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Respondent determined an addition to tax of $40,349 under
section 6661 for taxable year ended July 31, 1989. Section
6661(a) imposes an addition to tax of 25 percent of the amount
of any underpayment attributable to a substantial understatement
of tax. An understatement is the difference between the amount
required to be shown on the return and the amount actually shown
on the return and is substantial if it exceeds the greater of
(1) 10 percent of the tax required to be shown on the return for
a taxable year, or (2) $10,000. Sec. 6661(b)(1) and (2)(A);
Tweeddale v. Commissioner, 92 T.C. 501, 505 (1989). The amount
of the understatement can be reduced if substantial authority
existed for the taxpayer's tax treatment of the item in dispute
or if the taxpayer adequately disclosed relevant facts regarding
the taxpayer's treatment of the item in the return or in a
statement attached to the return. Sec. 6661(b)(2)(B). The
taxpayer has the burden of proving it is not liable for the
addition to tax. Rule 142(a). Petitioner does not contend that
substantial authority existed for its position or that it
adequately disclosed the relevant facts.
Rather, petitioner maintains that it had reasonable cause
for the understatement. Section 6661(c) provides that the
Commissioner may waive the addition to tax if the taxpayer
proves that reasonable cause existed for the understatement and
the taxpayer acted in good faith. The most important factor in
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