F I L E D

United States Court of Appeals

Tenth Circuit

JUL 28 1998

PATRICK FISHER

Clerk

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re JAMES BERRY CRADDOCK, d/b/a

Craddock Development Company,

Debtor,

----------------------

UNITED STATES OF AMERICA,

INTERNAL REVENUE SERVICE,

Claimant-Appellant,

v.

JAMES BERRY CRADDOCK,

Debtor-Appellee.

No. 95-1437

Appeal from the United States District Court

for the District of Colorado

(D.C. No. 94-K-175)

Laurie Snyder (Henry Lawrence Solano, United States Attorney, and Gary D.

Gray with her on the briefs), Department of Justice, Washington, D.C., for

Claimant-Appellant.

John Lawrence Hamil (Richard C. Morris with him on the brief) of Hamil

Professional Corporation, Denver, Colorado, for Debtor-Appellee.

Before BRORBY, Circuit Judge, McKAY, Senior Circuit Judge, and HENRY,

Circuit Judge.
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BRORBY, Circuit Judge.

Mr. James Berry Craddock petitions this court for rehearing on the issue of

his substantial understatement of tax penalty addressed in our opinion, In re

Craddock, 143 F.3d 595, 1998 WL 213685 (10th Cir. May 1, 1998). We grant

Mr. Craddock’s petition, in part, as to our standard of deference applicable to a

treasury regulation, and the application of this standard to Treas. Reg. § 1.6661-

2(c)-(d). We deny his petition as to all other issues and deny his suggestion for

rehearing en banc. The original opinion is withdrawn. This opinion is ordered

substituted for the original opinion filed in this case.

The Internal Revenue Service ("IRS") appeals the district court's denial of

late filing penalties and computation of a substantial underpayment of tax penalty

assessed against Mr. James Berry Craddock's Chapter 11 bankruptcy estate. The

IRS contends the district court erred in reversing the bankruptcy court's finding

that no reasonable cause existed for Mr. Craddock's failure to timely file his

federal 1981, 1982, and 1985 tax returns, and affirming the bankruptcy court's

computation of understatement of tax penalty for Mr. Craddock's 1985 tax

liability. We exercise jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 1291, and

reverse.
1

 The penalties included additions to tax for negligence under 26 U.S.C.

("I.R.C.") § 6653(a) and failure to file timely tax returns under I.R.C. § 6651(a)

for each of the tax years 1981-1985, and substantial understatement of tax

penalties pursuant to I.R.C.§ 6661 for tax years 1982, 1983, and 1985.

2

 The late-filing penalties disputed in this appeal are $82,540 for 1981,

$1,665 for 1982, and $61,806 for 1985.

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BACKGROUND

The IRS filed proofs of claims for taxes, interest and penalties against Mr.

Craddock's bankruptcy estate relating to tax years 1979-1986.1 Most the claims

were resolved by agreement except for the two issues in this appeal. The relevant

facts are as follows.

Failure to timely file tax returns.

During the years 1981-1985, Mr. Craddock owned and operated a real

estate development company, Craddock Development Company ("CDC"), as a

sole proprietor. He reported his CDC income in his federal individual income tax

returns for each of the relevant tax years. Despite obtaining extensions, Mr.

Craddock filed each of his income tax returns for the years 1981, 1982, and 1985

over ten months late. Consequently, the IRS assessed late filing penalties under

I.R.C. § 6651.2

 Mr. Craddock objected on grounds his failure to timely file the

returns was due to reasonable cause and not willful neglect, an excuse permitted
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by I.R.C. § 6651(a). In support of his objection, Mr. Craddock presented his

testimony and testimony of Mr. Robert J. Rudnick, a former CDC accountant

responsible for reviewing Mr. Craddock's tax returns from July 1982 through

1985. Their testimony provided the following evidence.

Mr. Craddock delegated his tax return preparation duties to CDC's

accounting staff. During the years in question, CDC and its related businesses

experienced exponential growth and complexity, resulting in the addition of at

least twenty-five other businesses arranged as pass-through entities such as

partnerships and S-corporations. To handle the additional workload, Mr.

Craddock added another accounting department and increased his accounting

personnel from five in the early 1980's to fifty by 1985. Mr. Craddock hired

outside accounting firms to review the tax returns prepared by his accounting

staff. From 1981 through 1985, Mr. Craddock paid approximately $1 million per

year (about fifty percent of his total payroll) on accounting and tax staff, and

more than $100,000 per year in fees to his independent certified public accounting

firm.

Mr. Craddock also purchased a new accounting system, the Basic-4 system,

to help manage his growing business. However the Basic-4 system failed to
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perform as quickly and effectively as represented. Despite his efforts, Mr.

Craddock knew his tax returns were still not being timely filed. Yet, he did not

instruct his staff to timely file the returns since he wanted the returns to be

accurate. He also chose not to hire outside accounting firms to help prepare tax

returns because he felt "[t]hey were too expensive."

Mr. Rudnick testified the untimely filing of Mr. Craddock's tax returns was

also due to a high rate of personnel turnover, extensive audits of prior years' tax

returns which required substantial amounts of the accounting department's time,

and the conversion to CDC's accounts from the accrual to the cash basis.

The bankruptcy court allowed the IRS's late filing penalties for several

reasons. The court cited United States v. Boyle, 469 U.S. 241 (1985) in

concluding Mr. Craddock's reliance on his accounting staff for the ministerial task

of filing tax returns was not "reasonable cause." In addition, the court held the

growth and complexity of one's business does not constitute an excuse. 

Furthermore, the court ruled Mr. Craddock was liable for the penalties because it

found "the circumstances were clearly within Mr. Craddock's ability to control."

The district court reversed, ruling the bankruptcy court improperly applied
3

 I.R.C. § 6661(a) (repealed and material portions recodified in 1989 in

§ 6662) imposed a twenty-five percent penalty on a substantial underpayment of

tax attributable to an understatement of tax.

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Boyle to the facts of this case since Mr. Craddock did more than merely rely on

his accounting department. The court held the proper legal standard was whether

Mr. Craddock exercised ordinary business care and prudence in attempting to file

his returns on time. The court concluded Mr. Craddock exercised such care, and

overruled the bankruptcy court's finding the circumstances were within Mr.

Craddock's ability to control. The IRS appeals the district court's decision.

Substantial Understatement of Tax

The IRS assessed a $61,825 understatement of tax penalty under I.R.C.

§ 6661(a) (1985),3 as an addition to Mr. Craddock's 1985 tax liability. Under the

1985 version of I.R.C. § 6661, an understatement of tax is the difference between

the amount of tax required to be reported on a return, and the amount of tax

actually reported, reduced by the amount of tax attributable to any item disclosed,

but not reported in the tax return. I.R.C. § 6661(b)(2)(A), (B). Mr. Craddock's

corrected tax required to be reported in his 1985 tax return was $247,299 after

IRS audit adjustments. He reported no tax. He disclosed but did not report

income of $3,378,385 from the "Airport Raintree" transaction. Following Treas.
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Reg. § 1.6661-2(c) and (d), the IRS computed Mr. Craddock's substantial

understatement penalty by recomputing his tax shown on his return as if he had

properly reported the Airport Raintree transaction for tax purposes, resulting in a

revised tax shown on his return of $0, and a substantial understatement of tax of

$247,299.

Mr. Craddock objected to the penalty on the ground that under the statute's

plain language, if the understatement was reduced "by that portion of the

understatement which is attributable to ... any item with respect to which the

relevant facts affecting the item's tax treatment are adequately disclosed," he

would not be liable for a penalty. I.R.C. § 6661(b)(2)(B). The bankruptcy court

agreed, rejecting the IRS's calculation in accordance with Treas. Reg. § 1.6661-

(c) and ruling there was no understatement of tax within the meaning of I.R.C.

§ 6661. It found no understatement would exist if the income attributable to the

Airport Raintree transaction was excluded from the computation of his corrected

tax required to be shown on his return. The district court affirmed by deciding

the bankruptcy court's computation was consistent with the purposes of I.R.C.

§ 6661(b)(2)(B)(ii) "to deter the use of undisclosed questionable reporting

decisions" since it "reversed out" the effect of the disclosed Airport Raintree

transaction. The IRS appeals.
4

 Rule 60(a) may be used to correct what is erroneous because the thing

spoken, written or recorded is not what the person intended to speak, write or

record. Allied Materials Corp. v. Superior Products Co., 620 F.2d 224, 225-26

-8-

The IRS also filed a motion in this court in July 1997 for leave to file a

motion in the bankruptcy court to correct a mistake in the bankruptcy court's

judgment filed January 7, 1994, almost three years ago. The IRS contends the

judgment did not accurately reflect the amount of interest contained in the parties'

stipulation filed March 9, 1993. The bankruptcy court's 1994 judgment awarded

taxes, penalties and interest specified in the IRS's Corrected Calculations filed

with the court on November 3, 1993. The IRS filed its Corrected Calculations

pursuant to the court's request that it calculate negligence penalties, not Mr.

Craddock's total tax liability including all penalties and interest. The IRS's

Corrected Calculations and hence the judgment appears not to have included the

amount of interest stipulated by the parties.

Under Fed. R. Civ. P. 60(a) made applicable to bankruptcy cases by Fed. R.

Bankr. P. 9024, "[c]lerical mistakes in judgments, [or] orders may be corrected by

the court at any time." However, "while the appeal is pending [such mistakes]

may be so corrected with leave of the appellate court." Fed. R. Civ. P. 60(a). 

The IRS claims the district court's order is correctable under Fed. R. Civ. P.

60(a),4

 while Mr. Craddock claims the order is only correctable under Fed. R. Civ.
(10th Cir. 1980). Such a correction should not require additional proof. Trujillo

v. Longhorn Mfg. Co., 694 F.2d 221, 226 (10th Cir. 1982); McNickle v. Bankers

Life & Cas. Co., 888 F.2d 678, 682 (10th Cir. 1989). Rule 60(a) is not available

to correct something that was deliberately done but later discovered to be wrong. 

McNickle, 888 F.2d at 682.

5

 Fed. R. Civ. P. 60(b) provides, in part:

On motion and upon such terms as are just, the court

may relieve a party ... from a final judgment, order, or

proceeding for ... (1) mistake, inadvertence, surprise, or

excusable neglect .... The motion shall be made within a

reasonable time, and for reason[] (1) ... not more than

one year after the judgment, order, or proceeding was

entered or taken.

Rule 60(b) covers mistakes by counsel or parties regarding procedural

errors, fraud in settlements, confusion etc. See Wright, Miller & Kane, Federal

Practice & Procedure: Civil 2d § 2858 (1995).

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P. 60(b),5 as a correction of an error caused by inadvertence or mistake. Under

Fed. R. Civ. P. 60(b), the district court can only amend its judgment for mistakes

within one year from the date originally awarded. If Mr. Craddock is correct, the

motion must be denied since it was filed beyond the one-year limitation. Based

on our review of the record, it is unclear whether the difference between the

stipulated interest and any interest stated in the judgment was due to a clerical

error or mistake. Therefore, unable to rule on the motion, we remand this

question to the bankruptcy court to determine whether the judgment contains a
6

 Mr. Craddock also filed a motion to strike the IRS's reply motion to Mr.

Craddock's response motion. Because the Federal Rules of Appellate Procedure

do not provide authority to file a reply motion and the IRS's reply motion contains

arguments not made in its original motion, we grant Mr. Craddock's motion to

strike. See Fed. R. App. P. 27.

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clerical error correctable under Fed. R. Civ. P. 60(a).6 Despite our remand, we

consider this judgment final for purposes of this appeal, since the parties treated

the judgment as final, the interest is not an issue on direct appeal, and if the

judgment contains a clerical error or mistake, such error generally does not render

the judgment invalid. See Stone v. I.N.S., 514 U.S. 386, 401 (1995) (stating the

pendency of a Rule 60(b) motion does not affect the continuity of a prior-taken

appeal); Pratt v. Petroleum Prod. Management, Inc. Employee Sav. Plan & Trust,

920 F.2d 651, 655-56 (10th Cir. 1990) (treating judgment as final where judgment

referenced another order and inadvertently omitted prejudgment interest not part

of the primary relief sought in the parties' appeal; also stating clerical errors in a

judgment sought to be corrected under Rule 60(a) do not render the judgment

invalid). We now address the merits of this appeal.

DISCUSSION

Failure to timely file tax return penalties

The IRS claims the district court erred in reversing the bankruptcy court's
7

 I.R.C. § 6651(a)(1) imposes a five percent penalty on the tax due on the

return "unless it is shown that such failure is due to reasonable cause and not due

to willful neglect."

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finding that no reasonable cause existed for Mr. Craddock's failure to timely file

his 1981, 1982, and 1985 tax returns. We agree. To avoid a late filing penalty

under I.R.C. § 6651(a)(1),7 the taxpayer bears the "heavy burden" of proving the

failure to timely file was both due to reasonable cause and not due to willful

neglect. Boyle, 469 U.S. at 245 (quoting I.R.C. § 6651(a)(1)); Jackson v.

Commissioner, 864 F.2d 1521, 1527 (10th Cir. 1989). Reasonable cause exists

"[i]f the taxpayer exercised ordinary business care and prudence and was

nevertheless unable to file the return within the prescribed time." Treas. Reg. §

301.6651-1(c) (emphasis added). The term "willful neglect" means "a conscious,

intentional failure or reckless indifference." Boyle, 469 U.S. at 245.

Whether the elements that constitute "reasonable cause" are present is a

question of fact. Boyle, 469 U.S. at 249 n.8. What elements constitute

"reasonable cause" is a question of law. Id. We review the district and

bankruptcy courts' legal determinations de novo, and the bankruptcy court's

factual findings for clear error. In re Yellow Cab Coop. Ass'n, 132 F.3d 591, 596-

97 (10th Cir. 1997); Jackson, 864 F.2d at 1527.
8

 In Boyle, the Supreme Court adopted a bright-line rule that a situation

where the taxpayer turns over his records to his agent and merely relies on the

agent to timely file his returns, does not constitute reasonable cause as a matter of

law. 469 U.S. at 252.

9

 Mr. Craddock also increased his staff when he realized his present

accounting staff was unable to handle its functions, and he replaced his antiquated

accounting system to aid in assimilating information faster.

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We recognize Mr. Craddock exercised some care in attempting to keep up

with his accounting and tax functions by selectively increasing his accounting

staff, having outside accounting firms review the tax returns, and replacing his

antiquated computer system with one recommended by experts. However, these

facts are not enough to escape a late filing penalty under I.R.C. § 6661. Although

the Boyle bright-line test8

 does not apply, since Mr. Craddock did more than just

rely on his employees to timely file his tax returns,9

 Mr. Craddock failed to

exercise "ordinary business care and prudence" in ensuring his returns were

timely filed and failed to show that he was "unable" to file the returns on time. 

Mr. Craddock's reasons for his failure to timely file, such as his records or

information could not be assimilated fast enough, his accounting staff was

overworked, and his computer system was inefficient, are not reasonable cause. 

A taxpayer is "expected in the exercise of ordinary business care and prudence ...

not [to] take on such a load that he could not fulfill his own legal obligations

within the required time." Dustin v. Commissioner, 467 F.2d 47, 50 (9th Cir.
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1972) (internal quotation marks omitted); Oliver v. Commissioner, 73 T.C.M.

(CCH) 2035, 2051 (1997) ("[A] taxpayer is not excused from timely filing his

income tax return merely because he is overworked."); Merriam v. Commissioner,

70 T.C.M. (CCH) 627 (1995) ("[A] heavy workload and preoccupation with

business affairs do not constitute reasonable cause for the untimely filing of a tax

return."), aff'd, 107 F.3d 877 (9th Cir. 1997) (table opinion). In addition, the

unavailability of business records or difficulty in obtaining records, unless such

records are destroyed, is generally not a reasonable cause for failure to file a tax

return. Robinson v. Commissioner, 68 T.C.M. (CCH) 1158, 1164 (1994); Young

v. Commissioner, 58 T.C.M. (CCH) 1, 8-9 (1989), aff'd, 937 F.2d 609 (6th Cir.

1991) (table opinion). The complexity of one's affairs also does not give

reasonable cause. Edgar v. Commissioner, 56 T.C. 717, 762-63 (1971). Nor does

the preoccupation with audits constitute reasonable cause. C.f. Morgan v.

Commissioner, 807 F.2d 81, 83 (6th Cir. 1986) (ruling the preoccupation with

litigation is not reasonable cause).

In addition, despite his efforts to improve the situation, Mr. Craddock

failed to prove that he was unable to file the tax returns on time as required by

Treas. Reg. § 301.6651-1(c)(1). The IRS contends the district court erred in

overruling the bankruptcy court's finding that the circumstances surrounding Mr.
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Craddock's late filed tax returns were within "his ability to control." The

bankruptcy court's findings are not clearly erroneous. A factual finding is

"clearly erroneous when, although there is some evidence to support it, upon

review of the entire record the appellate court is left with the definite and firm

conviction that a mistake has been made." Daemi v. Church's Fried Chicken,

Inc., 931 F.2d 1379, 1384 (10th Cir. 1991). Evidence in the record reveals Mr.

Craddock knew his businesses were expanding rapidly and his tax affairs were

becoming complex. For over three years, he was aware his accounting staff filed

his tax returns over ten months late, yet he continued to delegate his tax return

responsibilities to them. He consciously decided not to engage an outside

accounting firm to prepare his tax returns. He also knew his new Basic-4

computer system was inadequate, yet he continued to use the system until 1987. 

As we are convinced no mistake has been made based on these facts, we rule the

bankruptcy court's finding was not clearly erroneous.

To support his position, Mr. Craddock relies on In Re Hudson Oil Co., 91

B.R. 932 (Bankr. D. Kansas 1988). In that case, a bankruptcy trustee was

appointed over the taxpayer's bankruptcy estate three weeks before the taxpayer's

1983 federal tax return was due. Id. at 936. Because of the short length of time

to the filing deadline and the disorganization of the taxpayer's books, the trustee's
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accountant filed the return late. Id. at 939. Consequently, the IRS imposed a late

filing penalty. Id. at 940. In response to the trustee's defense of reasonable

cause, the bankruptcy court found the trustee did all he could do under the

circumstances to file the tax return, but was physically unable to timely file the

return due to the short time period to file and the taxpayer's books were in such a

disarray. Id. at 950.

We find Mr. Craddock's case distinguishable. Unlike the trustee in Hudson

who had only three weeks to prepare and file the tax return, Mr. Craddock knew

his tax return deadlines and responsibilities long before the returns were actually

due. In addition, Mr. Craddock controlled his books for a long time before the

returns were due, unlike the trustee in Hudson. Although Mr. Craddock argues

his situation is similar to the facts in Hudson, in that he also was unable to

prepare the return as a result of his books not being final, we disagree. A

distinguishing feature in Hudson is that the books were not ready through no fault

of the trustee, while in Mr. Craddock's case, he knew on an ongoing basis that his

books and tax returns were not being prepared timely, yet despite his unsuccessful

efforts, he failed to correct the situation. Furthermore, Mr. Craddock even

testified his books were not in disarray since "all the facts were there," but he was

just having problems "pulling it all together." Mr. Craddock's situation is not one
10 Mr. Craddock's situation is comparable to the circumstances in Valen

Mfg. Co. v. United States, 90 F.3d 1190, 1193 (6th Cir. 1996), and Conklin Bros.

of Santa Rosa, Inc. v. United States, 986 F.2d 315, 318 (9th Cir. 1993), where the

courts held the corporate taxpayers were not disabled from complying with their

tax return filing deadlines even though their employees responsible for such

filings secretly failed to comply with the deadlines without the managements'

knowledge. The courts ruled despite the companies prudence and care in

overseeing its employees, the situation was ultimately within the companies'

control. Valen, 90 F.3d at 1193; Conklin Bros., 986 F.2d at 318-19. Similarly in

Mr. Craddock's case, although he increased his accounting staff and installed a

new computer system to comply with his tax obligations, the situation was within

Mr. Craddock's ability to control and therefore he was not "unable" to file his tax

returns on time.

11 By allowing Mr. Craddock's situation to constitute "reasonable cause,"

we would open a Pandora's Box of excuses which would effectively erode tax

return filing deadlines. As the Supreme Court observed in Boyle, "our system of

self-assessment ... of a tax simply cannot work on any basis other than one of

strict filing standards. Any less rigid standard would risk encouraging a lax

attitude toward filing dates." 469 U.S. at 249.

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where he was unable to prepare his tax returns, but rather where his decisions

merely made it challenging. His decisions do not excuse him from complying

with his tax obligations.10 Although Mr. Craddock made efforts to comply with

the tax law, his situation was not one requiring a flexible approach to tax return

deadlines.11 As the Fifth Circuit has observed: "[t]he federal tax statute has

'placed the responsibility for filing (of a) return on time squarely upon each and

every taxpayer.' Charles C. Rice [Rice v. Commissioner], 14 T.C. 503 (1950), at

509. If every taxpayer who ... was too busy to file a return escaped the penalty

for failure to file, our tax system would soon collapse." Logan Lumber Co. v.
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Commissioner, 365 F.2d 846, 854 (5th Cir. 1966).

Mr. Craddock claims it would have been inappropriate for him to file

inaccurate tax returns. A tax return does not have to be completely accurate, but

must be based on the best information available, Oliver, 73 T.C.M. (CCH) at

2051, and may be amended later if necessary, Estate of Vriniotis v. Commissioner,

79 T.C. 298, 311 (1982). Mr. Craddock testified his tax information was

available but just not synthesized. Without more, Mr. Craddock has failed to

prove he could not file a return based on the best information available and later

amend the return as permitted by law.

Mr. Craddock also contends that if he filed returns he knew to be

inaccurate, he would have risked being subject to I.R.C. § 7206(1) which makes it

a felony for "any person" to "[w]illfully make[] and subscribe[] any return ...

which he does not believe to be true and correct as to every material matter." We

reject Mr. Craddock's contention. First of all, the record fails to support Mr.

Craddock's assertion the returns would have been inaccurate as to every material

matter. The evidence on this issue is Mr. Craddock's testimony that he "didn't

want to file returns that were not right," and Mr. Rudnick's testimony that "there

would be a high degree or probability and knowledge that there were errors in the
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tax return, and our effort was to file the best quality tax return we could." 

Second, to commit a felony under I.R.C. § 7206(1), the taxpayer must have the

specific intent to violate the law. See United States v. Pomponio, 429 U.S. 10, 12

(1976); United States v. Winchell, 129 F.3d 1093, 1096-97 (10th Cir. 1997). The

record does not support Mr. Craddock had that intent.

Finally, the IRS claims the undisputed facts constitute willful neglect as a

matter of law. The IRS contends Mr. Craddock "was aware at all times that his

accounting staff was not filing timely returns" and yet purposely did not instruct

his accounting staff to prepare the returns because he knew the returns would be

inaccurate. Therefore, relying on Boyle, the IRS claims Mr. Craddock's conscious

and intentional failure to timely file his return was willful neglect. Due to our

dispositive holding that Mr. Craddock failed to establish reasonable cause, we do

not consider this issue further.

Substantial Understatement of Tax Penalty

The IRS's final claim is the district and bankruptcy courts erred in

computing Mr. Craddock's 1985 understatement of tax penalty pursuant to I.R.C.

§ 6661. Since the facts are largely undisputed, we review the bankruptcy and

district court's interpretation of law de novo. Morrissey v. Internal Revenue
12 An understatement of tax is substantial if it exceeds the greater of either

ten percent of the correct amount of the tax required to be shown on the return, or

$5,000. I.R.C. § 6661(b)(1).

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Service (In re EWC, Inc.), 114 F.3d 1071, 1073 (10th Cir. 1997).

The 1985 version of I.R.C. § 6661(a) imposed a twenty-five percent penalty

on the amount of any underpayment of tax attributable to a substantial

understatement of tax.12 An understatement means the excess of the correct

amount of tax required to be shown on the return for the taxable year, over the

amount of tax actually shown on the return for that year. I.R.C. § 6661(b)(2)(A). 

However, the amount of understatement "shall be reduced by that portion of the

understatement which is attributable to ... any item with respect to which the

relevant facts affecting the item's tax treatment are adequately disclosed in the

return or in a statement attached to the return." I.R.C. § 6661(b)(2)(B).

After its audit of Mr. Craddock's 1985 tax return, the IRS followed Treas.

Reg. § 1.6661-2 in computing a substantial understatement of tax penalty of

$61,825. Under Treas. Reg. § 1.6661-2(c)(1)-(2), an understatement of tax is the

excess of the correct amount of tax required to be shown on the return, over the

amount of tax shown on the return for the taxable year. To reduce the
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understatement for adequately disclosed items, the regulation provides the amount

of tax shown on the return is determined by computing the tax as if the items

adequately disclosed had been properly reported. Treas. Reg. § 1.6661-1(d)(2). 

Therefore, the IRS computed the amount of tax shown on Mr. Craddock's tax

return for purposes of the penalty by adding to the amount of alternative minimum

tax (AMT) income actually shown on Mr. Craddock's tax return (-$5,973,827), the

post-audit AMT income adjustments of $7,209,720 less the AMT adjustment of

$3,378,385 for the adequately disclosed Airport Raintree transaction. This

resulted in -$2,142,492 of AMT income and $0 tax for the amount shown on his

return. Consequently, the IRS deducted $0 (the amount of tax shown on the

return) from $247,299, the correct amount of tax after the IRS audit, to arrive at a

understatement of tax of $247,299 and a penalty of $61,825 (25% of $247,299).

The bankruptcy and district courts rejected the IRS's computation, agreeing

with Mr. Craddock that all of the understatement of tax, $247,299, relates to the

adequately disclosed Airport Raintree transaction, and therefore no penalty was

due. Under the courts' approach, the penalty is computed by taking the corrected

amount of AMT income after all audit adjustments, $1,235,893 and reversing out

the AMT income adjustment relating to the adequately disclosed Airport Raintree

transaction, $3,378,385 arriving at -$2,142,492 AMT income, or $0 tax. From
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this calculation, the courts reasoned that without the AMT income adjustment

from the Airport Raintree transaction, no underpayment would exist. 

Consequently, they concluded Mr. Craddock was not liable for any substantial

understatement penalty since all of the underpayment was attributable to an

adequately disclosed item. We now must decide which interpretation of I.R.C.

§ 6661 is proper.

We believe the statute, I.R.C. § 6661((b)(2)(B)(ii), is ambiguous as to how

a taxpayer precisely computes the "portion of the understatement attributable to"

disclosed items. Pursuant to I.R.C. § 7805(a), Congress delegated authority to the

Secretary of the Treasury to "prescribe all needful rules and regulations for the

enforcement of [the Internal Revenue Code]." Under this authority, the Secretary

of the Treasury adopted Treas. Reg. § 1.6661-2 to implement I.R.C. § 6661. We

generally presume treasury regulations are valid “and ‘are not to be invalidated

except for weighty reasons.’” See Pepcol Mfg. Co. v. Commissioner, 28 F.3d

1013, 1015 (10th Cir. 1993) (quoting United Telecomm., Inc. v. Commissioner,

589 F.2d 1383, 1387 (10th Cir. 1978), cert. denied, 442 U.S. 917 (1979)). A

regulation “‘must be sustained unless unreasonable and plainly inconsistent with

the revenue statutes.’” United Telecomm., 589 F.2d at 1387 (quoting Fulman v.

United States, 434 U.S. 528, 533 (1978)). In determining whether the regulation
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implements the congressional mandate in a reasonable manner, we “‘look to see

whether the regulation “harmonizes with the plain language of the statute, its

origin, and its purpose.”’” True v. United States, 894 F.2d 1197, 1202 (10th Cir.

1990) (quoting National Muffler Dealers Ass’n v. United States, 440 U.S. 472,

477 (1979)).

The language of the statute offers no guidance as to how to compute “the

portion of the understatement attributable to” disclosed items. See I.R.C.

§ 6661(b)(2). However, we know the purpose of the penalty under the statute is

to deter taxpayers from playing “audit lottery” by taking undisclosed questionable

positions on their returns in hopes their aggressive positions will go undetected. 

S. Rep. No. 97-494, at 272-73 (1982), reprinted at 1982 U.S.C.C.A.N. 781, 1019. 

Therefore, by reducing the understatement for disclosed items in computing the

penalty, the statute promotes disclosure.

Consistent with this policy goal, Treas. Reg. § 1.6661-2(d) treats a taxpayer

as if he had properly reported the items that he disclosed to compute the tax

penalty. We think this construction reasonably implements the policy behind

§ 6661(b) by rewarding a taxpayer who discloses an item for purposes of

computing the understatement of tax penalty. The effect of this treatment is it
13 Mr. Craddock's correct tax would be the same, $247,299. His revised

tax shown on his return would be $0 (AMT on -$5,973,827 reported income, plus

$3,378,385 income on Airport Raintree transaction). Therefore, the

understatement of tax penalty would be 25% of $247,299 ($247,299 correct tax

less $0 tax shown on return), or $61,825.

-23-

reduces the understatement for items disclosed as required by I.R.C. § 6661(b)(2).

However, the regulation also effectively restricts the reduction of the

understatement for disclosed items in cases where the taxpayer would be subject

to the same understatement penalty if he had properly reported the disclosed

items. For example, in Mr. Craddock’s case, based on the record before us, had

he properly reported the Airport Raintree transaction that he disclosed, all other

adjustments remaining the same, he still would have been liable for the same

understatement of tax penalty as he is now, $ 61,825.13 Therefore, in his case, the

penalty under the regulation does not appear to be reduced for disclosed items,

because he would be liable for the same penalty as he is now if he had properly

reported the disclosed items. Despite this anomaly, we find Treasury’s

interpretation reasonable. Even though this limit is not prescribed by the statute,

we consider the regulation reasonably implements the statute in promoting

disclosure but not rewarding it more than had the taxpayer properly reported the

item in his tax return. This interpretation reasonably accommodates the statute’s
-24-

intention with the competing interest of fairness. See Atlantic Mut. Ins. Co. v.

Commissioner, 118 S. Ct. 1413, 1417, 1418 (1998) (ruling the Treasury’s

definition of “reserve strengthening” under I.R.C. § 846 need not be

“microscopically fair” but rather a “reasonable accommodation).

In a similar case, United Telecomm. 589 F.2d at 1387-88, we upheld Treas.

Reg. § 1.46-3(c)(1), which prevented a taxpayer from taking a double investment

tax credit, even though the statute did not contain a specific prohibition against a

double credit. As the court held in that case, the logical presumption is the

statute opposed a double credit. Id. at 1388. Likewise, the logical presumption in

this case is Congress intended to promote disclosure, but it certainly did not

intend to reward disclosure over actually properly reporting an item on the

taxpayer’s tax return. The regulation at issue not only implements Congress’

intent to reward disclosure by treating disclosed items as if they had been

properly reported for purposes of the tax penalty, but it also logically limits

rewarding disclosure above properly reporting an item for purposes of computing

the understatement penalty.

Furthermore, we may presume the validity of a regulation which remains

unchanged after the statute it implements has been re-enacted. See Cottage Sav.
-25-

Assoc. v. Commissioner, 499 U.S. 554, 561 (1991); see also Maurer v. United

States, 284 F.2d 122, 124 (10th Cir. 1960). Treas. Reg. § 1.6661-2 has remained

unchanged since 1985. 50 Fed. Reg. 12,014 (1985). In contrast, the statute,

I.R.C. § 6661 has been amended several times and re-enacted under I.R.C. § 6662

in 1989. Amended by Pub. L. 97-354, § 5(a)(42), 96 Stat. 1697 (1982); Pub. L.

98-369, Div. A, Title VII, § 714(h)(3), 98 Stat. 962 (1984); Pub. L. 99-509, Title

VIII, § 8002(a), (c), 100 Stat. 1951 (1986); Pub. L. 99-514, Title XV, § 1504(a),

100 Stat. 2743 (1986); Repealed and re-enacted by Pub. L. 101-239, Title VII,

§ 7721(c)(2), 103 Stat. 2399 (1989). Since Congress’ amendments and reenactment of the statute has not impacted the regulation, we may presume the

regulation received congressional approval. Cottage Sav., 499 U.S. at 561.

Mr. Craddock claims the regulation is contrary to I.R.C. § 6661 because

under the statute, the understatement should be reduced first for disclosed items. 

Mr. Craddock misconstrues the statute. The statute does not do what Mr.

Craddock suggests, but rather, requires the understatement be reduced by the

“portion of the understatement which is attributable” to disclosed items. I.R.C. §

6661(b)(2)(B)(ii). As we have concluded above, we find this language

ambiguous, and Treas. Reg. § 1.6661-2(c)-(d) reasonably interprets the statute.
-26-

Based on the reasons above, we find Treas. Reg. § 1.6661-2(c)-(d) not

unreasonable or plainly inconsistent with I.R.C. § 6661. Therefore, since we find

the regulation is a valid interpretation of the statute, the district and bankruptcy

courts erred by not following it.

Accordingly, we REVERSE the district court's decision that Mr. Craddock

established reasonable cause, and therefore reinstate the IRS late filing penalties

for years 1981, 1982, and 1985. We REVERSE the district and bankruptcy

court's calculation of the substantial understatement of tax penalty for 1985 and

REMAND to the bankruptcy court to calculate the proper penalty in accordance

with Treas. Reg. § 1.6661-2(d). We REMAND the IRS's motion for leave to

correct a mistake in the bankruptcy court's judgment to the bankruptcy court to

determine whether its 1994 judgment contains a clerical error or mistake for

interest.
F I L E D

United States Court of Appeals

Tenth Circuit

MAY 1 1998

PATRICK FISHER

Clerk

PUBLISH

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

In re JAMES BERRY CRADDOCK, d/b/a

Craddock Development Company,

Debtor,

----------------------

UNITED STATES OF AMERICA,

INTERNAL REVENUE SERVICE,

Claimant-Appellant,

v.

JAMES BERRY CRADDOCK,

Debtor-Appellee.

No. 95-1437

Appeal from the United States District Court

for the District of Colorado

(D.C. No. 94-K-175)

Laurie Snyder (Henry Lawrence Solano, United States Attorney, and Gary D.

Gray with her on the briefs), Department of Justice, Washington, D.C., for

Claimant-Appellant.

John Lawrence Hamil (Richard C. Morris with him on the brief) of Hamil

Professional Corporation, Denver, Colorado, for Debtor-Appellee.

Before BRORBY, Circuit Judge, McKAY, Senior Circuit Judge, and HENRY,

Circuit Judge.
1

 The penalties included additions to tax for negligence under 26 U.S.C.

("I.R.C.") § 6653(a) and failure to file timely tax returns under I.R.C. § 6651(a)

for each of the tax years 1981-1985, and substantial understatement of tax

penalties pursuant to I.R.C.§ 6661 for tax years 1982, 1983, and 1985.

-2-

BRORBY, Circuit Judge.

The Internal Revenue Service ("IRS") appeals the district court's denial of

late filing penalties and computation of a substantial underpayment of tax penalty

assessed against Mr. James Berry Craddock's Chapter 11 bankruptcy estate. The

IRS contends the district court erred in reversing the bankruptcy court's finding

that no reasonable cause existed for Mr. Craddock's failure to timely file his

federal 1981, 1982, and 1985 tax returns, and affirming the bankruptcy court's

computation of understatement of tax penalty for Mr. Craddock's 1985 tax

liability. We exercise jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 1291, and

reverse.

BACKGROUND

The IRS filed proofs of claims for taxes, interest and penalties against Mr.

Craddock's bankruptcy estate relating to tax years 1979-1986.1

 Most the claims

were resolved by agreement except for the two issues in this appeal. The relevant

facts are as follows.
2

 The late-filing penalties disputed in this appeal are $82,540 for 1981,

$1,665 for 1982, and $61,806 for 1985.

-3-

Failure to timely file tax returns.

During the years 1981-1985, Mr. Craddock owned and operated a real

estate development company, Craddock Development Company ("CDC"), as a

sole proprietor. He reported his CDC income in his federal individual income tax

returns for each of the relevant tax years. Despite obtaining extensions, Mr.

Craddock filed each of his income tax returns for the years 1981, 1982, and 1985

over ten months late. Consequently, the IRS assessed late filing penalties under

I.R.C. § 6651.2 Mr. Craddock objected on grounds his failure to timely file the

returns was due to reasonable cause and not willful neglect, an excuse permitted

by I.R.C. § 6651(a). In support of his objection, Mr. Craddock presented his

testimony and testimony of Mr. Robert J. Rudnick, a former CDC accountant

responsible for reviewing Mr. Craddock's tax returns from July 1982 through

1985. Their testimony provided the following evidence.

Mr. Craddock delegated his tax return preparation duties to CDC's

accounting staff. During the years in question, CDC and its related businesses

experienced exponential growth and complexity, resulting in the addition of at

least twenty-five other businesses arranged as pass-through entities such as
-4-

partnerships and S-corporations. To handle the additional workload, Mr.

Craddock added another accounting department and increased his accounting

personnel from five in the early 1980's to fifty by 1985. Mr. Craddock hired

outside accounting firms to review the tax returns prepared by his accounting

staff. From 1981 through 1985, Mr. Craddock paid approximately $1 million per

year (about fifty percent of his total payroll) on accounting and tax staff, and

more than $100,000 per year in fees to his independent certified public accounting

firm.

Mr. Craddock also purchased a new accounting system, the Basic-4 system,

to help manage his growing business. However the Basic-4 system failed to

perform as quickly and effectively as represented. Despite his efforts, Mr.

Craddock knew his tax returns were still not being timely filed. Yet, he did not

instruct his staff to timely file the returns since he wanted the returns to be

accurate. He also chose not to hire outside accounting firms to help prepare tax

returns because he felt "[t]hey were too expensive."

Mr. Rudnick testified the untimely filing of Mr. Craddock's tax returns was

also due to a high rate of personnel turnover, extensive audits of prior years' tax

returns which required substantial amounts of the accounting department's time,
-5-

and the conversion to CDC's accounts from the accrual to the cash basis.

The bankruptcy court allowed the IRS's late filing penalties for several

reasons. The court cited United States v. Boyle, 469 U.S. 241 (1985) in

concluding Mr. Craddock's reliance on his accounting staff for the ministerial task

of filing tax returns was not "reasonable cause." In addition, the court held the

growth and complexity of one's business does not constitute an excuse. 

Furthermore, the court ruled Mr. Craddock was liable for the penalties because it

found "the circumstances were clearly within Mr. Craddock's ability to control."

The district court reversed, ruling the bankruptcy court improperly applied

Boyle to the facts of this case since Mr. Craddock did more than merely rely on

his accounting department. The court held the proper legal standard was whether

Mr. Craddock exercised ordinary business care and prudence in attempting to file

his returns on time. The court concluded Mr. Craddock exercised such care, and

overruled the bankruptcy court's finding the circumstances were within Mr.

Craddock's ability to control. The IRS appeals the district court's decision.
3

 I.R.C. § 6661(a) (repealed and material portions recodified in 1989 in

§ 6662) imposed a twenty-five percent penalty on a substantial underpayment of

tax attributable to an understatement of tax.

-6-

Substantial Understatement of Tax

The IRS assessed a $61,825 understatement of tax penalty under I.R.C.

§ 6661(a) (1985),3 as an addition to Mr. Craddock's 1985 tax liability. Under the

1985 version of I.R.C. § 6661, an understatement of tax is the difference between

the amount of tax required to be reported on a return, and the amount of tax

actually reported, reduced by the amount of tax attributable to any item disclosed,

but not reported in the tax return. I.R.C. § 6661(b)(2)(A), (B). Mr. Craddock's

corrected tax required to be reported in his 1985 tax return was $247,299 after

IRS audit adjustments. He reported no tax. He disclosed but did not report

income of $3,378,385 from the "Airport Raintree" transaction. Following Treas.

Reg. § 1.6661-2(c) and (d), the IRS computed Mr. Craddock's substantial

understatement penalty by recomputing his tax shown on his return as if he had

properly reported the Airport Raintree transaction for tax purposes, resulting in a

revised tax shown on his return of $0, and a substantial understatement of tax of

$247,299.

Mr. Craddock objected to the penalty on the ground that under the statute's
-7-

plain language, if the understatement was reduced "by that portion of the

understatement which is attributable to ... any item with respect to which the

relevant facts affecting the item's tax treatment are adequately disclosed," he

would not be liable for a penalty. I.R.C. § 6661(b)(2)(B). The bankruptcy court

agreed, rejecting the IRS's calculation in accordance with Treas. Reg. § 1.6661-

(c) and ruling there was no understatement of tax within the meaning of I.R.C.

§ 6661. It found no understatement would exist if the income attributable to the

Airport Raintree transaction was excluded from the computation of his corrected

tax required to be shown on his return. The district court affirmed by deciding

the bankruptcy court's computation was consistent with the purposes of I.R.C.

§ 6661(b)(2)(B)(ii) "to deter the use of undisclosed questionable reporting

decisions" since it "reversed out" the effect of the disclosed Airport Raintree

transaction. The IRS appeals.

The IRS also filed a motion in this court in July 1997 for leave to file a

motion in the bankruptcy court to correct a mistake in the bankruptcy court's

judgment filed January 7, 1994, almost three years ago. The IRS contends the

judgment did not accurately reflect the amount of interest contained in the parties'

stipulation filed March 9, 1993. The bankruptcy court's 1994 judgment awarded

taxes, penalties and interest specified in the IRS's Corrected Calculations filed
4

 Rule 60(a) may be used to correct what is erroneous because the thing

spoken, written or recorded is not what the person intended to speak, write or

record. Allied Materials Corp. v. Superior Products Co., 620 F.2d 224, 225-26

(10th Cir. 1980). Such a correction should not require additional proof. Trujillo

v. Longhorn Mfg. Co., 694 F.2d 221, 226 (10th Cir. 1982); McNickle v. Bankers

Life & Cas. Co., 888 F.2d 678, 682 (10th Cir. 1989). Rule 60(a) is not available

to correct something that was deliberately done but later discovered to be wrong. 

McNickle, 888 F.2d at 682.

5

 Fed. R. Civ. P. 60(b) provides, in part:

On motion and upon such terms as are just, the court

may relieve a party ... from a final judgment, order, or

-8-

with the court on November 3, 1993. The IRS filed its Corrected Calculations

pursuant to the court's request that it calculate negligence penalties, not Mr.

Craddock's total tax liability including all penalties and interest. The IRS's

Corrected Calculations and hence the judgment appears not to have included the

amount of interest stipulated by the parties.

Under Fed. R. Civ. P. 60(a) made applicable to bankruptcy cases by Fed. R.

Bankr. P. 9024, "[c]lerical mistakes in judgments, [or] orders may be corrected by

the court at any time." However, "while the appeal is pending [such mistakes]

may be so corrected with leave of the appellate court." Fed. R. Civ. P. 60(a). 

The IRS claims the district court's order is correctable under Fed. R. Civ. P.

60(a),4 while Mr. Craddock claims the order is only correctable under Fed. R. Civ.

P. 60(b),5 as a correction of an error caused by inadvertence or mistake. Under
proceeding for ... (1) mistake, inadvertence, surprise, or

excusable neglect .... The motion shall be made within a

reasonable time, and for reason[] (1) ... not more than

one year after the judgment, order, or proceeding was

entered or taken.

Rule 60(b) covers mistakes by counsel or parties regarding procedural

errors, fraud in settlements, confusion etc. See Wright, Miller & Kane, Federal

Practice & Procedure: Civil 2d § 2858 (1995).

6

 Mr. Craddock also filed a motion to strike the IRS's reply motion to Mr.

Craddock's response motion. Because the Federal Rules of Appellate Procedure

do not provide authority to file a reply motion and the IRS's reply motion contains

arguments not made in its original motion, we grant Mr. Craddock's motion to

strike. See Fed. R. App. P. 27.

-9-

Fed. R. Civ. P. 60(b), the district court can only amend its judgment for mistakes

within one year from the date originally awarded. If Mr. Craddock is correct, the

motion must be denied since it was filed beyond the one-year limitation. Based

on our review of the record, it is unclear whether the difference between the

stipulated interest and any interest stated in the judgment was due to a clerical

error or mistake. Therefore, unable to rule on the motion, we remand this

question to the bankruptcy court to determine whether the judgment contains a

clerical error correctable under Fed. R. Civ. P. 60(a).6 Despite our remand, we

consider this judgment final for purposes of this appeal, since the parties treated

the judgment as final, the interest is not an issue on direct appeal, and if the

judgment contains a clerical error or mistake, such error generally does not render
7

 I.R.C. § 6651(a)(1) imposes a five percent penalty on the tax due on the

return "unless it is shown that such failure is due to reasonable cause and not due

to willful neglect."

-10-

the judgment invalid. See Stone v. I.N.S., 514 U.S. 386, 401 (1995) (stating the

pendency of a Rule 60(b) motion does not affect the continuity of a prior-taken

appeal); Pratt v. Petroleum Prod. Management, Inc. Employee Sav. Plan & Trust,

920 F.2d 651, 655-56 (10th Cir. 1990) (treating judgment as final where judgment

referenced another order and inadvertently omitted prejudgment interest not part

of the primary relief sought in the parties' appeal; also stating clerical errors in a

judgment sought to be corrected under Rule 60(a) do not render the judgment

invalid). We now address the merits of this appeal.

DISCUSSION

Failure to timely file tax return penalties

The IRS claims the district court erred in reversing the bankruptcy court's

finding that no reasonable cause existed for Mr. Craddock's failure to timely file

his 1981, 1982, and 1985 tax returns. We agree. To avoid a late filing penalty

under I.R.C. § 6651(a)(1),7

 the taxpayer bears the "heavy burden" of proving the

failure to timely file was both due to reasonable cause and not due to willful

neglect. Boyle, 469 U.S. at 245 (quoting I.R.C. § 6651(a)(1)); Jackson v.
-11-

Commissioner, 864 F.2d 1521, 1527 (10th Cir. 1989). Reasonable cause exists

"[i]f the taxpayer exercised ordinary business care and prudence and was

nevertheless unable to file the return within the prescribed time." Treas. Reg. §

301.6651-1(c) (emphasis added). The term "willful neglect" means "a conscious,

intentional failure or reckless indifference." Boyle, 469 U.S. at 245.

Whether the elements that constitute "reasonable cause" are present is a

question of fact. Boyle, 469 U.S. at 249 n.8. What elements constitute

"reasonable cause" is a question of law. Id. We review the district and

bankruptcy courts' legal determinations de novo, and the bankruptcy court's

factual findings for clear error. In re Yellow Cab Coop. Ass'n, 132 F.3d 591, 596-

97 (10th Cir. 1997); Jackson, 864 F.2d at 1527.

We recognize Mr. Craddock exercised some care in attempting to keep up

with his accounting and tax functions by selectively increasing his accounting

staff, having outside accounting firms review the tax returns, and replacing his

antiquated computer system with one recommended by experts. However, these

facts are not enough to escape a late filing penalty under I.R.C. § 6661. Although
8

 In Boyle, the Supreme Court adopted a bright-line rule that a situation

where the taxpayer turns over his records to his agent and merely relies on the

agent to timely file his returns, does not constitute reasonable cause as a matter of

law. 469 U.S. at 252.

9

 Mr. Craddock also increased his staff when he realized his present

accounting staff was unable to handle its functions, and he replaced his antiquated

accounting system to aid in assimilating information faster.

-12-

the Boyle bright-line test8 does not apply, since Mr. Craddock did more than just

rely on his employees to timely file his tax returns,9

 Mr. Craddock failed to

exercise "ordinary business care and prudence" in ensuring his returns were

timely filed and failed to show that he was "unable" to file the returns on time. 

Mr. Craddock's reasons for his failure to timely file, such as his records or

information could not be assimilated fast enough, his accounting staff was

overworked, and his computer system was inefficient, are not reasonable cause. 

A taxpayer is "expected in the exercise of ordinary business care and prudence ...

not [to] take on such a load that he could not fulfill his own legal obligations

within the required time." Dustin v. Commissioner, 467 F.2d 47, 50 (9th Cir.

1972) (internal quotation marks omitted); Oliver v. Commissioner, 73 T.C.M.

(CCH) 2035, 2051 (1997) ("[A] taxpayer is not excused from timely filing his

income tax return merely because he is overworked."); Merriam v. Commissioner,

70 T.C.M. (CCH) 627 (1995) ("[A] heavy workload and preoccupation with

business affairs do not constitute reasonable cause for the untimely filing of a tax
-13-

return."), aff'd, 107 F.3d 877 (9th Cir. 1997) (table opinion). In addition, the

unavailability of business records or difficulty in obtaining records, unless such

records are destroyed, is generally not a reasonable cause for failure to file a tax

return. Robinson v. Commissioner, 68 T.C.M. (CCH) 1158, 1164 (1994); Young

v. Commissioner, 58 T.C.M. (CCH) 1, 8-9 (1989), aff'd, 937 F.2d 609 (6th Cir.

1991) (table opinion). The complexity of one's affairs also does not give

reasonable cause. Edgar v. Commissioner, 56 T.C. 717, 762-63 (1971). Nor does

the preoccupation with audits constitute reasonable cause. C.f. Morgan v.

Commissioner, 807 F.2d 81, 83 (6th Cir. 1986) (ruling the preoccupation with

litigation is not reasonable cause).

In addition, despite his efforts to improve the situation, Mr. Craddock

failed to prove that he was unable to file the tax returns on time as required by

Treas. Reg. § 301.6651-1(c)(1). The IRS contends the district court erred in

overruling the bankruptcy court's finding that the circumstances surrounding Mr.

Craddock's late filed tax returns were within "his ability to control." The

bankruptcy court's findings are not clearly erroneous. A factual finding is

"clearly erroneous when, although there is some evidence to support it, upon

review of the entire record the appellate court is left with the definite and firm

conviction that a mistake has been made." Daemi v. Church's Fried Chicken,
-14-

Inc., 931 F.2d 1379, 1384 (10th Cir. 1991). Evidence in the record reveals Mr.

Craddock knew his businesses were expanding rapidly and his tax affairs were

becoming complex. For over three years, he was aware his accounting staff filed

his tax returns over ten months late, yet he continued to delegate his tax return

responsibilities to them. He consciously decided not to engage an outside

accounting firm to prepare his tax returns. He also knew his new Basic-4

computer system was inadequate, yet he continued to use the system until 1987. 

As we are convinced no mistake has been made based on these facts, we rule the

bankruptcy court's finding was not clearly erroneous.

To support his position, Mr. Craddock relies on In Re Hudson Oil Co., 91

B.R. 932 (Bankr. D. Kansas 1988). In that case, a bankruptcy trustee was

appointed over the taxpayer's bankruptcy estate three weeks before the taxpayer's

1983 federal tax return was due. Id. at 936. Because of the short length of time

to the filing deadline and the disorganization of the taxpayer's books, the trustee's

accountant filed the return late. Id. at 939. Consequently, the IRS imposed a late

filing penalty. Id. at 940. In response to the trustee's defense of reasonable

cause, the bankruptcy court found the trustee did all he could do under the

circumstances to file the tax return, but was physically unable to timely file the

return due to the short time period to file and the taxpayer's books were in such a
10 Mr. Craddock's situation is comparable to the circumstances in Valen

Mfg. Co. v. United States, 90 F.3d 1190, 1193 (6th Cir. 1996), and Conklin Bros.

of Santa Rosa, Inc. v. United States, 986 F.2d 315, 318 (9th Cir. 1993), where the

-15-

disarray. Id. at 950.

We find Mr. Craddock's case distinguishable. Unlike the trustee in Hudson

who had only three weeks to prepare and file the tax return, Mr. Craddock knew

his tax return deadlines and responsibilities long before the returns were actually

due. In addition, Mr. Craddock controlled his books for a long time before the

returns were due, unlike the trustee in Hudson. Although Mr. Craddock argues

his situation is similar to the facts in Hudson, in that he also was unable to

prepare the return as a result of his books not being final, we disagree. A

distinguishing feature in Hudson is that the books were not ready through no fault

of the trustee, while in Mr. Craddock's case, he knew on an ongoing basis that his

books and tax returns were not being prepared timely, yet despite his unsuccessful

efforts, he failed to correct the situation. Furthermore, Mr. Craddock even

testified his books were not in disarray since "all the facts were there," but he was

just having problems "pulling it all together." Mr. Craddock's situation is not one

where he was unable to prepare his tax returns, but rather where his decisions

merely made it challenging. His decisions do not excuse him from complying

with his tax obligations.10 Although Mr. Craddock made efforts to comply with
courts held the corporate taxpayers were not disabled from complying with their

tax return filing deadlines even though their employees responsible for such

filings secretly failed to comply with the deadlines without the managements'

knowledge. The courts ruled despite the companies prudence and care in

overseeing its employees, the situation was ultimately within the companies'

control. Valen, 90 F.3d at 1193; Conklin Bros., 986 F.2d at 318-19. Similarly in

Mr. Craddock's case, although he increased his accounting staff and installed a

new computer system to comply with his tax obligations, the situation was within

Mr. Craddock's ability to control and therefore he was not "unable" to file his tax

returns on time.

11 By allowing Mr. Craddock's situation to constitute "reasonable cause,"

we would open a Pandora's Box of excuses which would effectively erode tax

return filing deadlines. As the Supreme Court observed in Boyle, "our system of

self-assessment ... of a tax simply cannot work on any basis other than one of

strict filing standards. Any less rigid standard would risk encouraging a lax

attitude toward filing dates." 469 U.S. at 249.

-16-

the tax law, his situation was not one requiring a flexible approach to tax return

deadlines.11 As the Fifth Circuit has observed: "[t]he federal tax statute has

'placed the responsibility for filing (of a) return on time squarely upon each and

every taxpayer.' Charles C. Rice [Rice v. Commissioner], 14 T.C. 503 (1950), at

509. If every taxpayer who ... was too busy to file a return escaped the penalty

for failure to file, our tax system would soon collapse." Logan Lumber Co. v.

Commissioner, 365 F.2d 846, 854 (5th Cir. 1966).

Mr. Craddock claims it would have been inappropriate for him to file

inaccurate tax returns. A tax return does not have to be completely accurate, but
-17-

must be based on the best information available, Oliver, 73 T.C.M. (CCH) at

2051, and may be amended later if necessary, Estate of Vriniotis v. Commissioner,

79 T.C. 298, 311 (1982). Mr. Craddock testified his tax information was

available but just not synthesized. Without more, Mr. Craddock has failed to

prove he could not file a return based on the best information available and later

amend the return as permitted by law.

Mr. Craddock also contends that if he filed returns he knew to be

inaccurate, he would have risked being subject to I.R.C. § 7206(1) which makes it

a felony for "any person" to "[w]illfully make[] and subscribe[] any return ...

which he does not believe to be true and correct as to every material matter." We

reject Mr. Craddock's contention. First of all, the record fails to support Mr.

Craddock's assertion the returns would have been inaccurate as to every material

matter. The evidence on this issue is Mr. Craddock's testimony that he "didn't

want to file returns that were not right," and Mr. Rudnick's testimony that "there

would be a high degree or probability and knowledge that there were errors in the

tax return, and our effort was to file the best quality tax return we could." 

Second, to commit a felony under I.R.C. § 7206(1), the taxpayer must have the

specific intent to violate the law. See United States v. Pomponio, 429 U.S. 10, 12

(1976); United States v. Winchell, 129 F.3d 1093, 1096-97 (10th Cir. 1997). The
-18-

record does not support Mr. Craddock had that intent.

Finally, the IRS claims the undisputed facts constitute willful neglect as a

matter of law. The IRS contends Mr. Craddock "was aware at all times that his

accounting staff was not filing timely returns" and yet purposely did not instruct

his accounting staff to prepare the returns because he knew the returns would be

inaccurate. Therefore, relying on Boyle, the IRS claims Mr. Craddock's conscious

and intentional failure to timely file his return was willful neglect. Due to our

dispositive holding that Mr. Craddock failed to establish reasonable cause, we do

not consider this issue further.

Substantial Understatement of Tax Penalty

The IRS's final claim is the district and bankruptcy courts erred in

computing Mr. Craddock's 1985 understatement of tax penalty pursuant to I.R.C.

§ 6661. Since the facts are largely undisputed, we review the bankruptcy and

district court's interpretation of law de novo. Morrissey v. Internal Revenue

Service (In re EWC, Inc.), 114 F.3d 1071, 1073 (10th Cir. 1997).

The 1985 version of I.R.C. § 6661(a) imposed a twenty-five percent penalty

on the amount of any underpayment of tax attributable to a substantial
12 An understatement of tax is substantial if it exceeds the greater of either

ten percent of the correct amount of the tax required to be shown on the return, or

$5,000. I.R.C. § 6661(b)(1).

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understatement of tax.12 An understatement means the excess of the correct

amount of tax required to be shown on the return for the taxable year, over the

amount of tax actually shown on the return for that year. I.R.C. § 6661(b)(2)(A). 

However, the amount of understatement "shall be reduced by that portion of the

understatement which is attributable to ... any item with respect to which the

relevant facts affecting the item's tax treatment are adequately disclosed in the

return or in a statement attached to the return." I.R.C. § 6661(b)(2)(B). The

penalty's purpose is to deter taxpayers from playing "audit lottery" by taking

undisclosed questionable positions on their returns in hopes their aggressive

positions will go undetected. S. Rep. No. 97-494, at 272-73 (1982), reprinted at

1982 U.S.S.C.A.N. 781, 1019.

After its audit of Mr. Craddock's 1985 tax return, the IRS followed Treas.

Reg. § 1.6661-2 in computing a substantial understatement of tax penalty of

$61,825. Under Treas. Reg. § 1.6661-2(c)(1)-(2), an understatement of tax is the

excess of the correct amount of tax required to be shown on the return, over the

amount of tax shown on the return for the taxable year. To reduce the
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understatement for adequately disclosed items, the regulation provides the amount

of tax shown on the return is determined by computing the tax as if the items

adequately disclosed had been properly reported. Treas. Reg. § 1.6661-1(d)(2). 

Therefore, the IRS computed the amount of tax shown on Mr. Craddock's tax

return for purposes of the penalty by adding to the amount of alternative minimum

tax (AMT) income actually shown on Mr. Craddock's tax return (-$5,973,827), the

post-audit AMT income adjustments of $7,209,720 less the AMT adjustment of

$3,378,385 for the adequately disclosed Airport Raintree transaction. This

resulted in -$2,142,492 of AMT income and $0 tax for the amount shown on his

return. Consequently, the IRS deducted $0 (the amount of tax shown on the

return) from $247,299, the correct amount of tax after the IRS audit, to arrive at a

understatement of tax of $247,299 and a penalty of $61,825 (25% of $247,299).

The bankruptcy and district courts rejected the IRS's computation, agreeing

with Mr. Craddock that all of the understatement of tax, $247,299, relates to the

adequately disclosed Airport Raintree transaction, and therefore no penalty was

due. Under the courts' approach, the penalty is computed by taking the corrected

amount of AMT income after all audit adjustments, $1,235,893 and reversing out

the AMT income adjustment relating to the adequately disclosed Airport Raintree

transaction, $3,378,385 arriving at 
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-$2,142,492 AMT income, or $0 tax. From this calculation, the courts reasoned

that without the AMT income adjustment from the Airport Raintree transaction,

no underpayment would exist. Consequently, they concluded Mr. Craddock was

not liable for any substantial understatement penalty since all of the

underpayment was attributable to an adequately disclosed item. We now must

decide which interpretation of I.R.C. § 6661 is proper.

We recognize the statute, I.R.C. § 6661((b)(2)(B)(ii), is ambiguous as to

how a taxpayer computes the "portion of the understatement attributable to"

disclosed items. Pursuant to I.R.C. § 7805(a), Congress delegated authority to the

Secretary of the Treasury to "prescribe all needful rules and regulations for the

enforcement of [the Internal Revenue Code]." Under this authority, the Secretary

of the Treasury adopted Treas. Reg. § 1.6661-2 to implement I.R.C. § 6661. We

are therefore constrained under Chevron, U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837, 843-44 (1984), to defer to the regulation if it

is not arbitrary, capricious, or manifestly contrary to the statute. A court "may

not substitute its own construction of a statutory provision for a reasonable

interpretation made by the administrator of an agency." Id. at 844.

We conclude Treas. Reg. § 1.6661-2(d) is a reasonable construction of
13 Under I.R.C. § 6661(b)(2)(B), the understatement is reduced for the

portion of understatement attributable to the tax treatment of an item for which

the taxpayer has or had substantial authority, in addition to items for which the

relevant facts were adequately disclosed in the taxpayer's return. Mr. Craddock

now claims the IRS has only assumed the remaining audit adjustments of

$3,831,335 were undisclosed or not supported by substantial authority. If Mr.

Craddock is correct that the items comprising the $3,831,335 were adequately

disclosed, then these items would be added to his revised reportable income

resulting in no understatement of tax. However, we are unable to determine from

the record whether these items were adequately disclosed or where Mr. Craddock

had substantial authority. In light of our remand of this calculation to the

bankruptcy court, we defer to the bankruptcy court to make these findings.

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I.R.C. § 6661. The regulation implements the statute by effectively reducing the

understatement for items properly disclosed in a taxpayer's tax return. Treas.

Reg. § 1.6661-2(d). Under the regulation, a taxpayer typically benefits in

disclosing the tax treatment of an otherwise questionable item by calculating his

tax shown on his return as if he had properly reported the item for tax purposes. 

Id.

Mr. Craddock claims the regulation applied to his case thwarts the statute's

purpose of promoting disclosure since he disclosed the Airport Raintree

transaction but is still subject to an understatement penalty. Although Mr.

Craddock adequately disclosed the Airport Raintree transaction income of

$3,378,385, he still allegedly failed to disclose another $3,831,335, which is

subject to the understatement penalty.13 It is this additional amount of income
14 The regulation provides different results depending on whether the

taxpayer's reported taxable income is a positive or negative amount. For example,

assume a taxpayer reports $500,000 of taxable income when his correct taxable

income is $1,000,000. He disclosed but did not report $250,000 of income. 

Assume a twenty percent tax rate. Without the disclosure of the $250,000, the

taxpayer's understatement of tax is $100,000 ($200,000 correct tax less $100,000

of tax "reported"). With the disclosure, the understatement of tax is $50,000

($200,000 correct tax less $150,000 of tax "reported"). Therefore, the taxpayer

receives a direct benefit from disclosing.

In contrast, assume the same facts above, except the taxpayer reports 

-$500,000 of taxable income. Without disclosure, the taxpayer's understatement

of tax is $200,000 ($200,000 correct tax less $0 tax "reported"). With disclosure

of the $250,000, the taxpayer's understatement of tax is still $200,000 ($200,000

correct tax less $0 tax "reported").

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which Mr. Craddock failed to disclose combined with awkwardness of beginning

with negative taxable income that results in an understatement penalty.14 We

agree with Mr. Craddock that the statute aims to promote the disclosure of

questionable reporting positions. However, we reject Mr. Craddock's, the

bankruptcy and district courts' view that by disclosing some amount, yet not

disclosing another significant amount of income, a taxpayer can avoid a

substantial understatement of tax penalty altogether. This interpretation would go

directly against the purpose of promoting disclosures of all questionable reporting

positions. We note that had Mr. Craddock properly reported the income from the

Airport Raintree transaction in his tax return, and treated the undisclosed items as

he did, he still would have been liable for the same understatement penalty,
15 Mr. Craddock's correct tax would be the same, $247,299. His revised

tax shown on his return would be $0 (AMT on -$5,973,827 reported income, plus

$3,378,385 income on Airport Raintree transaction). Therefore, the

understatement of tax penalty would be 25% of $247,299 ($247,299 correct tax

less $0 tax shown on return), or $61,825.

16 Mr. Craddock's correct tax would be the same, $247,299. However, his

revised tax shown on his return would also be $247,299 (AMT on -$5,973,827

reported income plus $3,378,385 income on the Airport Raintree transaction

adequately disclosed plus $3,831,335 of income of all other audit adjustments),

resulting in no penalty (25% of $0 ($247,299 correct tax minus $247,299 tax

shown on return).)

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$61,825 under the statute.15 Therefore, why should he receive a greater benefit

for disclosing an item than he would receive if he had actually reported the item

as required by the tax law? This situation would create an anomaly. Assuming

Mr. Craddock had disclosed but not reported all transactions resulting in the audit

adjustments, his penalty would be zero.16 The result is exactly what the statute

aims to promote, the disclosure of questionable tax positions. Consequently, we

rule Treas. Reg. §1.6661-2(d) is a permissible construction of I.R.C. § 6661, and

therefore are obligated to defer to the proper calculation made under the

regulation.

Accordingly, we REVERSE the district court's decision that Mr. Craddock

established reasonable cause, and therefore reinstate the IRS late filing penalties

for years 1981, 1982, and 1985. We REVERSE the district and bankruptcy
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court's calculation of the substantial understatement of tax penalty for 1985 and

REMAND to the bankruptcy court to calculate the proper penalty in accordance

with Treas. Reg. § 1.6661-2(d). We REMAND the IRS's motion for leave to

correct a mistake in the bankruptcy court's judgment to the bankruptcy court to

determine whether its 1994 judgment contains a clerical error or mistake for

interest.