## Facts

- James E. Pickering, a certified public accountant, prepared federal tax returns for A.P.T. Construction, Inc. and its shareholders for multiple years, including 1976 and 1977.
- In 1978, the IRS audited A.P.T.’s corporate returns and the shareholders’ individual returns.
- The audit found A.P.T. had paid and deducted shareholders’ personal expenses as corporate deductions, including personal telephone service and gasoline and repairs for personal vehicles.
- The IRS assessed civil return-preparer penalties against Pickering under 26 U.S.C. § 6694(b) for willfully understating tax liabilities for 1976 and 1977.
- A.P.T. used a bookkeeper, Vinetta Smith, to pay bills and maintain records; Pickering’s task was to prepare the returns.
- Pickering reviewed the books annually and performed a spot-check of random invoices, then prepared returns relying on the books rather than underlying documentation; he claimed the spot-check did not reveal personal expenses being paid by the corporation.
- The bookkeeper testified she knew the corporation paid many personal bills for shareholders and provided testimony from which the factfinder could infer Pickering had been alerted to the issue and nevertheless treated the payments in a way that reduced tax liability.
- Pickering paid 15% of the assessed penalties and brought a refund action under 26 U.S.C. § 6694(c) in federal district court.
- The district court found Pickering willfully understated A.P.T.’s corporate tax liability but did not willfully understate the shareholders’ individual tax liabilities; it upheld penalties as to the corporate returns, totaling $1,000.
- Pickering appealed, arguing the evidence was insufficient to support a finding of willfulness.

## Issues

1. Whether the district court clearly erred in finding that Pickering “willfully understated” A.P.T. Construction, Inc.’s tax liability for 1976 and 1977, supporting penalties under 26 U.S.C. § 6694(b).

## Decision

- The Eighth Circuit affirmed the district court’s judgment.
- The court held the district court’s finding of willfulness was not clearly erroneous under Federal Rule of Civil Procedure 52(a).
- The penalty assessment against Pickering for willfully understating A.P.T.’s corporate tax liability for 1976 and 1977 was sustained.

## Legal Principles

- Under 26 U.S.C. § 6694(b), a tax return preparer may be penalized for willfully attempting to understate a taxpayer’s tax liability.
- Whether a preparer acted willfully is a factual determination; on appeal, such findings are reviewed for clear error under Federal Rule of Civil Procedure 52(a).
- Evidence that a corporation paid shareholders’ personal expenses and claimed them as corporate deductions can support an inference of willfulness by a preparer, particularly where the preparer had reason to know of the personal nature of the expenditures yet reported them in a manner that reduced tax liability.
- A preparer’s reliance on client books, without examining underlying documentation, does not preclude a finding of willfulness when other evidence supports knowledge or reckless disregard.

## Conclusion

The Eighth Circuit upheld civil penalties against a CPA return preparer under § 6694(b) because the district court’s determination that he willfully understated a corporation’s tax liability—by allowing deductions tied to shareholders’ personal expenses—was not clearly erroneous.


Pickering v. United States, 691 F.2d 853 (8th Cir. 1982)