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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
tax.
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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