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the circumstances. Neely v. Commissioner, 85 T.C. 934, 947
(1985).
The addition to tax for substantial understatement of tax is
equal to 25 percent of the amount of the underpayment
attributable to the understatement. Sec. 6661(a). In the case
of individuals, an understatement is substantial where it exceeds
the greater of $5,000 or 10 percent of the amount required to be
shown on the taxpayer's return. Sec. 6661(b)(1)(A). The amount
of the understatement is reduced by that portion of the
understatement that is attributable to the tax treatment of an
item by the taxpayer if there was substantial authority for such
treatment. Sec. 6661(b)(2)(B).
Respondent argues that petitioners did not properly
estimate their income tax liabilities when petitioners filed
their extension applications for their 1988 Federal income tax
returns and that therefore the extension applications that were
filed were invalid and petitioners should be treated as having
failed to timely file their 1988 Federal income tax returns.
Respondent also argues that petitioners were unreasonable and
negligent in, and lacked substantial authority for, claiming on
their 1988 Federal income tax returns the losses relating to
their horse breeding and horse racing activities and to the LB
Partnership. Petitioners bear the burden of proof on each of the
additions to tax. Rule 142(a).
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