Kenneth G. Schladweiler - Page 17

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          parents, it is impossible to reconstruct, with any reliability,             
          the cost of utilities used by petitioner’s business in 1994.                
               We sustain respondent’s determination as to utilities.                 
               Accuracy-Related Penalties                                             
               Respondent has proposed accuracy-related penalties against             
          petitioner for each of the years in issue.                                  
               Section 6662(a) authorizes respondent to impose a penalty in           
          an amount equal to 20 percent of the underpayment attributable to           
          negligence or disregard of rules or regulations.  Negligence is             
          defined as “any failure to make a reasonable attempt to comply              
          with the provisions of * * * [the Internal Revenue Code]”.  Sec.            
          6662(c); see also Neely v. Commissioner, 85 T.C. 934, 947 (1985)            
          (negligence is lack of due care or failure to do what a                     
          reasonable and prudent person would do under the circumstances).            
          Negligence also includes any failure by the taxpayer to keep                
          adequate books and records or to substantiate items properly.               
          See sec. 1.6662-3(b)(1), Income Tax Regs.  The term “disregard”             
          includes any careless, reckless, or intentional disregard.  Sec.            
          6662(c).  Disregard of rules or regulations is careless if the              
          taxpayer does not exercise reasonable diligence to determine the            
          correctness of a return position that is contrary to the rule or            
          regulation.  See sec. 1.6662-3(b)(2), Income Tax Regs.  A                   
          taxpayer is not liable for the penalty if he shows that he had              

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