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On audit, respondent disallowed the $813,462 claimed
interest expense deduction. Respondent also determined additions
to tax under sections 6653(a)(1) for negligence and 6661 for
substantial understatement of tax.
Petitioner has conceded the disallowance of the $813,462
claimed interest expense deduction and the addition to tax under
section 6653(a)(1).
Discussion
Under section 6661(b)(1)(A), a substantial understatement of
tax occurs where the understatement exceeds the greater of $5,000
or 10 percent of the amount of tax required to be shown on the
return. The amount of the addition to tax is equal to 25 percent
of any underpayment attributable to the substantial
understatement. Sec. 6661(a).
The understatement may be eliminated if substantial
authority existed for the claimed tax treatment of the item to
which the addition to tax relates or if relevant facts regarding
the taxpayer’s treatment of the item were adequately disclosed by
the taxpayer on the tax return or in a statement attached to the
return. Sec. 6661(b)(2)(B); sec. 1.6661-4(a), Income Tax Regs.
The adequate disclosure standard will be treated as
satisfied where a taxpayer provides information on the tax return
"that reasonably may be expected to apprise the Internal Revenue
Service of the identity of the item, its amount, and the nature
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Last modified: May 25, 2011