Paul F. and Eleanore M. Nichols - Page 10




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          T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947);                
          Snyder v. Commissioner, supra.                                              
               We conclude on the basis of our analysis and on the record             
          before us that the trusts were shams.  Accordingly, we will                 
          ignore them for Federal income tax purposes.5  We sustain                   
          respondent’s determination that petitioners are liable for the              
          deficiencies in Federal income taxes for 1997 and 1998.                     
               We now turn to the issue of the accuracy-related penalties.            
               Respondent determined that petitioners are liable for                  
          accuracy-related penalties under section 6662(a) and (d) as a               
          result of a substantial understatement of income tax.  Respondent           
          has the burden of production with respect to these penalties.               
          Sec. 7491(c).  Section 6662(a) imposes an accuracy-related                  
          penalty in the amount of 20 percent of the portion of the                   
          underpayment attributable to any substantial understatement of              
          income tax.  Sec. 6662(b)(2).  The understatement is defined as             
          the excess of the amount of tax required to be shown on the                 
          return over the amount of tax shown on the return reduced by any            
          rebate.  Sec. 6662(d)(2).  Under section 6662(d)(1), the                    
          understatement is substantial if the amount of the understatement           
          exceeds the greater of (1) 10 percent of the tax required to be             
          shown on the return or (2) $5,000.                                          

               5 We also note that the income which was reported by the               
          trusts, and which respondent has treated as unreported income of            
          petitioners, primarily derived from Mr. Nichols’s sweeping                  
          business.                                                                   




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