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Because no evidence was introduced relating to the earnings
and profits of Roy, Inc., the entire amount of the expenses paid by
Roy, Inc. constitutes constructive dividends. Rule 142(a).
Issue 3. Accuracy-Related Penalties
The final issue for decision is whether the corporate and/or
the individual petitioners are liable for the accuracy-related
penalty, pursuant to section 6662, for negligence or disregard of
rules or regulations or substantial understatement of tax.
Respondent determined a penalty for the corporate petitioner for
1991, 1993, and 1994, and a penalty for the individual petitioners
for each of the years in issue. Petitioners generally assert a
reasonable cause defense.
Section 6662 imposes a penalty equal to 20 percent of the
amount of the underpayment attributable to negligence or disregard
of rules or regulations or substantial understatement of tax.
"Negligence" means any failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue Code, and
"disregard" means any careless, reckless, or intentional disregard.
Sec. 6662(c). A substantial understatement of tax means an
understatement of tax which exceeds the greater of 10 percent of
the tax required to be shown on the tax return or $5,000. Sec.
6662(d)(1)(A).
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