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followed regulations and procedures when preparing records and
the returns at issue in these cases. We disagree.
1. Burden of Production
Section 7491(c) places on the Commissioner the burden of
producing evidence that it is appropriate to impose a particular
penalty. To meet that burden, the Commissioner need not produce
evidence relating to defenses such as reasonable cause or
substantial authority. Higbee v. Commissioner, 116 T.C. 438, 446
(2001); H. Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747,
995. Once the Commissioner meets the burden of production, in
order to not be found liable for the penalty the taxpayer must
produce evidence showing that the Commissioner’s determination is
incorrect. Higbee v. Commissioner, supra at 447.
Respondent has met the burden of production under section
7491(c) with respect to the accuracy-related penalty under
section 6662(a) by showing: (a) Western did not report its
income on a permitted tax year; (b) respondent notified
petitioners in writing that Western was not an S corporation; (c)
petitioners disregarded statutes and the regulations thereunder
in claiming losses from Western for 1999, 2000 and 2001; (d)
petitioners performed personal services and claimed that their
corporations earned the income received for personal services
provided for tax year 2001; and (e) Mr. Arnold and not Pacific
earned the $17,995 that petitioners reported as leased payroll
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