Hector Prowse - Page 4

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          section 6663(a) for the years 2002 and 2003 in the amounts of               
          $987 and $2,354, respectively.2                                             
               After concessions, the issues for decision are:  (1) Whether           
          for 2002 and 2003 petitioner is entitled to deductions for                  
          various expenses on Schedules A, Itemized Deductions; (2) whether           
          for 2002 and 2003 petitioner is liable for the civil fraud                  
          penalty under section 6663 or, in the alternative, the accuracy-            
          related penalty under section 6662(a); and (3) whether for 2002             
          petitioner is liable for the late-filing addition to tax under              
          section 6651(a)(1).3                                                        

               2 Respondent’s apparent motivation for asserting fraud was             
          prompted by this Court’s holding in Prowse v. Commissioner, T.C.            
          Memo. 2006-120, that petitioner was liable for the sec. 6663(a)             
          fraud penalty for the year 2001.  Sec. 6663(b) provides that, if            
          any portion of an underpayment is attributable to fraud, the                
          entire underpayment shall be deemed to be attributable to fraud             
          except as to the portion the taxpayer establishes is not due to             
          fraud.  Thus, a finding of fraud preempts or trumps the                     
          negligence penalty of sec. 6662(a) determined in the notice of              
          deficiency.  See sec. 6662(b).                                              
               3 Two adjustments in the notice of deficiency were not                 
          addressed at trial and are, therefore, deemed conceded.  One of             
          these adjustments relates to $1,078.57 petitioner received during           
          2002 that he reported as dividend income on his 2002 return.  In            
          the notice of deficiency, respondent determined that the                    
          $1,078.57 was not a dividend but was a distribution from a                  
          qualified plan as defined in sec. 4974(c), and, therefore,                  
          petitioner is liable for the 10-percent additional tax under sec.           
          72(t).  The second adjustment that is also deemed conceded                  
          relates to a $17,725.50 payment petitioner received during 2003             
          pursuant to a Form 1099-MISC, Miscellaneous Income, from SCI                
          Engineering & Surveying, P.C., for nonemployee compensation.                
          Respondent determined that petitioner is liable for self-                   
          employment tax on that distribution under sec. 1401 with a                  
          corresponding deduction for one-half of that tax under sec.                 

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