                         T.C. Memo. 2007-87



                       UNITED STATES TAX COURT



              DUANE D. & INA R. GAY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14273-05.               Filed April 12, 2007.



     Duane D. & Ina R. Gay, pro sese.

     Albert B. Kerkhove, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    Respondent determined the following defi-

ciencies in, and accuracy-related penalties under section

6662(a)1 on, petitioners’ Federal income tax (tax):



     1
      All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

                                         Accuracy-Related Penalty
      Year          Deficiency              Under Sec. 6662(a)
      2000            $8,223                     $1,644.60
      2001             3,657                        731.40

     The issues remaining for decision are:

     (1) Should we sustain respondent’s determination for each of

the years at issue that the expenditures that petitioners made

during each such year on certain properties must be capitalized

and amortized?   We hold that we should.

     (2) Should we sustain respondent’s determination that

petitioners are liable for each of the years at issue for the

accuracy-related penalty under section 6662(a)?       We hold that we

should.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     At the time petitioners filed the petition in this case,

they resided in Columbus, Nebraska (Columbus).

     At times not disclosed by the record during 2000 and 2001,

petitioners made expenditures for certain work that they had done

on two rental properties that they owned on 40th Street and 8th

Street, respectively, in Columbus (40th Street property and 8th

Street property).

     Petitioners timely filed Form 1040, U.S. Individual Income

Tax Return, for each of their taxable years 2000 (2000 return)

and 2001 (2001 return).
                               - 3 -

     In Schedule E, Supplemental Income and Loss (Schedule E),

included as part of petitioners’ 2000 return (2000 Schedule E),

petitioners showed total rents received of $16,490 and claimed

total expenses of $61,654 and total losses of $45,164.   An

attachment to that schedule showed, inter alia, the following

items which, when totaled and rounded to the nearest dollar,

equal the total expenses of $61,654 claimed in the 2000 Schedule

E:

                  $39,545.86   expenses
                  $ 4,427.94   Taxes
                  $17,680.50   Credit card Visa
                  $61,654.30

     Schedule E included as part of petitioners’ 2001 return

(2001 Schedule E) contained no entries.   However, an attachment

to that schedule (attachment to the 2001 Schedule E) showed,

inter alia, total rental income of $14,000 and total expenses of

$89,542.

     Another attachment to the 2001 Schedule E (second attachment

to 2001 Schedule E) showed the following items which, when

totaled and rounded to the nearest dollar, equal the total

expenses of $89,542 shown in the attachment to the 2001 Schedule

E:
                                 - 4 -

             Mark Wagner - lease                  $634.00
             Brodey Pharmacy                    $8,088.57
             Labor                             $20,180.00
             Rental Utilities                     $485.00
             Tooley Drug                        $1,940.42
             Oakwood Nursing Home              $18,598.89
             Episcopal Church                   $1,200.00
             Building Supplies                 $28,624.00
             Aunt Lorraine’s Health Ins.        $1,092.00
             Taxes                              $8,699.29
                                               $89,542.17

     Respondent issued to petitioners a notice of deficiency

(notice) for their taxable years 2000 and 2001.       In that notice,

respondent determined, inter alia, that $26,971.69 of the total

expenses of $61,654 that petitioners claimed in the 2000 Schedule

E and $39,083 of the total expenses of $89,542 that petitioners

claimed in the attachment to the 2001 Schedule E and the second

attachment to the 2001 Schedule E must be capitalized and amor-

tized.   In the notice, respondent also determined that petition-

ers are liable for each of their taxable years 2000 and 2001 for

the accuracy-related penalty under section 6662(a).

                                OPINION

     Petitioners bear the burden of proving that the determina-

tions in the notice are erroneous.2       Rule 142(a); Welch v.


     2
      Petitioners do not claim that the burden of proof shifts to
                                                   (continued...)
                                   - 5 -

Helvering, 290 U.S. 111, 115 (1933).       Moreover, deductions are a

matter of legislative grace, and petitioners bear the burden of

proving entitlement to any deduction claimed.       INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).       Petitioners were required

to maintain records sufficient to establish the amount of any

deduction claimed.       Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

Claimed Property Expenditures

        It is petitioners’ position3 that they are entitled to

deduct for each of the years at issue the entire amount of the

expenditures that they made during each such year for certain

work done on the 40th Street property and the 8th Street prop-

erty.       In support of that position, Ms. Gay testified:

     we have two properties that were totally destroyed by
     renters. My husband went ahead, had to hire someone to
     do the repair work because he can’t do it anymore.

          He came up with the totals of what it costs, the
     labor and the material, et cetera, and this was the
     numbers that he came up with and put it on his income
     tax.

          Later, we are audited and they say, No, we have to
     -- I think the term is disallowed. There’s a certain
     amount that the government wants, I guess, you have to
     amortize over a period of so many years.



        2
      (...continued)
respondent under sec. 7491(a). In any event, petitioners have
failed to establish that they satisfy the requirements of sec.
7491(a)(2). On the record before us, we find that the burden of
proof does not shift to respondent under sec. 7491(a).
        3
      Although the Court ordered petitioners to file a posttrial
brief, they failed to do so.
                                - 6 -

          If he did that, he would be over 100-and-some
     years, which we know he’s 75 now. He would never
     recoup that money back. He can’t recoup the money back
     at all unless he can, you know -- you couldn’t charge
     enough rent to recoup what the damage was in our life-
     time is what I’m saying.

According to petitioners, they would not have made the expendi-

tures at issue on the 40th Street property and the 8th Street

property during each of the years 2000 and 2001 if they had not

believed that the entire amount of such expenditures is deduct-

ible for each of those years.   Instead, they would have abandoned

those properties.

     Section 263(a) provides that “No deduction shall be allowed

for--(1) Any amount paid out for new buildings or for permanent

improvements or betterments made to increase the value of any

property or estate.”   Section 263(a) denies a deduction for an

expenditure for the year the expenditure is incurred when the

amount paid or incurred:   (1) Creates or enhances a separate and

distinct asset, see Commissioner v. Lincoln Sav. & Loan Associa-

tion, 403 U.S. 345, 354 (1971); Wells Fargo & Co. & Subs. v.

Commissioner, 224 F.3d 874, 882 (8th Cir. 2000), affg. in part

and revg. in part 112 T.C. 89 (1999); (2) produces a significant

benefit beyond the current taxable year, see INDOPCO, Inc. v.

Commissioner, supra at 87-89; Wells Fargo & Co. & Subs. v. Com-

missioner, supra at 887; or (3) is in connection with the acqui-

sition of a capital asset, Commissioner v. Idaho Power Co., 418
                                - 7 -

U.S. 1, 13 (1974).4

     On the record before us, we find that petitioners have

failed to carry their burden of establishing (1) that they are

entitled for each of their taxable years 2000 and 2001 to deduct

the entire amount of the expenditures that they made during each

such year on the 40th Street property and the 8th Street property

and (2) that no portion of such expenditures must be capitalized

and amortized.   On that record, we sustain respondent’s determi-

nations with respect to those expenditures.

Accuracy-Related Penalty

     It is respondent’s position that petitioners are liable for

each of their taxable years 2000 and 2001 for the accuracy-

related penalty under section 6662(a) because of negligence or

disregard of rules or regulations under section 6662(b)(1).

     The term “negligence” in section 6662(b)(1) includes any

failure to make a reasonable attempt to comply with the Code.

Sec. 6662(c).    Negligence has also been defined as a failure to

do what a reasonable person would do under the circumstances.

See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),

affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.

686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990).   The term

“disregard” includes any careless, reckless, or intentional



     4
      See also Basin Elec. Power Coop. v. Commissioner, T.C.
Memo. 2004-109.
                                 - 8 -

disregard.   Sec. 6662(c).

      The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion.     Sec. 6664(c)(1).   The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and circum-

stances, including the taxpayer’s efforts to assess such tax-

payer’s proper tax liability, the knowledge and experience of the

taxpayer, and the reliance on the advice of a professional, such

as an accountant.     Sec. 1.6664-4(b)(1), Income Tax Regs.

     Respondent has the burden of production under section

7491(c) with respect to the accuracy-related penalty under sec-

tion 6662.   To meet that burden, respondent must come forward

with sufficient evidence indicating that it is appropriate to

impose that penalty.     Higbee v. Commissioner, 116 T.C. 438, 446

(2001).   Although respondent bears the burden of production with

respect to the accuracy-related penalty that respondent deter-

mined for petitioners’ taxable years 2000 and 2001, respondent

“need not introduce evidence regarding reasonable cause * * * or

similar provisions.    * * * the taxpayer bears the burden of proof

with regard to those issues.”     Id.

     Petitioners conceded certain determinations that respondent

made in the notice for each of the years at issue and, as a
                                - 9 -

result, have acknowledged that an underpayment exists for each

such year.    Petitioners offered no evidence, and advance no

argument, under section 6662 with respect to their return treat-

ment for the years at issue of (1) the various items as to which

respondent made determinations that petitioners conceded and

(2) the expenditures in question as to which respondent made

determinations that we sustained.5      On the instant record, we find

that the burden of production that respondent has under section

7491(c) is satisfied.

     On the instant record, we find that petitioners have failed

to carry their burden of showing that they were not negligent and

did not disregard rules or regulations, or otherwise did what a

reasonable person would do, with respect to the underpayment for

each of the years at issue.

     On the instant record, we further find that petitioners have

failed to carry their burden of showing that there was reasonable

cause for, and that they acted in good faith with respect to, the

underpayment for each of the years at issue.      See sec.

6664(c)(1).

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that they are not

liable for each of the years at issue for the accuracy-related


     5
      The record does not show that any records that petitioners
maintained were sufficient under sec. 6001 and sec. 1.6001-1(a),
Income Tax Regs. See sec. 1.6662-3(b)(1), Income Tax Regs.
                             - 10 -

penalty under section 6662(a).    On that record, we sustain re-

spondent’s determinations under that section.

     We have considered all of the parties’ contentions and

arguments that are not discussed herein, and we find them to be

without merit, irrelevant, and/or moot.

     To reflect the foregoing and the concessions of petitioners,


                                      Decision will be entered for

                                 respondent.
