Gary E. and Rebecca L. Hurley - Page 11

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          negotiated the refinancing of their personal residence in order             
          to finance their home improvements.  Respondent presented no                
          authority that would require the improvements to be performed in            
          the year of the refinancing, nor does the evidence suggest to the           
          Court that petitioners’ claim came as an afterthought after the             
          deduction was disallowed by respondent.  Therefore, the                     
          refinancing was “in connection with” home improvements.  Sec.               
          461(g)(2).  Petitioners may deduct the entire $4,400 paid in                
          points on their 1999 Federal income tax return.  Petitioners are            
          sustained on this issue.                                                    
               Respondent determined a section 6662(a) penalty of $1,367.60           
          for 1999.  Section 6662 provides for a 20-percent penalty for any           
          underpayment to which the section applies.  Sec. 6662(a).                   
          Respondent determined, under section 6662(b):  (1) Petitioners              
          were negligent or disregarded rules or regulations, or (2)                  
          petitioners’ deficiency represented a substantial understatement            
          of income tax.  Under section 7491(c), the Commissioner bears the           
          burden of production with regard to penalties and additions to              
               Negligence is defined as “any failure to make a reasonable             
          attempt to comply with the provisions of this title”, and                   
          disregard includes “careless, reckless, or intentional                      
          disregard.”  Sec. 6662(c).  A taxpayer is not negligent if he can           
          demonstrate that the underpayment of tax was due to reasonable              

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