116 T.C. No. 28



                UNITED STATES TAX COURT



  EARL G. HIGBEE AND LESLEY A. HIGBEE, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 14035-99.                      Filed June 6, 2001.



     Ps filed a petition seeking redeterminations of
R’s disallowance of several deductions and imposition
of an addition to tax and accuracy-related penalty.
The parties settled most of the issues regarding the
disallowed deductions except one regarding certain
Schedule C deductions. At trial, Ps claimed additional
deductions on account of a casualty loss, charitable
contributions, unreimbursed employee expenses, and
Schedule C and E expenses that were neither claimed by
Ps on their tax returns nor raised in the notice of
deficiency. The examination in the instant case took
place after the effective date of sec. 7491, I.R.C., as
amended by the Internal Revenue Service Restructuring
and Reform Act of 1998, Pub. L. 105-206, sec. 3001, 112
Stat. 685, 726.

     Held: Because Ps failed to introduce credible
evidence, Ps failed to meet the requirements of sec.
7491(a), I.R.C., as amended, so as to place the burden
of proof on R for the factual issues relating to the
                                - 2 -

     deductions in issue.

          Held, further, to meet his burden of production
     pursuant to sec. 7491(c), I.R.C., as amended, R must
     come forward with sufficient evidence indicating that
     it is appropriate to impose a penalty, addition to tax,
     or additional amount.

          Held, further, R met his burden of production with
     regard to the addition to tax and accuracy-related
     penalty.


     Earl G. Higbee and Lesley A. Higbee, pro sese.

     Erin K. Huss, for respondent.


                               OPINION

     VASQUEZ, Judge:    Respondent determined the following

deficiencies in, addition to, and accuracy-related penalty on

petitioners’ 1996 and 1997 Federal income taxes:

                             Addition to Tax       Penalty
     Year    Deficiency      Sec. 6651(a)(1)     Sec. 6662(a)

     1996     $10,796            $2,669               –-
     1997      12,443              --              $2,488.60

     Unless otherwise stated, all section references are to the

Internal Revenue Code in effect for the years in issue, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.

     After concessions, we must decide whether petitioners are

entitled to the following deductions:     (1) $1,328 for a casualty

loss, (2) $6,937.20 for charitable contributions, (3) $6,468.09

for unreimbursed employee expenses, (4) certain amounts paid on
                               - 3 -

account of a failed business as part of a chapter 13 bankruptcy

proceeding, and (5) various expenses related to two rental

properties.   Finally, we must decide whether petitioners are

liable for an addition to tax under section 6651(a)(1) and an

accuracy-related penalty under section 6662(a).

                            Background

     Petitioners contest respondent’s determinations with regard

to their 1996 and 1997 tax years.   In the notice of deficiency,

respondent disallowed the following deductions for 1996:   (1) A

$3,000 capital loss, (2) $57,099 in expenses listed on

petitioners’ Schedule A, Itemized Deductions, (3) $5,487 in

expenses listed on petitioners’ Schedule C, Profit or Loss From

Business, and (4) $25,811 in expenses listed on petitioners’

Schedule E, Supplemental Income and Loss.   After concessions, the

parties agreed that petitioners are entitled to:   (1) The $3,000

capital loss, (2) $7,070 in itemized deductions,1 (3) $3,567 in

Schedule C expenses (with the remainder still in dispute), and

(4) the $25,811 Schedule E expenses.

     With regard to the 1997 tax year, respondent disallowed the

following deductions:   (1) A $3,000 capital loss, (2) $41,172 in


     1
        The parties agreed that petitioners are entitled to
deduct the following amounts: (1) $822 for taxes, (2) $1,189 for
interest, (3) $1,500 for charitable contributions, (4) $484 for
union dues, and (5) $3,075 for unreimbursed employee expenses.
We remind the parties that when making their Rule 155
calculations, miscellaneous itemized deductions must be adjusted
for the 2-percent floor. See sec. 67.
                                - 4 -

itemized deductions, and (3) $25,965 in Schedule E expenses.

After concessions, the parties agreed that petitioners are

entitled to:   (1) The $3,000 capital loss, (2) $12,083 in

itemized deductions,2 and (3) the $25,965 Schedule E expenses.

     At trial, the only issue remaining with regard to the notice

of deficiency was whether petitioners were entitled to the $1,920

in Schedule C deductions reported on petitioners’ 1996 tax return

and disallowed by respondent.   Petitioners, however, raised new

issues at trial by claiming additional deductions for a casualty

loss, charitable contributions, unreimbursed employee expenses,

and Schedule C and E expenses that were neither claimed on their

returns nor raised in the notice of deficiency.

     We combine our findings of fact and opinion under each

separate issue heading.   Some of the facts have been stipulated

and are so found.   The stipulation of facts, the supplemental

stipulations of facts, and the attached exhibits are incorporated

herein by this reference.   At the time petitioners filed their

petition, they resided in Phoenix, Arizona.



     2
        The parties agreed that petitioners are entitled to
deduct the following amounts: (1) $3,263 for taxes, (2) $4,531
for charitable contributions, and (3) $4,289 for unreimbursed
employee expenses. We note that petitioners claimed other
expenses on their Schedule A in the section entitled “Job
Expenses and Most Other Miscellaneous Deductions”. Because
petitioners have not raised any arguments with regard to those
amounts, we treat their failure to raise any assignments of error
as a concession. See Petzoldt v. Commissioner, 

, 683
(1989).
                                - 5 -

                             Discussion

I.   Disallowed Deductions

     Deductions are a matter of legislative grace, and a taxpayer

bears the burden of proving that he is entitled to the deductions

claimed.    See Rule 142(a); INDOPCO, Inc. v. Commissioner, 

 (1992); New Colonial Ice Co. v. Helvering, 

(1934).    The taxpayer is required to maintain records that are

sufficient to enable the Commissioner to determine his correct

tax liability.    See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

In addition, the taxpayer bears the burden of substantiating the

amount and purpose of the claimed deduction.    See Hradesky v.

Commissioner, 

, 90 (1975), affd. per curiam 

 (5th Cir. 1976).

      Section 7491(a), a new provision created by Internal Revenue

Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L.

105-206, sec. 3001, 112 Stat. 685, 726, places the burden of

proof on respondent with regard to certain factual issues.

Section 7491 applies to examinations commenced after July 22,

1998.   See RRA 1998 sec. 3001(c), 112 Stat. 727.   The examination

in the instant case commenced after July 22, 1998; accordingly,

we evaluate whether respondent bears the burden of proof pursuant

to section 7491(a).

      Section 7491(a)(1) provides that if, in any court

proceeding, the taxpayer introduces credible evidence with
                                - 6 -

respect to factual issues relevant to ascertaining the taxpayer’s

liability for a tax (under subtitle A or B), the burden of proof

with respect to such factual issues will be placed on the

Commissioner.    For the burden to be placed on the Commissioner,

however, the taxpayer must comply with the substantiation and

record-keeping requirements of the Internal Revenue Code.      See

sec. 7491(a)(2)(A) and (B).    In addition, section 7491(a)

requires that the taxpayer cooperate with reasonable requests by

the Commissioner for “witnesses, information, documents,

meetings, and interviews”.    Sec. 7491(a)(2)(B).   Finally, the

benefits of section 7491(a) are unavailable in the cases of

partnerships, corporations, and trusts unless the taxpayer meets

the net worth requirements of section 7430(c)(4)(A)(ii).      See

sec. 7491(a)(2)(C).

     Respondent argues that because petitioners have failed to

meet the requirements of section 7491(a)(1) and (2), the burden

of proof should remain with petitioners as to the remaining issue

associated with respondent’s determination of petitioners’ 1996

tax liability.    We therefore examine the evidence to establish

whether petitioners have presented credible evidence and have met

the other requirements of section 7491(a)(1) and (2) so as to

place the burden of proof on respondent.
                                 - 7 -

     A.     Casualty Losses

     Pursuant to section 165(a) and (c)(3), a taxpayer is allowed

a deduction for an uncompensated loss that arises from fire,

storm, shipwreck, or other casualty.     Section 165(h), however,

states that any “loss * * * shall be allowed only to the extent

that the amount of the loss to such individual arising from each

casualty * * * exceeds $100” and only to the extent that the net

casualty loss “exceeds 10 percent of the adjusted gross income”.

     When property is damaged rather than totally destroyed by

casualty, the proper measure of the amount of the loss sustained

is the difference between the fair market value of the property

immediately before and after the casualty, not to exceed the

property’s adjusted basis.     See sec. 1.165-7(b)(1), Income Tax

Regs.     The fair market values required by the Treasury

regulations must generally be ascertained by competent appraisal.

See sec. 1.165-7(a)(2)(i), Income Tax Regs.     As an alternative,

the Treasury regulations provide that if the taxpayer has

repaired the property damage resulting from the casualty, the

taxpayer may use the cost of repairs to prove the casualty loss.

See sec. 1.165-7(a)(2)(ii), Income Tax Regs.     In general,

estimates of the cost of repairs are not evidence of the actual

costs of repairs unless the repairs are actually made.      See

Lamphere v. Commissioner, 

, 396 (1978); Farber v.

Commissioner, 

, 719 (1972).
                               - 8 -

     Petitioners claim a casualty loss deduction in the amount of

$1,328 on account of alleged damage to their home and personal

property which was not deducted on their tax return.   Mr. Higbee

testified that the $1,328 represents the damage to petitioners’

property which was not reimbursed by their insurance company but

awarded by a small claims court.3   In support, petitioners

provided a form document entitled “Small Claims

Complaint/Summons/Answer” which appears to be issued by the

Glendale Justice Court in Glendale, Arizona, but which does not

bear any type of notation or certification by a governmental

official.

     In order for section 7491(a) to place the burden of proof on

respondent, the taxpayer must first provide credible evidence.

The statute itself does not state what constitutes credible

evidence.   The conference committee’s report states as follows:

     Credible evidence is the quality of evidence which,
     after critical analysis, the court would find
     sufficient upon which to base a decision on the issue
     if no contrary evidence were submitted (without regard
     to the judicial presumption of IRS correctness). A
     taxpayer has not produced credible evidence for these
     purposes if the taxpayer merely makes implausible
     factual assertions, frivolous claims, or tax protestor-
     type arguments. The introduction of evidence will not
     meet this standard if the court is not convinced that
     it is worthy of belief. If after evidence from both
     sides, the court believes that the evidence is equally
     balanced, the court shall find that the Secretary has
     not sustained his burden of proof. [H. Conf. Rept.
     105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995.]


     3
         Petitioners assert that the judgment remains unpaid.
                                - 9 -

Further, the conference report explains the purpose of the

limitations set forth in section 7491(a)(2):

          Nothing in the provision shall be construed to
     override any requirement under the Code or regulations
     to substantiate any item. Accordingly, taxpayers must
     meet applicable substantiation requirements, whether
     generally imposed10 or imposed with respect to specific
     items, such as charitable contributions or meals,
     entertainment, travel, and certain other expenses.
     Substantiation requirements include any requirement of
     the Code or regulations that the taxpayer establish an
     item to the satisfaction of the Secretary. Taxpayers
     who fail to substantiate any item in accordance with
     the legal requirement of substantiation will not have
     satisfied the legal conditions that are prerequisite to
     claiming the item on the taxpayer’s tax return and will
     accordingly be unable to avail themselves of this
     provision regarding the burden of proof. Thus, if a
     taxpayer required to substantiate an item fails to do
     so in the manner required (or destroys the
     substantiation), this burden of proof provision is
     inapplicable.

                *      *    *    *      *   *   *
           10
           See e.g., Sec. 6001 and Treas. Reg. sec. 1.6001-
     1 requiring every person liable for any tax imposed by
     this Title to keep such records as the Secretary may
     from time to time prescribe, * * *.
     [Id. at 241, 1998-3 C.B. at 995; certain fn. refs.
     omitted.]

     Petitioners’ evidence does not meet the requirements of

section 7491(a).    Besides the fact that the form document

entitled “Small Claims Complaint/Summons/Answer” does not

actually indicate whether litigation in small claims court was

commenced or completed, the document itself does not qualify as a

competent appraisal or reliable estimate of the cost of any

repairs.   Because petitioners have failed to provide credible
                                - 10 -

evidence of a casualty loss, the burden of proof as to this issue

is not placed on respondent.     Further, for similar reasons

regarding our discussion of petitioners’ evidence for purposes of

section 7491, we conclude that petitioners have not met their

burden of proof.    See Rule 142(a).     Consequently, we reject

petitioners’ claimed casualty loss deduction.

     B.    Charitable Contributions

     Section 170(a)(1) provides that a taxpayer may deduct “any

charitable contribution * * * payment of which is made within the

taxable year.     A charitable contribution shall be allowable as a

deduction only if verified under regulations prescribed by the

Secretary.”     Pursuant to the Treasury regulations, contributions

of money are required to be substantiated by canceled checks,

receipts from the donee organizations showing the date and amount

of the contributions, or other reliable written records showing

the name of the donee, date, and amount of the contributions.

See sec. 1.170A-13(a)(1), Income Tax Regs.       Similarly,

contributions of property other than money must be substantiated,

at a minimum, by a receipt from the donee showing the name and

address of the donee, the date and location of the contribution,

and a description of the property in detail reasonably sufficient

under the circumstances.     See sec. 1.170A-13(b)(1), Income Tax

Regs.     Where it is unrealistic to obtain a receipt, taxpayers

must maintain reliable written records of their contributions.
                              - 11 -

See id.

     To substantiate additional charitable contributions of

$6,937.20 for 1996 not previously claimed on their return for

that year, petitioners offered several documents to the Court.

Some of the documents do not have any indication of being

provided by a donee organization but instead appear to have been

generated by petitioners.   Other documents consist of preprinted

forms issued by alleged charitable organizations which

petitioners filled in with the type and number of items donated

and the estimated value of the donation.    In addition,

petitioners submitted checks and receipts which appear to be for

the purchase of goods and services.    Lastly, at trial,

petitioners attempted to buttress their claims by describing the

types of goods allegedly donated.

     While the preprinted forms appear authentic, we nevertheless

conclude that petitioners’ self-generated receipts and other

documents are not credible evidence of the order necessary to

substantiate the deductions claimed in the instant case.    See

Tokh v. Commissioner, T.C. Memo. 2001-45.    Further, we do not

find petitioners’ testimony credible.    We hold that petitioners

have failed to introduce credible evidence to substantiate the

actual items contributed and their fair market values.4    See sec.


     4
        For instance, on one of the preprinted forms, petitioners
listed a charitable contribution of $700 for “cribs” and $200 for
“baby clothes”. Because petitioners have failed to establish how
                               - 12 -

7491(a)(1) and (2)(A).    Consequently, the burden of proof is not

placed on respondent.    Because petitioners have failed to present

us with any credible evidence, they have not met their burden of

proof pursuant to Rule 142(a) to support their claimed

deductions.    We therefore hold that petitioners are not entitled

to a deduction for charitable contributions in excess of the

$1,500 that respondent has already allowed.


     C.     Unreimbursed Employee Expenses and Schedule C
            and E Expenses

     Petitioners argue that they are entitled to a deduction of

$6,468.09 for unreimbursed employee expenses instead of the

$3,075 deduction returned on their Schedule A for 1996.     Aside

from Mrs. Higbee’s self-serving testimony at trial that these

additional expenses related to her employment at a beauty salon,

petitioners have failed to provide us with sufficient and

credible evidence for us to rule in their favor.

     Petitioners also claim additional Schedule C deductions of

$8,087.26 for 1996 and $8,590.48 for 1997 on account of amounts

allegedly owed and paid with regard to their failed beauty salon

business.    Petitioners contend that they paid these amounts while




they arrived at those fair market values, we are unable to allow
such deductions. Further, petitioners have not produced any
other independent and credible evidence indicating that those
donations were actually made.
                               - 13 -

in a chapter 13 bankruptcy proceeding.5   In support, petitioners

submitted to the Court a document entitled “Debtor Receipts and

Disbursements Summary” which provides general information about

the deposits made by petitioners with the trustee of the

bankruptcy estate and the disbursements to creditors by the

trustee.   As to the bankruptcy-related expenses claimed,

petitioners have failed to provide us with sufficient credible

evidence that petitioners had outstanding business debts which

were paid while in bankruptcy.    Further, petitioners have failed

to explain the origin of these expenses in sufficient detail for

us to find that these expenses would be allowable for the tax

years in issue.    Petitioners have failed to meet the

substantiation and record-keeping requirements of section

7491(a).   The burden of proof therefore is not placed on

respondent.   Finally, we conclude that petitioners have not met

their burden of proof to support the claimed deductions, and

therefore we sustain respondent’s determination as to this issue.

See Rule 142(a).

     Petitioners also claim additional Schedule E deductions with

regard to their rental activities for repairs ($5,976.31 for 1996

and $2,080 for 1997), legal expenses ($5,217 for 1996),

automobile expenses ($475.64 for 1996), and insurance ($139 for


     5
        The claimed deduction of $8,087.26 for 1996 encompasses
the $1,920 still in dispute with regard to respondent’s
deficiency determination.
                              - 14 -

1996) not previously deducted on their tax returns.   Again, we

reiterate that petitioners have failed to provide this Court with

credible evidence for us to allow petitioners’ claims with

respect to the disallowed deductions.   We therefore reject all of

petitioners’ contentions as to these issues.

II.   Addition to Tax and Accuracy-Related Penalty

      Under RRA 1998, Congress also enacted a provision, section

7491(c), requiring the Commissioner to carry the “burden of

production” in any court proceeding with respect to the liability

of any individual for any penalty, addition to tax, or additional

amount (penalties).   Although the statute does not provide a

definition of the phrase “burden of production”, we conclude that

Congress’ intent as to the meaning of the burden of production is

evident from the legislative history.   The legislative history of

section 7491(c) sets forth:

      in any court proceeding, the Secretary must initially
      come forward with evidence that it is appropriate to
      apply a particular penalty to the taxpayer before the
      court can impose the penalty. This provision is not
      intended to require the Secretary to introduce evidence
      of elements such as reasonable cause or substantial
      authority. Rather, the Secretary must come forward
      initially with evidence regarding the appropriateness
      of applying a particular penalty to the taxpayer; if
      the taxpayer believes that, because of reasonable
      cause, substantial authority, or a similar provision,
      it is inappropriate to impose the penalty, it is the
      taxpayer’s responsibility (and not the Secretary’s
      obligation) to raise those issues. [H. Conf. Rept.
      105-599, supra at 241, 1998-3 C.B. at 995.]

Therefore, with regard to section 7491(c), we conclude that for

the Commissioner to meet his burden of production, the
                               - 15 -

Commissioner must come forward with sufficient evidence

indicating that it is appropriate to impose the relevant penalty.

     The legislative history to section 7491(c), however, also

discloses that the Commissioner need not introduce evidence

regarding reasonable cause, substantial authority, or similar

provisions.   In addition, the legislative history indicates that

it is the taxpayer’s responsibility to raise those issues.    We

therefore conclude that the taxpayer bears the burden of proof

with regard to those issues.

     Finally, we note that Congress placed only the burden of

production on the Commissioner pursuant to section 7491(c).

Congress’ use of the phrase “burden of production” and not the

more general phrase “burden of proof” as used in section 7491(a)

indicates to us that Congress did not desire that the burden of

proof be placed on the Commissioner with regard to penalties.6

See sec. 7491(c).   Therefore, once the Commissioner meets his

burden of production, the taxpayer must come forward with

evidence sufficient to persuade a Court that the Commissioner’s

determination is incorrect.


     6
        We note that sec. 6665(a)(2) provides that any reference
to tax shall be deemed also to refer to penalties. However, the
application of sec. 6665(a)(2) is limited by the language “Except
as otherwise provided in this title”. Considering that limiting
language of sec. 6665(a)(2), the reference in sec. 7491(a) to tax
liabilities imposed by subtitle A or B (whereas penalties are
imposed by subtitle F), and the structure of sec. 7491 as a
whole, we believe that Congress intended for sec. 7491(c) (and
not sec. 7491(a)) to apply to penalties.
                              - 16 -

     Having described the framework of section 7491(c), we

evaluate whether respondent has met his burden of production with

regard to the section 6651(a)(1) addition to tax and the section

6662 accuracy-related penalty.   We also discuss whether

petitioners have presented any evidence which would cause us not

to sustain respondent’s determinations with regard to the

addition to tax and the accuracy-related penalty.

     Section 6651(a)(1) imposes an addition to tax for a

taxpayer’s failure to file a required return on or before the

specified filing date, including extensions.   The amount of the

liability is based upon a percentage of the tax required to be

shown on the return.   See sec. 6651(a)(1).   The addition to tax

is inapplicable, however, if the taxpayer’s failure to file the

return was due to reasonable cause and not to willful neglect.

See sec. 6651(a)(1).   Under section 7491(c), as noted above, the

Commissioner bears the burden of production with regard to

whether the section 6651(a)(1) addition to tax is appropriate,

but he does not bear the burden of proof with regard to the

“reasonable cause” exception of section 6651(a).

     Respondent determined that petitioners are liable for a

section 6651(a)(1) addition to tax with regard to their 1996 tax

return.   The parties have stipulated that petitioners filed their

1996 return on April 18, 1998, approximately 1 year after it was
                                  - 17 -

due.7       Accordingly, we conclude that respondent has produced

sufficient evidence to show that the section 6651(a)(1) addition

to tax is appropriate, unless petitioners prove that their

failure to file was due to reasonable cause.

        Petitioners have not provided any evidence indicating that

their failure to file was due to reasonable cause.       Therefore, an

addition to tax of 25 percent of the amount required to be shown

as tax on the return is sustained in the instant case.       Because

the parties have made several concessions, respondent’s original

section 6651(a)(1) addition to tax computation must be adjusted

to reflect such changes.       As a final matter, we note that there

is a discrepancy in the record with regard to petitioners’ amount

of withholding.8       See sec. 6651(b)(1) (providing that the amount

required to be shown as tax on the return for purposes of the

section 6651(a)(1) addition to tax shall be reduced for timely

payments or credits allowed to be claimed on the return).       The

parties are asked to consider this discrepancy in their Rule 155

computations.

        Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

(1) attributable to a substantial understatement of tax or (2)

        7
        In addition, the 1996 tax return, which is part of the
record, reflects that it was not timely filed.
        8
        Petitioners claimed withholding of $154.46 on their 1996
tax return. It appears that respondent did not give credit for
such withholding in the notice of deficiency.
                                - 18 -

due to negligence or disregard of rules or regulations.      See sec.

6662(b).   A substantial understatement of tax is defined as an

understatement of tax that exceeds the greater of 10 percent of

the tax required to be shown on the tax return or $5,000.        See

sec. 6662(d)(1)(A).     The understatement is reduced to the extent

that the taxpayer has (1) adequately disclosed his or her

position and has a reasonable basis for such position or (2) has

substantial authority for the tax treatment of the item.        See

sec. 6662(d)(2)(B).     In addition, section 6662(c) defines

“negligence” as any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code, and

“disregard” means any careless, reckless, or intentional

disregard.

     Whether applied because of a substantial understatement of

tax or negligence or disregard of the rules or regulations, the

accuracy-related penalty is not imposed with respect to any

portion of the understatement as to which the taxpayer acted with

reasonable cause and in good faith.      See sec. 6664(c)(1).    The

decision as to whether the taxpayer acted with reasonable cause

and in good faith depends upon all the pertinent facts and

circumstances.   See sec. 1.6664-4(b)(1), Income Tax Regs.

Relevant factors include the taxpayer's efforts to assess his

proper tax liability, including the taxpayer’s reasonable and

good faith reliance on the advice of a professional such as an

accountant.   See id.    Further, an honest misunderstanding of fact
                               - 19 -

or law that is reasonable in light of the experience, knowledge,

and education of the taxpayer may indicate reasonable cause and

good faith.    See Remy v. Commissioner, T.C. Memo. 1997-72.

     For the 1997 tax year, respondent determined that

petitioners are liable for an accuracy-related penalty

attributable to a substantial understatement of tax or, in the

alternative, due to negligence or disregard of rules or

regulations.    Petitioners have conceded that they are not

entitled to $30,245 in itemized deductions relating to NOL

carryovers ($28,036) and certain taxes ($2,209) claimed on

Schedule A of their 1997 tax return.    With regard to respondent’s

determination that petitioners were negligent and disregarded

rules and regulations, respondent argues that he has met his

burden of production under section 7491(c) through petitioners’

above concessions, along with evidence in the record indicating

that petitioners were experienced in business affairs.    Further,

respondent contends that because petitioners have failed to

introduce any evidence to indicate that they were not negligent,

petitioners have failed to meet their burden of proof, which they

retain despite the application of section 7491(c).

     Respondent has shown that petitioners have failed to keep

adequate books and records or to substantiate properly the items

in question.    Such a failure in the instant case is evidence of

negligence.    See sec. 1.6662-3(b), Income Tax Regs.

Consequently, we conclude that respondent has met his burden of
                             - 20 -

production for his determination of the accuracy-related penalty

based on negligence or disregard of rules or regulations.

Additionally, with regard to that determination, petitioners have

failed to meet their burden of proving that they acted with

reasonable cause and in good faith.    We therefore sustain

respondent’s determination that petitioners are liable for the

accuracy-related penalty on the underpayment associated with the

disallowed itemized deductions conceded by petitioners.9

     In reaching our holdings herein, we have considered all

arguments made, and to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.




     9
        Because of respondent’s concessions (see supra p. 4), we
conclude that the accuracy-related penalty based on a substantial
understatement of tax is not applicable as the understatement
does not exceed the greater of 10 percent of tax required to be
shown on the return or $5,000. See sec. 6662(d)(1).