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issue, petitioners' understatement was substantial within the
meaning of section 6661(b)(1)(A).
The amount of the understatement may be reduced by that
portion of the understatement which is attributable to either:
(1) The tax treatment of any item by the taxpayer if there is or
was substantial authority for such treatment; or (2) any item
with respect to which the relevant facts affecting the item's tax
treatment are adequately disclosed in the return or in a
statement attached to the return. Sec. 6661(b)(2)(B). However,
if the understated item is attributed to a "tax shelter", within
the meaning of section 6661(b)(2)(C)(ii), a reduction in the
understatement is not permitted unless the tax treatment of the
item used is supported by substantial authority and the taxpayer
believed that the tax treatment of such item was more likely than
not the proper tax treatment. Sec. 6661(b)(2)(C)(i)(II).
We conclude that Irving & Co. was a tax shelter within the
meaning of section 6661(b)(2)(C)(ii). Therefore, even if
petitioner adequately disclosed the nature of the understated
items on their return, which they did not do, they could not have
avoided the addition for substantial understatement. Sec.
6661(b)(2)(C)(i)(I).
The question now is whether petitioners have substantial
authority for their treatment of the items in question and did
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