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c. Substantial Understatement
As an alternative to the addition to tax under section
6659, respondent determined an addition to tax for substantial
understatement of income tax under section 6661.
Section 6661(a) provides for an addition to tax in
the amount of 25 percent of the amount of any underpayment
attributable to a substantial understatement of income tax.
An understatement is the amount by which the correct tax
exceeds the tax reported on the return. Sec. 6661(b)(2)(A).
An understatement is substantial if it exceeds the greater
of 10 percent of the tax required to be shown on the return
or $5,000. Sec. 6661(b)(1)(A).
If a taxpayer has substantial authority for the
tax treatment of any item on the return, the understatement
is reduced by the amount attributable to it. Sec.
6661(b)(2)(B)(i). Similarly, the amount of the understatement
is reduced for any item adequately disclosed either on the
taxpayer's return or in a statement attached to the return.
Sec. 6661(b)(2)(B)(ii).
Petitioner argues that it had substantial authority for its
position, and that it reasonably relied on its tax advisers for
the tax treatment of the covenant not to compete. Petitioner
further argues that respondent should have waived the additions
to tax under section 6661. Vorsheck v. Commissioner, 933 F.2d
757, 759 (9th Cir. 1991).
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