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Most of the asserted penalty disappears with our ruling that
Murphy was entitled to treat the $225,000 payment as interest.
There were, however, other adjustments in the notice of
deficiency. These were comparatively small and, in a burst of
lawyerly horse-trading before the trial began, they were all
settled with reciprocal concessions. Murphy conceded the
following:
Description Amount
Capitalization of electrical $4,500
Legal expenses 1,850
Utilities 3,995
Telephone 2,869
Dues and subscriptions 900
Total 14,114
The parties did not settle the question of whether the
section 6662 penalty would apply to these items. The Court
warned them that they should introduce some evidence on these
items because the penalty remained in dispute. They did not do
so, and now we have to decide the issue in the absence of any
evidence.
We solve this problem by relying on Swain v. Commissioner,
118 T.C. 358, 364-65 (2002), where we said:
An individual must first challenge a penalty
by filing a petition alleging some error in
the determination of the penalty. If the
individual challenges a penalty in that
manner, the challenge generally will succeed
unless the Commissioner produces evidence
that the penalty is appropriate.
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Last modified: May 25, 2011