- 10 - Consequently, we conclude that petitioner did not exercise the care of a reasonably prudent tax lawyer and is therefore liable for the addition to tax for negligence. II. Addition to Tax for Substantial Understatement Under Section 6661(a) In the case of a substantial understatement, section 6661(a) provides for an addition to tax in the amount of 25 percent of the amount of any underpayment attributable to such understatement.1 An "understatement" is the excess of the amount of tax required to be shown on the return over the amount actually shown on the return. Sec. 6661(b)(2)(A). An understatement is "substantial" (in the case of a noncorporate taxpayer) if the amount of the understatement exceeds the greater of (1) 10 percent of the tax required to be shown on the return, or (2) $5,000. The amount of the understatement generally is reduced by the portion of the understatement attributable to (1) the tax treatment of an item if there was substantial authority for such treatment, or (2) any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return. Sec. 6661(b)(2)(B). To prove that substantial authority exists in the case of a tax shelter, section 6661(b)(2)(C)(i)(II) provides that the taxpayer must establish that he reasonably believed that the 1 This rule is applicable to returns due in 1984 where an assessment is made after Oct. 21, 1986. Pallottini v. Commissioner, 90 T.C. 498 (1988).Page: Previous 1 2 3 4 5 6 7 8 9 10 11 Next
Last modified: May 25, 2011