T.C. Memo. 2007-165



                       UNITED STATES TAX COURT



                  ELIZABETH LAI, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 142-05.                    Filed June 26, 2007.



     Kevin O’Connell, for petitioner.

     Wesley F. McNamara, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    Respondent determined deficiencies and

penalties with respect to petitioner’s 1999, 2000, and 2001

Federal income tax as follows:
                              - 2 -

                                           Penalties
     Year        Deficiency       Sec. 6662(a)1   Sec. 6663

     1999        $45,969.00        $2,434.20     $25,348.50
     2000         42,401.00            --         31,778.25
     2001         38,393.00            --         28,761.00

After concessions,2 the issues remaining for decision are:    (1)

Whether petitioner failed to report income from La Belle Vie,

petitioner’s nail salon business; (2) whether petitioner is

liable for the section 6662(a) penalty for 1999 for the

underpayment attributable to unsubstantiated deductions; (3)

whether petitioner is liable for the civil fraud penalty pursuant

to section 6663 for a portion of the 1999 deficiency and the

entire 2000 and 2001 deficiencies; (4) whether, in the

alternative, if petitioner is found not to be liable for the

civil fraud penalty pursuant to section 6663 on any portion of

the underpayment for any of the years in issue, petitioner is

liable for the accuracy-related penalty on such portion of the

underpayment pursuant to section 6662.




     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
     2
        The parties stipulated that petitioner received small
amounts of interest and dividend income in each of the 3 years at
issue that were not reported on petitioner’s income tax returns.
The parties also stipulated that petitioner incurred a $30
capital loss in 2001 that petitioner did not report on her 2001
income tax return. In her briefs, petitioner concedes that she
cannot substantiate $38,211 in business expenses for 1999.
                               - 3 -

                         FINDINGS OF FACT

     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 petitioner filed her petition, she

resided in Oregon.

General Background

     Petitioner was born in Vietnam on December 25, 1953.     In

1977, petitioner immigrated to the United States.    Petitioner and

her 13 living siblings were all born and raised in Vietnam.     The

numerous members of petitioner’s extended family live in Vietnam

and various locations in the United States.    During 1999, 2000,

and 2001, some of petitioner’s siblings who still lived in

Vietnam were arranging their financial affairs in anticipation of

moving to the United States.   Petitioner speaks limited English.

Petitioner’s Nail Salon Business

     During 1999, 2000, and 2001, petitioner operated as a sole

proprietorship La Belle Vie, a nail beauty salon in a shopping

mall in Oregon.   Petitioner opened her first nail salon in Oregon

in 1987.   Petitioner handled the banking and finances of La Belle

Vie, depositing the credit card receipts every day and the cash

receipts approximately once a week.    Petitioner paid herself a

“salary” from La Belle Vie by writing checks to herself from La
                                - 4 -

Belle Vie bank accounts.    Petitioner also received tips from her

work at La Belle Vie during 1999, 2000, and 2001.

Petitioner’s Banking and Investment Accounts

     During 1999, 2000, and 2001, petitioner maintained bank

accounts at both Key Bank and U.S. Bank.   She maintained two

checking accounts at Key Bank in her own name.     Petitioner

maintained a checking account at U.S. Bank under “La Belle Vie”

and a money market account under “Elizabeth T. Lai Sole Prop La

Belle Vie”.   Petitioner used the Key Bank accounts as her

personal accounts and the U.S. Bank accounts as her business

accounts.

     Petitioner deposited and withdrew money from her personal

accounts at Key Bank as follows:

     Year      Cash Deposits    Total Deposits    Withdrawals

     1999      $85,590.88        $113,766.37      $116,275.50
     2000       63,300.00          94,096.74        95,728.48
     2001      112,800.00         151,145.22       135,502.02

Petitioner’s withdrawals from her personal accounts at Key Bank

included payments for home and car loans, utilities, clothes, and

other personal expenditures.

Petitioner’s Purchase of a Cashier’s Check in 2000

     On September 29, 2000, petitioner used cash to purchase a

cashier’s check of $55,204 from U.S. Bank.     Petitioner did not

withdraw the $55,204 that she used to purchase the cashier’s

check from any of her personal or business accounts.     Petitioner
                                 - 5 -

purchased the cashier’s check with funds from Gioni Birkenfeld,

petitioner’s former daughter-in-law and the mother of

petitioner’s grandchild, and with funds that came indirectly from

Hong Lai, petitioner’s sister.    Gioni Birkenfeld gave petitioner

$17,000.   Hong Lai, who lived in Vietnam at the time, arranged

for several relatives in the United States to give money to

petitioner.    When those relatives later traveled to Vietnam, Hong

Lai repaid them the amounts they paid petitioner, which the

relatives would use during their trips in Vietnam.3   Acting on

Hong Lai’s behalf, petitioner then used the cash she received

from the relatives to pay for the remaining portion of the

cashier’s check for which Gioni Birkenfeld did not pay.

     On October 2, 2000, petitioner purchased a residence in

Portland, Oregon, apparently using the cashier’s check as a

downpayment.   Gioni Birkenfeld lived in the residence for 14

months after it was purchased, during which time she assumed

responsibility for mortgage payments of approximately $1,500 per

month.   Hong Lai lived in the residence for a brief period when

she arrived in the United States in 2003.   The residence was sold

in September 2003.



     3
        A vital factual underpinning of petitioner’s actions in
this case is her (and her family’s) reluctance to transport
money--particularly large sums of U.S. dollars--between Vietnam
and the United States in ordinary banking transactions.
Petitioner and her family apparently feared that Vietnamese
officials would seize the money if discovered.
                                 - 6 -

Preparation of Petitioner’s Income Tax Returns

     Petitioner engaged Thanh Nguyen (Mr. Nguyen), an enrolled

agent, to prepare her 1999, 2000, and 2001 Federal income tax

returns.    Petitioner filed Forms 1040, U.S. Individual Income Tax

Return, for 1999, 2000, and 2001.    Petitioner attached to each of

those returns Schedules C, Profit or Loss From Business,

reporting the following gross receipts, cost of goods sold, and

expenditures for La Belle Vie:

                Gross       Cost of       Business
     Year      Receipts    Goods Sold    Deductions   Net Profit

     1999     $428,595     $63,845       $331,957      $31,933
     2000      412,763      85,618        272,495       54,650
     2001      466,770      38,897        338,417       88,760

     Petitioner’s business records consisted of her bank

statements and canceled checks, and the parties agree that Mr.

Nguyen prepared the returns based solely on canceled checks and

statements from petitioner’s U.S. Bank accounts.      Petitioner did

not inform Mr. Nguyen of her tip income at the time.

     Petitioner did not report any of her tip income on her

Federal income tax returns for the years at issue.     Petitioner

did not mention the tip income to Mr. Nguyen because she did not

believe that tips were taxable.    Indeed, petitioner became aware

that tip income was taxable only when she was informed as such by

her attorney during preparation for the trial of this case.
                                 - 7 -

Examination of Petitioner’s Income Tax Returns

     Petitioner’s 1999 income tax return was selected by

respondent for examination.   Revenue Agent Daren Cedergreen

(Agent Cedergreen) conducted the examination, which began in

2002.

     On February 14, 2002, Agent Cedergreen met with petitioner

and Mr. Nguyen, who agreed to represent petitioner during the

examination, at La Belle Vie.    During that meeting, petitioner

stated, inter alia, that all her income came from La Belle Vie,

that she did not have a safe deposit box, and that she did not

receive any loans during 1999.

     On September 23, 2002, Agent Cedergreen met again with

petitioner and Mr. Nguyen at Mr. Nguyen’s office.    During that

meeting, petitioner stated that the deposits in her Key Bank

accounts represented loan proceeds and loan repayments from

family and friends in the United States and Vietnam.    Petitioner

also said that she maintained a safe deposit box at Key Bank.

     At the meeting, petitioner showed Agent Cedergreen seven

letters (the first set of letters) that she believed were

authored by relatives and acquaintances.    The letters, many of

which are written in Vietnamese, discuss loans between petitioner

and her friends and family made during late 1998 and 1999.

     During the meeting of September 23, 2002, petitioner filled

out a questionnaire indicating that her routine cash expenditures
                               - 8 -

for personal items such as groceries, gas for her car, and other

needs amounted to $9,760 during 1999.

     At some point after this meeting, respondent expanded the

scope of the examination to include petitioner’s 2000 and 2001

returns.

     Agent Cedergreen met with petitioner, Mr. Nguyen, and Bob

Bradley (who was also representing petitioner), at respondent’s

Portland, Oregon, office on August 14, 2003.    At this meeting,

petitioner again explained that the large deposits into her

personal accounts represented loan proceeds and loan repayments

from friends and family.   Petitioner estimated that she received

more than $70,000 in loans in 2000 and more than $120,000 in

loans in 2001.

     During the meeting of August 14, 2003, Agent Cedergreen

questioned petitioner about her purchase of a cashier’s check on

September 29, 2000.   Petitioner initially did not remember that

she purchased a cashier’s check in 2000 or 2001 and stated that

she did not make such a purchase.   After further questioning,

petitioner recalled that she purchased a cashier’s check on

behalf of Ms. Birkenfeld for the purpose of purchasing a

residence in which Ms. Birkenfeld would live.    Petitioner

recalled that Ms. Birkenfeld agreed to give the house to Hong Lai

when Hong Lai came to the United States.
                               - 9 -

     On or about August 19, 2003, petitioner hired C.P.A. Jerry

Levey to help represent her during the examination.

     On October 29, 2003, petitioner provided Agent Cedergreen

with 50 additional letters (the second set of letters).   The

letters indicate that some of petitioner’s friends and family in

Vietnam sent cash to petitioner for safekeeping or investment in

anticipation of their immigration to the United States.

According to the letters, friends and family of petitioner who

traveled from Vietnam to the United States would deliver the

money to petitioner in amounts ranging from $3,000 to $17,000.

     Petitioner subsequently discovered that the first set of

letters was not written by their purported authors.   Shortly

after she received the original letters in the mail, petitioner

gave them to her mother to read and store.   When petitioner asked

her mother for the letters during the examination of her returns,

petitioner’s mother could not find them and instead attempted to

replicate the originals.   Petitioner’s mother attempted to

reconstruct the loan amounts mentioned in the letters from

memory.   When petitioner learned of her mother’s actions,

petitioner promptly notified Mr. Levey of her discovery, and

petitioner and Mr. Levey subsequently informed respondent that

the first set of letters was authored by petitioner’s mother.

Petitioner maintained at both the audit and at trial that the
                             - 10 -

content of the second set of letters was authentic and that the

letters were written by their purported authors.

     At all stages of the examination, progress was significantly

hampered by misunderstandings due to language barriers, poor

translations, cultural differences between petitioner and

respondent’s employees, and petitioner’s somewhat guarded

approach towards government officials.   For example, petitioner

originally told Agent Cedergreen that she did not receive any

loans during 1999 despite the fact that she simultaneously

volunteered the existence of her Key Bank accounts which

contained significant, unexplained deposits which she would later

attribute to intrafamily loans.   At subsequent meetings,

petitioner offered Agent Cedergreen detailed information on

several loan transactions, apparently without believing that the

information contradicted her previous statements.

The Notice of Deficiency

     In a notice of deficiency dated October 5, 2004, respondent

determined deficiencies and penalties as 

.      Aside

from those adjustments which the parties have conceded, the

deficiencies are composed of four elements:   (1) Inclusion of

petitioner’s additional bank deposits as unreported income for

each year; (2) inclusion of $9,760 of cash income for each year;

(3) inclusion of the amount of the cash used to purchase the

cashier’s check in gross income for 2000; and (4) adjustments to
                               - 11 -

petitioner’s reported itemized deductions, personal exemptions,

self-employment tax, and child tax credit.

     For all 3 years at issue, respondent conducted a bank

deposit analysis to determine the total deposits in petitioner’s

business and personal bank accounts.    Respondent excluded

deposits that, in his determination, represented nontaxable

sources, including transfers between petitioner’s accounts.

Respondent determined that the remaining amount was taxable

income.

     Respondent added $9,760 of income to petitioner’s reported

adjusted gross income for each year.    According to respondent,

this figure represented the amount of petitioner’s annual cash

expenditures for personal expenses based on the form petitioner

filled out at her meeting with Agent Cedergreen on September 23,

2002.    Because petitioner withdrew nearly zero cash from her

personal and business accounts during 1999, 2000, and 2001,4

respondent determined that the $9,760 represented additional

income.

     For 2000, respondent determined $55,204 of additional

income.    That amount reflects petitioner’s cash purchase of the

cashier’s check 

.    Because petitioner did not

withdraw cash from any of her bank accounts to provide the funds


     4
        Petitioner wrote one check to cash in 1999 in the amount
of $3,500. Respondent accordingly reduced his deficiency
determination by that amount for 1999.
                               - 12 -

used to purchase the cashier’s check, respondent determined that

the cash petitioner used to purchase the cashier’s check was

unreported income.

     Finally, respondent adjusted the amounts of petitioner’s

reported itemized deductions, personal exemptions, self-

employment tax, and child tax credit in accordance with the above

determinations.

                               OPINION

Deficiencies

     Generally, the Commissioner’s determinations of deficiencies

in a notice of deficiency are presumed correct, and the taxpayer

bears the burden of showing that the Commissioner’s

determinations are in error.   See Rule 142(a); Welch v.

Helvering, 

, 115 (1933).5    The U.S. Court of Appeals

for the Ninth Circuit (to which an appeal of this matter would

lie) has held that the Commissioner must establish “some

evidentiary foundation” connecting the taxpayer with the income-

producing activity, Weimerskirch v. Commissioner, 

,

361-362 (9th Cir. 1979), revg. 

(1977), or demonstrate

that the taxpayer actually received unreported income, see

Edwards v. Commissioner, 

, 1270 (9th Cir. 1982) (the


     5
        Petitioner has neither claimed nor shown that she
satisfied the requirements of sec. 7491(a) to shift the burden of
proof to respondent with regard to any factual issue affecting
her liability for the income tax deficiencies. Accordingly,
petitioner bears the burden of proof. See Rule 142(a).
                              - 13 -

Commissioner’s assertion of a deficiency is presumptively correct

once some substantive evidence is introduced demonstrating that

the taxpayer received unreported income), for the presumption of

correctness to attach to the deficiency determination in

unreported income cases.   If the Commissioner introduces some

evidence that the taxpayer received unreported income, the burden

shifts to the taxpayer to show by a preponderance of the evidence

that the deficiency was arbitrary or erroneous.    See Hardy v.

Commissioner, 

, 1004 (9th Cir. 1999), affg. T.C.

Memo. 1997-97.

     The Commissioner has broad powers under section 446 to

compute the taxable income of a taxpayer.    Sec. 446; Petzoldt v.

Commissioner, 

, 693 (1989).    Generally, such

computation is made using the taxpayer’s regularly employed

method of accounting.   Sec. 446(a).   If the taxpayer’s method of

accounting does not clearly reflect income, then the method used

shall be the method which, in the Commissioner’s opinion, clearly

reflects income.   Sec. 446(b); see Palmer v. U.S. IRS, 

, 1312 (9th Cir. 1997).

     “The use of the bank deposit method for computing income has

long been sanctioned by the courts.”     Estate of Mason v.

Commissioner, 

, 656 (1975), affd. 

(6th Cir.

1977).   “A bank deposit is prima facie evidence of income and

respondent need not prove a likely source of that income.”
                              - 14 -

Tokarski v. Commissioner, 

, 77 (1986) (citing Estate of

Mason v. Commissioner, supra at 656-657).

     Respondent has introduced adequate evidence to show that

petitioner received unreported income during 1999, 2000, and

2001.   With regard to respondent’s determinations that resulted

from respondent’s bank deposit analyses, respondent is not

required to show a link between petitioner’s bank deposits and a

likely taxable source of income.   See, e.g., Tokarski v.

Commissioner, supra; Kudo v. Commissioner, T.C. Memo. 1998-404,

affd. 

(9th Cir. 2001).     Respondent’s

determinations regarding the cashier’s check and petitioner’s

cash income are founded on statements from third parties such as

banks and brokerage firms, and on petitioner’s admissions that

she received cash income that she failed to report on her tax

returns.   Moreover, petitioner’s nail salon business clearly

qualifies as an income-producing activity.    See, e.g., Hamilton

v. Commissioner, T.C. Memo. 2004-66 (ownership of interests in

businesses sufficient to prove likely source of unreported

income).   Respondent has therefore introduced adequate

substantive evidence to show that petitioner received unreported

income in the amounts determined, and, as 

, the burden

of proof falls on petitioner to demonstrate that respondent’s

determinations are arbitrary or erroneous.
                              - 15 -

     In addition to her own testimony, petitioner offered

testimony from her sisters Hong Lai and Sharon Huynh, and her

daughter Victoria Lai Hutchins to support her contention that the

deposits into her personal accounts represent loan proceeds and

repayments from intrafamily loans.     Petitioner also offered the

second set of letters that she gave to Agent Cedergreen during

the examination of petitioner’s 1999, 2000, and 2001 income tax

returns.

     Petitioner, Hong Lai, Sharon Huynh, Victoria Lai Hutchins

all testified that petitioner participated in several intrafamily

loans during the years at issue in an effort to help family

members establish financial stability as they arrived and settled

in the United States.   Petitioner testified that she deposited

the proceeds of several loans into her personal accounts during

the years at issue.   Hong Lai, who had indepth knowledge of her

extended family’s financial affairs, corroborated that several

letters from the second set were authentic and that she

recognized the handwriting and signatures of her sisters in

Vietnam on 31 of the letters.6   Sharon Hunyh’s and petitioner’s

testimony regarding the letters corroborated Hong Lai’s

testimony.




     6
        Although petitioner’s witnesses testified that additional
letters were authentic, some pertain to loan transactions that
occurred in years other than the years at issue.
                              - 16 -

     We decide whether a witness is credible on the basis of

objective facts, the reasonableness of the testimony, and the

demeanor of the witness.   Quock Ting v. United States, 

, 420-421 (1891); Wood v. Commissioner, 

, 605 (9th

Cir. 1964), affg. 

(1964); Dozier v. Commissioner,

T.C. Memo. 2000-255.   Having had the opportunity to observe the

above-mentioned witnesses at trial, we find petitioner, Hong Lai,

Sharon Huynh, and Victoria Lai Hutchins to be honest, forthright,

and credible.   Based on this testimony and the 31 letters from

the second set of letters, we find that petitioner deposited

proceeds she received from intrafamily loans into her personal

accounts as follows:

                Year           Amount Deposited

                1999               $74,500
                2000                68,800
                2001                74,000


     The above-mentioned amounts are loan proceeds.   Loan

proceeds do not constitute income to a taxpayer.   Commissioner v.

Tufts, 

, 307 (1983).   We therefore hold that the

above-mentioned amounts are not income to petitioner.

     Moreover, the record establishes that the cash petitioner

used to purchase the cashier’s check in 2000 did not represent

unreported income to petitioner.   We find the testimony of Hong

Lai, Gioni Birkenfeld, and petitioner credible with regard to the

cashier’s check, and we believe that petitioner used funds that
                               - 17 -

Hong Lai and Gioni Birkenfeld lent to petitioner to purchase the

cashier’s check on their behalf.   As 

, loan proceeds

do not constitute income to a taxpayer.

that the amount of the cashier’s check does not represent income

to petitioner.7

     Based on the credible documentary evidence and credible

corroborating testimony, petitioner has established by a

preponderance of the evidence that a portion of the disputed

determinations is erroneous.   However, petitioner has not carried

her burden of proof with regard to the remaining portion of the

deficiency.   We therefore partially uphold respondent’s

determination.




     7
        Generally, the Commissioner may assess taxes only within
3 years after a taxpayer files his or her income tax return.
Sec. 6501(a). However, if a taxpayer omits from gross income an
amount properly includible therein which is in excess of 25
percent of the amount of gross income stated in the return, the
Commissioner may assess income taxes for that year at any time
within 6 years after the return was filed. Sec. 6501(e)(1)(A).
In the matter before us, the notice of deficiency was issued on
Oct. 5, 2004. Petitioner filed her 1999 income tax return on or
about Oct. 20, 2000. Thus, without regard to application of the
sec. 6663 fraud penalty, discussed infra, unless sec. 6501(e)
applies, that year falls outside the period of limitations, and
respondent may not assess additional tax for 1999. It appears
that the 6-year period of sec. 6501(e) may not apply to
petitioner’s 1999 tax year. See sec. 6501(e)(1)(A)(i). If,
pursuant to the parties’ Rule 155 calculations, sec. 6501(e) does
not apply to petitioner’s 1999 tax year, respondent may not
assess additional taxes for 1999. Sec. 6501(a).
                                  - 18 -

Penalties

     A.     Section 6663

     Section 6663 imposes a penalty equal to 75 percent of the

portion of any underpayment which is attributable to fraud.         Sec.

6663(a).     The penalty in the case of fraud is a civil sanction

provided primarily as a safeguard for the protection of the

revenue and to reimburse the Government for the heavy expense of

investigation and the loss resulting from a taxpayer’s fraud.

Helvering v. Mitchell, 

, 401 (1938).       Fraud is

intentional wrongdoing on the part of the taxpayer with the

specific purpose to evade a tax believed to be owing.        McGee v.

Commissioner, 

, 256 (1973), affd. 

(5th

Cir. 1975).

     The Commissioner has the burden of proving fraud by clear

and convincing evidence.       Sec. 7454(a); Rule 142(b).   To satisfy

this burden, the Commissioner must show:       (1) An underpayment

exists; and (2) the taxpayer intended to evade taxes known to be

owing by conduct intended to conceal, mislead, or otherwise

prevent the collection of taxes.       Parks v. Commissioner, 

, 660-661 (1990).       The Commissioner must meet this burden

through affirmative evidence because fraud is never imputed or

presumed.     Petzoldt v. Commissioner, 

; Recklitis v.

Commissioner, 

, 909-910 (1988); Beaver v.

Commissioner, 

, 92 (1970).
                               - 19 -

     The Commissioner must prove that a portion of the

underpayment for each taxable year in issue was due to fraud.

Profl. Servs. v. Commissioner, 

, 930 (1982).      If the

Commissioner establishes that any portion of an underpayment in a

particular year is attributable to fraud, the entire underpayment

is treated as attributable to fraud, except with respect to any

portion of the underpayment which the taxpayer establishes (by a

preponderance of the evidence) is not attributable to fraud.

Sec. 6663(b).

     The existence of fraud is a question of fact to be resolved

from the entire record.    Gajewski v. Commissioner, 

,

199 (1976), affd. without published opinion 

(8th

Cir. 1978).

     Respondent has failed to meet his heavy burden of

establishing by clear and convincing evidence that petitioner had

the requisite fraudulent intent for any of the years at issue.

Several aspects of petitioner’s conduct are markedly inconsistent

with fraudulent intent.    At her first meeting with Agent

Cedergreen, petitioner voluntarily disclosed the existence of her

personal accounts, the very accounts in which respondent alleges

that she hid her income.    When petitioner discovered that the

first set of letters she had presented were not originals, she

disclosed that information to respondent.    Petitioner also freely

disclosed her unreported tip income and that she had cash
                                - 20 -

expenditures for personal expenses even though she had nearly

zero cash withdrawals from her bank accounts.    In effect,

petitioner consistently drew respondent’s attention to those

areas in which her explanations were less than satisfactory.

Such behavior is hardly consistent with intent “to conceal,

mislead, or otherwise prevent the collection of taxes”.       Katz v.

Commissioner, 

, 1143 (1988).

     Petitioner contradicted herself on a few occasions during

the examination and at trial.    However, having had the

opportunity to observe petitioner as a witness at trial, and

considering that many of her contradictions and disclosures could

not have advanced her cause, we do not attribute petitioner’s

contradictions to fraudulent intent.     Rather, we attribute them

to a series of misunderstandings and to petitioner’s fear of

governmental attention due to negative experiences with foreign

governments.

     Finally, and most importantly, the evidence before us is

sufficiently credible to convince us that petitioner did actually

participate in the kind of intrafamily transactions which would

explain the deposits in her personal accounts, though the record

is not sufficiently detailed to establish that all of the

deposits into petitioner’s personal accounts represent proceeds

from such transactions.   We therefore do not sustain respondent’s

imposition of the section 6663 penalty.
                                  - 21 -

     B.    Burden of Production

     Section 7491(c) provides that the Commissioner will bear the

burden of production with respect to the liability of any

individual for additions to tax and penalties.    “The

Commissioner’s burden of production under section 7491(c) is to

produce evidence that it is appropriate to impose the relevant

penalty, addition to tax, or additional amount.”    Swain v.

Commissioner, 

, 363 (2002); see also Higbee v.

Commissioner, 

, 446 (2001).    Once the Commissioner

has done so, the burden of proof is upon the taxpayer to

establish reasonable cause and good faith.    Higbee v.

Commissioner, supra at 449.

     C.    Section 6662(a)

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

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

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

due to negligence or disregard of rules or regulations.    Sec.

6662(b).    The term “understatement” means the excess of the

amount of tax required to be shown on a return over the amount of

tax imposed which is shown on the return, reduced by any rebate

(within the meaning of section 6211(b)(2)).    Sec. 6662(d)(2)(A).

Generally, an understatement is a “substantial understatement”

when the understatement exceeds the greater of $5,000 or 10

percent of the amount of tax required to be shown on the return.
                                 - 22 -

Sec. 6662(d)(1)(A).    The term “negligence” in section 6662(b)(1)

includes any failure to make a reasonable attempt to comply with

the Code.    Sec. 6662(c).    Negligence has also been defined as the

failure to exercise due care or the failure to do what a

reasonable person would do under the circumstances.     See Allen v.

Commissioner, 

, 12 (1989), affd. 

, 353 (9th

Cir. 1991); Neely v. Commissioner, 

, 947 (1985).        The

term “disregard” includes any careless, reckless, or intentional

disregard.    Sec. 6662(c).    Failure to keep adequate records may

be evidence not only of negligence, but also of intentional

disregard of regulations.      See sec. 1.6662-3(b)(1) and (2),

Income Tax Regs.; see also Benson v. Commissioner, T.C. Memo.

2007-113.

     In the matter before us, respondent has met the burden of

production imposed on him by section 7491(c).     Respondent has

shown that petitioner failed to keep adequate records for the

years at issue.    To avoid application of the penalty, petitioner

must therefore demonstrate that the underpayments of tax for

1999, 2000, and 2001 were due to reasonable cause and good faith.

See sec. 6664(c)(1); Higbee v. Commissioner, supra at 449.

     The decision as to whether a taxpayer acted with reasonable

cause and in good faith depends upon all the pertinent facts and

circumstances.    Sec. 1.6664-4(b)(1), Income Tax Regs.   Relevant

factors include the taxpayer’s efforts to assess his or her
                               - 23 -

proper tax liability, including the taxpayer’s reasonable and

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

accountant.   See

the advice of a

professional tax advisor does not necessarily establish

reasonable cause and good faith.

the advice of a tax professional is not reasonable when a

taxpayer fails to disclose a fact that he or she knows, or

reasonably should know, is relevant to the proper tax treatment

of an item.   Sec. 1.6664-4(c)(1)(i), Income Tax Regs.

     Petitioner has not demonstrated that any of her

underpayments are due to reasonable cause and good faith.

Petitioner did not mention her tip income to Mr. Nguyen during

his preparation of petitioner’s income tax returns.    Although

petitioner may have believed that tip income was not taxable,

that belief is not reasonable.   Petitioner has failed to

demonstrate that she acted with reasonable cause and good faith

with regard to any particular portion of the underpayments in

this case.    Therefore, to the extent that we uphold respondent’s

determination of deficiencies for the years at issue, we conclude

that petitioner is liable for the section 6662(a) penalties.

     To reflect the foregoing,


                                           Decision will be entered

                                     under Rule 155.