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respondent’s determinations are erroneous. Rule 142(a); Bixby v.
Commissioner, 58 T.C. 757, 791 (1972).
Petitioners have produced no evidence that their failure to
file timely in 1987 and 1988 was due to reasonable cause.
Petitioners' failure to file is prima facie evidence of
negligence. See Emmons v. Commissioner, 92 T.C. 342, 349 (1989),
affd. 898 F.2d 50 (5th Cir. 1990).
In addition, petitioners understated their income in 1987
and 1988 due to their practice of mischaracterizing as business
expenses, and failing to report as income, their personal
expenses that were paid by Babb & Hanna. Mr. Hanna testified
that he was aware that personal expenses were being paid by the
corporation but assumed that they would ultimately be charged as
income to him. He gave no reason for failing to report the
payments as income in the years that they were made. Such
mischaracterization of expenses is strong evidence of
petitioners’ lack of due care and disregard of the income tax
rules or regulations. See, e.g., Gutierrez v. Commissioner, T.C.
Memo. 1995-252; Epstein v. Commissioner, T.C. Memo. 1994-34.
Respondent’s determination that petitioners are liable for
the section 6653(a)(1)(A) and (B) addition to tax for 1987 and
the section 6653(a)(1) addition to tax for 1988 will be
sustained.
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