Full opinion text
OPINION AND ORDER MEANS, District Judge. This case is before the Court on the complaint of the United States of America, which seeks to permanently enjoin Clement (“Clem”) Bailey, Jewelene Bailey, Kristi Shelton, and Kathy Zeeb, individually, and doing business as Clem Bailey & Associates, from preparing federal income tax returns for compensation. The Court held a preliminary injunction hearing in the spring of 1991, during which the United States elicited testimony from twenty-two witnesses. The Court then entered an agreed order in June which enjoined the defendants from preparing tax returns for any individuals who were not already their clients and from interfering with the proper administration of the internal revenue laws. The defendants were also ordered to abide by all Internal Revenue Service rules applicable to tax return preparers. At trial on the merits in January 1992, the United States offered testimony from forty-six witnesses and entered 890 exhibits into evidence. After reviewing the testimonial and documentary evidence adduced at trial, this Court has made findings of fact as to each taxpayer whose return was entered into evidence. Pursuant to those findings, this Court will grant the government’s petition for injunctive relief in full as to Clem and Jewelene Bailey and in part as to Kristi Shelton and Kathy Zeeb. I. FINDINGS OF FACT Clem Bailey & Associates (hereinafter, “CBA”), now defunct, prepared federal income tax returns, both corporate and individual. CBA employed Clem Bailey, his wife, Jewelene Bailey, Jewelene Bailey’s two daughters, Kristi Shelton and Kathy Zeeb, and a number of bookkeepers, typists, and clerical personnel. The Baileys,' Shelton, and Zeeb are income tax return preparers as that term is defined in 26 U.S.C. § 7701(a)(36). CBA, which obtains its clients by word-of-mouth advertising, prepared 7320 federal income tax returns from 1988 through 1990. In 1991, CBA prepared a total of 1764 returns. Of those, Clem Bailey prepared 624; Jewelene Bailey, 273; Kristi Shelton, 548; and Kathy Zeeb 319. These returns were filed in twenty-one different districts covering the southwestern United States. When a client came into CBA’s office, customarily one or more of the defendants met with the client for thirty minutes to an hour and prepared a handwritten return based upon the information provided by the taxpayer. The return was then sent to a typist for final preparation and proofread by either the typist or another clerical worker who then signed the preparing defendant’s name to the return. None of the defendants reviewed the return again before the taxpayer actually filed it with the Internal Revenue Service (“IRS”). As part of its “Clem Bailey Return Preparer Project,” the IRS spent almost 15,000 hours examining 521 individual and corporate returns prepared by CBA. Over eighty percent of them contained an understatement of tax liability. Cumulatively, those understatements exceeded two-and-one-half million dollars. Clem Bailey prepared 340 of those returns; Jewelene Bailey, forty; Kristi Shelton, sixty-nine; Kathy Zeeb, sixty; and Clem Bailey & Associates prepared twelve. Clem Bailey has been preparing federal income tax returns since 1951. In 1957, he and his wife established Clem Bailey & Associates, but on December 31, 1990, they dissolved the enterprise and became self-employed tax preparers. Bailey does not have a college degree, nor is he a certified public accountant or an enrolled agent allowed to practice before the Internal Revenue Service. Jewelene Bailey has been preparing federal income tax returns since 1957. She does not have a college degree, nor is she a certified public accountant or an enrolled agent allowed to practice before the IRS. Jewelene is currently in business with her husband, who often assists her in preparing returns. Kristi Shelton has been preparing federal income tax returns since 1981 when CBA first employed her. Her professional education consists of “on the job” training by Clem Bailey and attending seminars on relevant tax topics. She does not have a college degree, nor is she a certified public accountant or an enrolled agent allowed to practice before the IRS. Since December 1990, Shelton has been a self-employed income tax preparer, but she shares office space with Clem and Jewelene Bailey. Kathy Zeeb has been preparing federal returns since the late 1970s. She attended one year of college at Texas Tech. She also attended a college in Oregon where she was subsequently licensed to prepare tax returns. Zeeb does not have a degree in accounting, nor is she a certified public accountant or an enrolled agent allowed to practice before the IRS. From 1982 through 1990, Zeeb worked for CBA but since the end of December 1990, Zeeb has been self-employed in the tax preparation business. Like Shelton, Zeeb shares office space with the Baileys. The Court makes the following findings of fact as to the conduct of each of the defendants in preparing federal income tax returns for the taxpayers whose names are set out below: A. CLEM BAILEY 1. DONNIE BARROW Donnie Barrow is the lead musician in a band that plays regularly at the Stagecoach, a nightclub in the Fort Worth area. The Stagecoach pays the band members directly, and issues a Form 1099 to each member. Donnie Barrow has a ninth-grade education and, because he is not sophisticated in tax matters, he hired Clem Bailey to prepare his federal income tax returns from the 1970s through 1987. Bailey also prepared the individual tax returns of at least one other Stagecoach band member. Barrow met with Bailey for twenty to twenty-five minutes to prepare his 1987 return. He gave Bailey his financial records and bank statements, including the Form 1099 he received from the Stagecoach, but did not give Bailey any cancelled checks, bank statements, or a Form 1099 showing that he had compensated other band members. The 1987 return Bailey prepared reports Barrow’s income of $28,-000 from the Stagecoach on Schedule C of Form 1040. Line 10 of Barrow’s Schedule C shows a deduction of $10,375 for payments to other band members, ostensibly for substituting for him when he was ill. Barrow testified, however, that he never paid the other band members or anyone else to substitute for him when he could not play. He did not tell Bailey that he made such payments, nor did Bailey ask him whether he had. Bailey appeared with Barrow when the IRS examined his 1987 return. When the examining agent questioned Barrow about the payments, Bailey told Barrow that they were payments to the other band members. Barrow denied making such payments, however, so Bailey told Barrow to tell the IRS that the commissions were “a misunderstanding.” The IRS disallowed the commission expense, and Barrow agreed that he owed the additional tax. Although the 1987 return showed that Barrow was entitled to an earned income credit of $851, Barrow actually owed $6,503.41 in additional taxes. In his affidavit filed with the IRS, Bailey swore that Barrow told him he had paid the other band members and that Bailey accepted Barrow’s oral representation without making personal verification. Bailey further stated that IRS regulations permitted him to rely in good faith on the information allegedly furnished by Donnie Barrow. Bailey is greatly in error. The revenue rulings specifically require a tax preparer to “make reasonable inquiries” if the information is incorrect or incomplete or if a code section or regulation requires the existence of specific facts, circumstances, or documents as a condition to claiming a deduction. See Rev.Proc. 80-40, 1980-2 C.B. 774. Clem Bailey knew or should have known that Barrow did not pay other members of the band. He prepared the individual tax returns of at least one other band member and knew that the Stagecoach paid the band members directly. Further, he knew Barrow’s annual earned income was insufficient for him to pay over $10,000 to other musicians for performing in his absence. Finally, even if Barrow did tell Bailey he paid his substitutes himself, Bailey had an obligation as a return preparer to require documentary proof of payment, whether in the form of cancelled checks, receipts, or Forms 1099 issued by Barrow. Clem Bailey knowingly and intentionally understated Barrow’s 1987 tax liability by including a fraudulent deduction on Barrow’s return. 2. JOSEPH BOWLES Joseph Bowles works for General Dynamics and runs a farm he inherited from his father in 1988. Clem Bailey prepared Bowles’s federal income tax returns in 1987, 1988, and 1989. On Bowles’s 1988 return, Bailey prepared a Form 4562, a depreciation form, which valued the farm equipment Bowles inherited from his father at $61,153. Bailey obtained this information from the inventory furnished to the probate court which set out the value of each piece of equipment. Bowles testified that he merely gave the inventory to Bailey; they did not go over the individual items on it, nor did Bailey ask him any questions about it. The inventory lists a front-end loader at $1500. A list attached to Bowles’s 1988 return, however, valued the front-end loader at $15,000. Bowles testified that he did not add the extra zero to the value of the loader, and that he first saw the changed valuation at the audit. Bailey testified that Bowles orally told him that he acquired additional farm equipment worth about $13,500 which is not shown on the list. Bailey testified that because $13,500 and $1500 add up to $15,000, he merely added the extra zero to the $1500 Bowles originally listed to reflect the additional equipment. Bailey admits, however, that he added other items to the list and valued them separately, so it is inconsistent that he would lump $13,500 worth of equipment with the $1500 front-end loader rather than list that equipment separately as well. Neither Bowles nor Bailey can provide documentation to support a depreciation deduction for the additional $13,500. This Court believes that Clem Bailey provided a falsified document to the IRS in order to justify his intentional overstatement of Bowles’s front-end loader and additional farm equipment. In light of this evidence, this Court finds that Clem Bailey knowingly and intentionally understated Bowles’s 1988 tax liability. 3. DANNY and GLENDA BUTLER Danny Butler is a self-employed construction contractor. Clem Bailey prepared Butler’s federal income tax returns from the mid-1970s until 1988. During the fall of 1987, Bailey promised Butler that he would incorporate Butler’s construction business as “Danny Butler Enterprises.” Butler then provided all the necessary information and paid Bailey to prepare the corporate returns for 1987, 1988, and 1989. Both Butler and his wife, Glenda, asked Bailey numerous times about the status of their 1987 corporate return. When Bailey told them that the return would not be ready to file by the December 15, 1988 deadline, they secured an extension of time to file until May 1989. Bailey subsequently told Glenda Butler to request another extension, which he said would be a granted since the Butlers did not owe any taxes. After the Butlers received an IRS notice in late summer 1989 that they were being audited, Glenda called Bailey’s office “probably fifteen or twenty times” in an attempt to obtain the return. No one ever returned her calls. Although Bailey represented to the examining IRS agent in Glenda Butler’s presence that he had prepared the corporate return, neither of the Butlers ever saw it. No other conclusion is possible except that Clem Bailey failed to prepare a corporate tax return for Danny Butler Enterprises in 1987 despite having timely received the necessary information and having been paid to prepare it. As a result of Bailey’s failure, the IRS attributed $389,400 in 1987 income earned by Danny Butler in his construction business to the Butlers individually. Bailey, who did prepare the 1987 individual return for the Butlers, failed to report this income on that return. Accordingly, this Court finds that Clem Bailey knowingly and intentionally understated the Butlers’ tax liability by failing to report the 1987 income earned by Danny Butler’s construction business on either the Butlers’ corporate or individual returns. 4.HAROLD and BONNIE CHANCELLOR Harold “Snuffy” Chancellor is a self-employed professional rodeo clown. Bonnie Chancellor helps her husband in his business by setting up appointments, answering the telephone, handling his itinerary, and keeping the financial records. She does not receive a salary for her assistance. Clem Bailey prepared the Chancellors’ federal income tax returns from 1983 though 1988. Chancellor customarily gave Bailey a summary sheet of his expenses for the year to assist him in preparing his return. Schedule C attached to the Chancellors’ 1987 Form 1040 shows a deduction of $9,000 for wages to a spouse. The summary sheet prepared by Chancellor, however, does not reflect a salary expense for his wife, and Chancellor did not tell Bailey that he paid his wife or anyone else a salary. Nevertheless, Bailey told Chancellor that he was entitled to deduct a salary for his wife because she assisted him in his rodeo business. Thus, Clem Bailey created a false deduction for wages to a spouse on the Chancellors’ 1987 return. Clem Bailey also told the Chancellors, contrary to law, that if they went out to dinner, they could deduct the cost of the meal as a “quiet business meal” provided they talked about Snuffy’s rodeo clown business during dinner. Although Chancellor’s summary sheet does not contain an entry for “quiet business meals,” Bailey included such a deduction on the Chancellors’ 1987 return. Not surprisingly, the IRS disallowed this expense. Clem Bailey knowingly and intentionally understated the Chancellors’ tax liability by including fraudulent deductions on their 1987 return. 5. CHARLIE and VICKI CRISP Charlie Crisp owns A & C Fire Protection, a business which installs fire-fighting equipment. Jewelene and Clem Bailey prepared individual and corporate federal income tax returns for Crisp and A & C Fire Protection from 1980 through 1988. For the preparation of the 1988 corporate return, Crisp gave the Baileys a sheet of lined yellow paper which summarizes that year’s business expenses for A & C Fire Protection. The summary sheet shows two entries for labor costs, one for $184,188.09, and another for $7350. Also, a handwritten scrawl near the bottom of the page states, “$85,000 transferred by note to Fire Sprinkler.” Although Crisp did not make the $7350 entry for labor costs or scrawl the notation at the bottom of the summary sheet, those figures appeared on the summary sheet when Crisp received it back from Bailey’s office. The 1988 corporate return for A & C claims $276,538.09 in labor costs. Bailey apparently arrived at that number by adding to the entry of $184,188.09 for labor costs shown on the summary sheet the two unexplained entries for $7350 and $85,000. Bailey testified that the labor costs exceeding $184,188.09 were those owed by Crisp’s company to a similar company owned by his brother. Crisp, however, denied that he owed any labor costs to his brother’s company. This Court finds that Clem Bailey understated the tax liability of A & C Fire Protection by intentionally and knowingly overstating labor costs on its 1988 return. 6. EARL CROMEANS and EARL CRO-MEANS DOZER, INC. Earl Cromeans owns an incorporated earthmoving equipment business, Earl Cro-means Dozer, Inc. He hired Clem Bailey to prepare his personal and corporate tax returns for most of the 1980s because he considers himself unsophisticated in tax matters. His trust in Bailey was such that he never reviewed the prepared returns; he merely signed on the appropriate lines before sending them to the IRS. In 1987, Earl Cromeans sold $57,500 worth of equipment: a backhoe for $7500; a bulldozer, truck, and trailer for $20,000; and a loader, maintainer, and two dump trucks for $30,000 in three cash installments of $15,000, $5000, and $10,000. Cro-means consulted with Bailey twice prior to the sales to ensure that his profit would not be consumed by taxes. Despite Bailey’s knowledge that the sales totalled $57,-500, Form 4797 of the 1987 corporate return shows equipment sales of only $42,-500. Bailey testified that Cromeans failed to tell him about the cash income received from the equipment sales. Bailey is not credible, however, especially in view of the fact that Cromeans did inform the IRS examiner about the amount of cash he received from the equipment sales. Clem Bailey knowingly and intentionally understated Earl Cromeans’s corporate income tax liability by omitting $15,000 in cash income from equipment sales on his 1987 corporate return. Cromeans and his wife are the only officers of Earl Cromeans Dozer, Inc. The corporation does not pay them a salary, and Cromeans testified that he never told Bailey that it did. Nevertheless, the 1987 corporate return for Earl Cromeans Dozer, Inc. reflects a deduction of $20,000 for compensation of officers. Bailey testified that Earl Cromeans told him that the $20,-000 represented an income bonus. Bailey, however, failed to report the “income bonus” on Cromeans’s individual return and did not appear at the audit to substantiate the figures reported on the corporate return. This Court finds that Clem Bailey knowingly and intentionally understated the corporation’s income tax liability by including on its 1987 return a false deduction for compensation paid to officers. 7. WANDA FANNIN Wanda Fannin, the owner of Wanda Fan-nin, Inc., a ladies’ clothing store in Waco, Texas, hired Clem Bailey to prepare her individual and corporate federal income tax returns during the 1980s. Fannin hired a separate accounting firm in Waco to prepare all other returns, forms and financial statements. At the end of each tax year, Fannin gave the financial statements to Clem Bailey, Kristi Shelton, or Kathy Zeeb to use in preparing her income tax returns. On the 1988 corporate return for Wanda Fannin, Inc., Bailey increased the cost of goods sold by over $49,000 from the amount shown on the financial statements, causing a reduction in the corporation’s taxable income by the same amount. Bailey also increased the entry for loans from stockholders to the corporation by a corresponding amount, as reported on Schedule L. There is no evidence that anyone connected with Wanda Fannin, Inc. told Bailey that the entries for cost of goods sold and loans from shareholders should be increased. No other finding is possible but that Clem Bailey knowingly and intentionally understated Wanda Fannin, Inc.’s tax liability by fabricating an increase in cost of goods sold and loans from shareholders on its 1988 return. 8. FRANK and ROSALIE LANDIS Frank Landis took early retirement from Union Pacific Railroad in December 1987 in consideration of which the railroad paid him $30,000 (“railroad severance pay”). Mr. Landis and his wife, Rosalie, originally employed H & R Block to prepare their 1987 federal income tax return. H & R Block included the railroad severance pay as taxable income on the Landises’ return. After hearing from other railroad retirees that the severance pay might not be taxable, the Landises filed an amended return which deleted the $30,000 payment and claimed a substantial refund. The Internal Revenue Service subsequently disallowed the refund. The Landises later heard from other railroad retirees that Bailey could obtain a refund of the tax paid on the railroad severance pay. Clem Bailey confirmed to them that for a fee of $500 he could obtain such a refund. In January 1989, he prepared an amended return showing that the railroad severance pay qualified for ten-year averaging because it constituted part of a qualified pension, stock sharing, or bonus plan. Consequently, the Landises received a refund of $6661 in February 1989. The IRS subsequently selected the Lan-dises’ 1987 return for examination. At the audit, which Bailey failed to attend despite a request from Landis that he do so, the IRS determined that the entire amount of the railroad severance pay was taxable. The courts have consistently held that railroad severance pay is taxable income. See Martin v. Commissioner of Internal Revenue, 877 F.2d 449, 451-53 (6th Cir.1989); Sutherland v. Egger, 865 F.2d 56, 58 (3rd Cir.1989); Herbert v. United States, 850 F.2d 32, 33-36 (2nd Cir.1988). The law was settled on this matter at the time Bailey prepared the Landises’ amended return in 1989. Bailey’s position that railroad severance pay is not taxable is unreasonable and not supported by the internal revenue laws. Bailey’s preparation of a second claim for refund, knowing that the IRS had already rejected a virtually identical claim, constitutes a willful understatement of the Landises’ 1987 tax liability- 9. WENDELL LAYNE Clem Bailey prepared Wendell Layne’s federal income tax returns in 1986 and 1987. Layne was self-employed at Barker Cable TV during 1987, and he paid himself $56,700 during that year. Layne’s 1987 return showed no income taxes due because his income was offset by a large net operating loss carryforward. Since Layne’s debts had been discharged in bankruptcy in 1986, however, he had no net operating loss to carry forward. See 26 U.S.C. § 108 (1988). This Court finds that Bailey knowingly and intentionally understated Layne’s 1987 tax liability by improperly reporting a net operating loss carry-forward on his tax return. When Layne turned to Bailey after the IRS contacted him to ask why he had not paid self-employment taxes with his 1987 return, Bailey amended Layne’s return. This time, Bailey caused it to report a deduction for cost of goods sold totalling exactly $52,500 — precisely offsetting the income reported. Result: no new taxes. Layne testified that he did not incur any costs of goods sold, tell Clem Bailey that he had incurred such costs, or present Bailey with any documentation of expenses total-ling $52,500. Accordingly, this Court finds that Clem Bailey knowingly and intentionally understated Wendell Layne’s 1987 tax liability by reporting a false deduction for cost of goods sold on his amended 1987 return. 10. MIKE PARKS and MARY I. LEE Mike Parks has been self-employed in a number of ventures over the past several years, including Carriage Cars, Inc., M-Par, Inc., and a partnership involving M-Par, Inc. and Mary I. Lee, Joint Venture. None of these entities have ever filed income tax returns. Parks has used Clem Bailey & Associates for approximately seventeen years and has, on a monthly basis, delivered his personal and business books and records to Bailey's office. Bailey prepared Parks’s 1985 federal income tax return which is the last return for Parks on file with the IRS. Parks claims he has not filed any returns since that date because Bailey lost his records. Bailey also prepared federal income tax returns for Mary I. Lee, Parks’s mother, from 1986 through 1990. On Lee’s returns, Bailey reported a large loss for three consecutive years on the partnership between M-Par, Inc. and Mary I. Lee, Joint Venture. Neither Lee nor Bailey has been able to provide documentation establishing that she is entitled to any losses on the partnership. This Court finds that Bailey knowingly and intentionally understated Mary I. Lee’s 1986, 1987, 1988, 1989, and 1990 tax liabilities by including unsubstantiated losses on her returns for each of those years. Also, Bailey knowingly and intentionally understated Mike Parks’s tax liabilities from 1986 through 1990 by failing to prepare individual tax returns for Parks in those years, despite having received sufficient information from him to prepare them. Bailey did, however, prepare returns for Parks in 1984 and 1985. In fact, he prepared two returns for each year: one to submit to a financial institution in support of loan applications and another for the IRS. Those filed with the “financial institutions” report significantly higher income than the returns prepared for submission to the IRS. This Court finds that Clem Bailey knowingly and intentionally prepared false 1984 and 1985 federal income tax returns for Parks to submit to a financial institution. 11. EDDIE and MARY RICHARDSON Clem Bailey prepared federal income tax returns for Eddie and Mary Richardson for over twenty years. During an audit of the Richardsons’ 1987 and 1988 returns, the IRS discovered unfiled, handwritten returns for those years, signed by Bailey, which had been submitted to a bank and which reported substantially greater income than the returns Bailey prepared for filing with the IRS. Mary Richardson testified that Bailey prepared the handwritten returns for the bank to help the Richard-sons obtain a loan, and that she instructed him as to her desired “bottom line” income figure. Bailey testified that he knew she wanted to submit falsified returns to obtain a loan, but that he prepared the returns as a special favor to her since she had been his client for over twenty years. He further testified, however, that he regrets his conduct and that he has never falsified returns for any other client. This Court believes otherwise. Clem Bailey’s preparation of two materially different returns for the same taxpayer for the same year demonstrates his disregard — indeed, his contempt — for the proper administration of the internal revenue laws of the United States. A a result, this Court finds that Clem Bailey knowingly and intentionally prepared false 1987 and 1988 federal income tax returns for submission to a financial institution. 12. JOE and ELNOR ROGERS Joe and Elnor Rogers used CBA to prepare their federal income tax returns from the early 1960s through 1984 and Joseph Schmitt to prepare their returns for 1985 through 1987. In 1986, the Rogerses purchased a commercial building in Hurst, Texas for $186,222. On their 1986 return, Schmitt used that year’s property tax appraisal ($61,230 for the land, $56,122 for the improvements) to allocate the purchase price proportionately between the land ($97,232) and the depreciable improvements ($88,990). In 1988, the Rogerses again asked Clem Bailey to prepare their income tax return. Bailey also prepared amended 1986 and 1987 returns, on which he valued the land at $25,222 and the depreciable improvements at $161,000. He claims to have based those values on an appraisal by Duane McDonald. The Rogerses deny paying for an appraisal by McDonald and profess not to know how Bailey arrived at his values for their property. Bailey did not produce at trial either McDonald or his alleged appraisal to substantiate his changes in those values. It is telling that when they refinanced the property in October 1989, the land appraised at $52,500 and the improvements at $69,500. The Court finds that Clem Bailey knowingly and intentionally understated the Rogerses’ 1986 and 1987 tax liabilities by inflating depreciation deductions on their returns for those years. 13.TIMOTHY RUDOLPH and GLEN ROSE TITLE COMPANY Timothy Rudolph is a lawyer in Glen Rose, Texas, as well as president and a fifty percent shareholder of Glen Rose Title Company (“Glen Rose”). Clem Bailey prepared Rudolph’s federal income tax returns from approximately 1981 through 1988. Bailey also prepared corporate returns for Glen Rose from 1984 through 1988. Rudolph testified that he customarily used Bailey after Bailey had prepared an amended return for him which resulted in a substantial refund. In 1984, Rudolph borrowed $30,000 to set up Glen Rose. He deposited the money in his lawfirm account and wrote checks out of that account for the company’s expenses. The 1986, 1987, and 1988 returns for Glen Rose reflect a depreciation deduction against the $30,000 initial expenditure. When the IRS examined the returns for Glen Rose, the examining agent, in the presence of Bailey, requested Rudolph to produce a copy of his 1984 individual return in order to determine whether Rudolph had also listed the $30,000 expendí-ture as an expense deduction on that return. Bailey promised to provide it. After considerable delay, Bailey mailed Rudolph a Schedule C worksheet from the 1984 individual return and a letter dated January 27, 1990, in which Bailey stated, “it is plain the $30,000 was not deducted by you in 1984 nor was it deducted by the corporation.” The worksheet Bailey provided did not reflect a $30,000 title company expense, but did show an additional $10,000 in repairs, an additional $10,000 in depreciation, and an additional $10,000 in court costs. Rudolph produced this document to the IRS examining agent. In the interim, because of the delay in securing a copy of the 1984 individual return from Rudolph, the examiner obtained the original return filed with the IRS. It reflected a deduction of $30,000 on Line 30b of Schedule C labeled “abstract exp.” Bailey does not deny the authenticity of the certified copy of the 1984 individual return, nor does he dispute that a double deduction appears on Rudolph’s tax returns. Rather, Bailey argues that Rudolph altered the Schedule C Bailey prepared to show a $30,-000 deduction for “abstract exp.” and to omit the $30,000 in deductions for repairs, court costs, and depreciation. Tim Rudolph denies altering that Schedule C. This Court finds that Clem Bailey knowingly and intentionally understated the 1986, 1987, and 1988 tax liabilities of Glen Rose by including fraudulent depreciation deductions on the corporate returns for those years. This Court further finds that Bailey prepared a false document for presentation to the IRS on behalf of Tim Rudolph. 14. BOB and ELIZABETH SAMUEL Bob and Elizabeth Samuel own and operate an automotive repair business. The Samuels also receive installment sale income from various rental properties they have sold over the years. Clem Bailey prepared the Samuels’ individual and corporate income tax returns from the early 1950s until 1989. Each year, Elizabeth Samuel gave summary sheets to Bailey to use in preparing the returns. The summary sheets list the expenses for the Sam-uels’ automotive alignment business, rental property information, personal expenses, and the principal and interest received annually on their installment sales. Schedule B of the Samuels’ 1987, 1988, and 1989 individual returns Bailey prepared all reflect income from interest payments on installment sales of property, but none show income from principal payments. Therefore, when the IRS examined the Samuels’ returns for those years it determined that they owed an additional $17,465 in taxes. Additionally, the 1987 Schedule C for the automotive alignment business includes $30,000 for wages to spouse. Although Elizabeth Samuel assisted her husband regularly in the business, she never received a salary, and the summary sheet she provided Bailey does not show that she did. By failing to report all the income received by the Samuels during 1987 through 1989, and by entering false deductions for wages, Clem Bailey willfully understated their federal income taxes for those years. The Samuels employ two sons and an unrelated person in their automotive repair business. In 1973, Bailey advised the Sam-uels to treat their employees as contract laborers and discontinue filing W-2 forms for them. The Samuels never issued a Form 1099 to their contract labor employees because Bailey advised them it was unnecessary. This Court finds that the Samuels improperly treated their workers as independent contractors or contract laborers since the workers were, in fact, employees who eared hourly wages. This Court finds that Bailey knowingly and intentionally caused an understatement of the Samuels’ employment tax liabilities by advising the Samuels not to file employment tax returns from 1973 through 1989. 15. RONNIE SANDERS Ronnie Sanders owns R & R Motors, Inc., a used-automobile business. On Sanders’s 1987 and 1988 personal returns, Bailey failed to report the $50,000 Sanders earned in salary from R & R Motors. Although Sanders took Bailey’s advice to place the words “advance” or “loan” on the checks he drew from the corporation, he did not repay this money, and did not believe that he was obligated to do so. When Bailey prepared a 1987 return for Sanders to submit to the North Fort Worth Bank for purposes of obtaining a loan, however, it did include the $50,000 in salary. Bailey also prepared a 1987 corporate return for Sanders to submit to the bank which shows the corporation’s taxable income to be $110,000 more than that shown on the 1987 return prepared by Kristi Shelton for submission to the IRS. This Court finds that Clem Bailey understated Ronnie Sanders’s 1987 and 1988 income tax liability by intentionally leaving salary income off his tax returns for those years. This Court further finds that Bailey knowingly prepared false 1987 returns for Sanders and R & R Motors to submit to North Fort Worth Bank. 16. JERRY SCOTT Dr. Jerry Scott is a dentist in Fort Worth. Dr. Scott initially hired Clem Bailey to prepare his 1986 income tax return, as well as his monthly books and employment tax returns. Scott also gave Bailey the Form K-l that he received from a limited partnership, Camelback Southwest, Ltd. That form stated that Scott’s share of a partnership gain, $233,380, should be reported on Form 4797 and attached to Scott’s 1986 individual return. Bailey reported this gain. Bailey, however, also entered the identical sum as the basis of the property on Form 4797, thereby giving Scott a net gain of zero. That basis does not appear on the K-l Scott gave Bailey, nor did Scott give Bailey any facts which would support a basis of $233,380. In fact, Scott told Bailey the basis was incorrect after Scott’s financial advisor in Houston notified him that the return had been erroneously prepared. Bailey told Scott that the problem had been resolved, and that the return should be filed. It follows that Clem Bailey intentionally understated Scott’s tax liability by placing a false basis on his 1986 return. Bailey promised Scott that he would assist him during an IRS audit triggered by the false entry. After Bailey missed several audit appointments, he told Scott that he had hired an attorney, Bruce Hart, to represent him in the audit and subsequent tax court proceedings. When Hart did not attend the audit, Scott telephoned Hart who stated that he had never heard of Scott and that Bailey had not hired him. Bailey later explained to Scott that he had fired Hart. Bailey next told Scott that he had hired Jack Price to represent him at a meeting with the IRS district counsel. Price did not attend this meeting and never contacted Scott. Although Bailey assured Scott that an attorney would represent him at the upcoming tax court trial, Scott appeared alone the day his tax court case was scheduled for trial. When the court permitted him additional time to retain another attorney, Bailey informed Scott that Gary Kleinschmidt would represent him. Although Bailey previously promised Scott that he would pay for the services of an attorney, Scott had to pay Kleinschmidt a retainer of $5,000 to represent him in March 1991. Clem Bailey thus prolonged the settlement of Scott’s case before the tax court by promising to obtain legal representation for Scott at no extra fee, and then reneging on those promises. He also caused Scott to incur additional interest expense and unexpected attorney’s fees. 17. JOSEPH SUTTON Joseph Sutton took early retirement from the Santa Fe Railroad in 1988 in exchange for a lump-sum payment of $50,000. Sutton hired Clem Bailey to prepare his 1988 income tax return on the recommendation of other retired railroad workers. He told Bailey why the railroad paid him this sum, and he did not tell Bailey the money was from a retirement plan. Nevertheless, Bailey treated the $50,000 lump-sum payment as a distribution from a qualified retirement plan and averaged the income over a ten-year period. The IRS disallowed the ten-year averaging and instead treated the lump-sum payment as taxable severance pay in the year received. See 26 U.S.C. § 61 (1984). Thereafter, Sutton paid Bailey $60 to file a tax court petition on his behalf to challenge the IRS’s disallowance of the treatment of his severance pay. Bailey never filed the petition, and never refunded the $60. When the IRS began sending collection letters to Sutton, Bailey told him to ignore the “form letters.” Ultimately, the IRS required Sutton to recognize the entire $50,-000 payment as 1988 income. This Court finds that Clem Bailey knowingly and intentionally understated Sutton’s federal income tax liability by treating his severance pay as nontaxable retirement pay on his 1988 return. 18. WADE and MARY TURNER and MY FAIR LADY Wade and Mary Turner hired Clem Bailey to prepare their federal income tax returns beginning in 1982 or 1983. In 1986, Turner and Mary Meier formed a partnership, My Fair Lady, a women’s retail clothing store. My Fair Lady also used Bailey’s services. Bailey’s office prepared My Fair Lady’s monthly financial statements, as well as the Form 1065 partnership return. My Fair Lady hired an in-house bookkeeper to write out the checks and place a record of the expenses on the stubs. On a monthly basis, My Fair Lady sent Bailey the sales tickets, daily cash balance sheets, bank statements, deposit slips, and can-celled checks. Turner either mailed or personally carried the ending inventory figures to Bailey’s office. CBA prepared and mailed to My Fair Lady the monthly financial statements, which My Fair Lady promptly submitted to the bank and to the various merchandise vendors. Although My Fair Lady provided Bailey with accurate inventory figures, the partnership returns for 1987, 1988, and 1989 are inaccurate. On the 1987 partnership return, Bailey erroneously decreased the ending inventory by $91,894, which increased the cost of goods sold and thereby inflated the partnership’s deductions. On the 1988 partnership return, Bailey used a different, and lower, beginning inventory than the 1987 ending inventory. On the 1989 partnership return, Bailey again used a lower beginning inventory than the 1988 ending inventory. Moreover, the financial statements prepared by Bailey for submission to the bank where My Fair Lady did business do not match the partnership returns prepared by him for submission to the IRS. Bailey also wrongly told the Turners that they could deduct up to $3000 a year for their daughter’s clothing expenses if she wore clothes from My Fair Lady on the campus of Baylor University, where she was a full-time student. The daughter did not report the $3000 as income on her own return. When Bailey failed to appear at the IRS audit of their returns, My Fair Lady’s partners hired a certified public accountant, Harry Harelik, who recalculated inventory, purchases, and expenses based on the same books and records. Harelik testified that the records kept by the Turners and used by Bailey did not substantiate the figures on the partnership return and that the IRS properly disallowed the deduction for in-kind payments to the Turners’ daughter. He agreed with the IRS that the individual partners owed over $80,000 each in taxes for 1987 through 1989. This Court finds that Clem Bailey knowingly and intentionally understated the 1987, 1988, and 1989 tax liabilities of Meier and the Turners by improperly reducing the income of My Fair Lady and by deducting in-kind payments to the Turners’ daughter. B. JEWELENE BAILEY 1. ARLIN ELLIS Arlin Ellis, an employee of General Dynamics, also runs a small farm which he purchased in 1985. At the time of purchase, the farm had a two-bedroom house, an outbuilding, an all-metal hay barn, two windmills, two wells, and was fenced. Jew-elene Bailey prepared the Ellises’ 1988 federal income tax return. Form 4562, relating to the Ellises’ farm income for 1988, reflects depreciation deductions of $8,868.78. Jewelene Bailey also prepared the depreciation schedule provided to the IRS during the examination of the Ellises’ return. It includes a storage barn in addition to the hay barn and indicates that a storage barn had been part of the original purchase in 1985. Ellis, however, testified that he never had a second barn on the property and had never told anyone at CBA that he owned two barns. The IRS disallowed the $1,301.05 depreciation deductions attributable to the storage barn in 1988 and 1989. Jewelene Bailey admitted she made an error on the Ellises’ return, but claimed that the error was not intentional. This Court, however, finds that Jewelene Bailey knowingly and intentionally understated the El-lises’ 1988 tax liability by including a false depreciation deduction for a second barn on their 1988 return. 2. JERRY KINDER Jerry Kinder is a hairdresser who employed Jewelene Bailey to prepare his 1987 federal income tax return. For the preparation of that return, Kinder showed Bailey two cancelled checks he had written — one dated in 1985 and the other dated in 1986. Kinder told her they were for business expenses, and asked if she could include those amounts on his 1987 return. Bailey responded that she could, and she did, deduct them as business expenses, despite the fact they had been paid in previous years. Bailey testified that she properly deducted the expenses in 1987 because Kinder borrowed money to pay the expenses and had only paid off the loan in 1987. Repayment of a loan, however, is not a deductible expense. Vukasovich, Inc. v. Commissioner of Internal Revenue, 790 F.2d 1409, 1413 (9th Cir.1986); Dowd v. Commissioner, 68 T.C. 294 (1977). For a cash-basis taxpayer like Kinder, expenditures are deductible only in the year they are incurred. Jewelene Bailey undoubtedly knew this. She must, therefore, be found to have intentionally understated Jerry Kinder’s 1987 tax liability by including false business deductions on his return for that year. C. KRISTI SHELTON 1. CARL EDWARDS Carl Edwards is a service manager for Southwest Ford, a car dealership. In 1987, Edwards received a salary, plus a $250-per-month “demo allowance” to cover the costs of his business travel. Southwest Ford did not require Edwards to keep a log or record of his business mileage in order to receive the demo allowance, and he did not keep any such record. Edwards paid Kristi Shelton to prepare his 1987 federal income tax return. Although Shelton interviewed Edwards and prepared a handwritten copy of the return, a typist actually signed Shelton’s name to it. Edwards and his wife gave Shelton their W-2 forms, various receipts, and a Form 1099 for the value of the demo allowance from Southwest Ford, which had failed to withhold tax for that amount. Shelton asked Edwards how many miles he drove that year, how far he lived from work, and the number of days he worked. Edwards told Shelton that “he had no idea [how many miles he had driven that year] — ten to fifteen thousand,” and that his homework-home trip was approximately ten miles. The Form 2106 attached to Edwards’s 1987 return showed a total of 7500 business miles out of a total of 10,000 miles driven. The form also represents that Edwards can provide written verification to document these figures. Edwards testified that he did not drive 7500 business miles in 1987, and does not know how Shelton arrived at that figure. Edwards’s best estimate is that he drove a maximum of 4000 business miles in 1987. Shelton testified that she reconstructed Edwards’s business use of his vehicle the best she could with the information Edwards had available. In Edwards’s case, if one adopts his estimate of a ten-mile daily commute and multiplies that figure by 250 days a year (fifty five-day weeks), it is clear that Shelton simply assumed that all vehicle use was “business” except for the 2500 miles generated by the daily commute. Her presumption is not reasonable, for it rests on the silly assumption that Edwards never used his vehicle for any purpose other than daily commuting and business. Accordingly, this Court must conclude that Kristi Shelton knowingly and intentionally understated Edwards’ 1987 tax liability by including a false deduction for employee business expenses on his return. 2. ROGER and LISA MOORE Roger Moore is an account manager who designs and sells software packages. In 1989, the company employing Moore sold itself another company for an exchange of stock. Each employee who, like Moore, owned stock in the selling company received stock in the buying company, which generated a taxable gain in 1989. Moore received an internal memorandum from his company in early 1990 informing him how to report the income he received from the stock sale. The memorandum stated that Moore would have both ordinary income and a short-term capital gain. According to the memorandum, the amount of the ordinary income Moore received from the stock sale was reflected in the W-2 he received for 1989. The memorandum also stated that Moore would have to report a capital gain on Schedule D. The memorandum clearly stated, in three separate places, that the amount of Moore’s Schedule D gain would “depend on the ACTUAL NET PROCEEDS FROM THE SALE OF YOUR STOCK.” Directly below the term “Net Schedule D gain” on the memorandum were the words “(EXAMPLE ONLY).” Roger Moore hired Kristi Shelton to prepare his 1989 federal income tax return. He gave Shelton his W-2 forms, expense figures, earnings figures, and the internal memorandum to aid her in preparing his 1989 return. Despite the clarity of this memorandum, Shelton never asked Moore how much he received per share or in the aggregate for his stock. On Schedule D of the 1989 return, Shelton reported Moore’s net gain as the example amount of $380 demonstrated in the memorandum, rather than the actual amount received by Moore which was much more than $380. The IRS subsequently determined that Moore owed a deficiency for the stock sale. Although Moore professed ignorance of the proper preparation of income tax returns and claimed not to know how to treat the stock sale correctly, he testified that Shelton made a good-faith error in computing his tax liability. This Court is not so naive. Kristi Shelton knowingly and intentionally understated Moore’s 1989 tax liability by reporting only a portion of the income Moore actually received from the sale of his stock on his 1989 return. D. KATHY ZEEB 1. JACKIE EUSTICE Sometime prior to 1988, Jackie Eustice purchased sixteen acres of swampland for $10,000. The sales contract did not allocate the $10,000 purchase price among the sixteen acres in the tract. In 1988, Eustice sold a small parcel of approximately five and one-half acres out of the sixteen-acre tract for $17,300. Kathy Zeeb prepared Eustice’s 1988 federal income tax return and reported the partial sale of the tract on his Form 4797. Eustice told Zeeb what he paid for the entire sixteen-acre tract and the price for which he sold the small parcel. The Form 4797 prepared by Zeeb reflects that Eustice had a basis of $13,780 in the parcel he sold for $17,300. The tax return thus reflected a gain on the sale of only $3520. The IRS adjusted downward the $13,780 basis shown on the return for the small parcel to reflect the fact that Eustice sold only a portion of the sixteen-acre tract and retained the remaining acreage. The examining agent divided the $10,000 original purchase price by sixteen to arrive at Eus-tice’s original price per acre. The agent then multiplied that figure by 5.5, the number of acres Eustice sold, to arrive at the permissible basis for the small parcel. Zeeb testified that since the remaining ten and one-half acres of land was worthless swampland, she properly apportioned the purchase price and basis between the smaller parcel and the remainder of the sixteen-acre tract. Kathy Zeeb offered no factual support for her assignment of a $13,780 basis to the smaller parcel. Therefore, the Court finds that Zeeb knowingly and intentionally understated Eustice’s 1988 tax liability. 2. GEORGE KEMP In 1989, George Kemp met with Kathy Zeeb for approximately one hour for the preparation of his 1988 federal income tax return. He gave her a list of interest and taxes paid, donations to his church, union dues and other job-related expenses, and a separate list of expenses related to his knife and buckle business, together with W-2 forms and a Form 1099 for the sale of land in Burleson, Texas. Kemp and his wife purchased the land, intending to place a mobile home on it for use as their residence. Because the Kemps were unable to use the land for that purpose, they sold it at a loss to Mrs. Kemp’s son, Richard Fuller, for $5,276.49. This amount is reported on Form 1099 of the Kemps’ 1988 individual return. Fuller agreed to pay the Kemps an additional $4000 if he subsequently sold the property, but they have not yet received any additional money. The Kemps never used the land for business purposes, nor did they tell Zeeb that they had. Even so, Zeeb reported its sale on Form 4797 of their 1988 return as the sale of business property and took a $6,723.51 ordinary loss. Kathy Zeeb knowingly and intentionally understated the Kemps’ 1988 tax liability by treating the sale of real property as an ordinary loss rather than a capital loss subject to capital loss limitations. Even if the Kemps had used the land for business purposes, they could not properly claim a loss because they sold the property to Mrs. Kemp’s natural son. The Internal Revenue Code specifically prohibits any deduction for a loss incurred in the sale or exchange of property between related persons. See 26 U.S.C. § 267(a) (1986 & Supp. 1991). Members of a family, including a person’s lineal descendants, are considered “related” for purposes of the statute. See id. §§ 267(b)(1), (c)(4). This Court finds that Kathy Zeeb knowingly and intentionally failed to take account of the familial relationship between the buyer and seller which disentitled the Kemps to any loss on their 1988 return from the sale of their land in Burleson. 3. DON and BETTY RICHARDS Don Richards owns R & R Concrete. His wife, Betty, assists him with the business and keeps the books. Prior to Kathy Zeeb’s preparation of the Richardses’ 1987 federal income tax return, Zeeb told Betty that she should be paid wages for maintaining the books and records of the family concrete business. Betty took Zeeb’s advice and periodically wrote checks to herself as compensation for performing services for the company. These checks typically amounted to between $100 and $200. Betty never paid self-employment taxes on this income and never prepared a Form 1099 or a W-2 form for herself, even though she mailed a Form 1099 to all R & R Concrete employees. On the Schedule C attached to the Rich-ardses’ 1987 return, Zeeb deducted $6500 for wages allegedly paid to Betty Richards. Line 20 of the return also reflects this amount as income. The records of R & R Concrete do not substantiate the $6500 deduction. During an IRS audit Betty could not reconstruct the salary deduction from her books and records. This Court also finds no factual substantiation for the deduction Zeeb placed on the return. Consequently, this Court finds that Kathy Zeeb knowingly and intentionally understated the Richardses’ 1987 tax liability by including a fraudulent deduction for wages to Betty Richards on their return. E. RETURNS PREPARED JOINTLY BY MORE THAN ONE DEFENDANT 1. HELEN and JIMMY BARRETT Jimmy Barrett is a self-employed drywall contractor. Helen, his wife, is a legal secretary who assists her husband in the drywall business. The Barretts paid $100 per month to CBA to perform bookkeeping services and to prepare monthly statements and federal income tax returns from the mid-1980s through 1988. Clem Bailey incorporated the Barretts’ drywall business in 1985, maintained all the corporate paperwork associated with the business, and prepared the 1988 corporate return. Kathy Zeeb prepared the Barretts’ 1985,1986, and 1987 personal returns. On a monthly basis, the Barretts provided CBA with their bank statements, check stubs, and personal interest statements for the preparation of their personal tax returns. In July 1988, the IRS notified the Bar-retts that their 1985 personal return had been selected for examination. The IRS scheduled a series of appointments with the Barretts, who in turn, notified Clem Bailey. Bailey told the Barretts to reschedule the first and second meetings and then advised them not to appear at the third rescheduled meeting because he had cancelled it. Bailey assured the Barretts that they would receive an IRS notice as to a fourth rescheduled meeting. Neither the Barretts nor Bailey ever met with the IRS to discuss the 1985 return. When the Barretts received IRS notices that they owed taxes, penalty, and interest for the 1985 tax year, Bailey again reassured them not to worry and not to schedule future IRS meetings because he had transferred their case to “Problem Resolution,” which he explained was a tax court. The Barretts soon discovered, however, that their 1985 examination had been closed for their failure to appear within ninety days to contest the IRS’s assessment. Several weeks later, Bailey told the Barretts that he could reopen their case. In December 1989, and again in February 1990, Helen Barrett unsuccessfully attempted to reopen their case in Problem Resolution. Shortly thereafter, Bailey represented to the Barretts that Problem Resolution would be sending them a letter stating that the dispute had been resolved and that the Barretts did not owe any money. The Barretts never received any such letter. Ultimately, the IRS issued a notice of levy against the Barretts for approximately $27,000, at which point Mrs. Barrett retrieved all her records from Bailey’s office. This Court finds that the behavior of Clem Bailey and Kathy Zeeb in deliberately failing to appear at the examinations of the Barretts’ 1985 return demonstrates a refusal to cooperate in the IRS examination process. In June 1989, the IRS began examining the Barretts’ 1986 personal return. Helen Barrett, Clem Bailey, and Kathy Zeeb were present for the first appointment with the IRS. The IRS examiner requested that the Barretts bring a number of documents to their next meeting, including a copy of the Barretts’ corporate return. At the next meeting with the IRS, Clem Bailey presented to the IRS examiner two documents which he represented to be copies of the 1985 and 1986 corporate returns for the Barretts’ drywall business. Helen Barrett, however, testified that neither she nor her husband ever signed a corporate return. This Court finds that Clem Bailey deliberately misled the examining agent by presenting to her copies of corporate returns that he falsely represented had been timely prepared, and by implication, timely filed with the IRS. The Schedule C attached to the Barretts’ 1986 personal return showed gross income of approximately $32,000 from wages that Jimmy Barrett caused his business to pay him in 1986. The IRS made an upward adjustment of $326,000 to the Barretts’ income for 1986. This adjustment represented the gross income earned by the Bar-retts’ drywall business in 1986 that had not been reported on any tax return. Bailey alleges that “someone” in his office prepared the Barretts’ corporate returns for the three subject years, and that the Barretts, for reasons unknown, did not sign and file the returns. This Court finds that Clem Bailey and Kathy Zeeb failed to prepare the 1985 and 1986 corporate income tax returns for the Barretts’ drywall business — despite having the information necessary to do so and having been employed for that purpose. This Court further finds that Clem Bailey and Kathy Zeeb failed to prepare any returns — either corporate or individual — properly reflecting thousands of dollars in income actually earned by the Barretts’ drywall business. The IRS also disallowed a deduction of $13,500 for wages to Helen Barrett. Bailey advised Helen that the Barretts could attribute to Helen half of her husband’s weekly wages of $500 so that they would not have to pay social security taxes on that portion. Helen Barrett never told Clem Bailey that she worked for, or was paid by, her husband on a regular basis. Although she assists her husband by keeping the books, she is not, and never has been, paid for assisting her husband in his business. Further, Clem Bailey and Kathy Zeeb knew she was not paid for assisting her husband in his business because CBA kept monthly books for the Barretts’ drywall business. The IRS also disallowed a deduction of $3400 shown as “Cost of Goods Sold” for payment of wages to the Barretts’ son, Kyle. Kyle did not receive a regular salary, nor did the Barretts tell Clem Bailey that they paid their son wages for assisting his father in the drywall business. The Barretts, however, did pay their son a regular weekly personal allowance. A business deduction is not allowed for personal, living, or family expenses. See 26 U.S.C. § 262(a) (1988 & Supp.1991). Clem Bailey and Kathy Zeeb testified that the Barretts split the $500 weekly draw from the drywall business between Helen and Kyle. Helen testified, however, that this $500 weekly payment was the entire sum the family drew from the corporation to pay their bills. Clem Bailey and Kathy Zeeb knowingly and intentionally understated the Barretts’ personal tax liability by placing fraudulent deductions for wages to a spouse and child on Schedule C of their 1986 individual return. 2. JAMES and MARSHA BRANUM James Branum is a self-employed framing contractor. Branum buys only a small amount of his own materials, usually nails, tools, and saw blades; the owner furnishes most of the rest. James and his wife, Marsha, employed CBA to prepare their 1987 and 1988 income tax returns. The Branums provided Clem Bailey and Kristi Shelton with a large sack containing all their business and financial records, including all the receipts and cancelled checks from James’s business. Shelton interviewed Marsha and was primarily responsible for preparation of the returns, though Bailey signed the 1988 return. On Schedule C of their 1988 return, Bailey or Shelton increased James’s expenses for materials, shown as “costs of goods sold,” by $19,000 over the actual costs, as evidenced by the Branums’ receipts. The Branums never told Bailey or Shelton that James had additional costs. During the audit of their 1988 return, Shelton admitted making a mistake in the cost of goods sold, but she claims not to know how or why the mistake occurred. This Court finds that Clem Bailey and Kristi Shelton knowingly and intentionally understated the Branums’ 1988 tax liability by overstating expenses of materials on Schedule C of their return. 3. DAVID and GLORIA CRISP David Crisp has been self-employed in the utility construction business since 1979. Clem Bailey has prepared David and Gloria Crisps’ federal income tax returns since about 1973, but Kristi Shelton assisted in the preparation of the Crisps’ 1987 return. In 1987 and 1988, CBA also prepared monthly financial statements based on the Crisps’ bank records. The monthly statements reflect that David Crisp spent $44,-537.63 for depreciable business equipment during 1987. Consequently, the 1987 return Bailey prepared for the Crisps shows a deduction for depreciation of equipment valued at that amount and placed in service that year. The return, however, also shows a business expense deduction for the same amount. Obviously, the Crisps were only entitled to a depreciation deduction. Schedule C of the same return contains another double deduction. The return properly reflects a $26,000 deduction for wages to Gloria Crisp. It also shows a second deduction of $26,000 as “returns and allowances.” The monthly statements prepared by Bailey’s office do not substantiate a