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technical ability, his years of experience, and the difficulty of
replacing Mr. Heitz with the fact that the corporate entity would
have shown a reasonable return for the equity holders, after
considering petitioners' concessions.
Issue 2. Accuracy-Related Penalty: Exacto
The next issue is whether petitioner is liable for accuracy-
related penalties pursuant to section 6662(a). Section 6662(a)
imposes an accuracy-related penalty of 20 percent on any portion
of an underpayment of tax that is attributable to items set forth
in section 6662(b). Respondent contends that either negligence
or substantial understatement of tax under section 6662(b)(1) and
(2) applies in the instant case.
Negligence includes any careless, reckless, or intentional
disregard of rules or regulations, any failure to make a
reasonable attempt to comply with the provisions of the law, and
any failure to exercise ordinary and reasonable care in
preparation of a tax return. Zmuda v. Commissioner, 731 F.2d
1417, 1422 (9th Cir. 1984), affg. 79 T.C. 714 (1982).
Section 6662(b)(2) specifies that a penalty shall be imposed
on “Any substantial understatement of income tax.” An
understatement is substantial if it exceeds the greater of 10
percent of the tax required to be shown on the return, or $10,000
for a corporation.
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