440 (1976); Ruth v. United States [87-1 USTC ¶9408], 823 F.2d 1091, 1093 (7th Cir. 1987). Accordingly, Goulding bears the burden of proving the absence of negligence. Janis, 428 U.S. at 440; Brockhouse, 749 F.2d at 1251.


4. Negligence in the context of Section 6694(a) is defined as a lack of due care or failure to do what an ordinary and reasonably prudent person would do under the circumstances. Brockhouse, 749 F.2d at 1251; Zmuda v. Commissioner [84-1 USTC ¶9442 ], 731 F.2d 1417, 1422 (9th Cir. 1984); Marcello v. Commissioner [67-2 USTC ¶9516 ], 380 F.2d 499, 506 (5th Cir. 1967), cert. denied, 389 U.S. 1044 (1968). The standard of care applicable under Section 6694(a) requires preparers to exercise due diligence. Brockhouse, 749 F.2d at 1251-52; Sansom, 703 F.Supp. at 1510. This means the preparer must act as a reasonable, prudent person with respect to the information at hand. Id. Under this standard, the preparer must evaluate the implications of relevant information and seek additional information if there is any doubt the return is not in compliance with IRS rules or regulations. Id. In the case of a partnership engaged in a tax shelter, it is unreasonable for the preparer not to obtain independent verification that the return complies with IRS rules and regulations. Zmuda, 731 F.2d at 1422. 4


5. The regulations to Section 6694(a) provide preparers with a reasonable basis exemption from Section 6694(a) 's penalties:


If a preparer in good faith and with reasonable basis takes the position that a rule or regulation does not accurately reflect the Code and does not follow it, the preparer has not negligently or intentionally disregarded the rule or regulation.


Treas. Reg. §1.6694-1(a)(4) . The reasonable basis exemption set forth in these regulations applies only where the preparer is engaged in a dispute about an IRS interpretation of a rule or regulation applicable to a provision of the return. Druker v. Commissioner [83-1 USTC ¶9116 ], 697 F.2d 46, 55 (2d Cir. 1982) (Friendly, J.), citing, H.R. Rep. No. 658, 94th Cong. 1st Sess. 278 (1975), U.S. Code Cong. & Admin. News 2897, 3174 (1976). This exemption is inapplicable to this case. Goulding is not engaged in a dispute with the IRS over the lawfulness of rules and regulations applicable to the partnership or limited partner returns. The dispute here is whether Goulding acted as a reasonably prudent person with respect to the information available to him. Brockhouse, 749 F.2d at 1251-52.


6. The uncontroverted evidence shows that Goulding negligently disregarded IRS rules and regulations by creating deductions that failed to qualify under applicable sections of the Internal Revenue Code ("the Code"). 26 U.S.C. §1 et seq.


7. Goulding deducted the partnerships' accounting, legal and management fees under 26 U.S.C. §162(a)(1) . 5 Section 162(a)(1) , in conjunction with 26 U.S.C. §703(a) 6 permits a partnership to claim as a deduction, all ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business, including a reasonable allowance for personal services actually rendered. 26 U.S.C. §162(a)(1) . Section 162 provides a deduction only for ordinary and necessary business expenses incurred during the life of a business. Fishman v. Commissioner [88-1 USTC ¶9137 ], 837 F.2d 309, 312 (7th Cir. 1988); Madison Gas & Electric Co. v. Commissioner [80-2 USTC ¶9754 ], 633 F.2d 512, 517 (7th Cir. 1980). "Pre-operating" or "start-up" costs are not deductible. Id. There is no dispute that the legal services provided by Goulding, for which the partnerships claimed a deduction of over $300,000 in 1979, pertained exclusively to negotiating and drafting various partnership agreements. These agreements enabled the partnerships to commence business. By definition, the legal fees paid to Goulding were nondeductible pre-operating costs. Id. It is also undisputed that Morris D. Ziegler & Co. rendered no accounting services to the partnerships. Therefore, Goulding had no reasonable basis to deduct accounting costs. Id. This leaves only the question of the management fees. Goulding claims that in 1979 the partnerships incurred deductible management fees of $200,000. However, the partnerships did not commence business until the last week of December 1979. There is no evidence that the general partners provided the partnerships with $200,000 in management services in just seven days. There is also no evidence that the general partners provided management services in 1980 or 1981. During these years, National Patent, and not the general partners, had sole responsibility for managing the partnerships' principal business activity--research and development of the acquired technologies. Therefore, Goulding lacked a reasonable basis for deducting management fees.


8. The deductions computed by Goulding under Section 162 are the result of a failure to exercise due care. Based on his knowledge and experience as an attorney, certified public accountant and former IRS agent, Goulding knew or should have known that the legal services he provided constituted nondeductible pre-operating expenses. And based on his extensive involvement in the affairs of each partnership, a reasonable inference may be drawn that Goulding knew or should have known that Morris D. Ziegler & Co. performed no accounting services and that the general partners performed no management services. At a minimum, Goulding had a duty to inquire whether these individuals in fact performed these services. Goulding failed to make this inquiry. A reasonably prudent person faced with the same circumstances would not have claimed the accounting, legal and management fees as deductions on the partnerships' returns. Brockhouse, 749 F.2d at 1251-52.


9. Goulding amortized the cost of the acquisition agreements under 26 U.S.C. §167(a)(1) . 7 Section 167(a)(1) permits investors to amortize or deduct the purchase price of an asset used in a trade or business, or held for the production of income. 26 U.S.C. §167(a)(1) ; Durkin v. Commissioner [89-1 USTC ¶9277 ], 872 F.2d 1271, 1276 (7th Cir. 1989); Estate of Franklin v. Commissioner [76-2 USTC ¶9773 ], 544 F.2d 1045, 1047 (9th Cir. 1976). Section 465(a) of the Code, 26 U.S.C. §465(a) , imposes an "at-risk" requirement on deductions claimed under Section 167 . 8 Section 465 provides that investors may not deduct more than the amount that they are personally liable to repay. Durkin, 872 F.2d at 1276; United States v. Kelley [89-1 USTC ¶9132 ], 864 F.2d 569, 571 (7th Cir. 1989); Levin v. Commissioner [87-2 USTC ¶9600 ], 832 F.2d 403, 408 (7th Cir. 1987). The application of Section 465 to Section 167 means that deductions are predicated upon investment, and not upon ownership. Durkin, 872 F.2d at 1276; Estate of Franklin, 544 F.2d at 1049. This means that investors may not deduct from the cost basis of an asset any portion of the purchase price that is contingent and unlikely to be paid. Durkin, 872 F.2d at 1276.


10. Evidence of a contingent purchase price exists (1) where the purchase price is to be paid out of proceeds from the exploitation of the asset, (2) the investor is sheltered from personal liability because the debt is non-recourse and (3) the purchase price of the asset unreasonably exceeds its fair market value. Id. Each of these conditions is present in this case. The inventors' sales warranties conditioned the contingent component of the acquisition agreements upon successful exploitation of the technologies. The fact that 98 percent of the cost of these technologies was contingent upon a multimillion dollar sales warranty reveals that the purchase price of these technologies far exceeded their fair market value. The undisputed evidence shows that on the date of acquisition, none of these technologies had a reasonable chance of producing the multimillion dollar sales guaranteed by each warranty. Trial II Tr. at 245-53. Barrows Dep. at 15-18; Rappaport Dep. at 15, 39, 53. The inventors had no reasonable expectation of ever receiving the amounts set forth in the acquisition agreements. Id. And the partnerships had no incentive to pay fair market value because a higher purchase price guaranteed a larger tax deduction. In addition, the substance of the acquisition agreements reveals no residual value to these technologies beyond the $7500 paid to each inventor. This conclusion is reinforced by the fact that none of the limited partners was at-risk for a greater amount. Although the assumption agreements required the limited partners to assume the full amount of the partnerships' debt to the inventors, these agreements relieved the limited partners of liability if the unrealistic multimillion dollar sales warranties failed to materialize. Kelley, 864 F.2d at 571. This gave the partnerships an incentive to negotiate an unreasonably high purchase price, far in excess of fair market value. Durkin, 872 F.2d at 1277; Kelley, 864 F.2d at 571.


11. Goulding failed to exercise due care or act in good faith when he relied on the various partnership agreements, offering memoranda and appraisal letters to compute the partnerships' amortization deductions.


The appraisal letters did not provide estimates of fair market value on the date of purchase. The uncontroverted testimony of William Raby, David Rappaport and Joseph Barrows shows that a reasonably prudent person would not have relied on the appraisal letters to compute the amortizable basis of the partnership technologies. Even Goulding's rebuttal witness, Ray Snyder, testified that he could not determine the fair market value of the partnership technologies based on these letters. Trial II Tr. at 347-48, 354.


The partnership agreements and partnership offering memoranda are Goulding's own work product. He virtually had exclusive control over their content. It is disingenuous for Goulding to claim that these documents provided him with an independent source of information. Clearly they did not. Even assuming that Goulding did not prepare the partnership agreements and offering memoranda, a reasonably prudent person would not have relied upon them. The unlikelihood of any sales materializing is readily apparent from the research and development agreements. Those agreements provide a June 30, 1981 cut-off date for research and development. The cut-off date should have alerted Goulding to the fact that amortizing the entire cost basis of the technologies was unreasonable. Also, Goulding amortized the acquisition agreements in accord with the partnerships' right to receive royalty income under the exclusive license agreements. But the license agreements provide that the partnerships are entitled to royalties only out of patented technologies, or technologies with patents pending. Although Goulding testified that four technologies had patents, there is no reliable evidence that the partnership technologies were patented or had patents pending. Accordingly, a reasonably prudent person would not have relied on the license agreements to adopt a method of amortization.


Finally, the offering memoranda warned investors that an IRS audit was probable. Goulding knew this better than anyone else involved with the partnerships. His background as an IRS agent and his acknowledged familiarity with the Code, including Section 6694(a) , should have alerted him to the likelihood of an audit. Consequently, Goulding had a duty to evaluate all available information and seek additional advice on the propriety of the amortization deductions. He failed to make this inquiry and thus acted negligently. Brockhouse, 749 F.2d at 1251-52.


12. Goulding has not met his burden of proving the absence of negligence. Goulding negligently prepared a substantial portion of the tax returns filed by the limited partners of Mercon, Ltd., LaSala, Ltd. and Jonquil, Ltd., and he is liable for penalties due under 26 U.S.C. §6694(a) . Accordingly, judgment is entered for the United States and against Randall S. Goulding.


1 On direct examination, Goulding disclaimed responsibility for any role in the preparation of these documents. The court finds that Goulding's testimony is self-serving and unworthy of credence. His testimony in this trial is directly contradicted by his prior deposition testimony and by his testimony in the first trial. See infra Findings of Fact ¶19. Goulding's lack of credibility is further underscored by his demeanor and his evasive and unresponsive answers on cross-examination.


2 The license agreement applied the 30 percent rate to the following percentages of applicable rates: 1979, 100 percent; 1980, 87.5 percent; 1981, 69 percent; 1982, 50.5 percent. Id. This formula produced a decline in the applicable sales basis of 12.5 percent from 1979 to 1980, 18.5 percent from 1980 to 1981, and 18.5 percent from 1981 to 1982. Id.


3 Section 6694(a) provides:


If any part of any understatement of liability with respect to any return or claim for refund is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to such return or claim, such person shall pay a penalty of $100 with respect to such return or claim.


4 Zmuda was decided under 26 U.S.C. §6653(a). That section prohibits the negligent or intentional disregard of IRS rules and regulations by individual taxpayers preparing their own return. There is no distinction between the standard of care applicable to Section 6653(a) and the standard applicable to Section 6694(a) . Brockhouse, 749 F.2d at 1251-52, citing Zmuda, 731 F.2d at 1422. See Drucker v. Commissioner [83-1 USTC ¶9116 ], 697 F.2d 46, 55 (2d Cir. 1982) (Friendly, J.).


5 Section 162(a)(1) provides:


(a) IN GENERAL.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including--


(1) a reasonable allowance for salaries or other compensation for personal services actually rendered.


6 Section 703(a) provides in part:


(a) INCOME AND DEDUCTIONS.--The taxable income of a partnership shall be computed in the same manner as in the case of an individual . . . .


7 Section 167(a)(1) provides:


(a) GENERAL RULE.--There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)--


(1) of property used in the trade or business.


8 Section 465(a)(1) provides in part:


(a) LIMITATION TO AMOUNT AT RISK.--


(1) IN GENERAL.--In the case of--


(A) an individual . . .


engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk . . . for such activity at the close of the taxable year.