Kevin L. and Victoria L. Hargrove, et al. - Page 14

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          Respondent has the burden of production under section 7491(c) and           
          must come forward with sufficient evidence that it is appropriate           
          to impose the penalties.  See Higbee v. Commissioner, 116 T.C.              
          438, 446-447 (2001).                                                        
               A taxpayer is liable for an accuracy-related penalty of 20             
          percent of any part of an underpayment attributable to, among               
          other things, a substantial understatement of income tax.11                 
          There is a substantial understatement of income tax under section           
          6662(b)(2) if the amount of the understatement exceeds the                  
          greater of either 10 percent of the tax required to be shown on             
          the return, or $5,000.  Sec. 6662(a), (b)(1) and (2), (d)(1)(A);            
          sec. 1.6662-4(a), Income Tax Regs.                                          
               Respondent has met his burden of production with respect to            
          Mr. and Mrs. Hargrove’s and Mr. and Mrs. Breeding’s substantial             
          understatements of income tax for the relevant years.  Mr. and              
          Mrs. Hargrove reported they owed income tax of $4,719 for 2000              
          and $4,123 for 2001.12  Respondent determined that they owed                
          $16,533 for 2000 and $12,620 for 2001.  Mr. and Mrs. Hargrove               

               11Respondent determined in the alternative that Mr. and Mrs.           
          Hargrove and Mr. and Mrs. Breeding were liable for the accuracy-            
          related penalties for negligence or disregard of rules or                   
          regulations under sec. 6662(b)(1) for the relevant years.                   
          Because respondent has proven that petitioners substantially                
          understated their income tax for the relevant years, we need not            
          consider whether petitioners were negligent or disregarded rules            
          or regulations.                                                             
               12None of petitioners’ returns for the relevant years was              
          introduced in evidence.  We have used the amounts reflected in              
          the deficiency notice for the amounts petitioners reported on               
          their returns.  We note there is a slight discrepancy between the           
          amounts we use and the amounts that petitioners stipulated, but             
          this difference is immaterial.                                              




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