Charles A. Ballard - Page 20

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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.                       
               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           
               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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