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discusses both bases. Petitioners, on the other hand, proffer no
argument on brief with respect to the penalty, and at no time
have they adduced any testimony or other evidence directed
specifically thereto. They apparently rely on the position that
they are not liable for the deficiency from which the penalty
derives.
The record in this case satisfies respondent’s burden of
production under section 7491(c) with respect to both negligence
and substantial understatement. The dearth of pertinent records,
the unexplained inconsistencies in treatment of the E Trade
account and Mr. Arberg’s various alleged businesses, and an
understatement well in excess of the statutory 10 percent or
$5,000 limit are illustrative. With this threshold showing, the
burden shifts to petitioners to establish that they acted with
reasonable cause and in good faith.
One key feature of this litigation preempts any conclusion
of good faith. Petitioners have never attempted to explain why
they claimed capital treatment when the E Trade account generated
gains, then changed course the following year to claim ordinary
income treatment when the account generated losses. Absent some
offer of justification, the appearance of manipulation or
selective application of the tax rules to achieve an advantage is
unavoidable. The Court sustains imposition of the section
6662(a) accuracy-related penalty.
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Last modified: November 10, 2007