                   T.C. Summary Opinion 2011-111



                      UNITED STATES TAX COURT



                   PHILLIP DORIS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25551-09S.              Filed September 19, 2011.



     Phillip Doris, pro se.

     Audra M. Dineen, for respondent.



     HAINES, Judge:   This case was heard pursuant to section 7463

of the Internal Revenue Code in effect when the petition was

filed.1   Pursuant to section 7463(b), the decision to be entered

is not reviewable by any other court, and this opinion shall not

be treated as precedent for any other case.


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended for the year at issue, and
Rule references are to the Tax Court Rules of Practice and
Procedure. Amounts are rounded to the nearest dollar.
                               - 2 -

     Respondent determined a deficiency of $6,824 and an

accuracy-related penalty pursuant to section 6662(a) of $1,365

with respect to petitioner’s 2006 Federal income tax.    After

concessions, the issues for decision are:    (1) Whether petitioner

is entitled to deductions claimed on Schedule A, Itemized

Deductions, for unreimbursed employee business expenses; (2)

whether petitioner is entitled to deductions claimed on Schedule

C, Profit or Loss From Business, for expenses related to his kart

racing activity; and (3) whether petitioner is liable for the

accuracy-related penalty pursuant to section 6662(a).

                            Background

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

The stipulation of facts and the supplemental stipulation of

facts, together with the attached exhibits, are incorporated

herein by this reference.   At the time petitioner filed his

petition, he resided in California.

     Petitioner is employed as a correctional officer by the

State of California at San Quentin State Prison (San Quentin) and

has held this position since 1982.     In 2006 petitioner worked an

average of 60 hours per week at San Quentin, earning wages of

$178,528.   As a correctional officer, petitioner is required to

complete 40 hours of annual training covering, among other

things, weapons qualification, use of pepper spray, use of force,

sexual harassment, cell extractions, and gang activity.    This
                                - 3 -

training is provided by the in-service training department at San

Quentin to teach correctional officers the proper techniques to

use on the job.   Petitioner is also required to complete a

quarterly weapons qualifications test.    This test is conducted at

San Quentin, and San Quentin provides all necessary weapons and

ammunition for this test.

     Correctional officers at San Quentin are required to

purchase two types of uniforms.    Class A uniforms, which are

formal dress uniforms, must be worn by a correctional officer for

certain types of activities, such as public posts, court details,

the transportation of inmates, and other special events.    Class B

uniforms are more casual and consist of either a pair of jeans

and a shirt or a jumpsuit.

     Petitioner enrolled in additional self-defense instruction

and practiced martial arts not required by San Quentin.    He also

purchased ammunition for personal use as well as tactical

trousers, a radio holder, pepper spray, a baton, and a lapel.

None of these purchases were required by San Quentin.

     Petitioner spent much of his spare time at raceways and

working on race karts (kart racing activity). Petitioner began

racing karts in the early 1980s and enjoyed racing karts and

being around speedways.    In 2005 petitioner began offering karts

to customers for rent.    He used the name Doris Racing for this

activity and charged $50 for 20-30 minutes of use of his karts.
                                - 4 -

Doris Racing was the first time petitioner tried to operate a

kart racing activity or any other activity in this manner.

Petitioner did not advertise Doris Racing in local publications.

     Petitioner did not maintain a separate bank account for

Doris Racing.   Petitioner’s records consist of handwritten notes

and certain receipts related to Doris Racing.    Petitioner’s

records were created at the end of every month.    Petitioner did

not keep a log in 2006 tracking his income and expenses from

Doris Racing.   Petitioner’s kart racing activity never earned a

profit, and in 2007 petitioner stopped operating Doris Racing.

     On July 27, 2009, respondent issued a statutory notice of

deficiency to petitioner denying his Schedule A deductions for

unreimbursed employee business expenses and Schedule C deductions

with respect to Doris Racing.   On October 23, 2009, petitioner

timely mailed his petition to this Court.

                            Discussion

I.   Unreimbursed Employee Business Expenses

     On his Schedule A, petitioner reported unreimbursed employee

business expenses consisting of the following:

     Uniform purchases                          $3,770
     Uniform cleaning                            2,360
     Subscriptions                                 640
     Self-defense instruction                    5,965
     Weapons, range fees, and ammunition         7,340
                                                20,075

Deductions are a matter of legislative grace, and the taxpayer

must prove he is entitled to the deductions claimed.     Rule
                                - 5 -

142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).    Section 162(a) provides that “There shall be allowed as

a deduction all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

business”.    Taxpayers are required to maintain records sufficient

to establish the amounts of allowable deductions and to enable

the Commissioner to determine the correct tax liability.    Sec.

6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999).    Respondent

disallowed each of petitioner’s above-listed deductions as

personal.    We consider each in the order listed.

      1.    Uniform Purchases and Uniform Cleaning

     Petitioner claimed a deduction for uniforms purchased and

uniform cleaning for his job as a correctional officer at San

Quentin.    Expenses for work clothing are deductible if the

clothing or uniform is of a type specifically required as a

condition of employment, the uniform is not adaptable to general

use as ordinary clothing, and the uniforms are not worn as

ordinary clothing.    Yeomans v. Commissioner, 30 T.C. 757, 767-769

(1958); Wasik v. Commissioner, T.C. Memo. 2007-148; Beckey v.

Commissioner, T.C. Memo. 1994-514.

     Petitioner was required to purchase uniforms for his job at

San Quentin, and we are satisfied that at least the class A

uniforms required by San Quentin are not adaptable to general use

and are not worn as ordinary clothing.    Nonetheless, petitioner

received a uniform allowance from San Quentin of $530 in 2006.      A
                                - 6 -

uniform receipt for $309 was the only evidence petitioner

produced outside of his own testimony to substantiate his claimed

uniform purchase expense.    Because petitioner received an

allowance in excess of his substantiated costs, he is not

entitled to a deduction.

     Petitioner’s only evidence to substantiate his claimed

uniform cleaning expense is a credit card statement showing an

$18 dry cleaning charge.    The credit card statement does not

state whether this expense was incurred to clean petitioner’s

uniforms.    Further, even if we were to assume this expense was

incurred for that purpose, the $18 fits within petitioner’s

uniform allowance for 2006.    Accordingly, we sustain respondent’s

determination with respect to uniform purchases and cleaning.

     2.     Subscriptions

     Petitioner has failed to present any evidence to

substantiate his $640 claimed deduction for subscriptions.

Accordingly, we sustain respondent’s determination with respect

to the subscriptions.
                                - 7 -

3.   Self-Defense Instruction

     Expenditures made by a taxpayer for education are

deductible, with certain exceptions not relevant here,2 if

the education either:

          (1) Maintains or improves skills required by the
     individual in his employment or other trade or business; or

          (2) Meets the express requirements of the individual’s
     employer, or the requirements of applicable law or
     regulations, imposed as a condition to the retention by the
     individual of an established employment relationship,
     status, or rate of compensation.

Sec. 1.162-5(a), Income Tax Regs.   Whether education maintains or

improves skills required by the taxpayer in his business is a

question of fact.   Boser v. Commissioner, 77 T.C. 1124, 1131

(1982), affd. without published opinion (9th Cir., Dec. 22,

1983); Joseph v. Commissioner, T.C. Memo. 2005-169.    The fact

that a taxpayer’s education is helpful to him in the performance

of his duties does not establish that its cost is a deductible

business expense.   Joseph v. Commissioner, supra.    Taxpayers must

show that there is a direct and proximate relationship between

the education expense and the skills required in their business.

Boser v. Commissioner, supra at 1131.

     Petitioner conceded at trial that outside self-defense

instruction was not required by San Quentin.   He decided to take


     2
      Otherwise qualifying expenses are not deductible if the
education (1) is required in order to meet the minimum
educational requirements for qualification in the taxpayer’s
employment, or (2) qualifies the taxpayer for a new trade or
business. Sec. 1.162-5(b), Income Tax Regs.
                                 - 8 -

self-defense classes because he felt that the extra knowledge

would help him deal with the dangers that come with working at a

prison.    All correctional officers at San Quentin received 40

hours of annual training, including training on the use of force.

Petitioner has failed to present any evidence describing the

nature of his self-defense instruction and whether such training

is consistent with the training required by San Quentin.

Further, petitioner has not presented any evidence to

substantiate the cost and amount paid for the claimed deduction.

Accordingly, we sustain respondent’s determination with respect

to the self-defense instruction.

     4.     Weapons, Range Fees, and Ammunition

     Petitioner presented four documents to substantiate

miscellaneous weapons expenses totaling approximately $385.      The

first document is an invoice for an $85 expense related to

petitioner’s personal firearm.    Petitioner has not presented

proof of payment with respect to this expense.    Accordingly, we

sustain respondent’s determination with respect to the firearm.

     The second and third documents are receipts for purchases

from Quartermaster, a uniform and equipment manufacturing

company.    The first receipt, dated August 9, 2006, shows a

payment of $102 with petitioner’s credit card for tactical

trousers, a radio holder, and pepper spray.    The second receipt,

dated September 8, 2006, shows a payment of $173 with

petitioner’s credit card for two pairs of tactical pants, a
                                - 9 -

baton, and a lapel.   Petitioner has substantiated that these

expenses were incurred; however, he has not presented any

evidence outside of his own self-serving testimony to establish

that they were required for his job at San Quentin.   Accordingly,

we sustain respondent’s determination with respect to

petitioner’s purchases from Quartermaster.

      Next, petitioner presented a $26 receipt from Northbay

Firearms for weapon cleaning.   Petitioner conceded that this

expense was incurred to clean his personal firearm.   Accordingly,

we sustain respondent’s determination with respect to

petitioner’s expense at Northbay Firearms.

      Finally, petitioner has failed to present any evidence of

expenses incurred with respect to range fees or ammunition.

Accordingly, we sustain respondent’s determination with respect

to range fees and ammunition.

II.   Petitioner’s Kart Racing Activity

      We must next decide whether petitioner’s kart racing

activity for 2006 amounts to a trade or business pursuant to

section 162(a) and, if so, whether petitioner has substantiated

his claimed deductions with respect to this activity.   To be

engaged in a trade or business, an individual must be involved in

an activity with continuity and regularity and the primary

purpose for engaging in the activity must be for income or

profit.   Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).    A

sporadic activity, a hobby, or an amusement diversion does not
                                - 10 -

qualify.    Id.   Deciding whether an individual is carrying on a

trade or business requires an examination of the facts involved

in each case.     Higgins v. Commissioner, 312 U.S. 212, 217 (1941).

     Under section 183(b)(2), if an individual engages in an

activity without the primary objective of making a profit,

deductions attributable to the activity are allowable only to the

extent of gross income from the activity.     See Allen v.

Commissioner, 72 T.C. 28, 33 (1979).     The Court of Appeals for

the Ninth Circuit, to which an appeal in this case would lie

absent stipulation to the contrary, has held that an activity is

engaged in for profit if the taxpayer’s “predominant, primary or

principal objective” in engaging in the activity was to realize

an economic profit independent of tax savings.     Wolf v.

Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), affg. T.C. Memo.

1991-212.    The taxpayer generally bears the burden of

establishing that the activity was engaged in for profit.     See

Rule 142(a).

     Section 1.183-2(b), Income Tax Regs., sets forth a

nonexclusive list of factors to be considered in evaluating a

taxpayer’s profit objective:    (1) The manner in which the

taxpayer carries on the activity; (2) the expertise of the

taxpayer or his advisers; (3) the time and effort expended by the

taxpayer in carrying on the activity; (4) the expectation that

assets used in the activity may appreciate in value; (5) the

success of the taxpayer in carrying on other similar or
                                - 11 -

dissimilar activities; (6) the taxpayer’s history of income or

losses with respect to the activity; (7) the amount of occasional

profits, if any, from the activity; (8) the financial status of

the taxpayer; and (9) elements of personal pleasure or

recreation.    Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d

724, 726-727 (9th Cir. 1986), affg. Lahr v. Commissioner, T.C.

Memo. 1984-472; Antonides v. Commissioner, 91 T.C. 686, 694 n.4

(1988), affd. 893 F.2d 656 (4th Cir. 1990); Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax

Regs.    No single factor or group of factors is determinative.

Golanty v. Commissioner, supra at 426; Dunn v. Commissioner, 70

T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980); sec.

1.183-2(b), Income Tax Regs.    A final determination is made only

after considering all facts and circumstances.     Indep. Elec.

Supply, Inc. v. Commissioner, supra at 727; Antonides v.

Commissioner, supra at 694; Golanty v. Commissioner, supra at

426.

       “The proper focus of the test * * * is the taxpayer’s

subjective intent. * * * However, objective indicia may be used

to establish that intent.”     Skeen v. Commissioner, 864 F.2d 93,

94 (9th Cir. 1988), affg. Patin v. Commissioner, 88 T.C. 1086

(1987); see also Wolf v. Commissioner, supra at 713; Indep. Elec.

Supply, Inc. v. Commissioner, supra at 726.    The expectation of

making a profit need not be reasonable.     Beck v. Commissioner, 85
                              - 12 -

T.C. 557, 569 (1985); Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), affd. without published opinion 702 F.2d 1205 (D.C. Cir.

1983); Golanty v. Commissioner, supra at 425-426.     However,

greater weight is given to objective facts than to a taxpayer’s

self-serving statement of intent.   Indep. Elec. Supply, Inc. v.

Commissioner, supra at 726; Antonides v. Commissioner, supra at

694; Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985), affd. 792

F.2d 1256 (4th Cir. 1986).   To make our determination, we address

the nine factors found in section 1.183-2(b), Income Tax Regs.

See Lowe v. Commissioner, T.C. Memo. 2010-129.

     1. The Manner in Which the Taxpayer Carries On the Activity

     The fact that the taxpayer carries on the activity in a

businesslike manner may indicate that the activity is engaged in

for profit.   Sec. 1.183-2(b)(1), Income Tax Regs.   Three common

inquiries are considered in this context:   (1) Whether the

taxpayer maintained complete and accurate books and records for

the activity; (2) whether the taxpayer conducted the activity in

a manner substantially similar to those of other comparable

activities that were profitable; and (3) whether the taxpayer

changed operating procedures, adopted new techniques, or

abandoned unprofitable methods in a manner consistent with an

intent to improve profitability.    Giles v. Commissioner, T.C.

Memo. 2005-28; sec. 1.183-2(b)(1), Income Tax Regs.
                                - 13 -

     Maintaining complete and accurate books and records may

indicate that an activity is engaged in for profit.       Rozzano v.

Commissioner, T.C. Memo. 2007-177.       Petitioner’s recordkeeping

system was limited to handwritten notes and various receipts in a

file.    Petitioner’s handwritten notes were not produced

contemporaneously with his activity but were produced once a

month.    Further, petitioner failed to maintain any records of his

income and expenses from Doris Racing.      Thus, petitioner has not

shown that he maintained complete and accurate books and records

for Doris Racing.

     Conducting an activity “in a manner substantially similar

to other activities of the same nature” can “indicate that the

activity is engaged in for profit.”       Remler v. Commissioner, T.C.

Memo. 2005-265.    Indicators of such include “advertising,

maintaining a separate business bank account, the development of

a written business plan, and having a plausible strategy for

earning a profit.”    Id.   Petitioner did not present a written

business plan for Doris Racing.    Further, he admitted that he

used his personal bank account and credit cards for purchases

related to Doris Racing.    Petitioner did not advertise locally,

but he testified that he paid individuals in foreign countries to

recruit clients.    He further testified that he took promotional

pictures of his clients on the racetrack.      Petitioner failed,

however, to present any substantive evidence of advertising.

None of the individuals petitioner claims to have hired testified
                                - 14 -

at trial, and petitioner failed to present any documentation of

the tasks performed by these individuals or proof that they were

paid.     Petitioner also failed to describe how pictures of his

clients on the racetrack were used for promotions or present any

evidence of such promotions.     Accordingly, petitioner has failed

to demonstrate that he conducted Doris Racing in a manner similar

to other kart racing businesses.

     Changing operating methods, adopting new techniques, or

abandoning “unprofitable methods in a manner consistent with an

intent to improve profitability” may indicate that the activity

is engaged in for profit.     Giles v. Commissioner, supra; see also

sec. 1.183-2(b)(1), Income Tax Regs.     Doris Racing was never

profitable, yet petitioner never adopted new techniques, such as

local advertising.     Petitioner abandoned Doris Racing because it

was unprofitable without attempting to make any substantive

changes to his alleged business model.     This does not demonstrate

an intent to improve profitability.

        Petitioner has not shown that he carried on Doris Racing in

a businesslike manner.     Accordingly, this factor favors

respondent.

        2. The Expertise of the Taxpayer or His Advisers

        “Preparation for the activity by extensive study of its

accepted business, economic, and scientific practices, or
                               - 15 -

consultation with those who are expert therein, may indicate that

the taxpayer has a profit motive where the taxpayer carries on

the activity in accordance with such practices.”   Sec. 1.183-

2(b)(2), Income Tax Regs.   In analyzing this factor, a

distinction must be drawn between expertise in the mechanics of

an activity and expertise in the business practices of the

activity.   Zidar v. Commissioner, T.C. Memo. 2001-200 (citing

Burger v. Commissioner, 809 F.2d 355, 359 (7th Cir. 1987), affg.

T.C. Memo. 1985-523).

     In Zidar v. Commissioner, supra, we held that a taxpayer’s

stock car racing activity was an activity not engaged in for

profit where the taxpayer had a longstanding interest in stock

car racing but no expertise in the economics or business of

owning a stock car.   The facts of this case are analogous:

petitioner had a longstanding interest in kart racing, but there

is no evidence that he studied or understood the accepted

business practices of kart racing or consulted experts in the

field.   Petitioner testified that he had been involved in racing

and had seen “how it works.”   He further testified he was

familiar with what people in the kart racing business do.

Petitioner’s self-serving testimony does not establish an

understanding of the kart racing business.   Accordingly, this

factor favors respondent.
                              - 16 -

     3. The Time and Effort Expended by the Taxpayer in Carrying
        On the Activity

     The time and effort devoted to an activity may indicate that

the activity is engaged in for profit, particularly where the

activity does not have a substantial personal or recreational

aspect.   Sec. 1.183-2(b)(3), Income Tax Regs.; see also Sousa v.

Commissioner, T.C. Memo. 1989-581 (amount of time spent on a

fishing and boating activity not necessarily indicative of profit

objective where taxpayer derived great personal pleasure from the

activity).   A taxpayer’s withdrawal from another occupation to

devote most of his time to the activity may also indicate that

the activity is engaged in for profit.   Sec. 1.183-2(b)(3),

Income Tax Regs.

     Although petitioner devoted a substantial amount of his

spare time to his kart racing activity in 2006, the record

reflects that he derived a great deal of personal pleasure from

the activity.   Accordingly, the amount of time petitioner spent

on the activity is not necessarily indicative of a profit

objective.   Further, petitioner’s primary occupation in 2006 was

as a correctional officer for San Quentin.    Petitioner worked at

San Quentin approximately 60 hours per week, and he has not

presented any evidence that his work schedule at San Quentin was

scaled down because of the time he spent working on Doris Racing.

Accordingly, this factor favors respondent.
                               - 17 -

     4. The Expectation That Assets Used in the Activity May
        Appreciate in Value

     “The term ‘profit’ encompasses appreciation in the value of

assets, such as land, used in the activity.”    Sec. 1.183-2(b)(4),

Income Tax Regs.    Petitioner did not argue or produce other

evidence to show that he bought assets for Doris Racing with the

expectation that they would appreciate in value.    Accordingly,

this factor favors respondent.

     5. The Success of the Taxpayer in Carrying On Other Similar
        or Dissimilar Activities

     “The fact that the taxpayer has engaged in similar

activities in the past and converted them from unprofitable to

profitable enterprises may indicate that he is engaged in the

present activity for profit, even though the activity is

presently unprofitable.”    Sec. 1.183-2(b)(5), Income Tax Regs.

Petitioner does not have a history of carrying on similar

activities.    His only other source of income was his job at San

Quentin.   Accordingly, this factor favors respondent.

     6. The Taxpayer’s History of Income or Losses With Respect
        to the Activity

     A taxpayer’s history of income or loss with respect to an

activity may indicate the presence or absence of a profit

objective.    Sec. 1.183-2(b)(6), Income Tax Regs.; see also

Golanty v. Commissioner, 72 T.C. at 426.    A series of losses

during the startup phase of an activity does not necessarily

indicate the activity is not engaged in for profit.    Sec. 1.183-

2(b)(6), Income Tax Regs.
                                 - 18 -

     Doris Racing was never a profitable activity.     However, lack

of profitability in the startup stage is not unusual for a small

business.   Accordingly, we find this factor neutral.

     7. The Amount of Occasional Profits, If Any, From the
        Activity

     “The amount of profits in relation to the amount of losses

incurred, and in relation to the amount of the taxpayer’s

investment and the value of the assets used in the activity, may

provide useful criteria in determining the taxpayer’s intent.”

Sec. 1.183-2(b)(7), Income Tax Regs.      “[A]n opportunity to earn a

substantial ultimate profit in a highly speculative venture is

ordinarily sufficient to indicate that the activity is engaged in

for profit even though losses or only occasional small profits

are actually generated.”   Id.

      As discussed above, Doris Racing was never profitable.

Petitioner did not present a written business plan or demonstrate

any strategic initiative towards making it financially

successful.   He has failed to present any evidence, including

speculative evidence, that Doris Racing had the opportunity to

earn a profit.   Accordingly, this factor favors respondent.

     8. The Financial Status of the Taxpayer

     “Substantial income from sources other than the activity

(particularly if the losses from the activity generate

substantial tax benefits) may indicate that the activity is not

engaged in for profit especially if there are personal or
                                - 19 -

recreational elements involved.”     Sec. 1.183-2(b)(8), Income Tax

Regs.     Petitioner earned wage income of $178,528 from his job as

a correctional officer at San Quentin.     Because petitioner earned

significant income from a source other than Doris Racing, this

factor favors respondent.

     9. Elements of Personal Pleasure or Recreation

        “The presence of personal motives in carrying on of an

activity may indicate that the activity is not engaged in for

profit, especially where there are recreational or personal

elements involved.”     Sec. 1.183-2(b)(9), Income Tax Regs.

“‘[W]here the possibility for profit is small (given all the

other factors) and the possibility for gratification is

substantial, it is clear that the latter possibility constitutes

the primary motivation for the activity.’”     Dodge v.

Commissioner, T.C. Memo. 1998-89 (quoting Burger v. Commissioner,

T.C. Memo. 1985-523), affd. without published opinion 188 F.3d

507 (6th Cir. 1999).

     Petitioner conceded that he enjoys being involved in kart

racing.     He began racing karts in the early 1980s and has been

around kart racing ever since.    It is clear from the record that

petitioner derived significant personal pleasure and recreation

from Doris Racing.    Accordingly, this factor favors respondent.

     After considering all of the above factors as applied to the

unique facts and circumstances of this case, we conclude that

Doris Racing was an activity not engaged in for profit within the
                                - 20 -

meaning of section 183.   As a result, we sustain respondent’s

determination with respect to petitioner’s Schedule C deductions.

III. Section 6662(a) Penalty

     Section 6662(a) and (b)(1) imposes a penalty equal to 20

percent of the amount of an underpayment attributable to

negligence or disregard of rules or regulations.      Negligence

includes any failure to make a reasonable attempt to comply with

the provisions of the Internal Revenue Code, including any

failure to maintain adequate books and records or to substantiate

items properly.   Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax

Regs.

     Petitioner’s failure to produce records substantiating his

Schedule A itemized deductions supports the imposition of the

accuracy-related penalty for negligence with respect to those

deductions for 2006.   Further, petitioner’s attempt to deduct

expenses from a personal activity supports the imposition of the

accuracy-related penalty for negligence with respect to his

Schedule C deductions for 2006.

     Section 6662(a) and (b)(2) imposes an accuracy-related

penalty upon any underpayment of tax resulting from a substantial

understatement of income tax.    The penalty is equal to 20 percent

of the portion of any underpayment attributable to a substantial

understatement of income tax.     Id.    The term “substantial

understatement” is defined as exceeding the greater of:      (1) 10

percent of the tax required to be shown on the return for the
                              - 21 -

taxable year or (2) $5,000.   Sec. 6662(d)(1)(A).   The

applicability of section 6662(b)(2) will depend on the magnitude

of the understatement of income tax as calculated under Rule 155.

If petitioner’s understatement of income tax as calculated under

Rule 155 exceeds the greater of $5,000 or 10 percent of the tax

required to be shown on the return in 2006, respondent will have

met his burden of production under section 7491(c).      If not,

respondent will have failed to meet his burden of production

under section 7491(c).

     An accuracy-related penalty is not imposed on any portion of

the underpayment as to which the taxpayer acted with reasonable

cause and in good faith.   Sec. 6664(c)(1).   The taxpayer bears

the burden of proof with regard to those issues.     Higbee v.

Commissioner, 116 T.C. 438, 446 (2001).     Petitioner has failed to

show reasonable cause, substantial authority, or any other basis

for reducing the penalties.   Accordingly, we find petitioner

liable for the section 6662 penalty for 2006 as commensurate with

respondent’s concessions and our holding.     See id. at 449.

     In reaching our holdings, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.

     To reflect the foregoing,


                                            Decision will be entered

                                       under Rule 155.
