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and final regulations issued pursuant to the Code. Sec. 6662(c);
sec. 1.6662-3(b)(2), Income Tax Regs.
The accuracy-related penalty does not apply to any portion
of an underpayment with respect to which it is shown that there
was a reasonable cause and that the taxpayer acted in good faith.
Sec. 6664(c)(1). The decision as to whether the taxpayer acted
with reasonable cause and in good faith depends on all pertinent
facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
The most important factor is the extent of the taxpayer's efforts
to assess the proper tax liability. Id. 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. Id.
Petitioner bears the burden of proof. Rule 142(a); ASAT Inc. v.
Commissioner, 108 T.C. 147, 175 (1997).
As to the disallowed deductions for 1993 and 1994,
petitioner failed to prove that her lack of substantiation was in
good faith or due to reasonable cause. Similarly, petitioner
failed to show that she acted in good faith and due to reasonable
cause in underreporting her income for both years in issue.
Therefore, we hold that an accuracy-related penalty attributable
to such amounts is appropriate.
However, we hold that the accuracy-related penalty does not
apply to the portion of the underpayment attributable to
petitioner's claimed exemption on behalf of Jasmine and Brandy
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