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Section 6653(a)(1) imposes an addition to tax equal to 5
percent of the underpayment if any part of an underpayment of tax
is due to negligence or intentional disregard of rules or
regulations. In cases involving negligence, an additional amount
is added to the tax under section 6653(a)(2); such amount is
equal to 50 percent of the interest payable with respect to the
portion of the underpayment attributable to negligence.
Negligence is defined as the failure to exercise the due care
that a reasonable and ordinarily prudent person would employ
under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947
(1985). The question is whether a particular taxpayer's actions
in connection with the transactions were reasonable in light of
his experience and the nature of the investment or business. See
Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 740 (1973).
Petitioners contend that they were reasonable in claiming
deductions and credits with respect to their investment in
Hyannis and attempt to distinguish the instant case from Provizer
v. Commissioner, supra, by arguing: (1) Petitioner acted
reasonably in relying upon the offering memorandum and the advice
and representations of Miller and Roberts; and (2) petitioner is
not a well-educated, sophisticated investor and was not seeking
to shelter income through Hyannis.
When petitioners claimed the disallowed deductions and tax
credits, they had no knowledge of the plastics or recycling
industries and no engineering or technical background. There is
nothing in the record indicating that petitioners independently
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Last modified: May 25, 2011