Brian E. & Sandra Shermer Good, Petitioner

T .C . Memo . 2008-24 5 BRIAN E . AND ANDRA SHERMER GOOD, Petitioners v . COMMISSIONS OF INTERNAL .REVENUE, Responden t Docket ` No .` 19770=c⁵ . Filed, October, 30, 2008 .

Brian E .., and .Sand a Shermer 'Good, pro sese ` Kathleen K . Raup , for respondent .

MEMORANDUM FINDINGS OF FACT AND .OPINION

HALPERN, Judge : B notice of deficiency dated September 15 , 2005 (the notice), resp ndent determined deficiencies in,an d penalties with respect o, petitioners', Federal income tax a s follows :

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,, 3 _ OCT 3 0 2008 W Deficiency $6,740 5,697 Year 2001 2002 Penalty Sec . 6662(a ) $1,34 8 1,13 7 Unless otherwise indicated, all section references are to the internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure . Petitioners bear the burden of proof . See Rul e 142(a) .

The issues for decision arise in connection with petitioners' reported activity of providing "Electronic shopping and information services" . We must decide whether petitioners (1) are entitled to credits against'their income tax liabilities for amounts spent to bring that activity into compliance with the Americans with Disabilities Act of 1990 (ADA), Pub . L . 101-336, 104 Stat . 327, (2) are entitled to deductions for expenses and interest paid in connection with the activity,'and (3) are subject to an,,accuracy-related penalty under section 6662 . 2

3 -

FINDINGS OF FACT

Some facts have een stipulated and are so 'found . The .

stipulation of fact s with .attached exhibits, is incorporated " herein by this refere Petitioner s Petitioners are usband and wife . For the taxabl e (calendar) years in`i sue, they made joint returns of income . At the time the petitio n was filed, they resided-in Pennsylvania .

Mr . Good is a ice tified public accountant, and'during th e years in question he as a partne r Shermer Good is a grad master's degree in bus University . During .th years in question, she was employed full time as a sales repre s ntative 'for a large pharmaceutical firm .

Petitioners' 2001 and 002 Income Tax Return s For both 2001 an d 2002, petitioners filed an Interna l Revenue Service (IRS) orm 1040, U .S . Individual Income Tax Return . Attached to e ch Form 10410 .is a Schedule C,'Profit o r Loss from Business . T Schedules C list Mr . Good as proprieto r of a business and descr' b C activity) as "Electro They show the Schedule accounting .

{ 4 - The 2001 Schedule C reports no income but reports . expenses of $19,-$45, and $5,475 for office expenses, travel, .and "Other expenses", respectively . The other expenses are furthe r explained as "Excess expenditures for modifications made for disabled access, to business" . The 2001 Schedule C reports a loss of $5,539 .

The 2002'Schedule C reports gross receipts or sales o f $4,228 and expenses as follows :

Category Interest Office expense Travel Deductible meal s and entertainment Other expenses Amount $33 8 42 7 33 5 5,89 6 The other expenses are further explained as comprising $5,475 and $421,' for "[e]xcess expenditures for modifications made fo r disabled access to business" and "[f]ranchise [flees", respectively .I' The 2002 Schedule C reports a loss of $2,792 .

Also attached to each Form 1040 is an IRS Form 8826 , Disabled Access Credit, claiming credits against income tax (the disabled access credits) of $5,000 and $4,491 for 20 .01 and 2002, respectively . .'

The Examinatio n Respondent examined the 2001 and 2002 Forms 1040 and disallowed the disabled access credits and all expenses claime d on both Schedules C (the Schedule C expenses) . As a compensating _ .5 _ adjustment, .responde t also eliminated the $4,228 of gross receipts or sales rep rted on the .2002.Schedule°C . Respondent explained that he was . disallowing the disabled access credits because petitioners h d failed to-show that they made an y expenditures for. the urpose of complying with the`ADA, or ., if .

they did, that the ex enditures were reasonable and necessary and, otherwise met the req irements of(cid:127)°section :44, which allows a .

credit against tax fo expenditures to provide access to disable individuals . Responde t further explained that he was disallowing the disabl d access credits and the Schedule ,C expenses because the S hedule C activity lacked economic substance and was-cond .cted solely to avoid,tax .

: .Finally, respondent added that e was disallowing the-Schedule C expenses .

because petitioners ha failed to establish that the expenses .(1) were made, (2) were-or inary and necessary business expenses, or (3) were made"for,the urposes indicated . °The,notice followed . ., The Schedule C Activi t The Schedule C activity involved Internet shopping .

Petitioners learned-abo t the activity from Oryan~Management and Financial Services (Ory n) ., During the years in issue, Oryan maintained a Web,, site a the Internet address (also ;.known as a .

Uniform Resource Locato (URL)) http ://www .ShopN2000 .com .

(ShopN2000 .com) . The S opN2000 .com Web site was,'a,portal Web site that linked visito s to dozens of merchants . A visitor could click on a merchant's banner or on a product advertised to 6 - purchase the product on the merchant's Web site . Oryan offered for sale URLs based on its(cid:127)URL but with the addition of a unique five-digit personal identification number (PIN) ; e .g ., ShopN2000 .com/.62234 . The purchaser of a URL from Oryan (a URL owner and a Sh6pN2000 URL, respectively) earned a commission if a visitor using,the URL owner's PIN arrived at a merchant's Web ., site :from a link at ShopN2000 .com and made a purchase . A corporation known as "Linkshare" collected the commissions and remitted them-,to Oryan . Oryan then distributed them to the appropriate URL owners .

J.

On April 13, 2004, the United States filed a "Complaint fo r Permanent- Injunction and Other Relief" against Oryan and others in the U .S . District Court for the District of Nevada (the complaint) . in Part, the complaint requested the District Court to restrain and enjoin Oryan from "[o]rganizing, promoting, or selling * * *~Shopn2000" . The-complaint made the following allegations . Oryan claimed that a URL owner could help the disabled by purchasing a ShopN2000 URL because the ShopN2000 .URL purchased by'~ithe URL owner could be modified to make it accessible to the disabled . Oryan told purchasers that they could pay $10,475 ($2,495 cash and a note for $7,980) to have their Web site modified to provide access to visually, hearing, and mobility impaired users, and that such modifications would make their Web'site compliant with provisions of the ADA . Oryan also told purchasers that they could have their Web sites .under section 44 and a $5,475 deduction business expenses . In fact,"however, ther e Web 'site, not a separate one for 'each URL simply -receiveda five-digit'account identify the owner . on the one ShopN2000 Web e. ShopN2000 Web site already included th e modifications advert i ed ;- the Web site was not modified again when each new URL own r was added to the system .

On May 3, '2004 , e=District Court'entered a "Stipulated ` Final Judgment of -Perm granting(cid:127)the,relief r e Document s On October . 15, 20 of Website", whereby h purchased a ShopN2000 URL with the URL "Shopn2000 .com/62234" .

The contract required no immediat e payment but called for payments-of 10 percent of the revenue s generated by the . Web site until $2,500 (with interest), had bee n paid .

On-October 19, 200 , Mr . Good'executed a "Contract'fo r Modification and Mainte ance of Website ",'`,whereby he retaine d Oryan to modify his URL ShopN2000 .com/62234,-to make it ~ "accessible to the visu lly disabled[ ;-] in accordance-with thos e agreed to pay Oryan $10,1475, a downpayment of $2,495 to be made 8 - "upon ;signing this-contract" and the balance, $7,980, to be evidenced by-a note . On that same day, Mr . Good executed a note in Oryan's .favor, obligating him to pay $7,980 (with interest), payments to be made from a portion of the revenues generated by the Web .site, with any remaining balance due in 8 years .

October, 19, 2001, Mr . Good executed a "Managemen t Agreement" with Oryan, whereby he retained Oryan to manage his URL, and he agreed to pay Oryan 15 percent "of all monies collected or vested to the Website . " On November 20, 2002, Ms . .Shermer Good executed .a "Contract for the Modification and Maintenance of Website", whereby she retained Advantage Management . for the purpose of modifying a Web site known as "Shopn2000 .com/60431" so that it "shall continue to be made accessible to the visually disabled, and further modified for accessibility for the Hearing and Speech disabled, in accordance with those ideals set forth in * * * [ADA], sectio n 3 . The payment terms are the same as the terms in the similar agreement between Mr . Good and Oryan executed on October 19, 2001, except that payments are to be made to Advantage Management . She signed a note similar to the note he signed (together, the notes) . The note she signed, like the contract she' signed, refers to a Web site known as "ShopN2000 .com/60431 " On November 20, 2002, Ms . Shermer Good executed a "Management Agreement" with Oryan,~whereby she retained Oryan to manage URL "Shopn2000 .com/60431", for a fee of.$15 a year .

Petitioners havs never owned a Web site with the addres s - 9 ShopN2000 .com/60431 . , Compensation Arran em nt s Although petitio ers believed they would earn commissions with respect to purch ses made using their PIN, they received n o document setting fortl a commission schedule in connection wit h ShopN2000 .com . Petitioners expected t g, generally, from 1 to 4 percent on sale s made through ShopN200 0 .com/62234 .

Petitioners als o advertising income eve y-time a visitor to ShopN2000 .com/6223 4 clicked on a merchant' banner displayed there, although the y received no document-s 001, Mr . Good incurred a credit card or of "Nevada . Corporate . HQ's" and on December 27, 2002, Ms .

Shermer Good wrote a .check for $2,495 t o "Okto Marketing Group" .

At the time Mr . Good made the first payment, petitioners be ieved that they would be able to claim a disabled access credit $5,000 on their 2001 Federal income ta x return . At the time Ms .Shermer Good made the second payment, petitioners believed th t they would be able to claim a disabled access credit of approx income tax return .

Operations Mr . Good received the following commissions from hi s ownership of ShopN2000/62234 :

Year Amount 2001 -0- 2002 $19 .6 0 1! .2003 10 .67 Unknown 1 .5 2 ,Mr . Good received no direct payment of any advertising income . Petitioners believe that advertising income was applie d to reduce the balance of the notes . Petitioners have no t otherwise made, any payments on the notes .

In early 2003, Mr . Good received an IRS Form 1099-MISC, Miscellaneous Income, . for 2002 (the 2002 Form 1099) from G& J Eagle Enterprises , Inc ., referring to account No . 62234 and showing "Other Income" of $4,198 .

Petitioners marketed their URL only by word-of-mouth t o friends and family and to one or two handicapped people they saw on the stree t Other Event s Sometime after May 2004, Mr . Good went on the Internet to ShopN2000 ..com/62234 and discovered that the URL was no longe r operating .

Mr . Good telephoned Oryan . The person answering the phon e refused to answer any of his questions .

Petitioners nei her sought "the return of any-of the moneys that they paid to Oran nor-took :any legal action against Orya n for breach of . contra c No one has conta~ted petitioners seeking payment'of th e notes .

Respondent's Expert Witnes s Respondent offer d,-and the Court accepted, Thomas M . Niccum (Mr . Niccum) . as an,ex ert witness in the field of computer science and Web site usiness design, operation, and valuation .

Mr .= Niccum is preside t of-Lancet Software Development, Inc ., a software consulting a n Web hosting -firm . He has the following academic degrees : bach for of computer science,,magnacum laude , master of science in c mputer science, and a Ph .D .-dn''computer science . He has publi .

hed articles on data management, and h e has taught in the fiel of computer science . The Court received his ` written report 'a s is direct,testimony . See Rule 143(f)(1 ) He has various opinions concerning the design, operation, and valuation of ShopN2000 .

om, which he,characterized as "a n Internet shopping Web e accessed at http :/-/www .shopn² .000 .com ."

His opinions =include t h following :

- The site was elatively small, with only a few pages and limited f nctions ; -- the promoters of the site-,were not selling Web site s but, more acc rately, were activating PIN numbers .

There was onl one Web site, where different PIN - 1 2 numbers were used only to track usage and, possibly, t o allow some customized content ; - every; PIN, enabled for that purpose or not, appeared to have access to the text-only site,for the visually impaired ; the text-only site did not work well ; security features enabled by users would interrupt the site's ability to associate usage with a particula r .shopN2000 . com had a poor business model : The site had only, a few links to shopping web sites , and .it did not appear to offer any useful functions, such as price comparisons or product reviews . The site merely gave a , simple .display of stores and some product categorie s and offered rudimentary search tools ; the~iShopN2000 .com business model did not work .well : B y 2004, there were hundreds of . complaints on the Internet describing problems with the site and lack of. .profits being._made by ShopN2000 .com URL owners ; ;' :

a ShopN2000 .com URL was nota viable business .

opportunity for a purchaser ; , the purchaser of a ShopN2000 .com URL acquired only th e rights to a Web address, and-acquired no software , code, copyrights, documentation, licenses, or other intellectual property ;, ,the, .-domain name'"ShopN2000com" was not transferred t o the` URL ow er ; shopN2000 .com URL,own.ers would have' difficult y _ .attracting- dvertisers, - .and- .advertising would not, provide a- s gnificant source of income,-'given the lo w :z.volume of t affic ShopN2000 .com URL owners could ' realistical yexpect ; petitioner s could not have resold their ShopN2000 .com -URL ; , .the . value ofi the ShopN2000 .com URL was-practically nil .'I I .

'Introduction

OPINION '

On brief,, respond nt characterizes-the Schedule C activity " as "a tax-motivated p r motion * * * that petitioners believed .; would allow them to .sp nd $2,495 `in (cid:127)2001 and $2,495-in .2002 to obtain Disabled Access Credits-of $5,000 in 2001and $4,900 in 2002 ." He has disallo ed not 'only the disabled access credit s petitioners claimed-bu t also the Schedule C expenses, and he ask s for an accuracy-relate d Petitioners- .clai m Taxpayers own the primary and,p r .The business inco m appropriately docu Respondent ' s claim basis for accessin -merit . r d and operated a small business with dominant purpose of making a profit .

operations-and deductions wer e ented and substantiated . Th e otherwise, 'as ''well as its [sic] [sic] addition to tax is without 14 - As set forth in our findings, respondent has multiple grounds for his adjustments . He has disallowed the disabled access credits because he believes that petitioners . have failed to show that they made any expenditures for the purpose of complying withi~the ADA, or, if they did, that those expenditure s were, reasonable and necessary and otherwise met the requirement s of section 44 . Alternatively, he has disallowed the disabled access credits ; and the Schedule C expenses, because he believe s the Schedule C'"activity lacked economic substance and ., wa s conducted solely,to avoid tax . Finally, he has disallowed th e Schedule C expenses because he believes that petitioners faile d to establish that the expenses (1) were made, (2) were ordinary and necessary ; business expenses, or (3) were made for th e purposes indicated .

We shall sustain respondent's disallowance of the Schedule C expenses and the disabled access credits on the grounds tha t petitioners have failed to substantiate that they made .the expenditures . involved . We shall also sustain the accuracy- related penalties .

II . . The Schedule C Expenses and Disabled Access Credit s A .

Introduction The Schedule C expenses consist of claimed expenditures fo r interest, office expenses, travel, meals and entertainment, and "Other expenses" . The other expenses are explained as being fo r modifications to allow the disabled access to the Web site (the 15 - Web site modificatio expenses) and_franchisefees The disabled access credits consist of additional expenditures beyond the~Web site modification exp nses claimed to have been made" to modify the Web site to compl with the ADA .3 We shall first :consider the Schedule C expens s other than the Web site-modification expenses. and then con ider those expenses together with the disabled .,access credi s .

. r B . Schedule C E enses Other Than=Web Site Modification ` Expense s In general, section 162 ( a) allows a deduction for "all the ordinary and necessar expenses paid or incurred during th e taxable year in carryiig on any trade or business" . To b e deductible, however, s ch expenses must be substantiated . E .g .

, Hradesky v . Commission r, 65 T .C . 87 (1975), affd . per curiam 54 0 F .2d 821 (5th Cir . 197 ) ; see also sec . 6001 ; sec . 1 .6001-1(a), Income Tax Regs . More ver, we need not accept the unverified and undocumented testimony of the taxpayer as substantiation .

Hradesky v . Commission r, supra at 90 . Finally, certain deductions, such as th se relating to travel and entertainmen t expenses , are subject t o .strict substantiation requirements . Se e sec . 274(d) .

See supra psection I .

r I of this report : .

In any event , we would reach no different result if we were to consider the Schedule C activity under section 212 .

The questions respondent has raised relating to substantiation1involve questions of fact ; e .g ., whether Mr . Good, a cash method taxpayer with respect to the Schedule C activity, can substantiate his 2002 Schedule C expense of $427 . for office expenses . And; while petitioners have in the petition assigne d error to respondent' s determinations of deficiencies in tax and penalties, they have failed to comply with the requirement of Rule 34(b)(5) that the petition contain clear and concis e If statements of' the facts on which the petitioner bases the assignments of error . Moreover, at the conclusion of the trial, we instructed the parties to file briefs, and we directed Mr .

Good to our Rules as to the form and content of briefs . W e emphasized the importance of making proposed findings of fact .

- 1 7 See Rule 1°51(e) (3) Nevertheless, petitioners have failed to include in'.their .ope ing brief any proposed findings-of fact, including only the f flowing statement under the headin g "Petitioners' Request for Findings of Fact" :- "The facts hav e been stipulated an d so [sic] are , found : . 'The stipulation o f facts and the attache exhibits are attached are .[sic] incorporated herei n We shall do our best in the light of th e inadequate assistanc e provided by petitioners .

We can dispose s mmarily of the Schedule C expenses othe r than the Web site mo d fication expenses ; viz, the deductions fo r office expenses and t avel for 2001 and for interest, offic e expense, travel, dedu tible meals and entertainment, and, unde r the category "Other e enses", franchise fees for 2002 . Puttin g aside for the moment p titioners' claim of travel expenses incurred in 2002,peti ioners have not provided adequate substantiation of the laimed expenses . For substantiation, petitioners offer onl y their own testimony and Mr . Good's self- generated computer-rec rds . Petitioners offer no receipts o r other evidence corrobo acing their testimony and Mr . Good's records . We need not, and do not, accept their unsupporte d testimony and records s adequate substantiation . See Hradesky v . Commissioner , supra .

With respect to pe titioners' 2002 travel, the parties have stipulated that, in Oc t ber 2002, petitioners traveled to Mexico for a vacation and paid for meals while there . Petitioners have failed to substantiate by adequate records or by sufficien t evidence corroborating their statements the business purpose of .

the meal expenditures or the business relationship to them o f persons they entertained, and for that reason no deduction unde r section 162 or 212 is allowable . See sec . 274(d) .

C .

Web Site Modification Expenses and Disabled Access Credit s Section 44, provides small businesses with a credit fo r expenditures to comply with the ADA . Petitioners claim to have spent $10,475 in both 2001 and 2002 to comply with the ADA .

p . .

Because of limitations on the amount of ADA complianc e expenditures creditable against tax, petitioners claimed disabled access credits ;of only $5,000 and $4,491 for 2001 and 2002, respectively . 'They did not, however, ignore the noncreditable portions of their claimed ADA compliance expenditures, and they deducted $5,475 each year as part of the Schedule C expenses ; i .e . the Web'site modification expenses .

,I We have in evidence two contracts (the contracts), each entitled "Contract for Modification and Maintenance of Website", and'both calling for total payments of $10,475, a downpayment of $2,495 to be made "upon signing of this contract" and the it balance, $7,980, to be evidenced by a note (the notes) . Th e first contract is between Mr . Good and Oryan ; it was signed by him .on October 19, 2001 ; it calls for modification of his URL, ShopN2000 .com~i/62234, and it requires that he make the $2,495 downpayment to Oryan .

The second contract i s between,Ms .'Sherme r Good and Advantage M nagement ; it was,signed-'by,her on Novembe r 20, 2002 ; it calls f r modification of a URL , ShopN2000 .com/60431 ; that petitioners did not own', and it .

requires that she ma the`$2,495 .downpayment to Advantage' Management . On Sept e er'10, 2001, Mr ., Good paid $2,495 by credit card . to "Nevad Corporate HQ's", and,'on .December 27 , 2002,,Ms . Shermer Goo paid $2,495 by check . t "Okto Marketin g Group" (together, the cash payments) .

Presumably, petitioner s claimed _.the cash,paym nts as a'portion of either Web'sit e modification expense s or the disabled, access credits .5, Respondent concedes , at the cash payments were made, but view s the payments not :-as f es to modify petitioners' Web site t o accommodate the disab ed b t, essentially,(cid:127)as their expenditur e to participate in a .b gus tax avoidance scheme . Petitioners ha v failed to convince us that the cash,payments were made for~th e purpose they claim ; i .

.to modify petitioners' : Web site t o accommodate-the disabled ..

Perhaps in an unguarded moment, Ms' Shermer Good' testified' on cross-examination t at petitioners made their-September,10, 2001, payment of $2,49 for the-franchise ." If they made the payment "for the franc ise", i .-e ., to participate in the Schedul e b We'cannot,be s re, since, as stated petitioners neither supported the petition with clear and concise statements of fact nor provided any`propo ed findings of fact on brief .

20 - C activity for 2001, that could explain why they made it 39 days before Mr . Goodiisigned a contract purporting to modify his Web site (and, indeed, 35 days before he acquired that Web site) .

That might also explain why the payment was made to Nevad a Corporate .HQ's,'trather than to Oryan, the party to whom the contract required petitioners to make the downpayment . The facts surrounding the,; contract signed by Ms . Shermer Good are also suspicious . Th'e contract she signed referred .to the wrong URL, she did not pay Advantage Management, as required by the contract, but paid "Okto Marketing Group", and she made the payment 37 days after the due date of the payment required by the contract . . In both cases, other than the correspondence of the amounts paid to the downpayments called for by the contracts, there is little evidence to support petitioners' claim that the cash', payments were made for Web site modifications toi'accommodat e the disabled . . Indeed, there is evidence that no such' , modifications were ever intended, at least by the promoters of f ShopN2000 .com . . Respondent's expert, Mr . Niccum, testified tha t there was only.,„ one Web site , to which each URL owner had acces s by way of a PIN, and that every PIN, enabled for that purpose or not, appeared to have access to the text-only site for th e visually impaired . That testimony is consistent with th e allegations in the complaint that led to the injunction agains t Oryan' s organizing , promoting , or selling ShopN2000 URLs .

Petitioners criticize Mr . Niccum for looking at ShopN2000 .com only in retrospect a d(cid:127)without having access to-the underlying computer-codes .

.-. :Al t ough aware in advance of Mr . Niccum'- s testimony, petitione ,presented no-expert testimony in rebuttal¹ .

.

Mr . Niccum impresse d s with hi s knowledge of computers and Web .

sites, andahwe have co fidence in his opinions . . We .do not believe that any modification were 'eve r made to petitioners' Web site t o accommodate-the disab ed . More importantly, :,petitioners hav e failed .to,convince .u s that they made the cash payments for°the purpose of obtaining .

Considering Ms . Sherm the discrepancies- .bet~een the payment terms .of .the contracts and 6 petitioners' actual p yments,,and the identification of the wrong URL in the contract . :,s'gnedby Ms :, Shermer Good, we believe that petitioners made the c sh payments to secure, as Ms . Shermer Good, describes it, "the fra chise"(cid:127) ; i .e . to secure undeserved tax benefits well in exces of the cash payments, and not for We b site modifications to ccommodate the disabled .

Before concluding this portion of our analysis, there is one further issue to,discu s . The contracts each call for deferred payments of .$7,980, th balance of the $10,475 contract price above the required dow payment of $2,495 . The notes evidenced those payments and staed that the deferred payments were to be made from a portion of the revenues generated by the Web site . .

Petitioners believed t at advertising revenue of $2 would be applied to the notes ev ry time a visitor to ShopN2000 .com/62234 E 22 - clicked on a merchant's banner .

The 2002 Form 1099 shows a payment to Mr . Good of " [ o]ther [i]ncome " of $4,198 from G&J Eagle ' Enterprises , Inc ., referring to account No . 6223 4 .

Although their briefs are unclear , petitioners appear to argu e that the .2002 Form 1099 evidences advertising revenue :of $4,198 applied in 2002' to Mr . Good's note . There-is ; however, no i evidence other .than the 2002 .Form 1099 that Mr . Good earned any advertising revenue from the operation of ShopN2000 .com/62234 in 2002 .' Petitioners have not identified G&J Eagle Enterprises , Inc .',Advertising revenue of $4,198 would indicate 2,099 click s in 2002 . Mr . Niccum is of the opinion that, given the low volume of traffic expected by a ShopN2000 .com URL`owner, it would be difficult to attract advertisers and advertising would no t provide a significant source of income .

We are not persuaded that the 2002 Form 1099 is legitimate .

Petitioners have failed to persuade us that they earned any advertising revenue in 2002, or that $4,198 was credited agains t either note .

Petitioners have failed to show that they expended any money in either 2001 or 2002 to modify their Web site to accommodate the disabled . Petitioners are not entitled to deductions for the Web'site modification expenditures or to the disabled acces s credits .

IV ndent's adjustments disallowing the . Schedul e Section 6662 imp portion of any : underp yment-which is attributable : t things,, a substantial understatement of income .tax .

and (b) (2) . . An under tatement of income tax is,deeme d substantial if it exc eds the greater of : (1) 10 percent'of the tax .-required to be sh wnaon the return for the year, .or (2 ) $5,000 . Sec . 6662(d) an understatement is a position (1) for whi h there is substantial authority, or (2 ) which the taxpayer ade uately disclosed on his return and "for.

which there is areas o addition, . the section the taxpayer can show underpayment=and that thereto . . Sec-_ 666,4 (c ) 1) .

Giving effect, t o espondent' .s adjustments : in the notice, $ petitioners' additional tax liabilities for 200 1.and 2002 were $6,740 and $5,697, .resp ctively . The taxes required to . be shown on petitioners' returns $34,606, respectively .

$5,000 (which is greate than 10 percent of the tax required to r be shown on the„returns --$ 2,843 in 2001 and $3,461 in 2002) , those~,understatements are substantial within the meaning o f section 6662(d) ,(1) (A) .

Respondent bears the burden of production with respect to the section(cid:127)6662 ( a) penalty .

See sec . 7491 ( c) . We have previously stated that the "burden imposed by section7491(c) is only to-come-forward with evidence regarding the appropriateness of applying a particular addition to tax or penalty to the taxpayer ."

Weir v . Commissioner , T .C . Memo . 2001-184 ;x .

Respondent has 'satisfied his burden of production . Nevertheless , the accuracy-related penalty specified by section 6662(a) is no t imposed with respect to any portion of the underpayment as to which the taxpayer has acted with reasonable cause and good faith . Sec . 6664(c)(1) . The taxpayer bears the burden of proving his entitlement to section 6664(c)(1) relief .

Higbee v .

Commissioner , :116 T .C . 438, 446 (2001) . Petitioners ;are well educated, with experience in business and accounting ." Indeed, Mr . Good is a-?certified public accountant and, during the years in question, was a partner in an accounting firm . Petitioners should have been aware that the ShopN2000 .com was a tax-reduction scheme . We are convinced that, without tax benefits ; there was no reasonable,;prospect of making any money, from the scheme .

, Petitioners have failed to show that they understood anythin g different . . Petitioners have failed to show that, with respect to - 2 5 any portion of the u derpayments, they acted with reasonable cause and in good faith . .

Petitioners are liable for the section 6662(a) penalty determined by respond nt .

IV . - Conclusio n Petitioners are fable for the deficiencies . in tax and penalties determined y respondent .

Decision will be entere d for respondent .

1. Petitioners argue that the burden of proof has shifted to respondent pursuant to sec : 7491(a) . We disagree . Petitioners have failed to introduce credible evidence in support of their assignment oV error . See sec . 7491(a)(1) . Nevertheless, respondent bears the burden of production with respect to the sec . 6662 penalty . See sec . 7491(c) .
2. In determining the deficiencies in question, respondent made certain additional adjustments that are merely computational . There is no dispute concerning those adjustments, and we do not further discuss them .
3. Sec . 44 allows credit for an expenditure to provide access to disabled pers ns, but sec . 44(d)(7)-denies a .deduction for the same expenditur - 16 '- Petitioners claim that they are entitled to deduct th e II Schedule C expenses under sections 162 and 212 .' Section 212 i s similar to section 162 in that it allows as a deduction "all th e ordinary and nebessary expenses paid or incurred during the taxable year" in connection with, among other things, "the production or collection of income" . We assume that petitioner s are relying primarily on section 162(a) since they describe th e Schedule C activity as a,-"small business " .
4. In 2002, petitioners deducted $338 of interest that, if deductible, would be deductible under sec . 163 .