TAX COURT OPINION

Case: Jerry C. Reagan, Jr. & Angela S. Reagan
Docket Number: 4660-09S
Judge: Colvin
Opinion Type: bench
Filed: 06/17/2010
Pages: 24

UNITED STATES TAX COURT WASHINGTON, DC 2021 7 JERRY C . REAGAN, JR . ANGELA S . REAGAN , Petitioners , V Docket No . 4660-09 S COMMISSIONER OF INTERNAL REVENUE, Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice . and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge Laurence J . Whalen-at Oklahoma City, Oklahoma, containing his oral findings of fact and opinion rendered on May 28, 201 .0 . In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155 . (Signed) Laurence J . Whalen Judge Dated : Washington, D .C . June 17, 2010 1 Bench Opinion By Senior Judge Laurence J . Whale n 2 Reagan v . Commissioner Docket No . 4660-09S 3 3 May 28, 201 0 4 5 THE COURT HAS DECIDED TO RENDER ORA L 6 FINDINGS OF FACT AND OPINION IN THIS CASE, AND TH E 7 FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT 8 AND OPINION . 9 II . 10 This proceeding was heard as a Small Ta x 11 Case pursuant to the provisions of section 7463 of the 12 Internal Revenue Code of 1986, as amended, and Rules 13 170 through 175 of the Tax Court Rules of Practice and 14 Procedure . Hereinafter, all section references are to 15 the Internal Revenue Code, as amended and in effec t 16 for the taxable years in issue, and all rul e 17 references are to the Tax Court Rules of Practice and 18 Procedure . Section 7463(b) provides that a decision 19 entered in a Small Tax Case shall not be reviewed in 20 any other court and shall not be treated as a 21 precedent for any other case . 22 III . 23 This bench opinion is made pursuant to th e 24 authority granted by section 7459(b) and Rule 152 . 25 Heritage Reporting Corporation (202) 628-4888 1 IV . 2 William C .. Chevaillier, Esquire, appeared on 3 behalf of petitioners . G . Chad Barton, Esquire , 4 appeared on behalf of respondent . 4 5 7 V . The notice of deficiency that is the subjec t of this proceeding determined a deficiency in petitioner ' s Federal income tax for taxable year 2004 in the amount of $13,270 and an accuracy - relate d 10 penalty under section 6662(a) in the amount of $2,654 . 11 It also determined a deficiency in petitioner' s 12 Federal income tax for taxable year 2005 in the amount 13 of $15,886 and an accuracy-related penalty unde r 14 section 6662(a) in the amount of $3,177 .20 15 vi, 16 The deficiencies, for 2004 and 2005 are based 17 upon (1) adjustments to the Schedules F, Profit o r 18 Loss From Farming, filed by petitioners for Mr . 19 Reagan's calf-cow business for both of the years in 20 issue, (2) adjustments to the Schedules A, Itemized 21 Deductions, filed by petitioners for both years, and 22 (3) an adjustment to the Schedule C, filed b y 23 petitioners for Mrs . Reagan's Arbonne business for 24. 2005 . Respondent determined adjustments t o 25 petitioner's taxable income of $64,668 for 2004, and Heritage Reporting Corporatio n (202) 628-4888 5 1 total adjustments of $73,796 for 2005 . 2 VII . 3 After concessions, there are four issues for 4 decision . The first issue requires the Court t o 5 redetermine the amount of the net farm profit or loss 6 realized from Mr . Reagan's cow-calf business durin g 7 taxable years 2004 and 2005 . In effect, respondent 8 determined that the net farm profit or loss for Mr . 9 Reagan's business amounted to a profit of $3,434 fo r 10 .2004 and a loss of $167 for 2005 . On the other hand, 11 petitioners contend that the business realized losses 12 for both years of $48,650 and $53,347, respectively . 13 We refer to this issue as the farm issue . 14 The second issue is whether petitioners are 15 entitled to deduct the unreimbursed employee business 16 expenses from Mrs . Reagan's job as a correction s 17 officer that were claimed on .Schedule A in the amount 18 of $10,342 for 2004 and $12,191 for 2005 . We refer to 19 this issue as the unreimbursed employee busines s 20 expense issue .- hi r 21 The issue is whether petitioners ar e 22 entitled to deduct expenditures for supplies for Mrs . 23 Reagan ' s Arbonne business that were claimed for 2005 24 on Schedule C in the amount of $3,229 . We refer to 25 this issue as the Arbonne issue . Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The last issue is whether petitioners ar e liable for the accuracy - related penalties unde r section 6662 ( a) determined by respondent on the groun d that petitioners were negligent . We refer to this 6 issue as the penalty issue . VIII . The parties have stipulated some of th e facts and the stipulation of facts filed by th e parties , together with the attached exhibits, i s hereby taken into evidence . Based thereon and the testimony at trial, we find the facts set out below . Petitioners resided in the state of Oklahom a at the time the petition in this case was filed . During the years 2004 and 2004 , Mr . Reagan wa s employed by the Oklahoma Highway Patrol as a la w enforcement officer, and Mrs . Reagan was employed by the Oklahoma Department of Corrections as a Deput y Warden . Neither petitioner is educated in accountin g or finance . Farm Issue : In addition to his employmen t by the Oklahoma Highway Patrol during the years i n issue, Mr . Reagan operated a "cow - calf" business as a farmer . This is the same business that Mr . Reagan' s father, who is now in his seventies , had conducted fo r many years . Heritage Reporting Corporation (202) 628-4888 7 1 The business consists of raising calves for 2 sale . The business is conducted on approximately 260 3 acres of land located. in Okmulgee, Oklahoma . Mr . 4 Reagan took over the . business in 1993 after his father 5 could no longer operate the business by himself. Mr . 6 Reagan's father still helps with the business by 7 making purchases of various supplies, among other 8 things . 9 Unreimbursed Employee Business Expense s 10 Issue : Petitioners' return for 2004 included a Form 11 2106-EZ, Unreimbursed Employee Business Expenses, for 12 Mrs . Reagan's employment as a correctional officer . 13 On that form, petitioners reported vehicle expenses, 14 using the standard mileage rate, of $3,656, trave l 15 expenses while away from home overnight of $5,729, and 16 meals and entertainment of $966, a total of $10,342 . 17 Petitioners' return for 2004 also included a 18 Form 2106-EZ for Mr . Reagan's employment as a .Highway 19 Patrol officer . On that form, petitioners reporte d 20 total expenses of $3,780 . The total unreimbursed 21 employee business expenses for both petitioners, 22 $14,122, was claimed as a deduction on Schedule A , 23 Itemized Deductions . That deduction was disallowed in 24 the notice of deficiency . 25 Petitioners' return for 2005 included a Form Heritage Reporting Corporatio n (202) 628-4888 8 1 2106-EZ, Unreimbursed EmploYee Business Expenses, for 2 Mrs . Reagan's employment asa correctional office . On 3 that form, petitioners reported vehicle expenses , 4 using the standard mileage rate, of $2,136, travel 5 expenses while away from home overnight of $1,930, 6 business expenses of $7,149, and meals and 7 entertainment of $976, a total of $12,191 . 8 Petitioners' return for 2005 also included a 9 Form 2106-EZ for Mr . Reagan's employment as a Highway 10 Patrol officer . On that form, petitioners reporte d 11 total expenses of $3,552 . The total unreimbursed 12 employee business expenses for both petitioners, 13 $15,743, was claimed as a deduction on Schedule A , 14 Itemized Deductions . That deduction was disallowed in 15 the notice of deficiency . 16 As mentioned above ., Mrs . Reagan was employed 17 by the . Oklahoma Department of Corrections as a Deputy 18 Warden at various correctional facilities during the 19 years in issue . She was assigned to the followin g 20 correctional facilities at the following times : Institution Becxin End Jess Dunn Correctional Center, Feb . 5, 2001 Apr . 8, 2003 Taft, Okla . Dr . Eddie Warrior Correctional Center, Apr . 9, 2003 June 14, 2004 Taft, Okla . Mabel Bassett Correctional Center, June 15, 2004 Nov . 30, 2004 McLoud, Okla . Joseph Harp Correctional Center, Dec . 1, 2004 June 30, 200 7 Heritage Reporting Corporation (202) 628-4888 9 Lexington, Okla . Dr . Eddie Warrior Correctional Center, Jul . 1, 2007 Apr . 20, 2008 Taft, Okla . Jess Dunn Correctional Center, Apr . 1, 2008 Apr . 30, 2009 Taft, Okla . Dr . Eddie Warrior Correctional Center, May 1, 2009 Present Taft, Okla . 6 As Deputy Warden at a correctional facility, 7 Mrs . Reagan was required to live at a location tha t 8 was within a certain "response time" established fo r 9 the institution . Some correctional facilities 10 provided living quarters for the Deputy Warden . 11 that case, a Deputy Warden could choose to live in the 12 quarter provided, or he or she could choose to take a 13 housing allowance of $320 per month . 14 When Mrs . Reagan was assigned to the Mabel 15 Bassett Correctional Institution in June of 2004, it 16 was necessary for her to find her own living quarters 17 nearby because no living quarters for the Deput y 18 Warden were provided by the facility . As a result, 19 Mrs . Reagan rented an apartment in Shawnee, Oklahoma . 20 She paid monthly rent of $375 for the apartment and 21 approximately $120 per month for utilities . 22 Beginning in .December of 2004, Mrs . Reagan 23 was assigned to the Joseph Harp Correctional Center in 24 Lexington, Oklahoma, and she began commuting fro m 25 Shawnee to Lexington, a distance of approximately 5 0 Heritage Reporting Corporation (202) 628-4888 1 miles each way . In February 2005, petitioner s 2 purchased a mobile home and financed the purchase with 3 a loan in the amount of $44,313 .38 . It appears tha t 4 the mobile home was stationed at the Joseph Har p 1 0 Correctional Center in Lexington, Oklahoma . . Arbonne Issue : During 2005, Mrs . Reagan made payments to Arbonne International on the following dates and in the following amounts : Date Nov . 19, 2005 Dec . 14, 2005 Dec . 24, 2005 Total Amount $538 .0 1 992 .3 4 958 .9 4 $2,489 .2 9 6 9 10 11 1 2 13 14 15 Arbonne International is a company that sells makeup 16 and related products . 17 Penalty Issue : Petitioners did not maintain 18 adequate books and records for Mr . Reagan's cow-calf 19 business or for Mrs . Reagan's Arbonne business . 20 Petitioners also did not maintain a log or adequate 21 records to substantiate Mrs . Reagan's employe e 22 business expenses . 23 During each of the years in issue, 24 petitioners retained the services of a retur n 25 preparer, Ms . Mary Rowe, who prepared their Federa l 26 income tax return . At some time prior to the due date 27 of the return for each year, Mr . Reagan and his father Heritage Reporting Corporatio n (202) 628-4888 11 1 prepared a worksheet or schedule of farm expenses an d 2 other expenses to give to the preparer . Mr . Reagan 3 took that schedule and other information to the return 4 preparer . The worksheets or schedules for 2004 an d 5 2005 are not in the record of this case . 6 IX . 7 Position of the parties regarding the farm 8 issue : Petitioners accept the increases in far m 9 income determined by respondent in the amount o f 10 $18,937 for 2004 and $13 , 262 for 2005 . Petitioners 11 also accept most of respondent ' s adjustments to the 12 farm expenses claimed on the return . Nevertheless, 13 they ask the Court to redetermine a net farm loss for 14 each year in approximately the same amount as the loss 15 claimed on their return . 16 Petitioners ask the Court to bring about 17 this happy result by making three changes to the 18 respondent's adjustments to the income and farm 19 expenses reported on the returns in issue . First , 20 they ask the Court to increase the cost of goods sold 21 for each year by an amount, $15,350 for 2004 and 22 $14,255 for 2005, which they claim was paid to feed 23 the calves that were sold during the year . 24 Second, the ask the Court to revise " cattle 25 costs" for each year based upon the "Deductible Heritage Reporting Corporatio n (202) 628-4888 12 1 Livestock Costs" for 2004 and 2005 published by Iowa 2 State University, University Extension . Third, they 3 ask the Court to increase Schedule F expenses by an 4 amount which they compute, using the "Deductibl e 5 Livestock Costs," for the expense of feeding cattle 6 that died during the year . Petitioners claim that their analysis is based upon, or supported by, studies made by Oklahom a 9 State University, Oklahoma Cooperative Extension 10 Service, and by Iowa State . University Extensio n 11 Service . We refer to these studies as the OSU Studies 12 and the Iowa State Studies . 13 Petitioners summarize their position in a 14 spreadsheet for each year in which they compare the 15 farm income and expenses claimed on their return for 16 the year, with the farm income and expenses determined 17 in the notice of deficiency, and with the farm income 18 and expenses that they estimate-to be the correc t 19 amounts . Petitioners' spreadsheets are replicated in 20 Appendix 1 and 2, which are attached hereto and made a 21 part of this opinion . 22 As can be readily seen on Appendix 1, the 23 additional farm income determined in the notice of 24 deficiency for 2004, $18,937, would be offset under 25 petitioners' position by increases in the cost basi s Heritage Reporting Corporation (202) 628-4888 13 1 of cattle and farm expenses in the aggregate amount of 2 $18,019 ( i .e ., $78,914 less $ 60,895 ) . Similarly, a s 3 can be seen on Appendix 2, the additional farm income 4 determined in the notice of deficiency for 2005 , 5 $13,262, would be offset under petitioners' position 6 by increases in the cost basis of cattle and far m 7 expenses in the aggregate amount of $ 10,537 (i .e ., 8 $81,452 less $ 70,915) . 9 Respondent raises two principal objections 10 to petitioners ' analysis . First, respondent asserts 11 that the production costs that would be computed under 12 the OSU and Iowa State Studies include most, if no t 13 ,all, of the expenses that respondent had alread y 14 allowed in the notice of deficiency . In support of 15 this point , respondent points to various e-mai l 16 statements in the record that were made by economists 17 employed by OSU or Iowa State . 18 We agree with respondent that the estimated 19 production costs computed under the OSU and Iowa State 20 Studies may duplicate some of the expenses that have 21 been allowed by respondent . For example , petitioners' 22 accountant , Mr . Jim Manley , acknowledged in hi s 23 testimony that petitioners ' computation of the cos t 24 basis of cattle sold includes feed costs for so-called 25 mother cows . Heritage Reporting Corporation (202) 628-4888 14 1 Similarly, Mr . William Edwards, an economist 2 employed by Iowa State University, wrote the following 3 about the costs that were taken into account i n 4 computing the "Deductible Livestock Costs" in the Iowa 5 State Studies : 6 "The costs include pasture, hay, corn , 7 protein supplement, veterinary expenses , 8 fuel, repairs, marketing, depreciation, and 9 20 percent of the labor costs (80 percent is 10 assumed to be unpaid operator labor) . " 11 Respondent's second principal objection to 12 petitioners' position . is the lack of evidence t o 13 support petitioners' claim that Mr . Reagan's herd 14 amounted to 70 cows and 3 bulls during each of the 15 years in issue . In fact, contrary to petitioners ' 16 claim, respondent introduced into evidence an undated 17 memorandum written by Mr . Reagan to his audito r 18 stating that he maintained 60 cows . 19 Position of the parties regarding th e 20 unreimbursed employee business expense issue : As a 21 preliminary matter, we note that petitioners' pretrial 22 memorandum does not mention the unreimbursed business 23 expenses claimed on behalf of Mr . Reagan for either of 24 the taxable years in issue . Petitioners presented no 25 evidence at trial regarding those expenses . 26 Accordingly, we deem the disallowance of the deduction 27 of Mr . Reagan's unreimbursed employee business Heritage Reporting Corporatio n (202) 628-4888 1 5 1 expenses to be conceded by petitioners . 2 As to Mrs . Reagan's unreimbursed employee 3 business expenses, petitioners assert that her jo b 4 assignments as Deputy Warden were temporary in nature 5 and required her to be away from her tax home . 6 Presumably, petitioners contend that Mrs . Reagan's tax 7 home was Okmulgee, but this is not clear . In any event, petitioners argue that the y 9 are entitled to deduct her travel, lodging, meals, and 10 other expenses for the years in issue . On the other 11 hand, respondent asserts that petitioners have no t 12 substantiated'any of Mrs . Reagan's employee business 13 expenses. . Furthermore, respondent asserts that Mrs . 14 Reagan's job assignments were not temporary, and she 15 is not entitled to deduct her travel, lodging, meals, 16 and other expenses . 17 Position of the parties regarding . th e 18 Arbonne Issue : Petitioners assert that Mrs . Reagan 19 began selling cosmetics and related products during 20 2005, and that she purchased $3,229 worth of supplies 21 for that business during the year . Petitioners ask 22 the Court to redetermine the adjustment made in the 23 notice of deficiency disallowing a deduction for that 24 amount and find that they are entitled to deduct the 25 amount claimed on their Schedule A, as an ordinary an d Heritage . Reporting Corporation (202) 628-4888 1 6 1 necessary business expense . Respondent asserts that 2 the cosmetics purchased by Mrs . Reagan during 200 5 3 were for her personal use and are not ordinary and necessary business expenses . 5 Position of the parties regarding the Penalty Issue : Petitioners assert that neither o f 7 them has any accounting or finance background o r training, and they retained Ms .,Mary Rowe to prepare their return for each . year and relied upon her in goo d 10 faith to prepare their returns . 11 Respondent asserts that petitioners wer e 12 negligent in that they failed to maintain adequat e 13 records for the . preparation and filing of an accurate 14 income tax return . Respondent further asserts that 15 petitioners have not shown that they employed a 16 competent tax advisor and provided the advisor with 17 all necessary and relevant information . 18 X . 19 Our legal analysis in this case i s 20 necessarily guided by several fundamental principles 21 of tax litigation . 22 First, as a general rule,, the Commissioner's 23 determinations are presumed correct, and the taxpayer 24 bears . the burden of proving that those determinations 25 are erroneous . Rules 142(a) . This principle wa s Heritage Reporting Corporation (202) 628-4888 17 1 firmly established by the United States Supreme Cour t 2 as early as 1933 and has been reaffirmed by th e 3 Supreme Court as recently as 1992 . See INDOPCO Inc . 4 v . Commissioner , 503 U .S . 79, 84 (1992) . 5 Parenthetically, we note that section 6 7491(a), which shifts the burden of proof to the 7 Commissioner in certain cases, does not apply in this 8 case because, among other reasons, petitioners did not 9 comply with the substantiation and record-keeping 10 requirements of the Internal Revenue Code . See sec . 11 7491 (a) (2) (A) and (B ) 12 Second, deductions are a matter o f 13 legislative grace, and the taxpayer bears the burden 14 of proving that he or she in entitled to any deduction 15 claimed . Rule 142(a) ; Deputy v . DuPont , 308, U .S . 488, 16 493 (1940) ; New Colonial Ice Co . v . Helvering , 29 2 17 U .S . 435, 440 (1934) . This includes the burden o f 18 substantiation . Hradesky v . Commissioner , 65 T .C . 87 19 (1975), affd . per curiam, 540 F .2d 821 (5th Cir . 20 1976) . 21 Third, the Court is not bound to accept the 22 unverified and undocumented testimony of a taxpayer . 23 24 25 Hradesky v . Commissioner , supra ; Tokarski v . Commissioner , 87 T .C . 74, 77 (1986) . See also Lovell & Hart, Inc . v . Commissioner , 456 F .2d 145, 148 (6th Heritage Reporting Corporatio n (202) 628-4888 1 8 1 Cir . 1972), affg . T .C . Memo . 1970-335 ; MacGuire v . 2 Commissioner , 450 F .2d 1239, 1244 (5th Cir . 1971), 3 affg . T .C . Memo . 1970-89 ; Niedringhaus v . 4 Commissioner ; 99 T .C . 202, 212 (1992) . 5 Fourth, a party's failure to introduc e 6 documentary evidence that is within his possession or 7 control gives rise to the presumption that, i f 8 produced, such evidence would be unfavorable . 9 10 Recklitis v . Commissioner , 91 T .C . . 874,890 (1988) ; Pollack v . Commissioner , 47 T .C . 92, 108 (1966), affd . 11 392 F .2d 409 (5th Cir . 1968) ; Wichita Terminal 12 Elevator Co . v . Commissioner , 6 T .C . 1158, 1165 , 13 (1946), affd . 162 F .2d 513 (10th Cir . 1947) . On this 14 point, we have particular reference to the logs and 15 other documents that petitioners mentioned during 16 their testimony but failed to produce . 17 XI . 18 Discussion of the Farm Issue : The las t 19 column of each spreadsheet attached hereto as Appendix 20 1 and Appendix 2 is our view of the correc t 21 computation of petitioners' net farm loss for each 22 year . 23 First, we do not accept petitioners' re- 24 computation of the cost basis of cattle sold because, 25 as mentioned above, petitioners have not shown tha t Heritage-Reporting Corporation (202) 628-4888 1 9 1 the amount they computed for each year does not 2 duplicate other livestock costs . 3 Second, we have adjusted petitioners ' 4 computation of . deductible livestock costs so that it 5 is based upon a total-of 60 cows and 3 bulls . 6 Finally, we .have allowed no. other cattle expenses 7 because petitioners have not 'shown that such othe r 8 expenses are . not duplicated by using .the OSU and Iow a Studies . 10 We believe that this is an appropriate use 11 of the Cohan rul ( i .e ., the holding of the court i n 12 Cohan y . . Commissioner , 39 F .2d 540 (2d Cir . 1930) ) 13 because, in this case, there is credible testimony by 14 Mr . Reagan of deductible expenditures for the cow-calf 15 business .that could not, otherwise, be taken int o 16 account . 17 Discussion of the Unr?imbursed Employe e ftle,51 K94.1 18 Business Expense : eligibility to deduct V 19 the unreimbursed employee business expenses claimed 20 for 2004 and 2005 turns on whether she was "away from 21 home" within the meaning of section 162(a)(2) fo r 22 business purposes during those years . For this 23 purpose, a-taxpayer's "home" means his or her 24 principal place of employment and not where the 25 taxpayer's personal residence is located . E .g . , Heritage Reporting Corporation (202) 628-4888 2 0 1 Mitchell v . Commissioner , 74 T .C . 578, 581 (1980) . 2 Where a taxpayer's principal place o f 3 employment is other than his residence, and he or she 4 chooses not to move the residence for persona l 5 reasons, any additional living and travel expenses are 6 a result of that personal choice . Such persona l 7 expenditures cannot be deemed ordinary and necessary 8 business expenses . Commissioner v . Flowers , 326 U .S . 9 465, 473-474 ; Tucker v . Commissioner , 55 T .C . 783, 78 6 10 (1971) . However, a taxpayer may claim his persona l 11 residence as his home in situations . where the taxpayer 12 is away from his home on a temporary rather tha n 13 indefinite or permanent basis . Peurifoy v . 14 15 Commissioner , 358 U .S . 59, 60 (1958) ; Kroll v . Commissioner , 49 T .C . 557, 562 (1968) . 16 We do not accept petitioners' position that 17 Mrs . Reagan's assignment to the correctional centers 18 at which she worked during-2004 and 2005 wer e 19 temporary positions that were likely to end in less 20 than one year . The testimony of Mr . Ken Klinger made 21 it clear that the assignment of a Deputy Warden to a 22 correctional facility was, considered an indefinit e 23 assignment, in the sense that there was no expectation 24 that the Deputy Warden would be reassigned to a 25 different facility, unless he or she sought such Heritage Reporting Corporation (202)628-4888 21 1 change . Furthermore, Mr . Klinger also explained tha t 2 Mrs . Reagan's tenure at the Mabel Bassett Correction 3 Center terminated in less than one year under unusual 4 circumstances . 5 Accordingly, we find that the unreimbursed 6 employee business expenses claimed by petitioners for 7 Mrs . Reagan's job as a correctional officer were not 8 ordinary and necessary expenses for that job . I n 9 light of this holding, it is unnecessary for us to 10 discuss whether the amounts claimed wer e 11 substantiated . 12 Discussion of the Arbonne Issue : According 13 to Mrs . Reagan's testimony, by the end of tax yea r 14 2005, she knew she could not continue her cosmetics 15 business and she terminated the business . He r 16 testimony, however, raises a question about why she 17 purchased cosmetics from Arbonne on December 14, 2005, 18 in the amount of $992 .34, and on December 24, 2005, in 19 the amount of $958 .94 . We do not credit Mrs . Reagan's 20 vague and unsupported testimony that the expenditure 21 of $3,229 was for supplies for her cosmetics business 22 as opposed to for her personal use . 23 XII . 24 We turn now to the accuracy-related penalty . 25 Section 6662(a) imposes a penalty equal to 20 percent Heritage Reporting Corporatio n (202) 628-4888 2 2 1 of an underpayment of tax that is attributable to 2 either (1) negligence or disregard of rules o r 3 regulations or (2) asubstantial understatement o f income tax . See sec . 6 .662(a ), (b)(1) and (2) . The term "negligence" includes any failure to make a reasonable attempt to comply with the Internal Revenue Code, and the term "disregard" includes any careless, reckless, or intentiona l 9 disregard . Sec . 6662(c) . 10 The accuracy-related penalty does not appl y 11 to any portion of the underpayment if it is shown that 12 there was a reasonable cause for the taxpayer' s 13 position and that the taxpayer acted in good faith 14 with respect to that portion .. Sec . 6664(c)(1) ; sec . 15 1 .6664-4(b), Income Tax Regs . ; see United States v . 16 Boyle , 469 U .S . .241, 242(1985) . 17 Section 7491(c) places .on the Commissioner 18 the burden of production . with respect to a taxpayer's 19 liability for a penalty such as the accuracy-related 20 penalty under section 6662(a) . However, the ultimate 21 burden of persuasion remains on the taxpayer . Swain 22 23 v . Commissioner , 118 T .C . 358, 363 (2002) ; Higbee v . Commissioner , 116 T .C . 438, 446-448 (2001) ; see Rule 24 142(a) ; INDOPCO Inc . v . Commissioner , 503 U .S . 79, 84 25 (1992) . Heritage Reporting Corporation (202) 628-4888 . 2 3 1 In this case, respondent satisfied hi s 2 burden of production under section 7491(c) because the 3 record convincingly demonstrates that petitioner s 4 failed to maintain the books and records necessary to 5 file accurate tax returns for the years in issue, as 6 required by section 6001 and the regulations 7 promulgated thereunder . In contrast,'petitioners 8 failed to satisfy their burden because the record 9 contains nothing to demonstrate that petitioners acted 10 with reasonable cause or in good faith . See sec . 11 6664(c)(1) . Accordingly, we hereby sustai n 12 respondent's determination that petitioners are liable 13 for the accuracy-related penalty . 14 XIII . 15 In order to give effect to the foregoing, 16 and concessions of the parties, we shall ente r 17 decision under Rule 155 . 18 XIV . 19 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF 20 FACT AND OPINION IN THIS CASE . 21 (Whereupon, at 9 :45 a .m ., the bench opinion 22 in the above-entitled matter was concluded .) 23 2 4 25 Heritage Reporting Corporation (202) 628-4888 Jerry C . Reagan , Jr. & Angela S . Reagan No. 4660-09S Appendix 1 2004 Per Return Adjustments Per Exam Per Petitioner Opinio n Schedule F Farm income Agricultural production payments Cost basis of cattle sold Gross profit Deductible livestock costs Car and truck expense Custom hire Depreciation Depreciation-cattle Feed purchased Fertilizers and lime Gasoline, fuel, and oil Insurance (other than health) Interest Labor hired Rent: Vehicles, machinery and equipmen Repairs and maintence Seeds and plants purchased Supplies purchased Taxes Utilities Veterinary, breeding, and medicine Other expenses: 3 head of cattle died Other expenses : Bank fees Other expenses : Fish for pond Total expenses Net farm loss Cost basis plus expenses Schedule F Adjustments One-half self-employment tax Schedule A . Itemized deductions Total adjustments 11,899 469 -1,040 11,328 0 6,750 10,996 4,017 4,752 6,804 5,257 4,745 3,219 . 2,217 0 0 3,416 1,832 721 1,355 629 945 2,200 0 0 59,855 -48,527 60,895 18,937 5,617 10,996 . 4,754 2,919 1,633 2,452 -4,017 -191 3,416 1,832 569 833 -329 874 2,200 -104 -430 51,96 1 -243 . 102 12,848 64,668 30,836 469 -1,040 30,265 29,795 469 -15,350 FN 1 14,914 1,133 . 0 4,017 4,752 2,050 2,338 3,112 767 2,217 4,017 191 0 0 152 522 958 71 0 104 430 45,240 1,133 0 4,017 0 0 0 3,112 767 2,217 4,017 191 0 0 0 522 958 0 856 FN 1 104 430 26,831 63,564 3,434 -48,650 78,914 30,83 6 46 9 -1,040 30,26 5 40,24 8 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10 4 430 40,782 -10,51 7 41,82 2 Fn I Petitioners' computation purports to be a six-month average , but it uses an annual cost factor without reduction . Jerry C . Reagan, Jr. & Angela S . Reagan No. 4660-09S Appendix 2 2005 Per Return Adjustments Per Exam Per Petitioner Opinio n Schedule F 15,498 340 -995 14,843 9,168 -11,702 6,975 4,636 7,675 4,864 6,321 4,546 0 0 0 3,086 1,452 1,425 2,244 785 1,321 2,640 1,080 0 0 69,920 -55,077 70,915 Farm Income Agricultural production payments Cost basis of cattle sold Gross profit Deductible livestock costs Car and truck expense Custom hire Depreciation Depreciation-cattle Feed purchased Fertilizers and lime Gasoline, fuel, and oil Insurance (other than health) Interest Labor hired Rent: Vehicles, machinery and equipmen Repairs and maintence Seeds and plants purchased Supplies purchased Taxes Utilities Veterinary, breeding, and medicine Other expenses : 3 head of cattle died Other expenses: 4 caves died Other expenses: Bank fees Other expenses : Fish for pond Total expenses Net farm loss Cost basis plus expenses Schedule F Adjustments Taxable interest Schedule C supplies Meals and entertainment Student loan interest deduction Itemized deduction Total adjustments 13,262 8,379 11,702 4,828 2,288 2,292 3,813 -2,553 3,086 1,452 861 1,388 -516 978 2,640 1,080 -70 54,91 0 10 8 3,22 9 -60 1,050 14,559 73,796 28,760 340 -995 28,105 27,765 340 -14,255 FN 1 13,850 789 0 6,975 4,636 2,847 2,576 4,029 733 : 0 2,553 0 0 0 564 856 1,301 343 0 0 70 0 46,545 789 0 6,975 0 0 0 4,029 733 0 2,553 0 0 0 564 856 1,301 0 1,926 FN1 856 FN I 70 0 28,272 67,197 -167 -53,347 81,452 28,760 340 -995 28,10 5 41,409 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7 0 0 41,479 -13,374 40,484 Fn 1 Petitioners' computation purports to be a six-month average , but it uses an annual cost factor without reduction .