James G. and Linda C. Jaroff - Page 17

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          a cost basis of $317,733 (adjusted by $139,230 for depreciation).           
          Petitioners stipulated and were deemed to admit that they did not           
          incur these expenses.  Respondent determined that petitioners’              
          adjusted basis for the assets giving rise to these expense                  
          deductions was zero, resulting in a valuation misstatement of 400           
          percent or more of the correct amount for purposes of section               
          6662(h).  See sec. 1.6662-5(g), Income Tax Regs.  As stated                 
          above, petitioners bear the burden of proving that respondent’s             
          determinations under section 6662 are incorrect.  Petitioners did           
          not appear for their trial and did not introduce any evidence to            
          contest these determinations.  Consequently, we sustain the                 
          imposition of a 40-percent penalty under section 6662(h) for a              
          gross valuation misstatement with regard to the portion of the              
          underpayment of tax attributable to the items described in this             
          paragraph.  See Zirker v. Commissioner, 87 T.C. 970, 979-980                
               Petitioners contend that an accuracy-related penalty should            
          not be imposed because they acted with reasonable cause and in              
          good faith for purposes of the “reasonable cause exception” of              
          section 6664(c)(1).  The determination of whether a taxpayer                
          acted with reasonable cause and in good faith is made on a case-            
          by-case basis, taking into account all the pertinent facts and              
          circumstances.  Sec. 1.6664-4(b)(1), Income Tax Regs.  Generally,           
          the most important factor is the extent of the taxpayer’s effort            

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