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6. Conclusion
We conclude that the second part of the Moline Properties
test is met because Rosewood Kennels, Inc., actually engaged in
business.1 Thus, we recognize Rosewood Kennels, Inc., as a
corporation in 1990 for Federal tax purposes. Petitioners have
not shown that any of the losses were their personal losses. We
sustain respondent's determination that the losses at issue were
those of Rosewood Kennels, Inc., in 1990.
D. Substantial Understatement of Tax
Respondent determined that petitioners are liable for the
accuracy-related penalty because they substantially understated
their tax under section 6662(a).
The penalty under section 6662 does not apply to any part of
an underpayment for which there was reasonable cause and the
taxpayer acted in good faith. Sec. 6664(c)(1). Whether a
taxpayer acted with reasonable cause and in good faith depends on
all pertinent facts and circumstances. Sec. 1.6664-4(b)(1),
Income Tax Regs. Circumstances that may indicate reasonable
cause and good faith include an honest misunderstanding of fact
or law that is reasonable in light of the experience, knowledge,
and education of the taxpayer. Id.
1 In light of our conclusion, we need not decide whether the
first part of the Moline Properties, Inc. v. Commissioner, 319
U.S. 436 (1943), test is met.
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