Tommy L. and Patricia A. Hobson - Page 6

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          petitioners are not liable for the addition to tax under section            
          6651 for taxable year 1990 as determined by respondent.                     
          Issue 3.  Section 6662 Substantial Understatement                           
               Respondent determined that petitioners are liable for the              
          section 6662(a) penalty for 1990.  Section 6662(a) imposes an               
          accuracy-related penalty in an amount equal to 20 percent of the            
          underpayment of tax attributable to one or more of the items set            
          forth in section 6662(b).  In the notice of deficiency,                     
          respondent based the determination of the section 6662(a) penalty           
          on petitioners' underpayment being due to a substantial                     
          understatement.  See sec. 6662(b)(2).  A "substantial                       
          understatement" occurs when an understatement exceeds the greater           
          of $5,000 or 10 percent of the amount of tax required to be shown           
          on a return.  Sec. 6662(d)(1)(A).  An "understatement" means the            
          excess of the amount of the tax required to be shown on a return            
          over the amount of tax imposed which is shown on the return,                
          reduced by any rebate (within the meaning of section 6211(b)(2)).           
          Sec. 6662(d)(2)(A).                                                         
               The accuracy-related penalty under section 6662(b)(2) does             
          not apply with respect to any portion of an underpayment if it is           
          shown that there was reasonable cause for such portion and that             
          petitioners acted in good faith with respect to such portion.               
          Sec. 6664(c)(1).  The determination of whether petitioners acted            

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