In John R. Johnson et al. v. Commissioner, T.C. Memo. 2023-116, the respondent had determined that the petitioners had applied a seven-year depreciation period instead of the correct 39-year period to commercial property, had double-counted mortgage interest, and had inadequately claimed the charitable contribution of a “building.” The petitioners conceded those adjustments but disputed the negligence penalty due to the reasonable cause and good faith exception. Their sole defense was reliance on their CPA. But for a taxpayer to so reasonably rely on the advice of a professional, one obvious element is reliance in good faith. See Neonatology Assoc., P.A. v. Commissioner, 115 T.C. 43, 99 (2000).
In what must have been a cringe-worthy spectacle to sit through at trial, the CPA took the stand, but apparently, nothing could be elicited as to what she told her clients. Further, the petitioner-husband’s testimony about the supposed advice received was dismissed as “not credible.” In sum, the petitioners simply failed to establish that they received any advice at all about the matters at hand.
And it got worse. The petitioners asserted the mere fact of a CPA having prepared their returns entitled them to the reasonable cause and good faith exception. The court emphasized the nondelegable duty of taxpayers to review returns for accuracy. And particularly with such a sophisticated taxpayer as the petitioner-husband (over 50 years’ real estate experience), the court was unpersuaded that he would have missed all the errors on his returns had he “conducted even a cursory review.”
One commentator piquantly noted the odd aspect of the finding in the Johnson opinion that the CPA was “competent,” another required element under the Neonatology test. Bryan Camp, When ‘My CPA Did It’ Is No Defense To Penalties, TaxProf Blog (September 18, 2023). Perhaps the judge was being gracious. But certainly, the CPA’s blasé conduct implicated section 10.22 of Circular 230 regarding due diligence. Not applying the correct depreciation period, entering the same amount of mortgage interest ($44,806) twice, and failing to appreciate the need for a qualified appraisal of a donated building (and not just an old jalopy) all add up to a disturbing picture. The Office of Professional Responsibility may not be so gracious.