Kaps Warehouse, Inc. - Page 28

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           improper extension of rebates to its related entities and                                  
           petitioner's improper writedown of ending inventory for the years                          
           at issue.  Although petitioner conceded the ending inventory issue,                        
           petitioner argues that these penalties are inapplicable to both                            
                 Section 6662(b)(2) imposes a penalty equal to 20 percent of                          
           the portion of an underpayment of tax that is attributable to any                          
           substantial understatement of tax.  Sec. 6662(a) and (b)(2).  An                           
           understatement of tax is substantial in the case of a corporation                          
           when it exceeds the greater of 10 percent of the tax required to be                        
           shown on the return or $10,000.  Sec. 6662(d)(1)(B).  The amount of                        
           an understatement will be reduced if a taxpayer has substantial                            
           authority for the way an item was treated, or if the facts that                            
           affect the item's tax treatment are adequately disclosed in the                            
           return.  Sec. 6662(d)(2)(B).  A taxpayer has the burden of proving                         
           that the Commissioner's determination of an addition to tax is in                          
           error.  Luman v. Commissioner, 79 T.C. 846, 860-861 (1982).                                
                 The accuracy-related penalty does not apply to any portion of                        
           an underpayment if there was reasonable cause for such portion and                         
           the taxpayer acted in good faith.  Sec. 6664(c)(1).  Such a                                
           determination is made by taking into account all facts and                                 
           circumstances, including the experience, knowledge, and education                          
           of the taxpayer and reliance on a professional tax adviser.  Sec.                          
           1.6664-4(b)(1), Income Tax Regs.                                                           

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Last modified: May 25, 2011