James Dirks - Page 10

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               Respondent also determined that petitioner is liable for an            
          accuracy-related penalty under section 6662(a) and (d).  Section            
          6662(a) and (d) imposes an accuracy-related penalty if any                  
          portion of an underpayment is attributable to a substantial                 
          understatement of income tax.  An understatement of income tax is           
          substantial if it exceeds 10 percent of the tax required to be              
          shown on the return or $5,000.  Sec. 6662(d)(1).  Respondent                
          bears the burden of production under section 7491(c) and must               
          come forward with sufficient evidence indicating that it is                 
          appropriate to impose an accuracy-related penalty.  Higbee v.               
          Commissioner, 116 T.C. 438, 446-447 (2001).  Once respondent has            
          met this burden, the taxpayer must come forward with persuasive             
          evidence establishing that the accuracy-related penalty does not            
          apply.  Id.  The taxpayer may establish, for example, that part             
          or all of the accuracy-related penalty is inapplicable because it           
          is attributable to an understatement for which the taxpayer acted           
          reasonably and in good faith.  Sec. 6664(c)(1).  Whether a                  
          taxpayer acted in such a fashion is a factual determination, sec.           
          1.6664-4(b)(1), Income Tax Regs., for which the taxpayer’s effort           
          to assess the proper tax liability is usually the most important            
          consideration.                                                              
               Here, respondent has met his burden of production in that              
          the understatement on petitioner’s return is “substantial” within           
          the meaning of section 6662(d)(1).  Petitioner argues that he               






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