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Petitioners merely testified vaguely about losses in 1983 and
1984. Even if respondent had audited the return for 1984 without
change, there is no evidence that the net operating loss was
correctly computed for that year or would have made a difference
for that year. To be entitled to deduct the claimed net
operating loss, petitioners would have to show that the losses
were sustained and how much was offset against taxable income in
earlier years. See sec. 172(b); Davis v. Commissioner, 674 F.2d
553 (6th Cir. 1982), affg. T.C. Memo. 1980-581; Jones v.
Commissioner, 25 T.C. 1100 (1956), revd. and remanded on another
issue 259 F.2d 300 (5th Cir. 1958); Egly v. Commissioner, T.C.
Memo. 1988-223; Naegle v. Commissioner, T.C. Memo. 1965-212,
affd. per curiam 378 F.2d 397 (9th Cir. 1967).
Additions to Tax and Penalties
Our discussion above concludes that petitioners are liable
for the additions to tax and penalties for fraud for each year,
and the alternative determinations with respect to negligence and
delinquency are therefore moot.
Respondent also determined additions to tax under section
6661 for 1985 through 1988. Section 6661 imposes an addition to
tax if there was a substantial understatement of income tax for
any taxable year. There was a substantial understatement if the
amount of the understatement exceeded the greater of
(1) 10 percent of the tax required to be shown on the return for
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