In Re James E. Mitchell and Diane C. Mitchell, Debtors. James E. Mitchell Diane C. Mitchell v. United States

We consider whether a person, who has some involvement in the filing of an “S corporation” tax return and its related Forms K-l that will result in understatements of income tax, should pay an aiding and abetting penalty for each K-l. 26 U.S.C. § 6701 (a), (b) (1988). This core adversary proceeding began in the bankruptcy court, the judgment of which the district court affirmed. Both courts agree that James Mitchell is liable only for a single $10,000 penalty because the return at issue is that of a corporation. Mitchell v. United States (In re Mitchell), 109 B.R. 434 (Bankr.W.D.Wash.1989), amended, 109 B.R. 441 (Bankr.W.D.Wash.), aff'd, 90-2 U.S. Tax Cas. (CCH) 1150,495 , 1990 WL 142016 (W.D.Wash.1990). We have jurisdiction over the district court’s affirmance of the bankruptcy court’s final order, 28 U.S.C. §§ 158 (d), 1291, and we reverse.

I

Mitchell organized and operated a tax shelter (Cascade Hydro) that invested in hydroelectric dams in Whatcom County, Washington. The projects were not successful, and the shelter improperly passed deductions on to investors. Mitchell argued before the bankruptcy court that he did not have the requisite knowledge to support imposition of…