204 F.3d 772 (7th Cir. 2000)
Dennis L. HAYDEN and Sharon E. Hayden,    Petitioners-Appellants,v.COMMISIONER OF INTERNAL REVENUE,    Respondent-Appellee.
No. 99-2520
In the  United States Court of Appeals  For the Seventh Circuit
Argued December 3, 1999Decided February 11, 2000

Appeal from the  United States Tax Court
Before Flaum, Rovner, and Evans, Circuit Judges.
Flaum, Circuit Judge.


1
Dennis and Sharon Hayden  petitioned the United States Tax Court seeking a  redetermination of the federal income tax  deficiency and penalty assessed against them for  the 1994 tax year. The Tax Court upheld the  determinations and resulting addition to tax, and  the Haydens now appeal. For the reasons stated  herein, we affirm.

Background

2
During 1994, Dennis Hayden was self-employed as  a certified public accountant and his wife,  Sharon Hayden, was employed as a nurse. During  that year, Dennis and Sharon Hayden were also the  sole partners in a partnership known as Leddos  Frozen Yogurt, LLC ("Leddos").


3
Section 162 of the Internal Revenue Code  ("Code" or "I.R.C.") allows a deduction for the  ordinary and necessary business expenses incurred  in carrying on a trade or business. In contrast,  section 263 of the Code allows no deduction for  a capital expenditure. "The primary effect of  characterizing a payment as either a business  expense or a capital expenditure concerns the  timing of the taxpayer's cost recovery: While  business expenses are currently deductible, a  capital expenditure usually is amortized and  depreciated over the relevant life of the asset."  Indopco, Inc. v. Commissioner, 503 U.S. 79, 83-84  (1992). Under section 179 of the Code, however,  a taxpayer may elect (subject to certain  limitations) to treat the cost of any "section  179 property" as a current expense in the year  such property is placed in service, rather than  depreciating the cost of the property over a  number of years.1


4
In 1994, Leddos purchased equipment for $26,650.  On the partnership tax return for its 1994 tax  year, Leddos reported $20,105 in gross receipts  and $22,529 in costs of goods sold, yielding an  income loss of $2,424. The partnership reported  total deductions in the amount of $13,294, and  showed a loss in the amount of $15,718. These  figures did not include any deduction for the  expense of section 179 property. On Form 4652  (Depreciation and Amortization), attached to the  partnership return, Leddos elected under section  179 to expense $17,500 of the $26,650 invested in  equipment. The Haydens reported this deduction as  a flow through to their 1994 federal income tax  return.


5
During the same period, Dennis Hayden operated  an accounting business as a sole proprietorship  (Hayden & Associates, CPAs). He has worked in  public accounting for over 20 years, and a  substantial portion of his accounting business  has involved tax-related work.


6
During 1994, Dennis Hayden paid the Haydens'  1993 income tax liability of $9,284 from the bank  account of Hayden & Associates, and that amount  was charged to the accounting firm's account  designated for "payroll" taxes. On the Haydens'  joint 1994 income tax return, they then deducted  $17,630 as "payroll" taxes for the accounting  business. This amount included the Haydens' 1993  income tax liability of $9,284.


7
On November 26, 1997, the Commissioner of  Internal Revenue ("Commissioner") issued a notice  of deficiency to the Haydens determining a  deficiency in income tax of $3,784, and an  addition to tax of $292.60 for the 1994 tax year.  The Commissioner disallowed the $17,500 claimed  as a section 179 deduction and the $9,284 claimed  as deductible "payroll" expenses which was  expended for their 1993 personal federal income  taxes. The Commissioner further determined that  an accuracy-related penalty under section 6662  was due in the amount of $292.60 on the  underpayment resulting from disallowance of the  $9,284. The Haydens filed a petition with the Tax  Court contesting the deficiency and the penalty.


8
Before the Tax Court, the Haydens conceded that  they were not entitled to claim the $9,284 amount  as business expenses. The only issues remaining  for trial were whether the Haydens were entitled  to a section 179 deduction in the amount of  $17,500 (passed through to them by virtue of  their partnership interest in Leddos), and  whether they were liable for the accuracy-related  penalty under section 6662.


9
The Tax Court upheld the determinations of the  Commissioner: a deficiency of $3,784 in income  tax for 1994, and an accuracy-related penalty  under section 6662(a) of $292.60. The Haydens now  appeal.

Discussion
A.

10
As the basis for the deficiency, the Tax Court  held that under I.R.C. sec. 179(b)(3)(A) and  Treasury Regulation sec. 1.179-2(c)(2), the  Commissioner correctly disallowed the deduction  of $17,500 that the Haydens claimed on their 1994  tax return as a flow through deduction from  Leddos because Leddos did not have any income for  1994. The court noted that section 179(b)(3)(A)  provides that the deduction under section 179  "shall not exceed the aggregate amount of taxable  income of the taxpayer for such taxable year  which is derived from the active conduct by the  taxpayer of any trade or business during such  taxable year." The court further recognized that  Treasury Regulation sec. 1.179-2(c)(2)  specifically addressed the issue in this case by  providing that "the partnership may not allocate  to its partners as a section 179 expense  deduction for any taxable year more than the  partnership's taxable income limitation for that  taxable year, and a partner may not deduct as a  section 179 expense deduction for any taxable  year more than the partner's taxable income  limitation for that taxable year."


11
The Haydens acknowledge that under Treasury  Regulation sec. 1.179-2(c)(2), the deduction they  claimed under section 179 is not allowable.  However, they argue that the regulation is  invalid. They argue that section 179(b)(3)(A)  applies only to the taxable income "of the  taxpayer" derived from the trade or business "by  the taxpayer." But under section 701 a  partnership is not a taxpayer, so section  179(b)(3)(A) cannot apply to a partnership. Tax  Regulation sec. 1.179-2(c)(2), which in essence  applies section 179(b)(3)(A) to partnerships, is  therefore an invalid interpretation of the  statute's mandates.


12
We agree with the Tax Court that Treasury  Regulation sec. 1.179-2(c)(2) is valid, and we  reject the Haydens' challenge. Section 7805(a) of  the Code vests in the Treasury Department the  primary responsibility for the administration of  the tax laws. In light of this directive, the  Supreme Court has emphasized that courts must  defer to a Treasury Regulation if the regulation  is reasonable. National Muffler Dealers Assoc. v.  United States, 440 U.S. 472, 488-89 (1979);  Fulman v. United States, 434 U.S. 528, 536  (1978); see also Atlantic Mutual Ins. Co. v.  Commissioner, 118 S.Ct. 1413, 1418 (1998). In  this case, the Tax Court correctly held that  Regulation sec. 1.179-2(c)(2) is a reasonable  interpretation of section 179, and it must  therefore be sustained.


13
Regulation 1.179-2(c)(2) is consistent with the  plain language of the statute. Section 179 of the  Code permits a taxpayer to elect to treat the  cost of certain tangible property as a current  expense in the year such property is placed in  service, rather than depreciating the cost of the  property over a number of years. The deduction  under section 179 is subject to several  limitations, the relevant one here being that,  under section 179(b)(3)(A), the deduction may not  exceed the taxpayer's aggregate amount of taxable  income derived from the active conduct of all  trades or businesses by the taxpayer. Section  179(d)(8) then provides that the limitations in  subsection (b) shall apply to a partnership and  to each partner. Consistent with the Code's  language, Regulation sec. 1.179-2(c)(2) states  that a partnership may not allocate a section 179  expense deduction to its partners to the extent  it exceeds the partnership's taxable income.  Rather, any excess amount may be carried forward  to later taxable years. sec. 179(b)(3)(B).


14
The Haydens' argument that a partnership is not  a "taxpayer" and that sec. 179(b)(3)(A) cannot  therefore apply to partnerships is unpersuasive.  Indeed, partnerships are not subject to income  tax. See sec. 701. A partnership's income, gains,  losses, deductions and credits are attributable  to its partners and taken into account only for  purposes of determining the partner's individual  income tax liabilities. However, a partnership's  income, gains, losses, deductions and credits are  first computed at the partnership level before  being "passed on" to its partners. That is, once  these amounts are determined at the partnership  level, a partnership is treated as a mere  aggregate of its partners, or a conduit which  serves to pass on to the partners their share of  these partnership amounts. United States v.  Basye, 410 U.S. 441, 448-49 (1973). Although a  partnership is not a taxable entity, section  703(a) refers to the "taxable income of a  partnership" and prescribes rules for its  computation; especially in light of section  179(d)(8)'s explicit application of section 179  limitations to partnerships, the Treasury  Department's reading of "taxpayer" to encompass  partnerships in the section 179 context is  reasonable.


15
The Tax Court correctly held that Treasury  Regulation 1.179-2(c)(2) is a reasonable and  valid interpretation of the statute. Leddos'  partnership return for 1994 reports a loss of  $15,718. Because Leddos had no taxable income for  1994, it had no section 179 expense deduction to  allocate to its partners, the Haydens.  Accordingly, the Tax Court correctly denied the  Haydens' $17,500-claimed section 179 expense  deduction.

B.

16
The Haydens next challenge the Tax Court's  holding that they are liable for the negligence  penalty under section 6662 of the Code. We review  the Tax Court's finding that the Haydens were  negligent under the clearly erroneous standard.  Little v. Commissioner, 106 F.3d 1445, 1449 (9th  Cir. 1997); Forseth v. Commissioner, 845 F.2d  746, 749 (7th Cir. 1988).


17
Section 6662 imposes a twenty percent penalty  on the portion of an underpayment attributable to  one or more accuracy-related deficiencies,  including negligence or the disregard of rules or  regulations. I.R.C. sec. 6662(a), (b)(1).  "Negligence" includes any failure to make a  reasonable attempt to comply with the provisions  of the Code or to exercise ordinary and  reasonable care in the preparation of a tax  return. I.R.C. sec. 6662(c); Treas. Reg. sec.  1.6662-3(b)(1). Negligence also includes any  failure to keep adequate books and records or to  substantiate items properly. Treas. Reg. sec.  1.6662-3(b)(1). "Disregard" includes any  careless, reckless, or intentional disregard of  rules or regulations. I.R.C. sec. 6662(c). The  Commissioner's determinations of negligence or  disregard of the tax laws are presumed to be  correct, and the taxpayer has the burden of  proving that the penalties are erroneous. Welch  v. Helvering, 290 U.S. 111, 115 (1933); Forseth,  845 F.2d at 749.


18
The Tax Court was justified in concluding on  this record that the Haydens should be liable for  the section 6662 accuracy-related penalties. The  Haydens were clearly not entitled to the claimed  deduction of $9,284 for their 1993 federal income  tax liability; Dennis Hayden, a certified public  accountant, does not dispute this. The Haydens  contend that the deduction resulted from a  reasonable mistake by an employee who erroneously  posted the amount paid for federal income taxes  to the "payroll" account. The Tax Court found  this contention unpersuasive:


19
The $9,284 in income taxes deducted as "payroll"  taxes constitutes approximately 17 percent of the  taxable income of the accounting practice.  Moreover, it represents 53 percent of the  deduction claimed for "payroll" taxes. These are  not insignificant figures, and we find it hard to  believe that, when preparing or supervising the  preparation of the return, petitioner would not  have questioned the deduction of this size. This  is particularly true because petitioner was aware  that his Federal income taxes had been paid from  the bank account used for the accounting  practice, a practice which in and of itself is  suspect. Either he closed his eyes to the facts,  or he simply did not properly supervise the  preparation of the return.


20
Hayden v. Commissioner, 112 T.C. 115, 122 (1999).  Considering these factual circumstances, we find  no clear error in the Tax Court's finding that  the tax return errors resulted from negligence.  We therefore affirm the Tax Court's determination  that the Hayden's are liable for the $292.60.2

Conclusion

21
For the reasons stated herein, the decision of  the Tax Court is AFFIRMED.



Notes:


1
 Section 179(a) provides: "A taxpayer may elect to  treat the cost of any section 179 property as an  expense which is not chargeable to capital  account. Any cost so treated shall be allowed as  a deduction for the taxable year in which the  section 179 property is placed in service."


2
 The Haydens assert that the Commissioner and Tax  Court incorrectly calculated the penalty. They  argue that no penalty is actually due because  zero income tax was owed and paid on the return.  This argument appears to be based on the  erroneous assumption that the accuracy-related  penalty only applies to normal income taxes, and  not to self-employment taxes. Section 6662  imposes a penalty to "any portion of an  underpayment of tax required to be shown on a  return." See also Margolis v. Commissioner, 77  T.C.M. (CCH) 1297 (1999) (applying the penalty to  self-employment taxes). The Commissioner and Tax  Court correctly calculated the penalty based on  the portion of the understatement of self-  employment tax that resulted from the claimed  "payroll"-tax deduction.


