Court Opinion

ID: 4337305
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:17:14.450458+00
Date Added: 2024-06-11T14:47:48.305018
License: Public Domain

T.C. Memo. 2008-245

                       UNITED STATES TAX COURT

           BRIAN E. AND SANDRA SHERMER GOOD, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 19770-05.               Filed October 30, 2008.

     Brian E. and Sandra Shermer Good, pro sese.

     Kathleen K. Raup, for respondent.

               MEMORANDUM FINDINGS OF FACT AND OPINION

     HALPERN, Judge:    By notice of deficiency dated September 15,

2005 (the notice), respondent determined deficiencies in, and

penalties with respect to, petitioners’ Federal income tax as

follows:
                                - 2 -

                                                 Penalty
           Year           Deficiency           Sec. 6662(a)

           2001              $6,740                  $1,348
           2002               5,697                   1,137

     Unless otherwise indicated, all section references are to

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

all Rule references are to the Tax Court Rules of Practice and

Procedure.   Petitioners bear the burden of proof.    See Rule

142(a).1

     The issues for decision arise in connection with

petitioners’ reported activity of providing “Electronic shopping

and information services”.   We must decide whether petitioners

(1) are entitled to credits against their income tax liabilities

for amounts spent to bring that activity into compliance with the

Americans with Disabilities Act of 1990 (ADA), Pub. L. 101-336,

104 Stat. 327, (2) are entitled to deductions for expenses and

interest paid in connection with the activity, and (3) are

subject to an accuracy-related penalty under section 6662.2

     1
        Petitioners argue that the burden of proof has shifted to
respondent pursuant to sec. 7491(a). We disagree. Petitioners
have failed to introduce credible evidence in support of their
assignment of error. See sec. 7491(a)(1). Nevertheless,
respondent bears the burden of production with respect to the
sec. 6662 penalty. See sec. 7491(c).
     2
        In determining the deficiencies in question, respondent
made certain additional adjustments that are merely
computational. There is no dispute concerning those adjustments,
and we do not further discuss them.
                               - 3 -

                         FINDINGS OF FACT

     Some facts have been stipulated and are so found.     The

stipulation of facts, with attached exhibits, is incorporated

herein by this reference.

Petitioners

     Petitioners are husband and wife.   For the taxable

(calendar) years in issue, they made joint returns of income.       At

the time the petition was filed, they resided in Pennsylvania.

     Mr. Good is a certified public accountant, and during the

years in question he was a partner in an accounting firm.     Ms.

Shermer Good is a graduate of Temple University and has a

master’s degree in business administration from Villanova

University.   During the years in question, she was employed full

time as a sales representative for a large pharmaceutical firm.

Petitioners’ 2001 and 2002 Income Tax Returns

     For both 2001 and 2002, petitioners filed an Internal

Revenue Service (IRS) Form 1040, U.S. Individual Income Tax

Return.   Attached to each Form 1040 is a Schedule C, Profit or

Loss from Business.   The Schedules C list Mr. Good as proprietor

of a business and describe the business (sometimes, the Schedule

C activity) as “Electronic shopping and information services”.

They show the Schedule C activity as using the cash method of

accounting.
                                - 4 -

     The 2001 Schedule C reports no income but reports expenses

of $19, $45, and $5,475 for office expenses, travel, and “Other

expenses”, respectively.   The other expenses are further

explained as “Excess expenditures for modifications made for

disabled access to business”.   The 2001 Schedule C reports a loss

of $5,539.

     The 2002 Schedule C reports gross receipts or sales of

$4,228 and expenses as follows:

          Category                            Amount

          Interest                               $338
          Office expense                          427
          Travel                                   24
          Deductible meals
            and entertainment                   335
          Other expenses                      5,896

The other expenses are further explained as comprising $5,475 and

$421 for “[e]xcess expenditures for modifications made for

disabled access to business” and “[f]ranchise [f]ees”,

respectively.   The 2002 Schedule C reports a loss of $2,792.

     Also attached to each Form 1040 is an IRS Form 8826,

Disabled Access Credit, claiming credits against income tax (the

disabled access credits) of $5,000 and $4,491 for 2001 and 2002,

respectively.

The Examination

     Respondent examined the 2001 and 2002 Forms 1040 and

disallowed the disabled access credits and all expenses claimed

on both Schedules C (the Schedule C expenses).    As a compensating
                               - 5 -

adjustment, respondent also eliminated the $4,228 of gross

receipts or sales reported on the 2002 Schedule C.    Respondent

explained that he was disallowing the disabled access credits

because petitioners had failed to show that they made any

expenditures for the purpose of complying with the ADA, or, if

they did, that the expenditures were reasonable and necessary and

otherwise met the requirements of section 44, which allows a

credit against tax for expenditures to provide access to disabled

individuals.   Respondent further explained that he was

disallowing the disabled access credits and the Schedule C

expenses because the Schedule C activity lacked economic

substance and was conducted solely to avoid tax.    Finally,

respondent added that he was disallowing the Schedule C expenses

because petitioners had failed to establish that the expenses (1)

were made, (2) were ordinary and necessary business expenses, or

(3) were made for the purposes indicated.   The notice followed.

The Schedule C Activity

     The Schedule C activity involved Internet shopping.

Petitioners learned about the activity from Oryan Management and

Financial Services (Oryan).   During the years in issue, Oryan

maintained a Web site at the Internet address (also known as a

Uniform Resource Locator (URL)) http://www.ShopN2000.com.

(ShopN2000.com).   The ShopN2000.com Web site was a portal Web

site that linked visitors to dozens of merchants.    A visitor

could click on a merchant’s banner or on a product advertised to
                                - 6 -

purchase the product on the merchant’s Web site.   Oryan offered

for sale URLs based on its URL but with the addition of a unique

five-digit personal identification number (PIN); e.g.,

ShopN2000.com/62234.   The purchaser of a URL from Oryan (a URL

owner and a ShopN2000 URL, respectively) earned a commission if a

visitor using the URL owner’s PIN arrived at a merchant’s Web

site from a link at ShopN2000.com and made a purchase.    A

corporation known as “Linkshare” collected the commissions and

remitted them to Oryan.   Oryan then distributed them to the

appropriate URL owners.

     On April 13, 2004, the United States filed a “Complaint for

Permanent Injunction and Other Relief” against Oryan and others

in the U.S. District Court for the District of Nevada (the

complaint).    In part, the complaint requested the District Court

to restrain and enjoin Oryan from “[o]rganizing, promoting, or

selling * * * Shopn2000”.   The complaint made the following

allegations.   Oryan claimed that a URL owner could help the

disabled by purchasing a ShopN2000 URL because the ShopN2000 URL

purchased by the URL owner could be modified to make it

accessible to the disabled.   Oryan told purchasers that they

could pay $10,475 ($2,495 cash and a note for $7,980) to have

their Web site modified to provide access to visually, hearing,

and mobility impaired users, and that such modifications would

make their Web site compliant with provisions of the ADA.     Oryan

also told purchasers that they could have their Web sites
                                - 7 -

modified up to three times and that each modification gave rise

to a $5,000 tax credit under section 44 and a $5,475 deduction

under section 162 for business expenses.    In fact, however, there

was just one ShopN2000 Web site, not a separate one for each URL

owner.    Each URL owner simply received a five-digit account

number (i.e., PIN) to identify the owner on the one ShopN2000 Web

site.    Further, the one ShopN2000 Web site already included the

modifications advertised; the Web site was not modified again

when each new URL owner was added to the system.

     On May 3, 2004, the District Court entered a “Stipulated

Final Judgment of Permanent Injunction” against Oryan and others

granting the relief requested in the complaint.

Documents

     On October 15, 2001, Mr. Good executed a “Contract for Sale

of Website”, whereby he purchased a ShopN2000 URL with the URL

“Shopn2000.com/62234”.    The contract required no immediate

payment but called for payments of 10 percent of the revenues

generated by the Web site until $2,500 (with interest), had been

paid.

     On October 19, 2001, Mr. Good executed a “Contract for

Modification and Maintenance of Website”, whereby he retained

Oryan to modify his URL, ShopN2000.com/62234, to make it

“accessible to the visually disabled[,] in accordance with those

ideals set forth in * * * [ADA section 3].”    For that work he

agreed to pay Oryan $10,475, a downpayment of $2,495 to be made
                               - 8 -

“upon signing this contract” and the balance, $7,980, to be

evidenced by a note.   On that same day, Mr. Good executed a note

in Oryan’s favor, obligating him to pay $7,980 (with interest),

payments to be made from a portion of the revenues generated by

the Web site, with any remaining balance due in 8 years.

      On October 19, 2001, Mr. Good executed a “Management

Agreement” with Oryan, whereby he retained Oryan to manage his

URL, and he agreed to pay Oryan 15 percent “of all monies

collected or vested to the Website.”

      On November 20, 2002, Ms. Shermer Good executed a “Contract

for the Modification and Maintenance of Website”, whereby she

retained Advantage Management for the purpose of modifying a Web

site known as “Shopn2000.com/60431” so that it “shall continue to

be made accessible to the visually disabled, and further modified

for accessibility for the Hearing and Speech disabled, in

accordance with those ideals set forth in * * * [ADA], section

3.”   The payment terms are the same as the terms in the similar

agreement between Mr. Good and Oryan executed on October 19,

2001, except that payments are to be made to Advantage

Management.   She signed a note similar to the note he signed

(together, the notes).   The note she signed, like the contract

she signed, refers to a Web site known as “ShopN2000.com/60431”.

      On November 20, 2002, Ms. Shermer Good executed a

“Management Agreement” with Oryan, whereby she retained Oryan to

manage URL “Shopn2000.com/60431”, for a fee of $15 a year.
                                - 9 -

     Petitioners have never owned a Web site with the address

ShopN2000.com/60431.

Compensation Arrangements

     Although petitioners believed they would earn commissions

with respect to purchases made using their PIN, they received no

document setting forth a commission schedule in connection with

their consideration of ShopN2000.com.    Petitioners expected to

earn commissions ranging, generally, from 1 to 4 percent on sales

made through ShopN2000.com/62234.

     Petitioners also believed that they would earn $2 as

advertising income every time a visitor to ShopN2000.com/62234

clicked on a merchant’s banner displayed there, although they

received no document specifying that.

Payments

     On September 10, 2001, Mr. Good incurred a credit card

charge of $2,495 in favor of “Nevada Corporate HQ’s” and on

December 27, 2002, Ms. Shermer Good wrote a check for $2,495 to

“Okto Marketing Group”.    At the time Mr. Good made the first

payment, petitioners believed that they would be able to claim a

disabled access credit of $5,000 on their 2001 Federal income tax

return.    At the time Ms. Shermer Good made the second payment,

petitioners believed that they would be able to claim a disabled

access credit of approximately $4,900 on their 2002 Federal

income tax return.
                                - 10 -

Operations

     Mr. Good received the following commissions from his

ownership of ShopN2000/62234:

                  Year                       Amount

                  2001                         -0-
                  2002                       $19.60
                  2003                        10.67
                 Unknown                       1.52

     Mr. Good received no direct payment of any advertising

income.   Petitioners believe that advertising income was applied

to reduce the balance of the notes.      Petitioners have not

otherwise made any payments on the notes.

     In early 2003, Mr. Good received an IRS Form 1099-MISC,

Miscellaneous Income, for 2002 (the 2002 Form 1099) from G&J

Eagle Enterprises, Inc., referring to account No. 62234 and

showing “Other Income” of $4,198.

     Petitioners marketed their URL only by word-of-mouth to

friends and family and to one or two handicapped people they saw

on the street.

Other Events

     Sometime after May 2004, Mr. Good went on the Internet to

ShopN2000.com/62234 and discovered that the URL was no longer

operating.

     Mr. Good telephoned Oryan.    The person answering the phone

refused to answer any of his questions.
                              - 11 -

     Petitioners neither sought the return of any of the moneys

that they paid to Oryan nor took any legal action against Oryan

for breach of contract.

     No one has contacted petitioners seeking payment of the

notes.

Respondent’s Expert Witness

     Respondent offered, and the Court accepted, Thomas M. Niccum

(Mr. Niccum) as an expert witness in the field of computer

science and Web site business design, operation, and valuation.

Mr. Niccum is president of Lancet Software Development, Inc., a

software consulting and Web hosting firm.   He has the following

academic degrees: bachelor of computer science, magna cum laude,

master of science in computer science, and a Ph.D. in computer

science.   He has published articles on data management, and he

has taught in the field of computer science.   The Court received

his written report as his direct testimony.    See Rule 143(f)(1).

He has various opinions concerning the design, operation, and

valuation of ShopN2000.com, which he characterized as “an

Internet shopping Web site accessed at http://www.shopn2000.com.”

His opinions include the following:

     --    The site was relatively small, with only a few pages

           and limited functions;

     --    the promoters of the site were not selling Web sites

           but, more accurately, were activating PIN numbers.

           There was only one Web site, where different PIN
                        - 12 -

     numbers were used only to track usage and, possibly, to

     allow some customized content;

--   every PIN, enabled for that purpose or not, appeared to

     have access to the text-only site for the visually

     impaired;

--   the text-only site did not work well;

--   security features enabled by users would interrupt the

     site’s ability to associate usage with a particular

     PIN;

--   ShopN2000.com had a poor business model:   The site had

     only a few links to shopping Web sites, and it did not

     appear to offer any useful functions, such as price

     comparisons or product reviews.   The site merely gave a

     simple display of stores and some product categories

     and offered rudimentary search tools;

--   the ShopN2000.com business model did not work well:    By

     2004, there were hundreds of complaints on the Internet

     describing problems with the site and lack of profits

     being made by ShopN2000.com URL owners;

--   a ShopN2000.com URL was not a viable business

     opportunity for a purchaser;

--   the purchaser of a ShopN2000.com URL acquired only the

     rights to a Web address, and acquired no software,

     code, copyrights, documentation, licenses, or other

     intellectual property;
                                - 13 -

      --    the domain name “ShopN2000.com” was not transferred to

            the URL owner;

      --    ShopN2000.com URL owners would have difficulty

            attracting advertisers, and advertising would not

            provide a significant source of income, given the low

            volume of traffic ShopN2000.com URL owners could

            realistically expect;

      --    petitioners could not have resold their ShopN2000.com

            URL;

      --    the value of the ShopN2000.com URL was practically nil.

                                OPINION

I.   Introduction

      On brief, respondent characterizes the Schedule C activity

as “a tax-motivated promotion * * * that petitioners believed

would allow them to spend $2,495 in 2001 and $2,495 in 2002 to

obtain Disabled Access Credits of $5,000 in 2001 and $4,900 in

2002.”     He has disallowed not only the disabled access credits

petitioners claimed but also the Schedule C expenses, and he asks

for an accuracy-related penalty.

      Petitioners claim on brief:

           Taxpayers owned and operated a small business with
      the primary and predominant purpose of making a profit.
      The business income, operations and deductions were
      appropriately documented and substantiated. The
      Respondent’s claims otherwise, as well as its [sic]
      basis for accessing [sic] addition to tax is without
      merit.
                                - 14 -

      As set forth in our findings, respondent has multiple

grounds for his adjustments.    He has disallowed the disabled

access credits because he believes that petitioners have failed

to show that they made any expenditures for the purpose of

complying with the ADA, or, if they did, that those expenditures

were reasonable and necessary and otherwise met the requirements

of section 44.   Alternatively, he has disallowed the disabled

access credits, and the Schedule C expenses, because he believes

the Schedule C activity lacked economic substance and was

conducted solely to avoid tax.    Finally, he has disallowed the

Schedule C expenses because he believes that petitioners failed

to establish that the expenses (1) were made, (2) were ordinary

and necessary business expenses, or (3) were made for the

purposes indicated.

      We shall sustain respondent’s disallowance of the Schedule C

expenses and the disabled access credits on the grounds that

petitioners have failed to substantiate that they made the

expenditures involved.    We shall also sustain the accuracy-

related penalties.

II.   The Schedule C Expenses and Disabled Access Credits

      A.   Introduction

      The Schedule C expenses consist of claimed expenditures for

interest, office expenses, travel, meals and entertainment, and

“Other expenses”.     The other expenses are explained as being for

modifications to allow the disabled access to the Web site (the
                              - 15 -

Web site modification expenses) and franchise fees.    The disabled

access credits consist of additional expenditures beyond the Web

site modification expenses claimed to have been made to modify

the Web site to comply with the ADA.3    We shall first consider

the Schedule C expenses other than the Web site modification

expenses and then consider those expenses together with the

disabled access credits.

     B.   Schedule C Expenses Other Than Web Site Modification
          Expenses

     In general, section 162(a) allows a deduction for “all the

ordinary and necessary expenses paid or incurred during the

taxable year in carrying on any trade or business”.    To be

deductible, however, such expenses must be substantiated.      E.g.,

Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per curiam 540
F.2d 821 (5th Cir. 1976); see also sec. 6001; sec. 1.6001-1(a),

Income Tax Regs.   Moreover, we need not accept the unverified and

undocumented testimony of the taxpayer as substantiation.

Hradesky v. Commissioner, supra at 90.    Finally, certain

deductions, such as those relating to travel and entertainment

expenses, are subject to strict substantiation requirements.       See

sec. 274(d).

     3
        Sec. 44 allows a credit for an expenditure to provide
access to disabled persons, but sec. 44(d)(7) denies a deduction
for the same expenditure.
                              - 16 -

     Petitioners claim that they are entitled to deduct the

Schedule C expenses under sections 162 and 212.4   Section 212 is

similar to section 162 in that it allows as a deduction “all the

ordinary and necessary expenses paid or incurred during the

taxable year” in connection with, among other things, “the

production or collection of income”.   We assume that petitioners

are relying primarily on section 162(a) since they describe the

Schedule C activity as a “small business”.   See supra section I.

of this report.   In any event, we would reach no different result

if we were to consider the Schedule C activity under section 212.

     The questions respondent has raised relating to

substantiation involve questions of fact; e.g., whether Mr. Good,

a cash method taxpayer with respect to the Schedule C activity,

can substantiate his 2002 Schedule C expense of $427 for office

expenses.   And while petitioners have in the petition assigned

error to respondent’s determinations of deficiencies in tax and

penalties, they have failed to comply with the requirement of

Rule 34(b)(5) that the petition contain clear and concise

statements of the facts on which the petitioner bases the

assignments of error.   Moreover, at the conclusion of the trial,

we instructed the parties to file briefs, and we directed Mr.

Good to our Rules as to the form and content of briefs.   We

emphasized the importance of making proposed findings of fact.

     4
        In 2002, petitioners deducted $338 of interest that, if
deductible, would be deductible under sec. 163.
                              - 17 -

See Rule 151(e)(3).   Nevertheless, petitioners have failed to

include in their opening brief any proposed findings of fact,

including only the following statement under the heading

“Petitioners’ Request for Findings of Fact”:   “The facts have

been stipulated and as so [sic] are found.   The stipulation of

facts and the attached exhibits are attached are [sic]

incorporated herein.”   We shall do our best in the light of the

inadequate assistance provided by petitioners.

     We can dispose summarily of the Schedule C expenses other

than the Web site modification expenses; viz, the deductions for

office expenses and travel for 2001 and for interest, office

expense, travel, deductible meals and entertainment, and, under

the category “Other expenses”, franchise fees for 2002.    Putting

aside for the moment petitioners’ claim of travel expenses

incurred in 2002, petitioners have not provided adequate

substantiation of the claimed expenses.   For substantiation,

petitioners offer only their own testimony and Mr. Good’s self-

generated computer records.   Petitioners offer no receipts or

other evidence corroborating their testimony and Mr. Good’s

records.   We need not, and do not, accept their unsupported

testimony and records as adequate substantiation.   See Hradesky

v. Commissioner, supra.

     With respect to petitioners’ 2002 travel, the parties have

stipulated that, in October 2002, petitioners traveled to Mexico

for a vacation and paid for meals while there.   Petitioners have
                              - 18 -

failed to substantiate by adequate records or by sufficient

evidence corroborating their statements the business purpose of

the meal expenditures or the business relationship to them of

persons they entertained, and for that reason no deduction under

section 162 or 212 is allowable.   See sec. 274(d).

     C.   Web Site Modification Expenses and Disabled Access
          Credits

     Section 44 provides small businesses with a credit for

expenditures to comply with the ADA.   Petitioners claim to have

spent $10,475 in both 2001 and 2002 to comply with the ADA.

Because of limitations on the amount of ADA compliance

expenditures creditable against tax, petitioners claimed disabled

access credits of only $5,000 and $4,491 for 2001 and 2002,

respectively.   They did not, however, ignore the noncreditable

portions of their claimed ADA compliance expenditures, and they

deducted $5,475 each year as part of the Schedule C expenses;

i.e., the Web site modification expenses.

     We have in evidence two contracts (the contracts), each

entitled “Contract for Modification and Maintenance of Website”,

and both calling for total payments of $10,475, a downpayment of

$2,495 to be made “upon signing of this contract” and the

balance, $7,980, to be evidenced by a note (the notes).   The

first contract is between Mr. Good and Oryan; it was signed by

him on October 19, 2001; it calls for modification of his URL,

ShopN2000.com/62234, and it requires that he make the $2,495
                              - 19 -

downpayment to Oryan.   The second contract is between Ms. Shermer

Good and Advantage Management; it was signed by her on November

20, 2002; it calls for modification of a URL,

ShopN2000.com/60431, that petitioners did not own, and it

requires that she make the $2,495 downpayment to Advantage

Management.   On September 10, 2001, Mr. Good paid $2,495 by

credit card to “Nevada Corporate HQ’s”, and, on December 27,

2002, Ms. Shermer Good paid $2,495 by check to “Okto Marketing

Group” (together, the cash payments).   Presumably, petitioners

claimed the cash payments as a portion of either Web site

modification expenses or the disabled access credits.5

Respondent concedes that the cash payments were made, but views

the payments not as fees to modify petitioners’ Web site to

accommodate the disabled but, essentially, as their expenditure

to participate in a bogus tax avoidance scheme.   Petitioners have

failed to convince us that the cash payments were made for the

purpose they claim; i.e., to modify petitioners’ Web site to

accommodate the disabled.

     Perhaps in an unguarded moment, Ms. Shermer Good testified

on cross-examination that petitioners made their September 10,

2001, payment of $2,495 “for the franchise.”    If they made the

payment “for the franchise”, i.e., to participate in the Schedule

     5
        We cannot be sure, since, as stated, petitioners neither
supported the petition with clear and concise statements of fact
nor provided any proposed findings of fact on brief.
                               - 20 -

C activity for 2001, that could explain why they made it 39 days

before Mr. Good signed a contract purporting to modify his Web

site (and, indeed, 35 days before he acquired that Web site).

That might also explain why the payment was made to Nevada

Corporate HQ’s, rather than to Oryan, the party to whom the

contract required petitioners to make the downpayment.    The facts

surrounding the contract signed by Ms. Shermer Good are also

suspicious.   The contract she signed referred to the wrong URL,

she did not pay Advantage Management, as required by the

contract, but paid “Okto Marketing Group”, and she made the

payment 37 days after the due date of the payment required by the

contract.   In both cases, other than the correspondence of the

amounts paid to the downpayments called for by the contracts,

there is little evidence to support petitioners’ claim that the

cash payments were made for Web site modifications to accommodate

the disabled.    Indeed, there is evidence that no such

modifications were ever intended, at least by the promoters of

ShopN2000.com.    Respondent’s expert, Mr. Niccum, testified that

there was only one Web site, to which each URL owner had access

by way of a PIN, and that every PIN, enabled for that purpose or

not, appeared to have access to the text-only site for the

visually impaired.    That testimony is consistent with the

allegations in the complaint that led to the injunction against

Oryan’s organizing, promoting, or selling ShopN2000 URLs.

Petitioners criticize Mr. Niccum for looking at ShopN2000.com
                              - 21 -

only in retrospect and without having access to the underlying

computer codes.   Although aware in advance of Mr. Niccum’s

testimony, petitioners presented no expert testimony in rebuttal.

Mr. Niccum impressed us with his knowledge of computers and Web

sites, and we have confidence in his opinions.    We do not believe

that any modifications were ever made to petitioners’ Web site to

accommodate the disabled.   More importantly, petitioners have

failed to convince us that they made the cash payments for the

purpose of obtaining modifications to their Web site.

Considering Ms. Shermer Good’s testimony, Mr. Niccum’s testimony,

the discrepancies between the payment terms of the contracts and

petitioners’ actual payments, and the identification of the wrong

URL in the contract signed by Ms. Shermer Good, we believe that

petitioners made the cash payments to secure, as Ms. Shermer Good

describes it, “the franchise”; i.e., to secure undeserved tax

benefits well in excess of the cash payments, and not for Web

site modifications to accommodate the disabled.

     Before concluding this portion of our analysis, there is one

further issue to discuss.   The contracts each call for deferred

payments of $7,980, the balance of the $10,475 contract price

above the required downpayment of $2,495.   The notes evidenced

those payments and stated that the deferred payments were to be

made from a portion of the revenues generated by the Web site.

Petitioners believed that advertising revenue of $2 would be

applied to the notes every time a visitor to ShopN2000.com/62234
                               - 22 -

clicked on a merchant’s banner.    The 2002 Form 1099 shows a

payment to Mr. Good of “[o]ther [i]ncome” of $4,198 from G&J

Eagle Enterprises, Inc., referring to account No. 62234.

Although their briefs are unclear, petitioners appear to argue

that the 2002 Form 1099 evidences advertising revenue of $4,198

applied in 2002 to Mr. Good’s note.     There is, however, no

evidence other than the 2002 Form 1099 that Mr. Good earned any

advertising revenue from the operation of ShopN2000.com/62234 in

2002.    Petitioners have not identified G&J Eagle Enterprises,

Inc.    Advertising revenue of $4,198 would indicate 2,099 clicks

in 2002.    Mr. Niccum is of the opinion that, given the low volume

of traffic expected by a ShopN2000.com URL owner, it would be

difficult to attract advertisers and advertising would not

provide a significant source of income.     We are not persuaded

that the 2002 Form 1099 is legitimate.     Petitioners have failed

to persuade us that they earned any advertising revenue in 2002,

or that $4,198 was credited against either note.

       Petitioners have failed to show that they expended any money

in either 2001 or 2002 to modify their Web site to accommodate

the disabled.    Petitioners are not entitled to deductions for the

Web site modification expenditures or to the disabled access

credits.
                                  - 23 -

       D.   Conclusion

       We sustain respondent’s adjustments disallowing the Schedule

C expenses and the disabled access credits.

III.    Section 6662 Penalty

       Section 6662 imposes a penalty equal to 20 percent of the

portion of any underpayment which is attributable to, among other

things, a substantial understatement of income tax.         Sec. 6662(a)

and (b)(2).     An understatement of income tax is deemed

substantial if it exceeds the greater of: (1) 10 percent of the

tax required to be shown on the return for the year, or (2)

$5,000.     Sec. 6662(d)(1)(A).   For those purposes, the amount of

an understatement is reduced to the extent it is attributable to

a position (1) for which there is substantial authority, or (2)

which the taxpayer adequately disclosed on his return and for

which there is a reasonable basis.         Sec. 6662(d)(2)(B).   In

addition, the section 6662 penalty does not apply to the extent

the taxpayer can show that there was reasonable cause for the

underpayment and that he acted in good faith with respect

thereto.     Sec. 6664(c)(1).

       Giving effect to respondent’s adjustments in the notice,

petitioners’ additional tax liabilities for 2001 and 2002 were

$6,740 and $5,697, respectively.      The taxes required to be shown

on petitioners’ returns for 2001 and 2002 were $28,432 and

$34,606, respectively. Since each of the understatements exceeds

$5,000 (which is greater than 10 percent of the tax required to
                                - 24 -

be shown on the returns--$2,843 in 2001 and $3,461 in 2002),

those understatements are substantial within the meaning of

section 6662(d)(1)(A).

     Respondent bears the burden of production with respect to

the section 6662(a) penalty.     See sec. 7491(c).   We have

previously stated that the “burden imposed by section 7491(c) is

only to come forward with evidence regarding the appropriateness

of applying a particular addition to tax or penalty to the

taxpayer.”    Weir v. Commissioner, T.C. Memo. 2001-184.

Respondent has satisfied his burden of production.      Nevertheless,

the accuracy-related penalty specified by section 6662(a) is not

imposed with respect to any portion of the underpayment as to

which the taxpayer has acted with reasonable cause and good

faith.    Sec. 6664(c)(1).   The taxpayer bears the burden of

proving his entitlement to section 6664(c)(1) relief.      Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).     Petitioners are well

educated, with experience in business and accounting.      Indeed,

Mr. Good is a certified public accountant and, during the years

in question, was a partner in an accounting firm.      Petitioners

should have been aware that the ShopN2000.com was a tax-reduction

scheme.    We are convinced that, without tax benefits, there was

no reasonable prospect of making any money from the scheme.

Petitioners have failed to show that they understood anything

different.    Petitioners have failed to show that, with respect to
                              - 25 -

any portion of the underpayments, they acted with reasonable

cause and in good faith.

      Petitioners are liable for the section 6662(a) penalty

determined by respondent.

IV.   Conclusion

      Petitioners are liable for the deficiencies in tax and

penalties determined by respondent.

                                           Decision will be entered

                                      for respondent.