                               T.C. Memo. 2015-247



                         UNITED STATES TAX COURT



           MICHAEL TSEYTIN AND ELLA TSEYTIN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 354-12.                            Filed December 28, 2015.



      Frank Agostino, Brian D. Burton, and Lawrence A. Sannicandro, for

petitioners.

      Marco Franco, for respondent.



                           MEMORANDUM OPINION


      SWIFT, Judge: Respondent determined a $30,478 deficiency in petitioners’

2007 Federal income tax and a $6,096 penalty under section 6662(a).

      For purposes of calculating the amount or portion of the total $23,099,420

that Michael Tseytin (petitioner) received in cash in a corporate merger that is
                                           -2-

[*2] taxable to him under section 356(a)(1)(B), the two issues for decision are: (1)

whether petitioner is to be treated as the owner of the two blocks of stock involved

in the merger or whether he is to be treated with respect to one of the blocks of

stock merely as an agent or nominee and (2) if he is to be treated as the owner of

both blocks of stock, whether petitioner may subtract the $527,298 loss he realized

on one of the blocks of stock from the $17,324,565 gain to be recognized on the

other block of stock. We must also decide whether petitioner is liable for a

penalty under section 6662(a).

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for 2007, and all Rule references are to the Tax Court

Rules of Practice and Procedure. Respondent has conceded that under section

6015(f) petitioner Ella Tseytin has been relieved from joint and several liability for

the tax deficiency and penalty at issue.

                                     Background

      This case was submitted under Rule 122. The stipulated facts are so found.

At the time of filing the petition, petitioner resided in New Jersey.

       In early 2007 and a number of prior years petitioner owned stock in US

Strategies, Inc. (USSI), a New Jersey corporation, which owned a majority (91%)

interest in two limited liability companies organized under the laws of the Russian
                                         -3-

[*3] Federation, which in turn owned and operated Pizza Hut and Kentucky Fried

Chicken franchises throughout the Russian Federation.

      Archer Consulting Corp. (Archer), apparently an unrelated legal entity

organized under the laws of the British Virgin Islands, owned 250 shares (or 25%)

of the issued and outstanding shares of stock in USSI (Archer shares).

      Petitioner owned the other 750 shares (or 75%) of the issued and

outstanding shares of stock in USSI (non-Archer shares) and had a zero tax basis

in the non-Archer shares.

      Unidentified key employees of USSI’s two limited liability companies

owned a minority 9% stock interest in each of the two limited liability companies.

      AmRest Holdings, NV (AmRest), a corporation unrelated to USSI and

organized under the laws of the Netherlands and the shares of which were publicly

traded on the Warsaw Stock Exchange, owned and operated Pizza Hut, Kentucky

Fried Chicken, Burger King, and Starbucks franchises throughout Central and

Eastern Europe.

      In May 2007 USSI, AmRest, and petitioner agreed to the merger of USSI

into AmRest. The merger was to qualify as a tax-free reorganization under

sections 356 and 368(a), subject to the requirement of section 356(a)(1)(B)

regarding cash received in the merger.
                                        -4-

[*4] For the sole purpose of facilitating the transfer and merger of USSI into

AmRest, AmRest formed AmRest Acquisition Subsidiary, Inc. (AA Subsidiary),

as a wholly owned subsidiary of AmRest.1

      In order to effect the transfer and merger, petitioner agreed to purchase the

Archer shares for $14 million and then to transfer to AmRest 100% of the shares

of stock in USSI for a total consideration that turned out to be worth

approximately $54 million.

      Below we summarize further details regarding the USSI-AmRest merger,

the Archer shares, and the transfer of the USSI stock to AmRest.

Merger Agreement

      On May 20, 2007, USSI, AmRest, and petitioner entered into the Agreement

and Plan of Merger (AmRest agreement). The AmRest agreement provided that

“USSI shall be merged into * * * [AmRest] and the separate existence of USSI

shall thereupon cease.”

      In article 5.4(d) of the AmRest agreement petitioner warranted that before

the merger he would hold of record and own beneficially all 1,000 shares of USSI




      1
      In this opinion and for convenience, hereinafter we ignore AA Subsidiary,
and we treat the merger as between USSI and AmRest.
                                         -5-

[*5] stock free and clear of any restrictions on transfer, contracts, commitments,

equities, claims, or demands.

      Under additional terms of the AmRest agreement, in exchange for

transferring all of the USSI stock to AmRest, petitioner was to receive as

consideration approximately $26.4 million in cash and AmRest stock equal to

approximately $21.6 million.2

      Archer was not a party to the AmRest agreement.

The Archer Shares

      As stated, under the May 20, 2007, AmRest agreement petitioner was to

acquire the 250 Archer shares he did not then own, and he was to be the owner of

100% of the USSI stock before closing of the USSI-AmRest merger.

      On May 25, 2007, petitioner entered into a securities purchase agreement

with Archer (Archer agreement), under which he agreed to purchase the Archer

shares for $14 million.

      Under the Archer agreement, petitioner was to receive “all right, title and

interest in and to the Archer shares, free and clear of all liens, claims and other




      2
       Because of foreign exchange rates, rounding, and differences in the parties’
arithmetic calculations, some of the numbers set forth in our opinion are
approximate.
                                        -6-

[*6] encumbrances” and he agreed to purchase the Archer shares for his “own

account.”

      AmRest was not a party to the Archer agreement.

      Petitioner’s purchase of the Archer shares closed on June 14, 2007.

Further Events and Amended Merger Agreement

      In further preparation for the USSI-AmRest merger, petitioner took a

number of actions as sole shareholder of USSI, including amending its bylaws,

appointing himself its sole director, and giving shareholder approval for the

merger.

      On July 2, 2007, USSI, AmRest, and petitioner executed an amendment to

the AmRest agreement (AmRest amendment) under which the amount of cash

petitioner was to receive on the merger was decreased to $23,099,420.

      Archer was not a party to the AmRest amendment.

      On July 2, 2007, the merger between USSI and AmRest closed. By transfer

into his bank account petitioner received the $23,099,420 cash, and he received

the AmRest stock which then had a market value of approximately $30,791,390.

      On July 5, 2007, from the $23,099,420 cash petitioner received, petitioner

paid Archer the $14 million owed to Archer for the Archer shares.
                                        -7-

[*7] Both the AmRest agreement and the AmRest amendment specify that each

share of USSI stock was being exchanged for an equal portion of the total merger

consideration (namely, $53,890,810).3

      As reflected in the summary below (and treating the Archer and the non-

Archer blocks of USSI stock as separate blocks of stock and ignoring petitioner’s

argument that he never owned the 250 Archer shares), on the basis of a pro rata

allocation of the $53,890,810 total merger consideration to all 1,000 shares of

USSI stock, petitioner realized on the merger: (1) a $527,298 short-term capital

loss on the transfer to AmRest of the 250 Archer shares and (2) a $40,418,107

long-term capital gain on the transfer to AmRest of the 750 Non-Archer shares:

                                                Archer            Non-Archer
            Item                                Shares              Shares
250 Archer shares transferred
 25% of total consideration received          $13,472,702
      Less cost basis                          14,000,000
 Short-term capital loss realized               (527,298)

750 non-Archer shares transferred
 75% of total consideration received                            $40,418,107
      Less cost basis                                                -0-
 Long-term capital gain realized                                 40,418,107




      3
          $23,099,420 cash + $30,791,390 stock value = $53,890,810.
                                        -8-

[*8] Petitioner’s Original 2007 Filed Tax Return

      On October 15, 2008, petitioner filed his 2007 Form 1040, U.S. Individual

Income Tax Return. On Schedule D, Capital Gains and Losses, thereof, petitioner

treated the 1,000 shares of stock in USSI involved in the merger as one block of

stock, all owned and transferred by him to AmRest.

      Petitioner treated the $23,099,420 cash received as taxable, but he reduced

that amount by the $5,977,733 portion of his $14 million total cost basis in the

USSI stock which he allocated to the cash received.4

      Accordingly, on his return petitioner reported a net taxable long-term capital

gain of $17,121,687 relating to the $23,099,420 cash boot he received on the

USSI-AmRest merger and a total Federal income tax due of $3,780,522.

Petitioner’s Amended 2007 Tax Return

      On October 6, 2009, petitioner submitted to respondent a 2007 Form

1040X, Amended U.S. Individual Income Tax Return.




      4
       On his original return petitioner’s allocation of $5,977,733 of his total cost
in the USSI stock to the $23,099,420 cash he received on the merger was
calculated using the percentage (42.7%) of the total cash petitioner received
divided by the total consideration petitioner received (i.e., $23,099,420 ÷
$54,099,420 = 42.7%).
                                         -9-

[*9] Consistent with his original return, on Schedule D of his amended return

petitioner treated all 1000 shares of stock in USSI as owned and transferred by

him to AmRest.

      However, inconsistent with his original return, on his amended return

petitioner treated the 250 Archer shares as separate from the 750 non-Archer

shares, and in calculating the taxable portion of the $23,099,420 total cash

petitioner received, petitioner ignored the $30.7 million value of the AmRest

shares that he received and that constituted part of the total merger consideration.

      First, petitioner treated 25%5 (or $5,774,855) of the total $23,099,420 cash

received as allocable to the 250 Archer shares, and he subtracted therefrom the

$14 million cost of the Archer shares, producing on his amended return a claimed

short-term capital loss of $8,225,145 relating to his transfer to AmRest of the

Archer shares.6

      Next, petitioner treated the 75% balance (or $17,324,565) of the

$23,099,420 total cash received as allocable to the non-Archer shares with a zero

basis, and he reported with regard to the non-Archer shares a resulting taxable



      5
       25% represented the percentage of all USSI shares transferred that
constituted Archer shares.
      6
          $5,774,855 cash ! cost basis of $14,000,000 = a loss of $8,225,145.
                                       - 10 -

[*10] long-term capital gain of $17,324,565, an increase of $202,878 over the

$17,121,687 long-term gain reported on his original return relating to the merger.

      Petitioner then on his amended return effectively offset or reduced the

$17,324,565 long-term capital gain to be recognized relating to the non-Archer

shares by the $8,255,245 short-term capital loss on the Archer shares, for a

reported net long-term capital gain relating to the USSI-AmRest merger of

$9,099,3207 and a reduced reported total tax liability of $2,577,182.

      To date petitioner has paid $2,732,428 toward his 2007 Federal income tax

liability, and he now seeks a refund of the amount paid in excess of the $2,577,182

reported tax due.

Respondent’s Audit and Determination

      On audit and in a notice of deficiency respondent treated the Archer and

non-Archer shares of USSI stock as owned by petitioner and as separate blocks of

stock with identifiable and different cost bases (as did petitioner on his amended

return). Respondent calculated the taxable amount or portion of the $23,099,420

total cash received on the merger using the total $53,890,810 merger

consideration--not just the $23,099,420 total cash received (as petitioner had done

on his amended return). As a result of respondent’s calculations, the amount of

      7
          $17,324,565 ! $8,225,245 = $9,099,320.
                                         - 11 -

[*11] petitioner’s long-term capital gain petitioner realized on the transfer of the

non-Archer shares increased to $40,418,107,8 and the entire $17,324,565 (i.e.,

75% of the total cash received allocable to the non-Archer shares) was charged or

taxed to petitioner as long-term capital gain.

      Reflected below are respondent’s calculations relating to the merger

separately with respect to the Archer and non-Archer shares of: (1) the short-term

capital loss petitioner realized; (2) the long-term capital gain petitioner realized;

(3) the amount of petitioner’s cost basis allocable to each block of stock; (4) the

amount of petitioner’s realized loss to be recognized and allowed to reduce the

taxable portion of petitioner’s long-term capital gain; and (5) the amount or

portion of petitioner’s realized gain to be recognized and taxed as cash boot.

The allocation of the total cash and stock petitioner received is:

      Total value of cash and stock petitioner received                   $53,890,810
      25% allocable to Archer Shares                                       13,472,702
      75% allocable to non-Archer shares                                   40,418,107




      8
          75% of $53,890,810 = $40,418,107.
                                        - 12 -

[*12]            Item                    Archer Shares         Non-Archer Shares

        Petitioner realized               $13,472,702             $40,418,107
        Less petitioner’s cost basis       14,000,000                  -0-
        Short-term loss realized           ($527,297)

        Long-term gain realized                                    40,418,107
        Gain/Loss to be recognized
         and taxed:
          Short-term loss to be
           recognized                            -0-

          75% of $23,099,240
           cash boot                                               17,324,565

As indicated above, relying on the loss disallowance rule of section 356(c),

respondent did not allow the $527,297 short-term capital loss realized on the

Archer shares to reduce or to be netted against the $40,418,107 long-term capital

gain realized on the non-Archer shares or to reduce the $17,324,564 portion of the

cash boot to be recognized and taxed.

        As a result of the above calculations, respondent determined for petitioner a

total 2007 Federal income tax liability of $3,811,000--a deficiency of $30,478

(based on petitioner’s originally reported 2007 $3,780,522 tax liability) and a

$6,095 accuracy-related penalty under section 6662(a).
                                         - 13 -

[*13]                                 Discussion

        On brief petitioner acknowledges that on his original 2007 Federal income

tax return the 1,000 shares of USSI stock were incorrectly treated as a single block

of stock, and he agrees that (as reflected on his amended return) those shares of

stock consisted of two separate blocks of stock.

        With regard to the Archer shares petitioner makes two arguments.

Petitioner argues for the first time that in transferring the Archer shares to AmRest

he acted only as a nominee or agent for Archer, that he never owned the Archer

shares, and that we should treat the Archer shares as either sold directly by Archer

to AmRest or as redeemed by USSI or by AmRest from Archer. According to his

argument, petitioner would treat $14 million (the amount paid to Archer for the

Archer shares) of the $23,099,420 total cash consideration received from AmRest

as not received by him, but rather as received by and taxable to Archer.

        In the alternative and if he is to be treated as owner of the Archer shares on

their transfer to AmRest, petitioner argues he should be allowed to subtract the

$527,297 short-term capital loss realized on the transfer of the Archer shares from

the $17,324,564 long-term gain to be recognized and taxed as cash boot.
                                        - 14 -

[*14] Petitioner’s Agency or Redemption Argument

      Although the Commissioner is authorized to look through the form of a

transaction to its substance, taxpayers have considerably less freedom to do so.

See Estate of Durkin v. Commissioner, 99 T.C. 561 (1992). As the Supreme Court

has stated: “[w]hile a taxpayer is free to organize his affairs as he chooses,

nevertheless, once having done so, he must accept the tax consequences of his

choice, whether contemplated or not”. Commissioner v. Nat’l Alfalfa Dehydrating

& Milling Co., 417 U.S. 134, 149 (1974).

      The rule binding taxpayers to the form of their transaction is not absolute.

The Court of Appeals for the Third Circuit, to which an appeal of this case would

lie, has developed and continues to apply the Danielson rule where a taxpayer

seeks to disavow the form of a transaction. The Danielson rule stands for the

proposition that, absent proof of mistake, fraud, undue influence, duress, or the

like, which would be recognizable under local law in a dispute between the parties

to an agreement, a taxpayer generally will be held to the terms or form of an

agreement entered into. Commissioner v. Danielson, 378 F.2d 771, 775 (3d Cir.

1967), vacating and remanding 44 T.C. 549 (1965); Life Care Comtys. of Am.,

Ltd. v. Commissioner, T.C. Memo. 1997-95. This rule, among other things, seeks

to prevent taxpayer challenges to the form of an agreement that, if successful,
                                        - 15 -

[*15] would nullify the reasonably predictable tax consequences for other parties

to the agreement, grant a unilateral reformation of the contract with a resulting

unjust enrichment, or permit a party to use the tax laws to obtain relief from an

unfavorable agreement. See Commissioner v. Danielson, 378 F.2d at 775.

      Petitioner has not challenged the agreements before us on the grounds of

fraud, mistake, undue influence, duress, or the like. Under the Danielson rule

petitioner is prohibited from challenging the form of the transactions before us.

      Even if petitioner were not bound by the form of the transactions he entered

into, the stipulated evidence convincingly supports the conclusion that petitioner

purchased the Archer shares from Archer on his own behalf and then transferred

them to AmRest.

      Petitioner warranted he would hold of record and beneficially own all 1,000

shares of USSI stock. Petitioner received all right, title, and interest in the Archer

shares, and he agreed to purchase them for his own account. Petitioner acted as

sole shareholder of USSI, amending USSI’s bylaws, appointing himself sole

director, and approving the merger.

      No persuasive evidence before us would support a finding of a nominee or

agency relationship between petitioner and Archer or that the Archer shares of

stock in USSI were redeemed from Archer by USSI or by AmRest.
                                        - 16 -

[*16] Petitioner purchased from Archer the Archer shares of stock in USSI in a

related and essentially simultaneous transaction independent from the merger and

then transferred to AmRest the Archer shares he had purchased.

       Neither AmRest nor USSI was a party to the stock purchase agreement

between petitioner and Archer. Archer was not a party to the merger agreement

between petitioner and AmRest. In the calculations on his original and amended

tax returns, petitioner reported the Archer shares as having been owned by him

and transferred by him to AmRest. The substance of the transactions before us

reflects and is consistent with their form.

      As determined by respondent, petitioner is to be treated as the recipient of

and is taxable on the portion of the cash boot he received on the merger that is

allocable to the Archer shares.

Petitioner’s Alternative Argument

      Petitioner argues in the alternative that if he is to be treated as owner and

transferor to AmRest of the Archer shares and as recipient of the total cash

involved in the merger transaction, he should be entitled to subtract the $527,297

loss he realized on the Archer shares against the $17,324,565 gain to be
                                        - 17 -

[*17] recognized on the non-Archer shares and to report a reduced total net long-

term capital gain of $16,797,268.9

      To support his alternative argument, petitioner cites a number of authorities

and argues that section 356(c) should be interpreted only as prohibiting the tax

recognition of a net bottom line cumulative loss on a merger transaction and that

internal netting of losses and gains should be allowed of different blocks of stock

involved in a merger transaction up to, but limited by, the total amount of the

overall gain to be recognized.

      However, petitioner goes much further than any authority which he cites

might suggest. As respondent points out, if (contrary to the loss disallowance rule

of section 356(c)) internal netting were allowable here it would allow only the

$527,297 loss petitioner realized on the Archer shares to reduce the $40,418,107

gain petitioner realized on the non-Archer shares, and petitioner’s tax liability

herein would be significantly increased over the tax liability determined by

respondent (i.e., petitioner would be taxed on the entire $23,099,420 cash boot

that he received).10


      9
          $17,324,565 ! $527,297 = $16,797,268.
      10
        Netting the $527,297 short-term loss realized against the $40,418,107 gain
realized produces a net realized gain of $39,890,810, and petitioner would be
                                                                      (continued...)
                                        - 18 -

[*18] We agree with respondent.

      Petitioner’s argument and citations relating to the internal netting of losses

and gains realized on separate blocks of stock in a merger transaction are not

apropos and are not helpful to petitioner. As stated, even if internal netting were

allowable, petitioner cites no authority that would allow a loss realized to offset or

be netted against a gain to be recognized. We reject petitioner’s alternative

argument.

      Petitioner argues that in Rev. Rul. 74-515, 1974-2 C.B. 118, the

Commissioner rejected a key and relevant part of his earlier ruling in Rev. Rul. 68-

23, 1968-1 C.B. 144, in which a loss realized on a block of stock was not allowed

to offset a gain realized on another block of stock. Petitioner cites Gordon E.

Warnke, “Developments, Theories and Themes in Stock Basis”, 86 Taxes 85, 119-

120 (2008), Michael L. Schler, “Rebooting Section 356: Part 2 -- The

Regulations”, 128 Tax Notes 379 (2010), and N.Y. State Bar Ass’n Tax Section,

“Report on Final Regulations Regarding Allocation of Basis Under Section 358

and Related Matters”, Doc 2007-27372; 2007 TNT 241-18 (Dec. 2007).




      10
        (...continued)
required to recognize the amount of that gain limited only by the total $23,099,420
amount of the cash boot received.
                                          - 19 -

[*19] Petitioner argues that the 2006 regulations, T.D. 9244, 2006-8 I.R.B. 463,

and 2009 proposed regulations, Notice of Proposed Rulemaking, 74 Fed. Reg.

3509, 3509, 3511, 3519 (Jan. 21, 2009), can be construed to allow internal netting

of a loss realized on one block of stock against a gain realized on another block of

stock so long as a net overall gain is still realized.

      Respondent cites Rev. Rul. 68-23, supra, wherein, as stated, the

Commissioner concluded that, in determining gain or loss on a merger transaction

to which section 356 applies, blocks of stock in which a taxpayer has different

bases are to be considered separately, and a loss on one block of stock may not

offset or reduce a gain recognized on another block of stock.

      Respondent cites the Court of Appeals for the Fifth Circuit’s opinion in

Lakeside Irr. Co. v. Commissioner, 128 F.2d 418 (5th Cir. 1942), aff’g 41 B.T.A.

892 (1940), involving the loss disallowance rule of section 267 applicable to

related party transactions. In that case the Court of Appeals affirmed a decision of

the Board of Tax Appeals and explained:

      But where, as here, four unrelated lots of stock were separately
      acquired and might readily have been separately sold, the fact that
      after ascertaining the value of each lot all were transferred together
      for a lump price will not require or authorize a merger of costs. The
      United States may inquire as to which stocks were disposed of at a
      profit and tax the profit, and may ignore losses altogether on the
                                       - 20 -

      [*20] disposal of other stocks, though realized at the same time and in
      the same transaction. * * *

Id. at 419.

      Respondent also cites Curtis v. United States, 336 F.2d 714, 722 (6th Cir.

1964), which involved a corporate reorganization. Therein the Court of Appeals

for the Sixth Circuit quoted Lakeside Irr. Co. extensively and disallowed the

netting of losses and gains and applied the rule of Lakeside Irr. Co. to a merger

transaction to which section 356 applies. This Court has cited both Curtis and

Lakeside Irr. Co. approvingly. See U.S. Holding Co. v. Commissioner, 44 T.C.

323, 333 (1965).

      As stated, under his alternative argument petitioner would be taxed only on

a net gain of $16,797,268 on the merger transaction, an amount that can be

reached only by netting his realized loss on the Archer shares against his gain to

be recognized on his non-Archer shares. No authority has been cited that would

support such a calculation.

      With regard to petitioner’s alternative argument, we conclude that petitioner

may not net his realized loss on the Archer shares against the gain to be

recognized and taxed on the non-Archer shares.
                                        - 21 -

[*21] Section 6662(a) Penalty

      Respondent’s determination of a $6,096 accuracy-related penalty under

section 6662(a) relates to petitioner’s filed original 2007 Federal income tax return

in which petitioner reported the exchange of the 1,000 shares of USSI stock as a

single block of stock, even though the 1,000 shares clearly constituted two blocks

of stock with different bases and different holding periods.

      Section 6662(a) imposes a penalty equal to 20% of the portion of an

underpayment attributable to, among other things, “[n]egligence or disregard of

rules or regulations.” Sec. 6662(b)(1). For the purposes of this penalty, “the term

‘negligence’ includes any failure to make a reasonable attempt to comply with the

provisions of * * * [the Internal Revenue Code], and the term ‘disregard’ includes

any careless, reckless, or intentional disregard.” Sec. 6662(c).11

      However, the accuracy-related penalty under section 6662(a) does not apply

to any portion of an underpayment if it is shown there was reasonable cause for,

and that the taxpayer acted in good faith with respect to, such portion. See sec.

6664(c)(1); Carlson v. Commissioner, 116 T.C. 87, 107 (2001). Generally, the

most important factor in determining whether a taxpayer acted in good faith is “the

      11
       Petitioner’s $30,478 understatement of income tax, see sec. 6662 (b)(2),
does not qualify as a sec. 6662(d)(1) “substantial understatement”, and the
substantial authority defense of sec. 6662(d)(2)(B)(i) is not available to petitioner.
                                        - 22 -

[*22] extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.”

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

      Under section 7491(c), the Commissioner has the burden of production with

respect to a proposed section 6662(a) accuracy-related penalty. Once the

Commissioner meets that burden of production, however, the taxpayer continues

to have the burden of proof with regard to whether the Commissioner’s

determination of the penalty is correct. Rule 142(a); Higbee v. Commissioner, 116

T.C. 438, 446 (2001). The taxpayer also bears the burden of proof with respect to

any reasonable cause defense. See Williams v. Commissioner, 123 T.C. 144, 153

(2004).

      Respondent determined the section 6662(a) penalty using petitioner’s

original 2007 tax return in which petitioner treated separate blocks of stock as a

single block, a treatment for which there was no reasonable basis in law and that

petitioner has not even attempted to defend. Petitioner has not presented sufficient

evidence to establish good-faith reliance on the advice of a tax professional or that

his reliance on a tax professional was reasonable. See Neonatology Assocs., P.A.

v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

      For penalty purposes, petitioner points us to some authority that he argues

supports his amended return and his alternative argument to the effect that related
                                          - 23 -

[*23] gains and losses in a merger transaction should be allowed to offset each

other.12 Therefrom petitioner argues that the acknowledged error in his original

tax return should be overlooked. However, respondent’s penalty is based on

petitioner’s position on his original return, not on his amended return. The cited

authority does not support the error petitioner acknowledges was made in his

original 2007 return.

      We conclude that respondent has met his burden of production with regard

to the accuracy-related penalty based on negligence or disregard of rules or

regulations, and petitioner has failed to meet his burden of proving that he acted

with reasonable cause and in good faith. We sustain respondent’s determination

of petitioner’s liability for the accuracy-related penalty under section 6662(a).

      To reflect the foregoing,


                                                   Decision will be entered

                                          for respondent.




      12
           See the authorities cited supra pp. 18-19.
