Danvis S. and Sheryl S. Smith - Page 11

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          We sustain respondent’s disallowance of each of the deductions at           
          Accuracy-Related Penalties                                                  
               Respondent determined that petitioners are liable for                  
          accuracy-related penalties under section 6662(a) for both years             
          in issue with respect to the underpayments resulting from the               
          total amounts of the deficiencies.  Respondent has the burden of            
          production with respect to the penalties but the burden of proof            
          remains on petitioners.  Sec. 7491(c); Higbee v. Commissioner,              
          116 T.C. 438 (2001).                                                        
               Section 6662(a) imposes a 20-percent penalty on the portion            
          of an underpayment attributable to any one of various factors,              
          one of which is negligence or disregard of rules or regulations.            
          Sec. 6662(b)(1).  “Negligence” includes any failure to make a               
          reasonable attempt to comply with the provisions of the Internal            
          Revenue Code, including any failure to keep adequate books and              
          records or to substantiate items properly.  Sec. 6662(c); sec.              
          1.6662-3(b)(1), Income Tax Regs.  Section 6664(c)(1) provides               
          that the penalty under section 6662(a) shall not apply to any               
          portion of an underpayment if it is shown that there was                    

          5The rent expense claimed by petitioners as both employee                   
          business expense and Schedule C business expense was connected to           
          petitioner’s use of his own residence.  Although petitioners do             
          not directly address the “home office” provisions of sec. 280A we           
          note that petitioners have not shown that any portion of their              
          residence was “exclusively used on a regular basis” for business            
          purposes.  Sec. 280A(c)(1).                                                 

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