                  T.C. Summary Opinion 2004-173



                     UNITED STATES TAX COURT



    JAMES EDWARD AND BRENDA DIANNE STARKOVICH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3979-04S.            Filed December 21, 2004.



     James Edward and Brenda Dianne Starkovich, pro sese.

     Abbey B. Garber, for respondent.



     DEAN, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.   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.   The decision
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to be entered is not reviewable by any other court, and this

opinion should not be cited as authority.

     Respondent determined for 2001 a deficiency in petitioners'

Federal income tax of $15,408 and an accuracy-related penalty of

$3,082 under section 6662(a).

     The issues for decision are whether petitioners:   (1)

Received unreported income during 2001; and (2) are liable for

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

                              Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   Petitioners

resided in McKinney, Texas, at the time the petition was filed.

     During 2001, James Edward Starkovich (petitioner) was a

residential and commercial painting contractor, and Brenda Dianne

Starkovich was a homemaker.    Petitioners timely filed their 2001

Federal income tax return.

     Attached to petitioners' return was a Schedule C, Profit or

Loss From Business, on which petitioner reported gross receipts

of $32,400 and expenses of $23,658 from his painting activities.

     Petitioner worked at an apartment complex owned by Golden

Leaf, Inc. (Golden Leaf), performing repairs and maintenance,

painting apartments, and staining fences in 2001.   Golden Leaf

paid petitioner by check for his work at the apartments.   During
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2001, petitioner received and cashed 13 checks from Golden Leaf.

The checks totaled $85,097.

     During 2001, respondent received a Form W-2, Wage and Tax

Statement, from Labor Ready Central III LP reporting that $52 in

wages was paid to petitioner.    Respondent also received a Form

1099-MISC, Miscellaneous Income, from Metroplex Design Builders

reporting that $1,450 in nonemployee compensation had been paid

to petitioner during 2001.

     Respondent issued a notice of deficiency for 2001

determining that petitioners had unreported income of $52,697

from services rendered, and determining an accuracy-related

penalty under section 6662(a) of $3,082.

                              Discussion

     Generally, the Commissioner's determinations of unreported

income in a notice of deficiency are presumed correct, and the

taxpayer has the burden of proving that those determinations are

erroneous.    See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).   In some cases the burden of proof with respect to

relevant factual issues may shift to the Commissioner under

section 7491(a).   Petitioners did not present evidence or

argument that they satisfied the requirements of section 7491(a),

and, therefore, the burden of proof does not shift to respondent.
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A.   Unreported Income

     Petitioner contends that he was involved in a fraudulent

kickback scheme involving Ione Morgan (Ms. Morgan), who works as

a live-in manager for Golden Leaf; her husband, Bob Morgan; and

his brother, Chester Morgan.    Petitioner alleges that he would

receive a check from Golden Leaf in an amount greater than what

he was owed for services he performed.      In exchange for receiving

the contracting job, petitioner would cash that check and remit

the overage to Bob Morgan.    Petitioner says he kept track of

these transactions but a fire at his home on August 22, 2001,

destroyed the records.

     Petitioner claims that at the end of 2001 he tried to

terminate his involvement in the scheme, but Ms. Morgan and her

husband told him that his family would be endangered by the other

individuals involved in the scheme.

     In her testimony, Ms. Morgan denied that she was involved in

a kickback scheme with petitioner.      She stated that petitioner

was paid for services rendered on various projects for Golden

Leaf.   When petitioner completed a job, he would submit an

invoice to Ms. Morgan.   Ms. Morgan would submit the invoice to

Mr. Yeh, president of Golden Leaf, and Mr. Yeh would write a

check to petitioner.

     Petitioners have not provided evidence sufficient to refute

respondent's determination.    The Court finds that petitioners
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have failed to meet their burden and sustains respondent's

determination with respect to the 2001 unreported income.

B.   Accuracy-Related Penalty

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

production in any court proceeding with respect to the liability

of any individual for any penalty or addition to tax.        Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001).    In order to meet his

burden of production, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the accuracy-related penalty.    Id. at 446.   Once the Commissioner

meets his burden of production, the taxpayer must come forward

with evidence sufficient to persuade a court that the

Commissioner's determination is incorrect.     Id. at 447.

     Respondent determined that petitioners are liable for the

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

imposes a 20-percent penalty on the portion of an understatement

attributable to any one of various factors, including negligence

or disregard of rules or regulations and a substantial

understatement of income tax.    See sec. 6662(b)(1) and (2).

"Negligence" includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code,

including any failure to keep adequate books and records or to

substantiate items properly.    See sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs.    A "substantial understatement"
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includes an understatement of tax of $5,000 or more.     See sec.

6662(d); sec. 1.6662-4(b), Income Tax Regs.

     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 taxpayer's

position and that the taxpayer acted in good faith with respect

to that portion.   The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

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

important factor is the extent of the taxpayer's effort to assess

his proper tax liability for the year.     Id.

     Petitioner failed to keep adequate books and records

reflecting his income.   See sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs.   There is also an understatement of tax greater

than $5,000.   The Court concludes that respondent has produced

sufficient evidence to show that the accuracy-related penalty

under section 6662 is appropriate.     Nothing in the record

indicates petitioners acted with reasonable cause and in good

faith.   The Court holds that the record supports respondent's

determination that petitioners are liable for the

accuracy-related penalty.
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    Reviewed and adopted as the report of the Small Tax Case

Division.

    To reflect the foregoing,

                                             Decision will be

                                        entered for respondent.
