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Respondent bears the burden of production with respect to
the accuracy-related penalties. Sec. 7491(c). In order to meet
this burden of production, respondent must produce sufficient
evidence that it is appropriate to impose the accuracy-related
penalties. Once respondent has done so, the burden of proof is
upon petitioners. Higbee v. Commissioner, 116 T.C. 438, 449
(2001). Petitioners may carry their burden by proving that with
respect to their underpayment there was reasonable cause and they
acted in good faith. Sec. 6664(c)(1).
Respondent has satisfied his burden of production in that
the record establishes that petitioners failed to substantiate
their claimed deductions. Section 6001 imposes on petitioners a
duty to maintain books and records sufficient to support items
reported on their returns, and petitioners’ breach of that duty
is contrary to what a prudent and responsible taxpayer would have
done under the circumstances. See sec. 1.6662-3(b)(1), Income
Tax Regs. Petitioners must now establish reasonable cause and
good faith in order to escape liability for the accuracy-related
penalties under section 6662(a). Petitioners have failed to
persuade us that their failure to maintain the requisite
substantiation was excused by reasonable cause and good faith.
We sustain respondent’s determination that petitioners are liable
for the 2000 and 2001 accuracy-related penalties under section
6662(a).
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Last modified: November 10, 2007