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penalty applies because of petitioners' substantial
understatement of tax.
As to the portion of the underpayment resulting from our
holding that the S Corporation is not entitled to the entire
amount deducted for attorneys' fees, although we calculate that
no substantial understatement of tax exists, we conclude that
petitioners have not established that they kept adequate books
and records. Sec. 6662; sec. 1.6662-3(b)(1), Income Tax Regs.
As evidence of the propriety of the deduction of attorneys' fees,
petitioners rely only on petitioner's own belief, "supported" by
the testimony of one of the attorneys who rendered services, that
the "vast majority" of the attorneys' fees were incurred in
connection with the embezzlement suit. Petitioners, however,
produced no bills or checks documenting the nature of the $34,226
claimed as a deduction for attorneys' fees. Moreover, Mr.
Cramer's testimony was far from conclusive as to the amount of
fees attributable to the embezzlement suit. Consequently, we
conclude that petitioners have not satisfied the requirements of
section 1.6662-3(b)(1), Income Tax Regs.
Nevertheless, no penalty may be imposed pursuant to section
6662 if petitioners establish that there was a reasonable cause
for the portion of the underpayment and that they acted in good
faith with respect to such portion. Sec. 6664(c)(1). In light
of the experience, knowledge, and education of petitioner, a
certified public accountant, we believe that he should have kept
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