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respondent did not raise it in a prior year. See Hawkins v.
Commissioner, 713 F.2d 347, 351-352 (8th Cir. 1983), affg. T.C.
Memo. 1982-451; Easter v. Commissioner, 338 F.2d 968, 969 (4th
Cir. 1964), affg. per curiam T.C. Memo. 1964-58.
Petitioners point out that the amounts B&W deducted as
advanced costs were less than 5 percent of its total income for
fiscal years 1994 and 1995 and argue that no material distortion
of income or expenses would result from deducting those costs.
Petitioners’ argument misses the mark. Respondent did not
determine that B&W’s income was distorted by its deduction of
advanced client costs; instead, respondent determined, and we
agree, that B&W may not deduct advanced client costs because they
were nondeductible loans to its clients.
C. Whether Petitioners Are Liable for the Accuracy-Related
Penalty for Negligence
Petitioners contend that they are not liable for the
accuracy-related penalty for negligence for 1994, 1995, and 1996.
We disagree.
Taxpayers are liable for a penalty equal to 20 percent
of the part of the underpayment attributable to negligence or
disregard of rules or regulations. See sec. 6662(a) and (b)(1).
Negligence includes failure to make a reasonable attempt to
comply with internal revenue laws or to exercise ordinary and
reasonable care in preparing a tax return. See sec. 6662(c). To
avoid liability for negligence, the Badells and Wilsons must show
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