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from WRI. Wise, a sophisticated taxpayer, made or supervised
making those journal entries and preparing the tax returns for
all the entities and parties involved in this case. We held that
the Wises and Eicher may not increase their respective bases in
WRI because, among other reasons, they did not follow the rules
and regulations concerning the proper timing of including income
and deducting expenses. Wise was negligent in not following
those rules. We conclude that the Wises are liable for the
additions to tax for negligence under section 6653(a).
2. Substantial Understatement
Section 6661(a) imposes an addition to tax of 25 percent of
the amount of any underpayment attributable to a substantial
understatement of tax. Pallottini v. Commissioner, 90 T.C. 498
(1988). An understatement is the amount by which the correct tax
exceeds the tax reported on the return. Sec. 6661(b)(2)(A). An
understatement is substantial if it exceeds the greater of 10
percent of the correct tax or $5,000. Sec. 6661(b)(1)(A).
If a taxpayer has substantial authority for the tax
treatment of any item on the return, the understatement is
reduced by the amount attributable to it. Sec. 6661(b)(2)(B)(i).
Similarly, the amount of the understatement is reduced for any
item adequately disclosed either on the tax return or in a
statement attached to the return. Sec. 6661(b)(2)(B)(ii).
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