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substantiate items properly. See sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. A “substantial understatement”
includes an understatement of tax that exceeds the greater of 10
percent of the tax required to be shown on the return or $5,000.
See sec. 6662(d); sec. 1.6662-4(b), Income Tax Regs. The
Commissioner bears the burden of production. Sec. 7491(c).
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion. 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 the pertinent 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
his proper tax liability for the year. Id. Reliance on the
advice of a professional tax adviser does not necessarily
demonstrate reasonable cause and good faith. Id.
For a taxpayer to rely reasonably upon advice so as to
negate a section 6662(a) accuracy-related penalty determined by
the Commissioner, the taxpayer must prove by a preponderance of
the evidence that the taxpayer meets all of the following
requirements: (1) The adviser was a competent professional who
had sufficient expertise to justify reliance, (2) the taxpayer
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Last modified: November 10, 2007