Beaver Bolt Inc. - Page 25

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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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