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10 percent of the tax required to be shown on the tax return or
$5,000. Sec. 6662(d)(1).
Section 7491(c) requires the Commissioner to carry the
burden of production with regard to penalties. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once the burden of
production is met, the taxpayer must come forward with sufficient
evidence that the penalty does not apply. Id. at 447.
Respondent has satisfied his burden by showing that petitioner’s
understatements of tax, which exceeded $5,000, were substantial.
The accuracy-related penalty is not imposed with respect to
any portion of the underpayment if the taxpayer can establish
that he acted with reasonable cause and in good faith. Sec.
6664(c)(1). The decision as to whether the taxpayer acted with
reasonable cause and in good faith depends upon all pertinent
facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
Circumstances indicating that a taxpayer acted with reasonable
cause and in good faith include “an honest misunderstanding of
fact or law that is reasonable in light of all of the facts and
circumstances, including the experience, knowledge and education
of the taxpayer.” Id.
Although petitioner did not raise the issue of reasonable
cause or good faith in the petition, per se, he did raise as an
issue that his belief that he was entitled to deduct expenses for
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Last modified: November 10, 2007