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.
COMMISSIONER OF INTERNAL REVENUE,

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

valorem taxes, to an escrow agent, Francis M. Lewis (Lewis).1

Also on November 29, 1994, petitioner and Rayonier executed a "MEMORANDUM OF CONTRACT", reciting that they had as of that date entered into the timber contract (referred to in the Memorandum of Contract as a "Timber Indenture Agreement"), whereby petitioner had conveyed to Rayonier:

All merchantable pine and hardwood timber suitable for poles, sawtimber, or pulpwood, which are located within *** [the 95 acres].

And, subject to the provisions of * * * [the timber contract], the right to cut and remove from the above-described lands all and singular of the said described trees and timber.

Petitioner recorded this memorandum of contract (but apparently not the timber contract) in the real property deed records of Laurens County, Georgia.

Also on November 29, 1994, petitioner and Rayonier executed a "TAX FREE EXCHANGE AGREEMENT". This agreement provides in relevant part:

WHEREAS, * *** [Rayonier] and *** [petitioner] have entered into an Agreement for the purchase of timber wherein *** [petitioner] has agreed to sell to *** [Rayonier] and *** [Rayonier] has agreed to purchase from *** [petitioner] certain timber growing on property of * * * [petitioner]; and

WHEREAS, *** [Rayonier] has agreed to cooperate with *** [petitioner] in the effectuation of a tax free exchange, pursuant to Section 1031 of the Internal Revenue Code; and

WHEREAS, certain property will be designated by *** [petitioner] to be acquired for the purpose of an exchange within one hundred eighty (180) days of the sale of the timber by *** [petitioner] to * * * [Rayonier] and an escrow agent will be designated by *** [petitioner] to receive and hold the monies from the sale as allowed by Section 1031 of the Internal Revenue Code; and

NOW, THEREFORE, for and in consideration of the mutual benefits and detriments to the Parties, IT IS AGREED AS FOLLOWS:

1.

The Parties hereto agree that the sell [sic] of the timber by * * * [petitioner] to *** [Rayonier] is expressly conditioned upon reasonable cooperation and a tax free exchange qualifying under Section 1031 of the Internal Revenue Code, and all Parties to this Agreement agree to

1 Francis M. Lewis is an attorney licensed to practice in the State of Georgia. He performed no services for petitioner during the 2-year period preceding Nov. 29, 1994, and is not related to petitioner.

cooperate to the extent set forth herein. The acquisition by [Rayonier] of the timber and the acquisition by *** [petitioner] of the property to be designated are intended to be mutually interdependent transactions for the purpose of qualifying under Section 1031 of the Internal Revenue Code.

2.

*** [Rayonier] shall upon the closing of the sale of the timber transaction between *** [Rayonier] and * * * [petitioner] pay the total purchase price due for said timber to Francis M. Lewis, Escrow Agent, and not to *** [petitioner].

Also on November 29, 1994, petitioner, Rayonier, and Lewis executed an escrow agreement. The agreement states that petitioner "intends for his exchange under * * * [the timber contract] to permit *** [petitioner] to report the receipt of the exchange property under the income tax deferral rules of Section 1031(a) of the Internal Revenue Code". The escrow agreement provides that on the closing of the timber contract, Rayonier will deliver to Lewis the net purchase price ($517,076 less $12,141 ad valorem taxes) to be held in escrow and paid out as provided in the escrow agreement. The escrow agreement (wherein petitioner is referred to as seller and Rayonier is referred to as purchaser) further provides in part:

3.

Seller will designate certain real estate referred to in a Tax Free Exchange Agreement between Purchaser and Seller, which shall be acquired by Purchaser and transferred to Purchaser. The Escrow Agent agrees to apply the funds toward the purchase of the property as directed by the Purchaser.

Title to the exchange property shall be acquired in the name of the Escrow Agent, as Agent for the Purchaser, and then conveyed by Escrow Agent to Seller. In the event the costs of acquiring and thereafter conveying the exchange property can be reduced by a direct transfer from the Seller [sic] of the exchange property to Seller, the Escrow Agent may arrange for a direct transfer to Seller upon receipt by Escrow Agent of a request from Seller.

7.

In no event shall Seller have use or control of the funds contained in escrow on or before termination of said escrow. Seller shall not have the right to sell, assign, transfer, encumber or in any other manner anticipate or dispose of his interest in said escrow until the same is actually paid over to and received by Seller.

Pursuant to the escrow agreement and the timber contract, on November 29, 1994, Lewis received from Rayonier net proceeds of $504,935 (the escrow funds), which he deposited