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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). Petitioners bear the burden of proving that
the addition to tax under section 6661 does not apply. Rule
142(a); Tweeddale v. Commissioner, 92 T.C. 501, 506 (1989).
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). Neither of these exceptions applies
here.
Petitioners argue that they did not substantially understate
their income for 1987 if all deductions and economic losses are
allowed for that year. They also argue that there was no
substantial understatement for 1988 because the tax liability
for 1988 is not substantial.
Petitioners omitted large amounts of income from their
1987 and 1988 joint returns, which caused substantial
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