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Giddio v. Commissioner, 54 T.C. 1530 (1970). Having failed to
establish the applicability of section 7491(a), petitioners have
the burden of establishing additional amounts of cost of goods
sold over the amount respondent has determined in the notice of
deficiency. See Rule 142(a).
Respondent reduced petitioners’ cost of goods sold for 1998
to $5,818 after the first audit. Exhibits and testimony at trial
establish that this cost of goods sold figure is understated and
that petitioners have substantiated additional costs of goods
sold of $17,680, consisting of expenses that Mr. Rusten incurred
buying equipment and materials for the railroads for which he
provided consulting services. Petitioners argue that there were
additional cost of goods sold items, but the documentation in the
record simply does not sustain any additional amounts.
Under section 6662(a) and (b)(1) and (2), taxpayers are
liable for a penalty equal to 20 percent of the portion of the
underpayment of tax attributable to negligence or to a
substantial understatement of income tax. A substantial
understatement of tax exists if the amount of the understatement
exceeds the greater of (1) 10 percent of the tax required to be
shown on the return, or (2) $5,000. Sec. 6662(d)(1)(A).
Respondent has satisfied his burden of production under
section 7491(c) because petitioners understated their income tax
by more than 10 percent and by more than $5,000.
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Last modified: March 27, 2008