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Section 6662(d)(2)(B) provides that the amount of the
understatement shall be reduced by the portion of the
understatement that is attributable to the tax treatment of any
item if: (1) There is or was substantial authority for such
treatment; or (2) if the relevant facts affecting the item's tax
treatment are adequately disclosed in the return or in a
statement attached to the return.
Section 1.6662-4(f)(2), Income Tax Regs., provides that the
Commissioner may prescribe by revenue procedure the circumstances
under which information provided on the return will constitute
adequate disclosure for purposes of section 6662. The
Commissioner issued Rev. Proc. 93-33, 1993-2 C.B. 470, and Rev.
Proc. 94-36, 1994-1 C.B. 682, which describe the requirements for
adequate disclosure for purposes of the reasonableness of officer
compensation for tax years using 1992 and 1993 tax forms.
Petitioner complied with these requirements by providing Mr.
Heitz’ name, Social Security number, stock ownership, percentage
of time devoted to Exacto, and the amount of the compensation on
Schedule E of its return for each of the years in issue.5
Accordingly, petitioner's understatement for FY 1993 was
adequately disclosed and will be evaluated only to determine
whether there was negligence under section 6662(b)(1).
5 Petitioner used 1992 and 1993 tax forms for FY 1993 and FY
1994, respectively.
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