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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
an "entity [such as an S corporation] * * * if the principal
purpose of such * * * entity * * * 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 * * * is the
avoidance or evasion of Federal income tax if that
purpose exceeds any other purpose. * * *
We do not believe that the principal purpose of Ballard
Marine was the avoidance of Federal tax, and we have so found.
No doubt Ballard Marine facilitated petitioner’s tax claim of a
profit objective by, among other things, providing him with a way
to pay for his own use of the yacht. Nevertheless, we are
convinced that petitioner had purposes for forming Ballard
Marine, such as limiting his liability, whose importance to him
exceeded any tax avoidance purpose. Petitioner’s understatement
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