Substituting an opinion it originally issued in May 1998, the 10th Circuit has held that while "the taxpayer exercised some care in keeping up with his accounting and tax functions by increasing his accounting staff, having outside accounting firms review the tax returns, and replacing his computer system with one recommended by experts," these facts were not enough to escape the imposition of the late filing penalty under IRC Sec 6661. Regarding the substantial understatement penalty, the taxpayer argued that Reg. 1.6661-2(6) was an unreasonable interpretation of the Code because even though he disclosed the item of income, he still was liable for the penalty.

Responding that the taxpayer was not entitled to the benefit for items that are properly disclosed, because the penalty, in this case, would have been the same even if he had properly reported the disclosed item, the court concluded that the regulation properly promotes disclosure but does not reward the disclosure "more than had the taxpayer properly reported the item." [U.S. v. Craddock, No. 95-1437 (10th Cir.)].