T.C. Memo. 2008-252
UNITED STATES TAX COURT
MICHAEL S. SILVER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25859-06. Filed November 10, 2008.
Michael S. Silver, pro se.
C. Teddy Li, for respondent.
MEMORANDUM OPINION
GOEKE, Judge: Respondent determined income tax
deficiencies and additions to tax for the years 1987, 1988, 1990,
and 1994 (the years in issue) as follows:
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Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6653(a)(1)
50% of the
interest on
1987 $334,147 $16,707 $334,707 ---
1988 532,493 --- --- $26,625
Additions to Tax/Penalties
Sec. Sec. Sec.
Year Deficiency 6662 6651(a)(2) 6651(f)
1990 $1,361 $272 --- ---
1994 46,898 --- $11,725 $34,001
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
Petitioner did not appear for trial. Thus, because of
petitioner’s failure to communicate with respondent or to appear
for trial at the Court’s Baltimore, Maryland, May 5, 2008, trial
session, respondent moved to dismiss this case for lack of
prosecution and for a default judgment as to the addition to tax
for fraudulent failure to file under section 6651(f).
Respondent’s motion relies on facts and evidence deemed
admitted by reason of default, through the allegations in
respondent’s answer, and through deemed admissions under Rule 90.
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Background
At the time his petition was filed, petitioner resided in
Maryland. During and before the years at issue petitioner was a
licensed attorney who did not actively practice law in the State
of Maryland.
On August 26, 1992, petitioner filed a voluntary petition
with the U.S. Bankruptcy Court for the District of Maryland
(bankruptcy court) under chapter 11 of the Bankruptcy Code.
On November 30, 1992, the bankruptcy court ordered
petitioner to file his Federal income tax returns for 1987, 1988,
1989, 1990, and 1991 on or before January 4, 1993. Petitioner
failed to comply with the bankruptcy court’s order, and no tax
returns were filed for the 1987 through 1991 tax years. On
January 22, 1993, petitioner’s bankruptcy case was converted to a
chapter 7 bankruptcy proceeding, and petitioner was discharged in
bankruptcy on October 14, 1993.
In December 1993 petitioner was employed by North American
Title Co. (North American). North American issued title
insurance binders and policies for commercial and residential
real estate. North American was required to maintain escrow
accounts of settlement funds deposited and to maintain balances
in these accounts sufficient to cover liabilities created by
escrow transactions.
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Beginning around January 1994 and continuing to October
1994, petitioner devised a scheme to defraud and obtain money
from buyers and sellers of residential real estate, their
mortgage companies, and title insurance companies. Petitioner
discovered that on one residential refinancing, the mortgage
company had funded a mortgage twice. Instead of repaying the
excess from the escrow account as required, petitioner diverted
in excess of $134,000 from the operating and escrow accounts of
North American for his own use. As a result of this diversion of
funds, North American was unable to pay its obligations from its
escrow accounts, such as taxes, mortgages, return of excess
settlement funds, and proceeds of sales and refinancings. When
the mortgage company discovered the double payment, petitioner
made false representations to avoid repayment. Petitioner
received gross income of approximately $139,248 in 1994 from the
diverted funds.
On March 1, 1997, a Federal grand jury in the U.S. District
Court for the District of Maryland returned a seven-count
indictment against petitioner--five counts for wire fraud (in
violation of 18 U.S.C. section 1343) and two counts for willful
failure to file income tax returns (in violation of section
7203). In August 1997 petitioner was disbarred by the Maryland
State Bar.
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Petitioner entered a plea of guilty in an agreement reached
on November 7, 1997, to one count of wire fraud and one count of
willful failure to file an income tax return for 1994. On July
24, 1998, the District Court entered its judgment in a criminal
case (the judgment) pursuant to said guilty plea. The District
Court dismissed the remaining counts on its own motion.
On October 9, 2001, petitioner (through his representative)
submitted to respondent’s revenue agent delinquent Federal income
tax returns which included the tax years 1987, 1988, and 1990.
Petitioner failed to file a Federal income tax return for the tax
year 1994 even though he timely filed an automatic extension of
time.
On September 15, 2006, respondent issued a statutory notice
of deficiency for 1987, 1988, 1990, and 1994 and determined
deficiencies of $334,147, $532,493, $1,361, and $46,898,
respectively. The deficiencies arose from respondent’s
disallowance of certain partnership, long- and short-term
capital, and other losses and the disallowance of some itemized
deductions petitioner claimed on his Federal income tax returns.
However, respondent did allow some standard and self-employment
tax deductions. Respondent also determined that petitioner was
liable for: (1) Additions to tax for negligence under section
6653(a)(1)(A) for the tax year 1987, additions to tax under
section 6653(a)(1)(B) for the tax year 1987, and additions to tax
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for negligence or disregard of rules and regulations under
section 6653(a)(1) for the tax year 1988; (2) an accuracy-related
penalty pursuant to section 6662 for the tax year 1990; (3) an
addition to tax for failure to pay under section 6651(a)(2) for
the tax year 19941; and (4) a penalty for fraudulent failure to
file for the tax year 1994 under section 6651(f).
On December 14, 2006, petitioner filed a petition for
redetermination of the deficiencies, additions to tax, and
penalties.
The Court served a notice setting case for trial and a copy
of the Court’s standing pretrial order on petitioner on December
10, 2007, at petitioner’s address of record. The notice stated
that “YOUR FAILURE TO APPEAR MAY RESULT IN DISMISSAL OF THE CASE
AND ENTRY OF DECISION AGAINST YOU.”
By letter dated December 21, 2007, respondent mailed to
petitioner a letter proposing a conference for January 7, 2008.
The letter further informed petitioner that should he fail to
appear for trial, he may be held liable for the full amount of
the deficiencies, additions to tax, and penalties as set forth in
the notice of deficiency. Petitioner failed to respond or
appear.
1
Since the time respondent’s pending motion was filed,
respondent has conceded the addition to tax for failure to pay
under sec. 6651(a)(2) for the tax year 1994.
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On February 15, 2008, respondent served on petitioner
informal discovery, including a request for production of
documents, written interrogatories, and a request for admissions.
In these documents petitioner was asked to explain and describe
his business relationships and to provide any and all evidence
establishing petitioner’s interest and basis in such investments
with Fleet Street Associates, Bond Street Associates, and Butcher
& Singer/Keystone Venture I Ltd./LP., for which petitioner
claimed partnership and other losses on his delinquent Federal
income tax returns for the years in issue. Petitioner failed to
respond to respondent’s requests.
On February 19, 2008, we filed respondent’s request for
admissions. Petitioner did not file a response within the 30-day
period, and, consequently, the requested admissions were deemed
admitted under Rule 90(c).
Before trial, on April 17, 2008, respondent served on
petitioner his pretrial memorandum pursuant to the Court’s
standing pretrial order, which included the date and time of the
calendar call. Respondent informed petitioner that a motion to
dismiss for lack of prosecution and for default judgment may be
filed for failure to properly prosecute his case. Petitioner
failed to respond. On May 2, 2008, respondent telephoned
petitioner and left a message informing him of the date, time,
and location of the calendar call and again reiterated the
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possible filing of the motion to dismiss. Petitioner failed to
respond to respondent’s telephone messages.
This case was called at the Court’s trial calendar in
Baltimore, Maryland, on May 5, 2008. Petitioner did not appear,
file a pretrial memorandum, submit a Rule 50(c) statement in lieu
of appearance, or request a continuance. At that time respondent
filed the motion to dismiss as provided by Rule 123(b). At the
conclusion of the proceeding the Court issued an order directing
petitioner to show cause on or before June 4, 2008, why
respondent’s motion to dismiss should not be granted and a
decision entered against petitioner determining deficiencies in
tax, additions to tax, and penalties due in the amounts and for
the years set forth in respondent’s motion to dismiss. The Court
has received no response and the order was not returned due to a
change of address.
Discussion
A. Failure To Properly Prosecute
Rule 123(b) provides:
(b) Dismissal: For failure of a petitioner
properly to prosecute or to comply with these Rules or
any order of the Court * * * the Court may dismiss a
case at any time and enter a decision against the
petitioner. The Court may, for similar reasons, decide
against any party any issue to which such party has the
burden of proof, and such decision shall be treated as
a dismissal * * *.
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In addition, Rule 149 provides in part:
(a) Attendance at Trials: The unexcused absence
of a party or party’s counsel when a case is called for
trial will not be ground for delay. The case may be
dismissed for failure properly to prosecute * * *.
(b) Failure of Proof: Failure to produce
evidence, in support of an issue of fact as to which a
party has the burden of proof * * * may be ground for
dismissal or for determination of the affected issue
against that party. * * *
The Court may dismiss a case at any time and enter a decision
against the taxpayer for failure properly to prosecute his case,
failure to comply with the Rules of the Court, or for any cause
that the Court deems sufficient. Rule 123(b); Mills v.
Commissioner, T.C. Memo. 2007-270; Stephens v. Commissioner, T.C.
Memo. 2005-183. Dismissal is appropriate where the taxpayer’s
failure to comply with the Court’s Rules and orders is due to
willfulness, bad faith, or fault. See Dusha v. Commissioner, 82
T.C. 592, 599 (1984); McCammon v. Commissioner, T.C. Memo. 2007-
3; Curci v. Commissioner, T.C. Memo. 2005-273. In addition, the
Court may dismiss a case for lack of prosecution if the taxpayer
inexcusably fails to appear at trial and does not otherwise
participate in the resolution of his claim. Rule 149(a);
Rollercade, Inc. v. Commissioner, 97 T.C. 113, 116-117 (1991);
Brooks v. Commissioner, 82 T.C. 413, 423-424 (1984), affd.
without published opinion 772 F.2d 910 (9th Cir. 1985); Curci v.
Commissioner, supra; Smith v. Commissioner, T.C. Memo. 2003-266,
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affd. sub nom. Hook v. Commissioner, 103 Fed. Appx. 661 (10th
Cir. 2004).
Petitioner disregarded the Court’s Rules and standing
pretrial order by failing to cooperate with respondent in
preparing this case for trial. Documentation in the record
demonstrates that respondent repeatedly requested petitioner to
comply with respondent’s informal discovery requests, which
petitioner rebuffed. Petitioner’s continuous refusal to meet
respondent’s request for discovery made it impossible for the
parties to exchange information, conduct negotiations, or prepare
a stipulation of facts before trial. Petitioner failed to
prepare and submit a pretrial memorandum before the scheduled
trial session as required by the Court’s standing pretrial order
and failed to produce any documents relevant to his case. In
addition, petitioner failed to appear at the scheduled trial
session.
Petitioner’s course of conduct throughout the proceedings
demonstrated that these failures are due to petitioner’s
willfulness, bad faith, or fault, and we conclude that dismissal
of this case is appropriate. Petitioner has failed to comply
with the Court’s Rules and orders and has failed properly to
prosecute his case. See Rollercade, Inc. v. Commissioner, supra
at 116-117; Smith v. Commissioner, supra. Petitioner is not
eligible for the benefit of section 7491 in the light of his
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failure to cooperate with reasonable requests of respondent for
information and other matters respecting this case. See sec.
7491(a)(2)(B). Accordingly, we shall grant respondent’s motion
to dismiss this case for lack of prosecution and for default
judgment. However, because respondent has determined that
petitioner is liable for additions to tax and a penalty pursuant
to section 7491(c), the burden of production is on respondent,
and we must determine whether respondent has satisfied his burden
of production.
B. Burden of Production
Section 7491(c) provides:
SEC. 7491(c). Penalties.--Notwithstanding any
other provision of this title, the Secretary shall have
the burden of production in any court proceeding with
respect to the liability of any individual for any
penalty, addition to tax, or additional amount imposed
by this title.
In order to satisfy his burden of production under section
7491(c), the Commissioner must produce evidence that it is
appropriate to impose the relevant penalty, addition to tax, or
additional amount. Wheeler v. Commissioner, 127 T.C. 200, 206
(2006), affd. 521 F.3d 1289 (10th Cir. 2008); Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner
meets his burden, the taxpayer must come forward with sufficient
evidence to persuade the Court that the Commissioner’s
determinations are incorrect.
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Respondent determined that petitioner is liable for
additions to tax under sections 6651(a)(2) and (f) and
6653(a)(1), (a)(1)(A) and (B), and a penalty under section 6662.
Because petitioner contested his liability for the additions to
tax and penalty in his petition, respondent has the burden of
production under section 7491(c) to come forward with evidence
that it is appropriate to hold petitioner liable for the
additions to tax and penalty. In addition, respondent bears the
burden of proof to establish fraudulent intent by clear and
convincing evidence regarding section 6651(f). See sec. 7454(a);
Rule 142(b).
1. Section 6651(f) Addition to Tax
Respondent determined that for 1994 petitioner is liable
under section 6651(f) for a $34,001 addition to tax for
fraudulent failure to file.
Section 6651(f) imposes an addition to tax of up to 75
percent of the amount of tax required to be shown on the return
where the failure to file a Federal income tax return is due to
fraud. To establish fraudulent intent, the Commissioner must
prove that a taxpayer intended to evade a tax known or believed
to be owed by conduct intended to conceal, mislead, or prevent
the collection of tax. Akland v. Commissioner, 767 F.2d 618, 621
(9th Cir. 1985), affg. T.C. Memo. 1983-249; Powell v. Granquist,
252 F.2d 56 (9th Cir. 1958).
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The existence of fraud is a question of fact that must be
considered on the basis of an examination of the entire record
and the taxpayer’s entire course of conduct. Petzoldt v.
Commissioner, 92 T.C. 661, 699 (1989). Respondent’s burden of
proving fraud can also be met by facts deemed admitted pursuant
to Rule 37(c). Doncaster v. Commissioner, 77 T.C. 334, 336-337
(1981). In the case of a default, facts alleged by respondent in
the answer are deemed to be true, and judgment for respondent is
proper if those facts are sufficient to show that petitioner
fraudulently failed to file his tax return for 1994. See Smith
v. Commissioner, 91 T.C. 1049, 1056-1057 (1988), affd. 926 F.2d
1470 (6th Cir. 1991). With respect to the addition to tax under
section 6651(f), the entry of a default judgment as a sanction
under Rule 104(c)(3) has the effect of deeming admitted all of
respondent’s factual and conclusory allegations relating to
section 6651(f) that are set forth in the answer. Smith v.
Commissioner, supra at 1056.
Since fraud can seldom be established by direct proof, the
requisite intent may be inferred from any conduct, the likely
effect of which would be to conceal, mislead, or otherwise
prevent the collection of taxes the taxpayer knew or believed he
owed. Spies v. United States, 317 U.S. 492, 499 (1943); Rowlee
v. Commissioner, 80 T.C. 1111 (1983); Vogt v. Commissioner, T.C.
Memo. 2007-209.
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Courts have developed several objective “badges” of fraud,
including: (1) Understatement of income; (2) inadequate records;
(3) failing to file tax returns; (4) providing implausible or
inconsistent explanations of behavior; (5) concealment of assets;
(6) failing to cooperate with taxing authorities; (7) filing
false Forms W-4, Employee’s Withholding Allowance Certificate;
(8) failing to make estimated tax payments; (9) dealing in cash;
(10) engaging in a pattern of behavior that indicates an intent
to mislead; and (11) filing false documents. Vogt v.
Commissioner, supra; see also Bradford v. Commissioner, 796 F.2d
303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Cooley v.
Commissioner, T.C. Memo. 2004-49. No single factor is
necessarily sufficient to establish fraud; however, a combination
of several of these factors may be persuasive evidence of fraud.
Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984),
affg. per curiam T.C. Memo. 1982-603. This case involves
numerous “badges” of fraud: (1) Petitioner willfully failed to
file an income tax return under section 7203 or make payment for
the taxable year 1994; (2) petitioner failed to report
substantial income for the 1994 tax year; (3) petitioner
attempted to conceal assets and income from a fraudulent scheme
for which he was criminally indicted and pleaded guilty; and (4)
petitioner failed to cooperate with respondent.
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Accordingly, the Court is granting a judgment by default for
respondent with respect to the $34,001 addition to tax under
section 6651(f) determined for the year 1994 for fraudulent
failure to file and willful negligence. See Rechtzigel v.
Commissioner, 79 T.C. 132, 143 (1982), affd. per curiam on
another ground 703 F.2d 1063 (8th Cir. 1983).
2. Section 6653 Additions to Tax
Respondent determined that petitioner is liable for
additions to tax for the tax year 1987 for negligence (1) of
$16,707 under section 6653(a)(1)(A), and (2) 50 percent of the
interest due on the portion of the underpayment attributable to
negligence ($334,707) under section 6653(a)(1)(B). Respondent
also determined an addition to tax for negligence of $26,625
under section 6653(a)(1) for 1988.
Section 6653(a)(1) and (a)(1)(A) and (B) imposes an addition
to tax2 if any part of the underpayment is due to negligence or
intentional disregard of rules and regulations. Negligence is
defined as a “lack of due care or failure to do what a reasonable
and ordinarily prudent person would do under the circumstances.”
2
The additions to tax under sec. 6653(a)(1)(A) and (B) are
for an amount equal to 5 percent of the underpayment, and an
amount equal to 50 percent of the interest payable under sec.
6601 with respect to the portion of the underpayment which is
attributable to negligence for the period beginning on the last
date prescribed by law for payment of such underpayment and
ending on the earlier of the date of the assessment of the tax or
the date of payment.
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Marcello v. Commissioner, 380 F.2d 499, 506 (5th Cir. 1967),
affg. in part and remanding in part 43 T.C. 168 (1964) and T.C.
Memo. 1964-299; Neely v. Commissioner, 85 T.C. 934, 947 (1985);
see Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984),
affg. 79 T.C. 714 (1982)
To prevail on the issue of negligence, taxpayers must prove
that their actions in connection with the transaction were
reasonable in the light of their experience and business
sophistication. Avellini v. Commissioner, T.C. Memo. 1995-489;
Dister v. Commissioner, T.C. Memo. 1987-217. If a taxpayer is
misguided, unsophisticated in tax law, and acts in good faith, we
may conclude that he or she is not liable for the addition to tax
for negligence. Collins v. Commissioner, 857 F.2d 1383, 1386
(9th Cir. 1988), affg. Dister v. Commissioner, T.C. Memo. 1987-
217; Hansen v. Commissioner, 820 F.2d 1464, 1469 (9th Cir. 1987).
On both his 1987 and 1988 Forms 1040, U.S. Individual Tax
Return, petitioner claimed partnership losses and long-term
capital losses for 1987 and 1988 from Fleet Street Associates and
Bond Street Associates. However, Fleet Street Associates and
Bond Street Associates did not file Federal income tax returns
for the tax years 1987 or 1988. Respondent provided redacted
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copies of IRS tax transcripts which showed that no returns were
filed by these partnerships for the tax years 1987 or 1988.
Respondent determined that petitioner was not allowed the
claimed losses because (1) petitioner failed to establish what
his adjusted basis was in these partnerships, (2) petitioner
failed to establish that any loss was sustained, or (3) it was
not established that the deduction was allowable as a deduction
or loss under any section of the Code.
Thus, respondent contends that petitioner has not provided
evidence or demonstrated that his underpayment of tax was not due
to negligence or disregard of rules or regulations or a
substantial understatement of income tax. Respondent also
contends that petitioner did not have reasonable cause or act in
good faith for the years at issue.
We agree and find that respondent has carried the burden of
production, and we sustain the additions to tax under section
6653(a)(1), (a)(1)(A) and (B) for 1987 and 1988.
3. Section 6662 Penalty
Respondent determined that petitioner is liable for an
accuracy-related penalty under section 6662 of $272 for 1990
because the underpayment of tax was attributable to negligence.
Section 6662(a) imposes a penalty of 20 percent of the
portion of the underpayment of tax which is attributable to,
inter alia, negligence or disregard of rules or regulations, sec.
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6662(b)(1), or a substantial understatement of income tax, sec.
6662(b)(2). For purposes of section 6662(a), the term
“negligence” includes any failure to make a reasonable attempt to
comply with the Code, and the term “disregard” includes any
careless, reckless, or intentional disregard. Sec. 6662(c); sec.
1.6662-3(b), Income Tax Regs. Negligence has also been defined
as a “‘lack of due care or failure to do what a reasonable and
ordinarily prudent person would do under the circumstances.’”
Neely v. Commissioner, supra at 947 (quoting Marcello v.
Commissioner, supra at 506); Criss v. Commissioner, T.C. Memo.
2002-62.
A taxpayer will not be liable for a penalty under section
6662 if he had reasonable cause. Sec. 6664(c). 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 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 the taxpayer’s proper liability.
“Circumstances that may indicate reasonable cause and good faith
include an honest misunderstanding of fact or law that is
reasonable in light of the experience, knowledge, and education
of the taxpayer.” Sec. 1.6664-4(b)(1), Income Tax Regs.
(emphasis added); see Reynolds v. Commissioner, 296 F.3d 607, 618
(7th Cir. 2002) (“experience, knowledge and education” proviso
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was fatal to taxpayer who was attorney, C.P.A., and IRS audit
supervisor), affg. T.C. Memo. 2000-20; Emerson v. Commissioner,
T.C. Memo. 2001-186 (lawyer liable for accuracy-related penalty
for failing to keep adequate records required by section 6001).
Petitioner claimed on his 1990 Form 1040 ordinary losses
(other section 1231 losses) and partnership losses (nonpassive
losses) from Fleet Street Associates and a short-term capital
loss from the entity Butcher & Singer/Keystone Venture I Ltd.
Respondent provided a redacted copy of an IRS tax transcript
which showed that no return was filed by these partnerships for
the tax year 1990. Thus, the bases in these partnerships had not
been substantiated, and the losses were disallowed. Accordingly,
on the basis of the entire record and the deemed admissions, the
Court finds that respondent has satisfied the burden of
production with respect to the accuracy-related penalty under
section 6662(a) imposed on petitioner for the taxable year 1990.
Respondent has shown that petitioner failed to keep adequate
books and records and negligently failed to report income. In
addition, petitioner’s educational and professional background
does not support an honest misunderstanding of facts and laws.
Petitioner has not provided evidence or demonstrated that his
underpayment of tax was not due to negligence or disregard of
rules or regulations. Respondent contends that because
petitioner has failed to introduce any evidence to indicate that
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he was not negligent, petitioner has failed to meet his burden of
proof. We agree. Accordingly, we sustain respondent’s
determination that petitioner is liable for an accuracy-related
penalty under section 6662 for the year 1990 of $272.
To reflect the foregoing,
An appropriate order and
decision will be entered.