The equation you listed is an older one. The current standard equation (from the 2001 NDS) for a bending member notched on the tension face (typically the bottom side) is
V'r = (2/3 * F'v * b * dn) * (dn/d)^2
Where
F'v = adjusted allowable horizontal shear stress value
b = member width
d = full member depth
dn = depth of member at notch (what's left)
This results in an allowable shear capacity in the timber. For simple beams with symmetric loading, this is one half of the load to the beam.
Fv is the allowable shear stress, not the average ultimate value listed in the Wood Handbook.
The currently published value of Fv for white oak (not grade dependent) is 205psi, not 1250psi.
While the code does say (and research and historical precedent has shown) a gradual notch does decrease the stress concentration, BUT, not in a manner that is easily computed. Standard practice is to assume a square notch.
Note with either the old or current equation, the allowable capacity (and witnessed in physical testing) of a notched beam is LESS than a smaller unotched beam of depth dn.
Joe