MICHAEL H. STOUGH AND BARBARA M. STOUGH, PETITIONERS
  v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
          Docket No. 8256–11.                Filed June 2, 2015.

        Lessor (Ps) constructed a commercial building and entered
      into a 10-year lease with Lessee (L). The lease requires L to
      pay monthly rent to Ps, and the monthly rent is based on the
      amount of ‘‘project costs’’ Ps incurred in acquiring and devel-
      oping the leased property. The lease provides L with the uni-

306
(306)                   STOUGH v. COMMISSIONER                               307


        lateral option to make a one-time payment to Ps to reduce
        ‘‘project costs’’ to be used in the calculation of rent and thus
        reduce the amount of rent otherwise owed by L under the
        lease. In 2008 L elected to make a $1 million payment to Ps
        pursuant to the terms of the lease. R argues that the $1 mil-
        lion payment is rental income to Ps and is reportable for the
        year of receipt (i.e., 2008). Ps argue that the $1 million pay-
        ment is not rental income. Alternatively, Ps argue that pursu-
        ant to I.R.C. sec. 467 the $1 million payment received from L
        is reportable as rental income ratably over the 10-year life of
        the lease. Held: The $1 million payment is rental income to
        Ps. Held, further, I.R.C. sec. 467(b)(1)(A) provides that the
        amount of rent under any sec. 467 agreement shall be deter-
        mined ‘‘by allocating rents in accordance with the agreement’’.
        Sec. 1.467–1(c)(2)(ii)(B), Income Tax Regs., provides that, ‘‘[i]f
        a rental agreement does not provide a specific allocation of
        fixed rent * * * the amount of fixed rent allocated to a rental
        period is the amount of fixed rent payable during that rental
        period.’’ The lease entered into between Ps and L states only
        when rent is payable and does not specifically allocate rent.
        The $1 million payment was due and payable in 2008. There-
        fore, Ps must report the entire $1 million payment as rental
        income for the year of receipt. Held, further, under sec. 1.467–
        1(d)(2)(i) and (ii), Income Tax Regs., the constant rental
        accrual and proportional rental accrual methods are inappli-
        cable to the lease at issue.

  Stanley L. Ruby and David M. Meranus, for petitioners.
  Richard J. Hassebrock, for respondent.
   RUWE, Judge: Respondent determined a $300,332 defi-
ciency in petitioners’ 2008 Federal income tax and a
$58,117.20 accuracy-related penalty under section 6662(a). 1
On one of their 2008 Schedules E, Supplemental Income and
Loss, petitioners reported as rents received a $1 million pay-
ment from Talecris Plasma Resources, Inc. (Talecris). Peti-
tioners then claimed an offsetting $1 million Schedule E
‘‘contribution to construct’’ deduction (Schedule E deduction).
Upon examination respondent disallowed the $1 million
Schedule E deduction but increased petitioners’ basis in the
subject rental property and allowed petitioners $87,868 in
additional depreciation. 2 Petitioners no longer contend that
  1 Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
  2 The parties agree that if we sustain respondent’s determination as to
                                                   Continued
308           144 UNITED STATES TAX COURT REPORTS                     (306)


they are entitled to the $1 million Schedule E deduction but
instead argue that they improperly reported as rents
received the $1 million payment.
  After concessions by the parties, 3 the issues remaining for
decision are: (1) whether the $1 million lump-sum payment
made by Talecris during the taxable year 2008 is rental
income to petitioners; (2) if the $1 million payment is rental
income, whether petitioners may allocate the $1 million pay-
ment proportionately over the life of the lease pursuant to
section 467; and (3) whether petitioners are liable for an
accuracy-related penalty under section 6662(a).
                           FINDINGS OF FACT

   Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are incor-
porated herein by this reference.
   At the time the petition was filed, Michael H. Stough (peti-
tioner) resided in Wyoming, and Barbara M. Stough resided
in Ohio. 4
   Petitioner is the sole shareholder of an Ohio corporation
named Stough Development Corp. (SDC). SDC was incor-
porated in January 1994 and, for the taxable year at issue,
operated as a subchapter S corporation. SDC is a real estate
development company primarily in the business of acquiring
and developing real estate for use as plasma collection cen-
ters.
   Talecris, a Delaware corporation and wholly owned sub-
sidiary of Talecris Biotherapeutics Holdings Corp. (Talecris
Holdings), also a Delaware corporation, 5 operates plasma
the $1 million in rental income and disallowance of the $1 million Sched-
ule E deduction, then the $87,868 in additional depreciation is allowable.
   3 Petitioners concede: (1) $2,773 in ordinary dividend income; (2) $1,808

in qualified dividend income; (3) $20,699 in interest income; and (4)
$34,343 in Schedule E income as set forth in the notice of deficiency. Peti-
tioners further concede a $463 utility expense deduction. Petitioners agree
that respondent properly adjusted the total amount of deductions peti-
tioners claimed on Schedule A, Itemized Deductions, for 2008 by increasing
the deductions by $14,747.
   4 The parties stipulate that petitioners maintained a mailing address in

Ohio at the time they filed their petition.
   5 On June 1, 2011, Grifols Therapeutics, Inc., a Spanish corporation

headquartered in Barcelona, Spain, acquired Talecris Holdings and all of
its subsidiaries, including Talecris.
(306)                STOUGH v. COMMISSIONER                          309


collection centers in various locations throughout the conti-
nental United States for the purpose of manufacturing and
selling plasma protein therapeutics.
  On December 15, 2006, SDC and Talecris entered into a
development agreement and related guaranty agreement
wherein SDC agreed to acquire real property in a location
acceptable to Talecris and to construct a plasma collection
center pursuant to Talecris’ specifications. Attached as an
exhibit to the development agreement was a proposed lease
to be entered into by SDC and Talecris once the plasma
collection center project was complete. The proposed lease
required Talecris to lease the plasma collection center from
SDC for an initial term of 10 years. Petitioner negotiated the
terms of both the development agreement and the proposed
lease on behalf of SDC, while James H. Moose acted as the
lead negotiator for Talecris. 6
  On September 10, 2007, pursuant to the terms of the
development agreement, SDC acquired title via general war-
ranty deed to a parcel of real property in North Carolina (NC
property). In order to fund the acquisition of the NC property
and to facilitate the subsequent construction of the plasma
collection center, SDC took out a commercial loan with PNC
Bank. Petitioner was personally liable for the commercial
loan. Talecris was not liable on or obligated to make pay-
ments under the commercial loan.
  On September 24, 2007, SDC transferred to Wintermans,
LLC (Wintermans), title to the NC property via general war-
ranty deed. Wintermans is an Ohio limited liability company
wholly owned by petitioner and is treated as a disregarded
entity for purposes of Federal income tax for the taxable year
2008.
  On February 19, 2008, SDC received a certificate of occu-
pancy for the newly constructed plasma collection center.
Talecris moved into the plasma collection center sometime in
February 2008. Although the proposed lease between
Talecris and SDC had not yet been executed when Talecris
moved into the plasma collection center, Talecris began
paying rent on March 1, 2008.
 6 Mr. Moose was an executive at Talecris from 2005 to 2010. When Mr.

Moose retired from Talecris in 2010, his title was senior vice president.
310           144 UNITED STATES TAX COURT REPORTS                     (306)


   On June 6, 2008, Wintermans and Talecris executed the
proposed lease 7 whereby Talecris agreed to lease the plasma
collection center from Wintermans for 10 years. There is no
indication and the parties do not argue that the terms of the
proposed lease and the final lease differ. The lease required
Talecris to pay monthly rent to Wintermans, and the rent
would be determined by a mathematical formula based on
‘‘project costs’’ that SDC incurred in acquiring and developing
the plasma collection center. Article 1 of the lease defines
project costs as ‘‘the sum of (a) the Acquisition Costs, (b) the
Hard Construction Costs, (c) the Soft Construction Costs, and
(d) the Financing Costs.’’ The calculation of monthly rent to
be paid by Talecris to Wintermans involves a two-step
process: (1) project costs are multiplied by 90% to arrive at
‘‘base rent’’; 8 and (2) base rent is multiplied by 125% and
then divided by 12 to arrive at monthly rent.
   Section 4.1(a)(v) of the lease allows Talecris, on or before
the commencement date, to provide written notice to
Wintermans to elect to pay or reimburse Wintermans in a
lump sum for any portion of the project costs. Section
4.1(a)(v) of the lease provides:
    (v) Notwithstanding any other provisions of this Lease to the contrary,
  Tenant may, by written notice given by Tenant to Landlord on or prior
  to the Commencement Date, elect to pay or reimburse Landlord in a
  lump sum for any portion of the Project Costs as Tenant may specify in
  such notice. If Tenant makes such an election, Tenant shall, on or prior
  to the Commencement Date, make a lump sum payment to Landlord in
  respect of Project Costs in the amount specified in Tenant’s notice of
  election, and, for purposes of determining the Assumed Term Loan Prin-
  cipal Amount, the Assumed Term Loan Amortization Amount and the
  Base Rent, the Project Costs and the Maximum Project Costs shall be
  reduced by the amount of such payment.

Because rent is a function of project costs, a lump-sum pay-
ment under section 4.1(a)(v) of the lease would reduce project
costs, and consequently, reduce the amount of rent that
Talecris owed under the lease. It was within the sole discre-
  7 Talecris and SDC executed the December 15, 2006, development agree-

ment with a related guaranty and proposed lease. The final lease of the
plasma collection center, executed on June 6, 2008, involved Talecris and
Wintermans.
  8 In years 6–10 of the lease, Talecris’ base rent increases to 103% of the

base rent in effect for the immediately preceding lease year.
(306)                 STOUGH v. COMMISSIONER                            311


tion of Talecris to make an election under section 4.1(a)(v) of
the lease and to determine the amount of such lump-sum
payment.
   As of April 1, 2008, there was an outstanding balance of
$2,365,400.72 owed by SDC on the commercial loan. On April
17, 2008, Talecris made a $1 million lump-sum payment to
Wintermans pursuant to section 4.1(a)(v) of the lease. 9 Peti-
tioners applied the $1 million lump-sum payment to the out-
standing balance of the PNC Bank commercial loan.
   Talecris issued to Wintermans a Form 1099–MISC, Mis-
cellaneous Income (original Form 1099–MISC), reporting
rents of $1,151,493.18 for 2008. This amount represents
$151,493.18 in monthly rent for the plasma collection center
along with the $1 million lump-sum payment pursuant to
section 4.1(a)(v) of the lease.
   Petitioners jointly filed a Form 1040, U.S. Individual
Income Tax Return, for 2008. On one of the Schedules E
attached to the return petitioners reported rents received of
$1,151,493 in connection with the plasma collection center
rental. Among the deductions that petitioners claimed on this
Schedule E was a $1 million ‘‘contribution to construct’’
expense. Certified Public Accountant (C.P.A.) Thomas D.
Heldman prepared petitioners’ Form 1040 for 2008.
   On April 16, 2010, respondent began an examination of
petitioners’ 2008 tax return. In a letter dated November 18,
2010, Michael V. Paul, chief operating officer of SDC, wrote
to Staci Baranchak, Talecris’ accounts payable manager,
requesting, inter alia, that Talecris amend the original Form
1099–MISC issued to Wintermans to treat the $1 million
lump-sum payment as a ‘‘buy-down reimbursement’’ of
construction cost. At a date not specified in the record,
Talecris issued to Wintermans a corrected Form 1099–MISC
(corrected Form 1099–MISC), reporting rents of $151,493.18
for 2008.
   On January 12, 2011, respondent issued to petitioners a
notice of deficiency for 2008, disallowing the claimed $1 mil-
lion Schedule E deduction but increasing petitioners’ basis in
   9 Although the lease was not executed until June 6, 2008, the parties

agree that the $1 million lump-sum payment was made pursuant to sec-
tion 4.1(a)(v), the terms of which are identical in both the proposed lease
and the final lease. It is unclear from the record whether Talecris provided
written notice of its election to Wintermans.
312           144 UNITED STATES TAX COURT REPORTS                     (306)


the plasma collection center and allowing petitioners $87,868
in additional depreciation. 10 Petitioners timely filed a peti-
tion disputing the determinations in the notice of deficiency.

                                OPINION

   As a general rule, the Commissioner’s determinations in
the notice of deficiency are presumed correct, and the tax-
payers bear the burden of proving that the determinations
are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). Pursuant to section 7491(a)(1), the burden of
proof with respect to relevant factual issues may shift to the
Commissioner. Specifically, section 7491(a)(1) provides: ‘‘If, in
any court proceeding, a taxpayer introduces credible evidence
with respect to any factual issue relevant to ascertaining the
liability of the taxpayer for any tax imposed by subtitle A or
B, the Secretary shall have the burden of proof with respect
to such issue.’’ Section 7491(a)(2) further provides that the
burden of proof shifts to the Commissioner only when the
taxpayer has: (1) ‘‘complied with the requirements under this
title to substantiate any item’’, and (2) ‘‘maintained all
records required under this title and has cooperated with
reasonable requests by the Secretary for witnesses, informa-
tion, documents, meetings, and interviews’’. ‘‘ ‘Credible evi-
dence is the quality of evidence which, after critical analysis,
the court would find sufficient upon which to base a decision
on the issue if no contrary evidence were submitted’ ’’. Higbee
v. Commissioner, 116 T.C. 438, 442 (2001) (quoting H.R.
Conf. Rept. No. 105–599, at 240–241 (1998), 1998–3 C.B.
747, 994–995). Because we decide this case on the preponder-
ance of the evidence, the allocation of the burden of proof
does not affect the outcome and need not be decided. See
Knudsen v. Commissioner, 131 T.C. 185, 189 (2008).
1. Rental Income
  The first issue for decision is whether the $1 million lump-
sum payment made by Talecris to Wintermans pursuant to
  10 Thebasis increase is allocated as follows: (1) $241,999.66 to the land;
(2) $626,526.53 to the plasma collection center building; and (3)
$131,473.81 to fixtures. This results in additional depreciation for 2008 of
$12,737 for the plasma collection center building and $75,131 for the fix-
tures.
(306)                    STOUGH v. COMMISSIONER                                313


section 4.1(a)(v) of the lease constitutes rental income to peti-
tioners for 2008. Although petitioners initially reported this
amount as rental income on one of their Schedules E, they
now argue that this reporting was in error and that the $1
million lump-sum payment does not constitute rental income
for 2008. Specifically, petitioners argue that the $1 million
lump-sum payment was not intended as rent by the parties
to the lease but rather was meant to reimburse petitioners
for leasehold improvements to the plasma collection center.
Respondent argues that ‘‘the $1,000,000.00 payment received
by the petitioners from * * * [Talecris] is considered addi-
tional rental income to the petitioners pursuant to Treasury
Regulation § 1.61–8(c) and was properly reported as such on
petitioners’ 2008 Form 1040.’’
   Section 61(a) defines gross income to mean all income from
whatever source derived, including rental payments received
or accrued during the taxable year. Sec. 61(a)(5); sec. 1.61–
8(a), Income Tax Regs. Section 1.61–8(c), Income Tax Regs.,
provides, in pertinent part:
    (c) Expenditures by lessee.—As a general rule, if a lessee pays any of
  the expenses of his lessor such payments are additional rental income
  of the lessor. If a lessee places improvements on real estate which con-
  stitute, in whole or in part, a substitute for rent, such improvements
  constitute rental income to the lessor. Whether or not improvements
  made by a lessee result in rental income to the lessor in a particular
  case depends upon the intention of the parties, which may be indicated
  either by the terms of the lease or by the surrounding circumstances.
  * * *

  When a lessee pays an expense or obligation incurred by
the lessor in bringing the leased property into existence,
there is a direct economic benefit to the lessor to the extent
that the lessor is relieved of his or her financial obligations.
Under these circumstances there is no ambiguity regarding
the financial benefit that the lessor receives. That being the
case, there need be no inquiry into the intent of the lessor
and lessee unless the lessee’s payments were unrelated to
the lease. In the instant case there is no question that the
$1 million lump-sum payment was made pursuant to the
terms of the lease; was optional at the election of the lessee;
was to ‘‘reimburse’’ the lessor for ‘‘project costs’’ 11 incurred
  11 The   lease clearly defines ‘‘project costs’’ as the sum of acquisition costs,
                                                    Continued
314          144 UNITED STATES TAX COURT REPORTS                      (306)


and paid by the lessor in bringing the property into exist-
ence; and reduced the lessee’s future rents otherwise due.
Given these facts the $1 million lump-sum payment falls
within the purview of section 1.61–8(c), Income Tax Regs., as
the lessee’s payment of the lessor’s expenses and therefore
constitutes rent without the need to inquire into the subjec-
tive intent of the parties. See Satterfield v. Commissioner,
T.C. Memo. 1975–203, 1975 Tax Ct. Memo LEXIS 170.
   Petitioners nevertheless argue that the subjective intent of
the parties should control. We disagree because this is not a
case of improvements made by a lessee. A lessee’s payment
for leasehold improvements may or may not result in rental
income to the lessor depending on the intent of the parties,
which may be indicated by the terms of the lease or by the
surrounding circumstances. Id.; see M.E. Blatt Co. v. United
States, 305 U.S. 267 (1938). There may be situations where
an improvement made by a lessee is not intended to com-
pensate a lessor. Indeed, an improvement by a lessee might
be worthless or even provide a detriment to the lessor. For
example, the useful life of such an ‘‘improvement’’ by the les-
see may not extend beyond the term of the lease, in which
case it has no value to the lessor and, in fact, may impose
a financial detriment if the lessor is responsible for its
removal upon termination of the lease. Here the lessee made
no leasehold improvements. Rather, the lessee exercised its
option to pay $1 million to petitioners in order to reduce the
amount of ‘‘project costs’’ for purposes of calculating annual
rent.
   Even if we were to look into the parties’ intentions, the
terms of the lease and the surrounding circumstances con-
vince us that the $1 million lump-sum payment was intended
as payment for the use of the leased property. First, the
operative provision allowing for the lessee’s election of a
lump-sum payment—section 4.1(a)(v)—is included within
article IV of the lease, entitled ‘‘RENT’’. Second, Mr. Moose
testified that the purpose of lease section 4.1(a)(v) was to
‘‘provide Talecris flexibility in the amount of rental payments

hard construction costs, soft construction costs, and financing costs. At a
minimum, acquisition and financing costs do not constitute a reimburse-
ment for leasehold improvements to the plasma collection center.
(306)                 STOUGH v. COMMISSIONER                           315


that they would be liable for in the future’’. 12 Third, both
parties to the lease treated the $1 million lump-sum payment
as rent before respondent’s examination of petitioners’ 2008
tax return. Talecris reported the $1 million payment as
‘‘rent’’ on the original Form 1099–MISC, and petitioners
reported the $1 million payment as rents received on one of
their Schedules E. Although the intention of the parties is
not determinative in the instant matter, we find that the
terms of the lease and the surrounding circumstances
indicate that the lessor and the lessee intended the $1 mil-
lion lump-sum payment to be rent.
2. Section 467
   Petitioners argue alternatively that, if we determine the $1
million lump-sum payment to be rental income, they are
entitled to report the payment ratably over the 10-year life
of the lease pursuant to section 467. In other words, peti-
tioners argue that only a portion of the $1 million lump-sum
payment is includible as income for 2008. Respondent argues
that petitioners are required to include the entire $1 million
payment they received from Talecris in gross income for the
year of receipt (i.e., 2008) under section 467. Both parties
base their respective arguments on section 467 and the regu-
lations thereunder. Neither party cites any caselaw to sup-
port those arguments, and the issue is one of first impression
in this Court.
   Congress enacted section 467 to prevent lessors and lessees
from mismatching the reporting of rental income and
expenses. H.R. Rept. No. 98–861 (1984), 1984–3 C.B. (Vol. 2)
1, 143; Staff of J. Comm. on Taxation, General Explanation
of the Revenue Provisions of the Deficit Reduction Act of
1984, at 285–288 (J. Comm. Print 1984). Section 467 pro-
vides accrual methods for allocating rents pursuant to a ‘‘sec-
tion 467 rental agreement’’. In order to qualify as a section
467 rental agreement, an agreement must have: (1)
increasing/decreasing rents or deferred/prepaid rents and (2)
aggregate rental payments exceeding $250,000. Sec.
467(d)(2); sec. 1.467–1(c)(1), Income Tax Regs. Both parties
  12 That Mr. Moose and petitioner testified that they did not consider the

lump-sum payment to be ‘‘rent’’ is completely at odds with the terms of the
$1 million option and the effect of its exercise.
316            144 UNITED STATES TAX COURT REPORTS                     (306)


agree that the lease in this case qualifies as a section 467
rental agreement. 13
  a. Allocation
  The accrual methods applicable to a section 467 rental
agreement are set forth in section 467(b), which provides in
part:
      SEC. 467(b). ACCRUAL OF RENTAL PAYMENTS.—
         (1) ALLOCATION FOLLOWS AGREEMENT.—Except as provided in para-
      graph (2), the determination of the amount of the rent under any sec-
      tion 467 rental agreement which accrues during any taxable year shall
      be made—
           (A) by allocating rents in accordance with the agreement, and
           (B) by taking into account any rent to be paid after the close of
         the period in an amount determined under regulations which shall
         be based on present value concepts.

Section 467(b)(1)(B) is inapplicable in the instant case, and
the parties do not argue otherwise. Therefore, except as pro-
vided in section 467(b)(2), the rent determination for any
rental period under section 467(b)(1)(A) is made by ‘‘allo-
cating rents in accordance with the agreement’’. Section
467(b)(2) provides for the use of the constant rental accrual
method in certain situations. As we explain infra, the con-
stant rental accrual method is inapplicable in the situation
before us.
  Section 467(h) directs the Secretary to ‘‘prescribe such
regulations as may be appropriate to carry out the purposes
of this section’’. The first case to apply section 467 was Pic-
cadilly Cafeterias, Inc. v. United States, 36 Fed. Cl. 330
(1996), which was decided before the promulgation of any
temporary or final regulations. There the parties’ dispute
revolved around whether a lease that specified a rent pay-
ment schedule could be construed to be an allocation within
the meaning of section 467(b)(1)(A). Id. at 332–333. In the
absence of regulations the Court of Federal Claims held that
a rent payment schedule could act as an allocation within the
meaning of section 467(b)(1)(A) and required the taxpayer to
report rent in accordance with the rent payment schedule.
Id. at 335.
  13 The lease qualifies as a sec. 467 rental agreement because the rental

payments increase in lease years 6–10 and the lease has aggregate rental
payments exceeding $250,000.
(306)                 STOUGH v. COMMISSIONER                              317


  Subsequently, on May 18, 1999, the Internal Revenue
Service issued final regulations under section 467 that apply
to the case before us. T.D. 8820, 1999–1 C.B. 1209. In gen-
eral these regulations require a lessor and lessee to treat
rents consistently and, in certain cases involving tax avoid-
ance, require the parties to account for rent and interest
under a prescribed method. Section 1.467–1(c), Income Tax
Regs., sets forth rules for allocating rent to a rental period
when a section 467 rental agreement contains a specific
allocation schedule and also in the absence of such specific
allocation schedule. Section 1.467–1(c)(2)(ii), Income Tax
Regs., provides:
     (ii) Fixed rent allocated to a rental period.—(A) Specific allocation.—
  (1) In general.—If a rental agreement provides a specific allocation of
  fixed rent, as described in paragraph (c)(2)(ii)(A)(2) of this section, the
  amount of fixed rent allocated to each rental period during the lease
  term is the amount of fixed rent allocated to that period by the rental
  agreement.
     (2) Rental agreements specifically allocating fixed rent.—A rental
  agreement specifically allocates fixed rent if the rental agreement
  unambiguously specifies, for periods no longer than a year, a fixed
  amount of rent for which the lessee becomes liable on account of the use
  of the property during that period, and the total amount of fixed rent
  specified is equal to the total amount of fixed rent payable under the
  lease. For example, a rental agreement providing that rent is $100,000
  per calendar year, and providing for total payments of fixed rent equal
  to the total amount specified, specifically allocates rent. A rental agree-
  ment stating only when rent is payable does not specifically allocate rent.
     (B) No specific allocation.—If a rental agreement does not provide a
  specific allocation of fixed rent (for example, because the total amount
  of fixed rent specified is not equal to the total amount of fixed rent pay-
  able under the lease), the amount of fixed rent allocated to a rental
  period is the amount of fixed rent payable during that rental period. If
  an amount of fixed rent is payable before the beginning of the lease
  term, it is allocated to the first rental period in the lease term. If an
  amount of fixed rent is payable after the end of the lease term, it is allo-
  cated to the last rental period in the lease term.
     [Emphasis added.]

   In applying this regulation to the facts of this case we first
find that the lease in question does not ‘‘specifically allocate’’
fixed rent to any rental period within the meaning of section
1.467–1(c)(2)(ii)(A), Income Tax Regs. However, the lease
does provide for a fixed amount of rent payable during the
rental period (i.e., rent payable pursuant to the terms of the
lease). Accordingly, in the absence of a ‘‘specific’’ allocation in
318            144 UNITED STATES TAX COURT REPORTS                  (306)


the rental agreement, the amount of rent payable in 2008
must be allocated to petitioners’ 2008 rental period pursuant
to section 1.467–1(c)(2)(ii)(B), Income Tax Regs., which pro-
vides that ‘‘the amount of fixed rent allocated to a rental
period is the amount of fixed rent payable during that rental
period.’’ Therefore, petitioners are required to include as
gross income the entire $1 million lump-sum payment made
pursuant to the terms of the lease for the year of receipt,
2008.
  b. Constant Rental Accrual
   Petitioners argue that they should be permitted to use the
constant rental accrual method provided in section 467(b)(2)
in order to spread their rental income to other years. How-
ever, this method is inapplicable because it was intended to
allow the Commissioner to rectify tax avoidance situations,
and the regulations provide that this method ‘‘may not be
used in the absence of a determination by the Commis-
sioner’’. Sec. 1.467–3(a), Income Tax Regs. No determination
was made by respondent concerning tax avoidance. In addi-
tion, the constant rental accrual method applies to disquali-
fied leasebacks and long-term agreements. Sec. 1.467–3(b),
Income Tax Regs. The lease sub judice is neither. 14 Finally,
any argument that section 467(b)(3)(B), which provides for
use of the constant rental accrual method if ‘‘such agreement
does not provide for the allocation referred to in paragraph
(1)(A)’’, does not apply since we have already held that there
was an allocation pursuant to the agreement within the pur-
view of paragraph (1)(A) of section 467(b) and section 1.467–
 14 Sec.   1.467–3(b)(2) and (3), Income Tax Regs., provides:
   (2) Leaseback.—A section 467 rental agreement is a leaseback if the
 lessee (or a related person) had any interest (other than a de minimis
 interest) in the property at any time during the two-year period ending
 on the agreement date. For this purpose, interests in property include
 options and agreements to purchase the property (whether or not the
 lessee or related person was considered the owner of the property for
 Federal income tax purposes) and, in the case of subleased property, any
 interest as a sublessor.
   (3) Long-term agreement.—(i) In general.—A section 467 rental agree-
 ment is a long-term agreement if the lease term exceeds 75 percent of
 the property’s statutory recovery period.
(306)                 STOUGH v. COMMISSIONER                           319


1(c)(2)(ii)(B), Income Tax Regs. Therefore, the constant rental
accrual method does not apply to this matter.
  c. Proportional Rental Accrual
   With respect to section 467 rental agreements that do not
provide for adequate interest on prepaid or deferred rent, the
fixed rent for any rental period is the proportional rental
amount. Sec. 1.467–1(d)(2)(ii), Income Tax Regs. Section
1.467–2(a), Income Tax Regs., describes section 467 rental
agreements to which the proportional rental method applies:
    (a) Section 467 rental agreements for which proportional rental
  accrual is required.—Under § 1.467–1(d)(2)(ii), the fixed rent for each
  rental period is the proportional rental amount, computed under para-
  graph (c) of this section, if—
    (1) The section 467 rental agreement is not a disqualified leaseback or
  long-term agreement under § 1.467–3(b); and
    (2) The section 467 rental agreement does not provide adequate
  interest on fixed rent under paragraph (b) of this section.

As discussed above the lease before us is neither a disquali-
fied leaseback nor a long-term rental agreement, and the
parties make no argument to the contrary. Therefore the
proportional rental accrual method will apply if the section
467 rental agreement at issue ‘‘does not provide adequate
interest on fixed rent under paragraph (b) of this section.’’
Sec. 1.467–2(a)(2), Income Tax Regs. (emphasis added). Con-
cerning adequate interest on fixed rent, section 1.467–2(b),
Income Tax Regs., provides:
    (b) Adequate interest on fixed rent.—(1) In general.—A section 467
  rental agreement provides adequate interest on fixed rent if, dis-
  regarding any contingent rent—
    (i) The rental agreement has no deferred or prepaid rent as described
  in § 1.467–1(c)(3);
    [Emphasis added.]

  Petitioner argues that the $1 million lump-sum payment is
prepaid rent. Section 1.467–1(c)(3)(ii), Income Tax Regs.,
defines prepaid rent as follows:
     (ii) Prepaid rent.—A rental agreement has prepaid rent under this
  paragraph (c)(3) if the cumulative amount of rent payable as of the close
  of a calendar year exceeds the cumulative amount of rent allocated as of
  the close of the succeeding calendar year (determined under paragraph
  (c)(3)(iii) of this section). [Emphasis added.]
320          144 UNITED STATES TAX COURT REPORTS                        (306)


Section 1.467–1(c)(3)(iv), Example (2), Income Tax Regs., pro-
vides the following example which is instructive in com-
paring the ‘‘cumulative amount of rent payable as of the close
of a calendar year’’ to the ‘‘cumulative amount of rent allo-
cated as of the close of the succeeding calendar year.’’
(Emphasis added.)
   Example 2. (i) A and B enter into a rental agreement that provides
 for a 10-year lease of personal property, beginning on January 1, 2000,
 and ending on December 31, 2009. The rental agreement provides for
 accruals of rent of $10,000 during each month of the lease term. Under
 paragraph (c)(3)(iii) of this section, $120,000 is allocated to each calendar
 year. The rental agreement provides for a $1,200,000 payment on
 December 31, 2000.
   (ii) The rental agreement does not have increasing or decreasing rent
 as described in paragraph (c)(2)(i) of this section. The rental agreement,
 however, provides prepaid rent under paragraph (c)(3)(ii) of this section
 because the cumulative amount of rent payable as of the close of a cal-
 endar year exceeds the cumulative amount of rent allocated as of the close
 of the succeeding calendar year. For example, the cumulative amount of
 rent payable as of the close of 2000 ($1,200,000 is payable on December
 31, 2000) exceeds the cumulative amount of rent allocated as of the close
 of 2001, the succeeding calendar year ($240,000). Accordingly, the rental
 agreement is a section 467 agreement.
   [Emphasis added.]

   The lease entered into between Talecris and Wintermans
does not provide for prepaid rent. First, it is necessary to
determine ‘‘the cumulative amount of rent payable as of the
close of * * * [the] calendar year’’. In 2008 Talecris paid rent
to Wintermans totaling $1,151,493.18 ($151,493.18 of
monthly rent for the plasma collection center and a $1 mil-
lion lump-sum payment pursuant to section 4.1(a)(v) of the
lease). Therefore, the cumulative amount of rent payable by
Talecris as of the close of the 2008 calendar year is
$1,151,493.18. Second, it is necessary to ascertain ‘‘the cumu-
lative amount of rent allocated as of the close of the suc-
ceeding calendar year’’ (i.e., 2009). As previously held, the
lease at issue does not specifically allocate fixed rent to any
rental period within the meaning of section 1.467–
1(c)(2)(ii)(A), Income Tax Regs. In the absence of a specific
allocation, the amount allocated to each year is the amount
payable for each rental period. Sec. 1.467–1(c)(2)(ii)(B),
Income Tax Regs. Although the record before us does not
include the exact amount of rent payable by Talecris for the
(306)                    STOUGH v. COMMISSIONER                          321


2009 calendar year, Talecris did have rent payable during
2009 based on the mathematical formula contained in the
lease. It follows logically that the cumulative amount of rent
payable as of the close of 2008 ($1,151,493.18) will not exceed
the cumulative amount of rent allocated as of the close of
2009 ($1,151,493.18 plus rent payable during 2009). Accord-
ingly, the section 467 rental agreement does not have pre-
paid rent pursuant to section 1.467–1(c)(3)(ii), Income Tax
Regs.
  Because the section 467 rental agreement has no prepaid
rent, it is deemed to have ‘‘adequate interest on fixed rent’’
under section 1.467–2(b), Income Tax Regs. As discussed
above, one requirement for the application of the proportional
rental accrual method is that ‘‘[t]he section 467 rental agree-
ment does not provide adequate interest on fixed rent’’. Sec.
1.467–2(a)(2), Income Tax Regs. Pursuant to section 1.467–
2(b), Income Tax Regs., 15 the lease between Talecris and
Wintermans does provide for adequate interest on fixed rent.
We hold that the proportional rental accrual method does not
apply and therefore petitioners must report the $1 million
lump-sum payment for 2008.
3. Section 6662(a) Accuracy-Related Penalty
  Respondent determined that petitioners were liable for a
section 6662(a) accuracy-related penalty of $58,117.20 for
2008. Section 6662(a) and (b)(2) imposes a 20% accuracy-
related penalty on any portion of an underpayment attrib-
utable to a substantial understatement of income tax. Section
7491(c) provides that the Commissioner bears the burden of
production with regard to penalties and must come forward
with sufficient evidence indicating that it is appropriate to
impose the penalty. See Higbee v. Commissioner, 116 T.C.
438, 446 (2001). However, once the Commissioner meets his
burden of production, the burden of proof remains with the
taxpayers, including the burden of proving that the penalty
  15 Sec.   1.467–2(b), Income Tax Regs., provides, in pertinent part:
    (b) Adequate interest on fixed rent.—(1) In general.—A section 467
  rental agreement provides adequate interest on fixed rent if, dis-
  regarding any contingent rent—
    (i) The rental agreement has no deferred or prepaid rent as described
  in § 1.467–1(c)(3); * * *
322           144 UNITED STATES TAX COURT REPORTS                      (306)


is inappropriate because of reasonable cause under section
6664. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at
446–447.
   There is a substantial understatement of income tax for
any taxable year if the amount of the understatement for the
taxable year exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000. Sec.
6662(d)(1)(A). Petitioners’ understatement of income tax
exceeds the greater of 10% of the tax required to be shown
on their return or $5,000. 16
   Respondent has met his burden of production in that he
has shown that petitioners improperly offset the $1 million
lump-sum payment through a Schedule E deduction and that
the understatement is substantial. See Longoria v. Commis-
sioner, T.C. Memo. 2009–162, 2009 Tax Ct. Memo LEXIS
162, at *31.
   Petitioners argue that they had reasonable cause because
they relied on the advice of their C.P.A., Mr. Heldman. 17
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment
if it is shown that there was reasonable cause for the tax-
payers’ position and that the taxpayers acted in good faith
with respect to that portion. See Higbee v. Commissioner, 116
T.C. at 448.
   ‘‘Reasonable cause requires that the taxpayer have exer-
cised ordinary business care and prudence as to the disputed
item.’’ Neonatology Assocs., P.A. v. Commissioner, 115 T.C.
43, 98 (2000), aff ’d, 299 F.3d 221 (3d Cir. 2002). The good-
faith reliance on the advice of an independent, competent
professional as to the tax treatment of an item may meet this
requirement. Id. (citing United States v. Boyle, 469 U.S. 241
(1985)); sec. 1.6664–4(b), Income Tax Regs. Whether a tax-
payer relies on the advice and whether such reliance is
reasonable hinge on the facts and circumstances of the case
and the law that applies to those facts and circumstances.
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. at 98;
sec. 1.6664–4(c)(1), Income Tax Regs. For the reliance to be
   16 Petitioners reported a $143,773 tax liability on their 2008 return. The

correct liability to be shown was over twice that amount.
   17 Petitioners concede that the accuracy-related penalty applies to por-

tions of the underpayment attributable to all adjustments in the notice of
deficiency which they previously conceded.
(306)             STOUGH v. COMMISSIONER                   323


reasonable, ‘‘the taxpayer must prove by a preponderance of
the evidence that the taxpayer meets each requirement of
the following three-prong test: (1) The adviser was a com-
petent professional who had sufficient expertise to justify
reliance, (2) the taxpayer provided necessary and accurate
information to the adviser, and (3) the taxpayer actually
relied in good faith on the adviser’s judgment.’’ Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. at 99.
   We are satisfied that petitioners’ 2008 tax return was pre-
pared by a competent professional with sufficient expertise.
However, at trial petitioner testified that he ‘‘[b]riefly’’
reviewed the 2008 tax return before signing it and did not
review the Schedule E at issue. Mr. Heldman testified that
he did not sit down with petitioners to discuss the prepared
tax return before petitioners signed the return. Uncondi-
tional reliance on a tax return preparer or C.P.A. does not
by itself constitute reasonable reliance in good faith; tax-
payers must also exercise ‘‘[d]iligence and prudence.’’ Estate
of Stiel v. Commissioner, T.C. Memo. 2009–278, 2009 Tax Ct.
Memo LEXIS 273, at *5 (quoting Marine v. Commissioner, 92
T.C. 958, 992–993 (1989), aff ’d without published opinion,
921 F.2d 280 (9th Cir. 1991)). Taxpayers have a duty to read
their returns. ‘‘Reliance on a preparer with complete informa-
tion regarding a taxpayer’s business activities does not con-
stitute reasonable cause if the taxpayer’s cursory review of
the return would have revealed errors.’’ Id. (citing Metra
Chem Corp. v. Commissioner, 88 T.C. 654, 662–663 (1987)).
Petitioner was a successful businessman who should have
recognized that the $1 million Schedule E deduction for ‘‘con-
tribution to construct’’ was money that, even had it been
related to the acquisition and construction of the plasma
collection center, would not have been deductible in total in
2008. In fact, the deduction was intended to cancel out the
$1 million in rental income that petitioner now claims was
improperly reported. Claiming reliance on Mr. Heldman and
choosing to not adequately review the contents of a tax
return is not reasonable reliance in good faith, and we will
not permit petitioners to avoid an accuracy-related penalty
for substantially understating their income tax liability.
Accordingly, we hold that petitioners are liable for the
accuracy-related penalty under section 6662(a).
324        144 UNITED STATES TAX COURT REPORTS          (306)


  In reaching our decision, we have considered all arguments
made by the parties, and to the extent not mentioned or
addressed, they are irrelevant or without merit.
  To reflect the foregoing,
                     Decision will be entered under Rule 155.

                       f
