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to tax is 25 percent of the underpayment attributable to a
substantial understatement. Pallottini v. Commissioner, 90 T.C.
498 (1988). The amount of the understatement, however, is
reduced by amounts attributable to items for which (1) there
existed substantial authority for the taxpayer's position, or
(2) the taxpayer disclosed relevant facts concerning the items
with his tax return. Sec. 6661(b)(2)(B).
If, however, the understatement is attributable to a tax
shelter, disclosure of the item will not enable the taxpayer to
avoid the addition, and the substantial authority test will not
apply unless the taxpayer can show that he reasonably believed
the treatment causing the understatement was more likely than not
proper. Sec. 6661(b)(2)(C)(i). The term "tax shelter" includes
"any investment plan or arrangement * * * if the principal
purpose of such * * * plan, or arrangement is the avoidance or
evasion of Federal income tax." Sec. 6661(b)(2)(C)(ii). Section
1.6661-5(b)(iii), Income Tax Regs., interprets the term "tax
shelter" as follows:
The principal purpose of an entity, plan, or
arrangement is the avoidance or evasion of Federal
income tax if that purpose exceeds any other purpose.
* * * Typical of tax shelters are transactions
structured with * * * nonrecourse financing * * *. The
existence of economic substance does not of itself
establish that a transaction is not a tax shelter if
the transaction includes other characteristics that
indicate it is a tax shelter.
Section 1.6661-5(a), Income Tax Regs., specifies that, to
meet the reasonable belief standard of section 6661(b)(2)(C)
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