T.C. Memo. 2021-9

UNITED STATES TAX COURT

WILLIAM BRUCE COSTELLO AND MARITZA LEGARCIE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1350-17. Filed January 25, 2021.

P-W engaged in a farming activity from which, for the seven

years up to and including the two years in issue, she reported losses. 

Her serial attempts at raising chickens, growing vegetables, and

raising cattle were all unsuccessful. She also engaged in a rental real

estate activity from which, for the first year in issue, she reported a

loss. R disallowed Ps' deductions for the farming losses on the

grounds that P-W had not incurred them in carrying on a trade or

business. He disallowed an operating loss deduction for one rental

property on the grounds that it was not held for rental because it had

been flooded, was in no condition to rent, and had not been advertised

for rental. He disallowed the sum of operating loss deductions for

other rental properties as a passive loss. In determining the passive

loss, R took no account of a substantial gain from the sale of two of

P-W's rental properties.

Held: Disallowance of deductions for losses from farming

activity sustained because losses were startup expenses for which

I.R.C. sec. 195(a) prohibits a current deduction.

Served 01/25/21
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[*2] Held, further, disallowance of operating loss deduction for first

rental property sustained because not held for rental.

Held, further, R erred in determining passive loss; disallowance

of loss deduction not sustained.

Held, further, addition to tax for failure to timely file return

sustained.

Held, further, accuracy-related penalties sustained.

William Bruce Costello and Maritza Legarcie, pro sese.

Andrea M. Faldermeyer, Jordan S. Musen, and Steven M. Roth, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: Respondent determined deficiencies of $35,003 and

$1,648 in petitioners' 2012 and 2013 Federal income tax, respectively, an addition

to tax of $8,747 for 2012 for failing timely to file a return, and accuracy-related

penalties of $7,001 and $330 for both years, respectively.

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
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[*3] Procedure, unless otherwise indicated. We round all dollar amounts to the

nearest dollar.

After a concession,

1

 the issues for decision are whether: (1) petitioners may

deduct as business expenses amounts expended in connection with various

agricultural pursuits during the years in issue; (2) respondent erred in disallowing

petitioners' real estate loss deductions; (3) petitioners are liable for the addition to

tax for failure to timely file their 2012 return; and (4) petitioners are liable for the

accuracy-related penalties.

Petitioners bear the burden of proof.2

 See Rule 142(a).

FINDINGS OF FACT

The parties have stipulated certain facts and the authenticity of certain

documents. The facts stipulated are so found, and documents stipulated are

accepted as authentic. Petitioners resided in California when they filed the

petition.

1Petitioners concede respondent's adjustment for 2012 disallowing their

$503,954 deduction for a net operating loss carryover.

2Petitioners have not raised the issue of sec. 7491(a), which shifts the

burden of proof to the Commissioner in certain situations. We conclude that sec.

7491(a) does not apply here because petitioners have not produced evidence that

they have satisfied the preconditions for its application.
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[*4] Tax Returns

Petitioners made joint returns of income on Form 1040, U.S. Individual

Income Tax Return, for both their 2012 and 2013 taxable (calendar) years. They

filed their 2012 return on November 26, 2013. Attached to each Form 1040 were

various schedules on which petitioners claimed deductions for net losses from

(1) a farming activity and (2) a real estate activity, both activities carried on by

petitioner wife (Ms. Legarcie). At issue are those deductions. Although

respondent does not dispute that petitioners spent the amounts deducted, he does

challenge their right to those deductions.

Farming Activities

Ms. Legarcie has since at least 2007 carried on a farming activity on a

6,500-acre tract of land, Oasis del Eden (property), in Mexico. Beginning with her

2007 Form 1040, Ms. Legarcie has, on Schedule F, Profit or Loss From Farming,

reported the activity. First she (reporting singly) and then petitioners (reporting

jointly) have reported net losses from the farming activity for every year beginning

with 2007.

In 2007, Ms. Legarcie decided to raise chickens on the property to sell for

meat. Apparently, that activity did not go well. Petitioner husband (Mr. Costello)

could not recall whether, from 2007 through 2011, petitioners sold any of the
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[*5] chickens, and the only sale that Ms. Legarcie reported for 2007 through 2011

is $264 received on the resale (at a loss) of livestock in 2011.

Sometime in 2011, Ms. Legarcie switched from raising chickens for meat to

raising them for egg production. By 2012, however, she had determined that she

would not make money with commercial egg production because of an upward

trend in the price of chicken feed. So she switched from commercial egg

production to building a flock in order again to sell chickens for meat. In May

2012, she purchased more than 69 birds, distributed among at least 14 breeds. 

She sold no chickens in 2012 or 2013 but had plans to begin sales in 2014. Her

plans were thwarted when, in January 2014, wild dogs destroyed most of the flock. 

When Ms. Legarcie was raising meat chickens, she occasionally sold or bartered

excess eggs that she did not need to grow the flock. Ms. Legarcie's only reported

income from selling eggs is $1,068 she reported for 2012.

Between 2007 and 2011, Ms. Legarcie grew watermelons, squash, peppers,

apples, bananas, pomegranates, date palms, and asparagus on the property. She

claimed the expenses of growing those crops as farming expense deductions, but

she reported no revenues from sales. Her lack of revenue was due to the fact that

the property is on the edge of the world's largest evaporative salt plant, and, in

1973, a spill from the salt plant created a salt flat on a portion of the property. 
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[*6] Moreover, evaporation from the salt plant blows across the property and

poisons the soil. Crops grown on the property are not commercially acceptable.

In 2012, Ms. Legarcie planted a test crop of peppers, which was not

successful because insects destroyed the crop. In neither 2012 nor 2013 did

Ms. Legarcie market produce from the property. In his testimony, Mr. Costello

agreed that the expenses incurred to grow the peppers were "pre-opening,

experimental R&D expenses."

In 2012, Ms. Legarcie acquired three cows and three calves. Her plan,

according to Mr. Costello, was: "Feed the calves, make them big, sell them,

impregnate the mothers * * * repeat." That plan did not work because, as

Mr. Costello explained: "[I]t quickly became apparent that we weren't going to

make money on cows because when I turned them out onto the * * * 6,500 acres,

they couldn't find enough to eat. * * * We immediately got rid of the cows."

Ms. Legarcie sold the cows in 2013 for $4,800, which is the only farm activity

income reported for 2013.

Mr. Costello explained the impetus behind Ms. Legarcie's progression from

activity to activity: "When you have something in a business that is not making

money, you change it, and you figure out why it's not making money. You

evaluate to see if you could make it make money. If it doesn't, you stop doing that
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[*7] and you start doing something else. He conceded: "[W]e have tried several

things on this property; so far, nothing has worked." He was, however, hopeful

that something would come along that would work and be profitable: "Will

something come along that will work? When the right opportunity comes,

financial conditions change, market conditions change, then yes, I fully expect to

be able to make a profit. At the present moment, no, * * * [we] don't."

For 2012 and 2013, Ms. Legarcie reported on Schedules F the gross income

and expenses from her farming activities. She described her principal crop or

activity on the schedules as "Poultry Products". For 2012, she reported income of

$1,068 from egg sales, and, for 2013, income of $4,800 from the sale of the cows. 

She reported her deductible expenses for each year both on the Schedule F and on

the Schedule C, Profit or Loss From Business (Schedule C (farming)). The parties

agree that the Schedule C (farming) expenses should have been reported on the

Schedules F and that the treatment of the Schedule C (farming) expenses follows

that of the Schedule F expenses. The following tables show the particulars of

Ms. Legarcie's tax reporting for her farming activity.
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[*8] Schedule C (Farming)

2012 2013

Gross income -0- -0-

Car and truck expenses ($2,618) -0-

Depreciation (852) -0-

Taxes and licenses (262) ($262)

 Total (3,732) (262)

Schedule F

2012 2013

Gross income $1,068 $4,800

Car and truck expenses (80) -0-

Feed (6,636) (18,461)

Gasoline, fuel, and oil (5,530) (1,140)

 Total (11,178) (14,801)

Respondent disallowed petitioners' deductions for Ms. Legarcie's net

Schedule C (farming) losses and also disallowed their deductions for her net

Schedule F losses of $10,110 and $10,001 for 2012 and 2013, respectively. In his

pretrial memorandum, respondent explains that, for each year, he erroneously

subtracted Ms. Legarcie's Schedule F gross income from her net Schedule F loss in

determining the Schedule F disallowance. He makes no claim for an added

deficiency on account of that mistake. Respondent explains that he made his
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[*9] adjustments, disallowing Ms. Legarcie's farming losses because she did not

incur those losses carrying on a trade or business.

Real Estate Activity

Petitioners attached Schedule E, Supplemental Income and Loss, to each of

their 2012 and 2013 Forms 1040 reporting income and losses from rental real

estate. On those Schedules E, petitioners reported that they were real estate

professionals who materially participated in a rental real estate activity. On the

2012 Schedule E, they listed four separate properties, and, on the 2013

Schedule E, they listed two of those four properties. The following table shows

the properties listed and the Schedule E income or loss from each.

 Property 2012 2013

Sproule Ave., Pacoima, CA $1,260 -0-

Truman St., San Fernando, CA 26,110 $50,540

San Fernando Rd., San Fernando, CA (39,240) -0-

Silvertip Dr., Big Bear Lake, CA (8,825) (9,094)

 Total (20,695) 41,446

The Silvertip Dr. property was flooded sometime in the 2000s and was not

thereafter in condition to rent. Petitioners did not advertise it for rental and

reported no rental income for it after 2005.
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[*10] Petitioners sold both the San Fernando Rd. and the Sproule Ave. properties

in 2012 and reported from those sales a long-term capital gain of $312,747.

Petitioners also claimed on Schedules C (Schedules C (real estate)) for both

2012 and 2013 deductions for expenses related to the real estate activity reported

on their 2012 and 2013 Schedules E. They claimed on those Schedules C (real

estate) deductions of $14,617 and $25,308 for 2012 and 2013, respectively. 

Petitioners claimed those deductions on the Schedules C (real estate) rather than

apportion them between the properties listed on their Schedules E because, Mr.

Costello testified, he did not separately track the expenses for each property.

Respondent disallowed petitioners' deductions for the claimed losses on the

Silvertip Dr. property for both 2012 and 2013 on the grounds that it was not a

rental property. He disallowed petitioners' remaining 2012 Schedule E loss of

$11,871 ($11,871 = $20,696 ! 8,825) on the grounds that it was a passive activity

loss. He determined that the disallowed passive activity loss could be carried over

and claimed against passive activity income in 2013. That reduced petitioners'

2013 rental income (disregarding the disallowed Silvertip Dr. loss) to $38,669

($38,669 = $50,540 ! 11,871), which was $2,777 less than the amount reported on

petitioners' 2013 Schedule E. Respondent made an appropriate adjustment to

petitioners' 2013 taxable income. Respondent disallowed the $14,617 and
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[*11] $25,308 Schedule C (real estate) losses for 2012 and 2013, respectively, on

the grounds that Ms. Legarcie was not in a real estate trade or business. He now

concedes, however, that the Schedule C (real estate) losses were related to

petitioners' Schedule E activity.

Penalties

Respondent determined that petitioners are liable for an addition to tax for

failure to file a timely tax return for 2012 and accuracy-related penalties based on

negligence and a substantial understatement of income tax for 2012 and on

negligence for 2013. The record includes a Civil Penalty Approval Form, dated

May 4, 2016, and signed by the immediate supervisor of the revenue agent who

conducted the examination in this case, approving the addition to tax and the

penalties before the date the notice of deficiency was issued.

OPINION

I. Farming Activities

Respondent disallowed Ms. Legarcie's farming-activity losses on the

grounds that she had not incurred the losses in carrying on a trade or business. 

Section 162(a) allows "as a deduction all the ordinary and necessary expenses paid

or incurred during the taxable year in carrying on any trade or business". 

Respondent argues that Ms. Legarcie cannot deduct her farming-activity losses
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[*12] under section 162 for two reasons; one, she lacked a profit motive, and, two,

her business had not during 2012 and 2013 yet commenced. "[Her] farm activity

never moved beyond initial research and investigation into an operating business."

While it is true that section 183(a) as a general rule disallows any deduction

attributable to an activity not engaged in for profit and that the regulations

implementing section 183 lay out nine nonexclusive factors for determining

whether an activity is engaged in for profit, some of which favor Ms. Legarcie

3

and some of which do not,4 Mr. Costello has convinced us that, notwithstanding

seven fallow years, his wife was determinedly seeking during the years in issue to

earn a profit from farming. Nevertheless, we do agree with respondent that,

during 2012 and 2013, her activities were for the most part preoperational and, for

that reason, she may not deduct her losses.

In order for expenses to be deductible under section 162(a), the expenses

must relate to a trade or business functioning when the expenses were incurred. 

3See, e.g., sec. 1.183-2(b)(1), Income Tax Regs. ("A change of operating

methods, adoption of new techniques or abandonment of unprofitable methods in a

manner consistent with an intent to improve profitability may * * * indicate a

profit motive.").

4See, e.g., sec. 1.183-2(b)(7), Income Tax Regs. ("An occasional small

profit from an activity generating large losses * * * would not generally be

determinative that the activity is engaged in for profit.").
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[*13] Hardy v. Commissioner, 93 T.C. 684, 687 (1989). A taxpayer has not

"'engaged in carrying on any trade or business' within the intendment of section

162(a) until such time as the business has begun to function as a going concern

and performed those activities for which it was organized." Richmond Television

Corp. v. United States, 345 F.2d 901, 907 (4th Cir. 1965), vacated and remanded

on other grounds, 382 U.S. 68 (1965). "Carrying on a trade or business" requires a

showing of more than initial research into or investigation of business potential. 

Sec. 162(a); Dean v. Commissioner, 56 T.C. 895, 902 (1971). "The business

operations must have actually commenced." McKelvey v. Commissioner, T.C.

Memo. 2002-63, 2002 WL 341044, at *3, aff'd, 76 F. App'x 806 (9th Cir. 2003). 

"Until the time the business is 'performing the activities for which it was

organized,' expenses related to that activity are not currently deductible under

section 162." Heinbockel v. Commissioner, T.C. Memo. 2013-125, at *42

(quoting Glotov v. Commissioner, T.C. Memo. 2007-147, 2007 WL 1702618,

at *2). They are instead classified as "startup" or "pre-opening" expenses. Hardy

v. Commissioner, 93 T.C. at 687. And startup expenses--which include those

incurred "before the day on which the active trade or business begins"--are only

deductible over time once an active trade or business begins. See sec. 195(a),

(c)(1)(A)(iii).
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[*14] Section 195(a) provides that no deduction shall be allowed for startup

expenditures. Section 195(c)(1) defines startup expenditures as, among other

things, any amount paid in connection with creating an active trade or business,

which, if paid or incurred in connection with the operation of an existing active

trade or business, would be allowable as a deduction for the taxable year in which

paid or incurred. Section 195(b) provides that startup expenditures may, at the

election of the taxpayer, be treated as deferred expenses that are allowed as a

deduction prorated equally over a 15-year period beginning with the month in

which the active trade or business begins. Startup expenses incurred in an

unsuccessful attempt to create a business may be deductible if the attempt is far

enough along. See, e.g., Seed v. Commissioner, 52 T.C. 880 (1969) (finding

deductible loss under section 165(c)(2) for legal and other expenses on

abandonment of business venture following denial of application for charter); Rev.

Rul. 77-254, 1977-2 C.B. 63.

McKelvey is instructive here. The taxpayer there purchased 39 acres with a

barn, and a cabin that he used as his personal residence. McKelvey v.

Commissioner, 2002 WL 341044, at *1. He intended to start a tree-farming

business on the property. Id. In the second year during which he owned the

property (the first year in issue), he began by conducting a "pilot test", planting of
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[*15] 51 Coulter pine trees, to determine whether the land could support

commercial Coulter pines. The test quickly proved unsuccessful because the land

could not support the trees. Id. at *2. By the end of the third year during which he

owned the property (and the second year in issue), he had not decided what

species of trees to plant and had not harvested any of the existing trees on the

property. Id. Indeed, as of the eighth year during which he owned the property,

he had not harvested any trees, had not planted any new trees, and had not yet

decided which species of trees to plant. Id. We agreed with the Commissioner

that what all that meant was that the taxpayer during the two years in issue did not

have a functioning business. Id. at *3. His expenses were therefore startup

expenses for which on account of section 195(a) we allowed no current deduction. 

Id. at *3-*4.

Reems v. Commissioner, T.C. Memo. 1994-253, 1994 Tax Ct. Memo

LEXIS 256, is similar. The taxpayer there also purchased property on which to

raise and harvest timber and had taken the first steps in a program to start a

commercial timbering business, paying some $30,000 in expenses. Reems v.

Commissioner, 1994 Tax Ct. Memo LEXIS 256, at *7-*8. Notwithstanding some

incidental sales of firewood and walnut trees from the property, we found that,

during the year in issue, he had not commenced an active business on the property. 
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[*16] Id. at *12. We allowed no deduction for what we described as "'start-up

expenditures'[,] * * * clearly covered by section 195". Id. at *11; see also

Heinbockel v. Commissioner, T.C. Memo. 2013-125.

Beginning in 2007 and through the years in issue, Ms. Legarcie's farming

activities never moved beyond initial experimentation and investigation into an

operating business. In 2012 and 2013, she was still planting research crops. With

respect to the peppers planted in 2012, Mr. Costello agreed that the expenses of

growing the peppers were "pre-opening, experimental, R&D expenses."

Ms. Legarcie described her principal crop or activity on the 2012 and 2013

Schedules F as "Poultry Products", a description we assume included both poultry

meat and egg production. But, in fact, she never sold any chickens for meat, even

though she raised a flock of meat chickens between 2007 and 2011. She sold and

bartered eggs from 2007 through 2013, but, from 2007 to 2011, those eggs were

byproducts from raising meat chickens. She briefly concentrated on commercial

egg production in 2011; but by the beginning of 2012, she had determined to stop

because it would not make money. She then went back to meat production, which

she continued unsuccessfully until January 2014, which is after the years in issue. 

Mr. Costello summed his wife's farming activities when he testified: "[W]e have

tried several things on this property; so far, nothing has worked."
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[*17] There is some question of whether to treat all of Ms. Legarcie's farming

activities as one activity or treat poultry, cattle, and crops as separate activities for

determining whether she had commenced an active trade or business. It may not

make much difference. She has not segregated her costs by activity. We agree

that, like the tree farmers in McKelvey and Reems, Ms. Legarcie had not, as of

2012, commenced any active business on the property. The egg-sale money that

she reported for 2012 was an incidental receipt realized after she had determined

to abandon commercial egg production and switch again, to meat production,

which she carried on though 2013. She may have ended her cattle activity in

2013, but we have no itemization of the costs of that activity or any basis to

estimate any deductible loss. See Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930). Most of her Schedules C (farming) and F expenses are startup

expenses for which section 195(a) prohibits a current deduction.

5

 To that extent,

5On the Schedules C (farming), she claimed a deduction for some amount of

taxes paid. If sec. 164 allows a deduction for those payments, those taxes paid are

not startup expenditures. See sec. 195(c)(1)(B). If necessary, the parties can

address that in their Rule 155 computation.
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[*18] we sustain respondent's adjustments disallowing petitioners' Schedule C

(farming) and F losses.

6

II. Real Estate Activities

Petitioners have failed to convince us that the Silvertip Dr. property, which

had been flooded, was in no condition to rent, and had not been advertised for

rental, was, during 2012 or 2013, a rental property. Indeed, petitioners make no

argument that under either section 162 (Trade or Business Expenses), section 212

(Expenses for Production of Income), or any other section of the Internal Revenue

Code are they entitled to any deduction with respect to the Silvertip Dr. property

for either year. We will sustain respondent's adjustment disallowing petitioners

claimed loss deductions of $8,825 and $9,094 with respect to the property for

2012 and 2013, respectively.

With respect to the remaining 2012 Schedule E loss of $11,871 and the

2012 Schedule C (real estate) loss of $14,617 (whose treatment follows the

treatment of the Schedule E loss), respondent now concedes that he erred in

determining that for 2012 there was any passive activity loss. In a posttrial

conference with the parties, the Court pointed out that, in 2012, petitioners sold

6Also, respondent has disallowed Ms. Legarcie's farm-activity losses only to

the extent they exceed her farm-activity income. Sec. 195 does not appear so

restricted. We will not go beyond respondent's adjustments.
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[*19] both the 1663 San Fernando Rd. and the 11727 Sproule Ave. properties and

reported from those sales a 2012 long-term capital gain of $312,747. Respondent

concedes that the amount of gain was part of petitioners' "aggregate income from

* * * passive activities" for 2012. See sec. 469(d)(1)(B); sec. 1.469-2T(c)(2),

Income Tax Regs., 53 Fed. Reg. 5711 (Feb. 25, 1988). Moreover, because the

2012 aggregate income from passive activities greatly exceeded the year's

aggregate losses from passive activities (including the Schedule C (real estate)

loss), there was no 2012 passive activity loss. See sec. 469(d)(1). And, for that

reason, there was no passive activity loss that could be carried over to 2013.

7

In sum, except for respondent's Schedule E adjustment disallowing any loss

deduction with respect to the Silvertip Dr. property, his Schedule E and Schedule

C adjustments for both 2012 and 2013 were in error and must be reversed. That

will necessitate a Rule 155 computation.

III. Addition to Tax and Penalties

A. Introduction

Section 7491(c) imposes the burden of production in any court proceeding

on the Commissioner with respect to the liability of any individual for penalties

7And petitioners make no argument for any passive loss carryover from

2011 to 2012.
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[*20] and additions to tax. See Higbee v. Commissioner, 116 T.C. 438, 446-447

(2001). In order to meet the burden of production under section 7491(c), the

Commissioner need only make a prima facie case that imposition of the penalty or

addition to tax is appropriate. E.g., Ball v. Commissioner, T.C. Memo. 2020-152,

at *12. If the Commissioner carries his burden, the taxpayer has the burden of

proving that any affirmative defenses apply, such as reasonable cause. Higbee v.

Commissioner, 116 T.C. at 446-447; Ball v. Commissioner, at *12.

B. Addition to Tax for Failure To File Return Timely

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

return. The addition equals 5% of the amount required to be shown as tax on the

delinquent return for each month or fraction thereof during which the return

remains delinquent, up to a maximum addition of 25% for returns more than four

months delinquent. Id. The addition to tax does not apply if the failure to file

timely is due to reasonable cause and not to willful neglect. Id.

Petitioners filed their 2012 tax return on November 26, 2013, several

months after it was due. See sec. 6072(a). Respondent has, therefore, satisfied his

burden of production. Petitioners make no argument that their failure to file the

return timely was due to reasonable cause and not willful neglect. Thus, we will

sustain the section 6651(a)(1) addition to tax for 2012.
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[*21] C. Section 6662 Accuracy-Related Penalties

Section 6662(a) and (b)(1) and (2) provides for an accuracy-related penalty

of 20% of the portion of any underpayment attributable to, among other things,

negligence or disregard of rules or regulations (without distinction, negligence) or

any substantial understatement of income tax. The term "negligence" includes

"any failure to make a reasonable attempt to comply with the provisions" of the

Internal Revenue Code or a failure to exercise "ordinary and reasonable care in the

preparation of a tax return." See sec. 1.6662-3(b)(1), Income Tax Regs. Section

6662(d)(2)(A) generally defines the term "understatement" as the excess of the tax

required to be shown on the return over the amount shown on the return as filed. 

In the case of an individual, an understatement is "substantial" if it exceeds the

greater of 10% of the tax required to be shown on the return or $5,000. 

Sec. 6662(d)(1)(A). An understatement is reduced, however, by the portion

attributable to the treatment of an item for which the taxpayer had "substantial

authority" or, in the case of items adequately disclosed, a "reasonable basis". 

Sec. 6662(d)(2)(B). Section 6664(c)(1) provides an exception to the imposition of

the section 6662(a) accuracy-related penalty if it is shown that there was

reasonable cause for the underpayment and the taxpayer acted in good faith.
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[*22] Because we do not sustain all of respondent's adjustments to petitioners'

income for 2012, we cannot determine whether petitioners substantially

understated their 2012 income tax. We need not do so because respondent has

satisfied his burden of production with respect to petitioners' negligence for 2012

and 2013. Petitioners conceded that they improperly claimed the NOL carryover

deduction on their joint 2012 tax return. They also erroneously claimed

deductions for Schedules C (farming) and F losses for Ms. Legarcie's farming

activity to which they are not entitled. Respondent has produced a Civil Penalty

Approval Form meeting the requirements of section 6751(b). Respondent has met

his burden of production.

Petitioners did not address the section 6662(a) penalties either at trial or in

their brief, and the evidence before us fails to demonstrate that they acted with

reasonable cause or in good faith. We sustain the accuracy-related penalties

determined by respondent.

IV. Conclusion

To reflect the foregoing and concessions by the parties,

Decision will be entered under

Rule 155.