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The amount of an understatement is reduced by the portion
thereof attributable to the tax treatment of any item for
which there is or was substantial authority, or of any item
with respect to which the relevant facts are adequately
disclosed in the return or on a statement attached to the
return. Sec. 6662(d)(2)(B).
Petitioners assert that they meet the requirements of
section 6664(c), and that no penalty can be imposed under
section 6662(a). Section 6664(c)(1) provides:
No penalty shall be imposed under this part with
respect to any portion of an underpayment if it
is shown that there was a reasonable cause for
such portion and that the taxpayer acted in good
faith with respect to such portion.
The regulations promulgated under section 6664(c)(1)
provide as follows:
The determination of whether a taxpayer acted
with reasonable cause and in good faith is made
on a case-by-case basis, taking into account all
pertinent facts and circumstances. The most
important factor is the extent of the taxpayer's
effort to assess the taxpayer's proper tax
liability. 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. [Sec. 1.6664-
4(b)(1), Income Tax Regs.]
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