Elizabeth Lai - Page 21

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               B.  Burden of Production                                               
               Section 7491(c) provides that the Commissioner will bear the           
          burden of production with respect to the liability of any                   
          individual for additions to tax and penalties.  “The                        
          Commissioner’s burden of production under section 7491(c) is to             
          produce evidence that it is appropriate to impose the relevant              
          penalty, addition to tax, or additional amount.”  Swain v.                  
          Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v.                  
          Commissioner, 116 T.C. 438, 446 (2001).  Once the Commissioner              
          has done so, the burden of proof is upon the taxpayer to                    
          establish reasonable cause and good faith.  Higbee v.                       
          Commissioner, supra at 449.                                                 
               C.  Section 6662(a)                                                    
               Pursuant to section 6662(a), a taxpayer may be liable for a            
          penalty of 20 percent of the portion of an underpayment of tax              
          (1) attributable to a substantial understatement of tax or (2)              
          due to negligence or disregard of rules or regulations.  Sec.               
          6662(b).  The term “understatement” means the excess of the                 
          amount of tax required to be shown on a return over the amount of           
          tax imposed which is shown on the return, reduced by any rebate             
          (within the meaning of section 6211(b)(2)).  Sec. 6662(d)(2)(A).            
          Generally, an understatement is a “substantial understatement”              
          when the understatement exceeds the greater of $5,000 or 10                 
          percent of the amount of tax required to be shown on the return.            

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