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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
issues.
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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