to penalties.6 See sec. 7491(c). Therefore, 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. Having described the framework of section 7491(c), we evaluate whether respondent has met his burden of production with regard to the section 6651(a)(1) addition to tax and the section 6662 accuracy-related penalty. We also discuss whether petitioners have presented any evidence which would cause us not to sustain respondent's determinations with regard to the addition to tax and the accuracy-related penalty. Section 6651(a)(1) imposes an addition to tax for a taxpayer's failure to file a required return on or before the specified filing date, including extensions. The amount of the liability is based upon a percentage of the tax required to be shown on the return. See sec. 6651(a)(1). The addition to tax is inapplicable, however, if the taxpayer's failure to file the return was due to reasonable cause and not to willful neglect. See sec. 6651(a)(1). Under section 7491(c), as noted above, the Commissioner bears the burden of production with regard to whether the section 6651(a)(1) addition to tax is appropriate, but he does not bear the burden of proof with regard to the “reasonable cause" exception of section 6651(a). Respondent determined that petitioners are liable for a section 6651(a)(1) addition to tax with regard to their 1996 tax return. The parties have stipulated that petitioners filed their 1996 return on April 18, 1998, approximately 1 year after it was due. Accordingly, we conclude that respondent has produced sufficient evidence to show that the section 6651(a)(1) addition to tax is appropriate, unless petitioners prove that their failure to file was due to reasonable cause. Petitioners have not provided any evidence indicating that their failure to file was due to reasonable cause. Therefore, an addition to tax of 25 percent of the amount required to 6 We note that sec. 6665(a)(2) provides that any reference to tax shall be deemed also to refer to penalties. However, the application of sec. 6665(a)(2) is limited by the language "Except as otherwise provided in this title". Considering that limiting language of sec. 6665(a)(2), the reference in sec. 7491(a) to tax liabilities imposed by subtit. A or B (whereas penalties are imposed by subtit. F), and the structure of sec. 7491 as a whole, we believe that Congress intended for sec. 7491(c) (and not sec. 7491(a)) to apply to penalties. 7In addition, the 1996 tax return, which is part of the record, reflects that it was not timely filed. be shown as tax on the return is sustained in the instant case. Because the parties have made several concessions, respondent's original section 6651(a)(1) addition to tax computation must be adjusted to reflect such changes. As a final matter, we note that there is a discrepancy in the record with regard to petitioners' amount of withholding. See sec. 6651(b)(1) (providing that the amount required to be shown as tax on the return for purposes of the section 6651(a)(1) addition to tax shall be reduced for timely payments or credits allowed to be claimed on the return). The parties are asked to consider this discrepancy in their Rule 155 computations. Pursuant to section 6662(a), a taxpayer may be liable for a penalty of 20 percent on the portion of an underpayment of tax (1) attributable to a substantial understatement of tax or (2) due to negligence or disregard of rules or regulations. See sec. 6662(b). A substantial understatement of tax is defined as an understatement of tax that exceeds the greater of 10 percent of the tax required to be shown on the tax return or $5,000. See sec. 6662(d)(1)(A). The understatement is reduced to the extent that the taxpayer has (1) adequately disclosed his or her position and has a reasonable basis for such position or (2) has substantial authority for the tax treatment of the item. See sec. 6662(d)(2)(B). In addition, section 6662(c) defines "negligence" as any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code, and “disregard” means any careless, reckless, or intentional disregard. Whether applied because of a substantial understatement of tax or negligence or disregard of rules or regulations, the accuracy-related penalty is not imposed with respect to any portion of the understatement as to which the taxpayer acted with reasonable cause and in good faith. See sec. 6664(c)(1). The decision as to whether the taxpayer acted with reasonable cause and in good faith depends upon all the pertinent facts and circumstances. See sec. 1.6664–4(b)(1), Income Tax Regs. Relevant factors include the taxpayer's efforts to assess his proper tax liability, including the taxpayer's reasonable and good faith reliance on the advice of a professional such 8 Petitioners claimed withholding of $154.46 on their 1996 tax return. It appears that respondent did not give credit for such withholding in the notice of deficiency. as an accountant. See id. Further, an honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge, and education of the taxpayer may indicate reasonable cause and good faith. See Remy v. Commissioner, T.C. Memo. 1997-72. For the 1997 tax year, respondent determined that petitioners are liable for an accuracy-related penalty attributable to a substantial understatement of tax or, in the alternative, due to negligence or disregard of rules or regulations. Petitioners have conceded that they are not entitled to $30,245 in itemized deductions relating to NOL carryovers ($28,036) and certain taxes ($2,209) claimed on Schedule A of their 1997 tax return. With regard to respondent's determination that petitioners were negligent and disregarded rules and regulations, respondent argues that he has met his burden of production under section 7491(c) through petitioners' above concessions, along with evidence in the record indicating that petitioners were experienced in business affairs. Further, respondent contends that because petitioners have failed to introduce any evidence to indicate that they were not negligent, petitioners have failed to meet their burden of proof, which they retain despite the application of section 7491(c). Respondent has shown that petitioners have failed to keep adequate books and records or to substantiate properly the items in question. Such a failure in the instant case is evidence of negligence. See sec. 1.6662-3(b), Income Tax Regs. Consequently, we conclude that respondent has met his burden of production for his determination of the accuracyrelated penalty based on negligence or disregard of rules or regulations. Additionally, with regard to that determination, petitioners have failed to meet their burden of proving that they acted with reasonable cause and in good faith. We therefore sustain respondent's determination that petitioners are liable for the accuracy-related penalty on the underpayment associated with the disallowed itemized deductions conceded by petitioners.9 9 Because of respondent's concessions, see supra p. 439, we conclude that the accuracy-related penalty based on a substantial understatement of tax is not applicable as the understatement does not exceed the greater of 10 percent of tax required to be shown on the return or $5,000. See sec. 6662(d)(1). In reaching our holdings herein, we have considered all arguments made, and to the extent not mentioned above, we find them to be moot, irrelevant, or without merit. To reflect the foregoing, Decision will be entered under Rule 155. D.G. SMALLEY AND NELL R. SMALLEY, PETITIONERS v. RESPONDENT Docket No. 2767-98. Filed June 14, 2001. In 1994, H entered into a deferred exchange whereby he relinquished 2-year timber cutting rights on his land and in return received in 1995 fee simple interests in three parcels of real estate. The transferee's obligation to transfer replacement property to H was secured by cash held in a qualified escrow account as defined in sec. 1.1031(k)-1(g)(3), Income Tax Regs. Held, at the beginning of the exchange period, H had a bona fide intent to enter into a deferred exchange of like-kind property within the meaning of sec. 1.1031(k)– 1(j)(2)(iv), Income Tax Regs. Under sec. 1.1031(k)-1(g)(3) and (j)(2), Income Tax Regs., H was not in actual or constructive receipt of property in 1994, and under the installment sale rules of sec. 453, I.R.C., Ps are not required to recognize income from the deferred exchange in 1994. David D. Aughtry and Brett W. Beveridge, for petitioners. David R. MacKusick, for respondent. THORNTON, Judge: Respondent determined a $139,180 deficiency in petitioners' joint 1994 Federal income tax. After concessions, the sole issue for decision is whether petitioners are required to recognize income in 1994 as the result of a deferred exchange that petitioner husband (petitioner) entered into in 1994 and that was completed in 1995. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for taxable year 1994. Rule references are to the Tax Court Rules of Practice and Procedure. FINDINGS OF FACT The parties have stipulated some of the facts, which we incorporate in our findings by this reference. When they filed their petition, petitioners resided in Dublin, Georgia. In the 1960's, petitioner acquired some 275 acres of timberland in Laurens County, Georgia. By 1994, some of the timber on this land had reached maturity. After attending a seminar on timber exchanges presented by a well-known timber taxation expert and after consulting with his longtime certified public accountant, petitioner decided to undertake an exchange of standing timber for additional acreage containing standing timber. As described in more detail below, on November 29, 1994, petitioner entered into a series of agreements with Rayonier, Inc. (Rayonier), whereby for a term of 2 years he granted Rayonier exclusive rights to cut and remove mature timber on some 95 acres of his Laurens County land (the 95 acres), in consideration of $517,076. Pursuant to the agreements, most of the funds were held by an escrow agent and applied toward the purchase of three parcels of land as designated by petitioner. More particularly, the "TIMBER CONTRACT" between petitioner and Rayonier, executed November 29, 1994, provides that in consideration of $517,076, petitioner grants Rayonier "the exclusive license and right to cut all merchantable pine and hardwood timber suitable for poles, sawtimber, or pulpwood, which are located within the timber sale boundaries of *** [the 95 acres] now growing and hereafter to grow during the term hereof upon the land in Laurens County." The timber contract states: The term of this contract shall be for a period commencing with the date hereof and ending on November 29, 1996 (24 months). In the event * * * [Rayonier] has not completed the cutting and removing of said bargained timber at the expiration of the above stated term because of abnormal circumstances such as weather conditions, *** [petitioner] [agrees] to extend the term of this contract for a period of time necessary to complete the harvesting of timber but in no event shall the extension exceed Six (6) months. Pursuant to the terms of the timber contract, Rayonier was to pay the $517,076 purchase price, less $12,141 timber ad |