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An understatement is substantial if it exceeds the greater of 10
percent of the tax required to be shown on the return or $5,000.
Sec. 6661(b)(1)(A). In general, if a taxpayer had substantial
authority for his tax treatment of the item in question, or if
the taxpayer adequately disclosed the tax treatment of the item
on his return, then the taxpayer may escape liability for the
addition to tax with respect to that liability. Sec.
6661(b)(2)(B). However, if the item in question is attributable
to a tax shelter, the substantial authority exception will apply
only if there was substantial authority for the treatment of the
item on the return and the taxpayer reasonably believed that the
treatment of the item was more likely than not the proper
treatment. Sec. 6661(b)(2)(B) and (C). Petitioner bears the
burden to prove that respondent's determination is in error.
Rule 142(a).
It is clear from the record that a substantial
understatement exists for 1985. Petitioner appears to concede
that there was no substantial authority for the treatment of the
charitable contribution on his 1985 return. Rather, petitioner
argues that respondent abused his discretion by failing to waive
the addition to tax for a substantial understatement of tax
liability.
Section 6661(c) provides that the Secretary may waive all or
part of the addition to tax under section 6661(a) "on a showing
by the taxpayer that there was reasonable cause for the
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Last modified: May 25, 2011