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For returns with a due date after December 31, 1993, the
item must be adequately disclosed and there must be a reasonable
basis for the tax treatment of such item. The test to determine
whether there was a reasonable basis for the taxpayer's position
is the same standard used to determine whether the taxpayer was
negligent under section 6662(b)(1). Sec. 1.6661-3(a)(2), Income
Tax Regs. Accordingly, petitioner's understatement for FY 1994
will be evaluated using the negligence standard under section
6662(b)(1).
Respondent determined accuracy-related penalties against all
the adjustments made in the notice of deficiency. Petitioner has
conceded the penalties as to all adjustments with the exception
of the adjustment to the compensation to Mr. Heitz. Considering
the facts of this case, we find that petitioner has shown that
approximately 70 percent of the amounts claimed for salary and
bonuses paid to Mr. Heitz was reasonable. Evaluation of whether
petitioner had a reasonable basis in the claimed deductions is a
factual pursuit. The range of reasonableness for Mr. Heitz’
compensation was particularly difficult to determine in this case
given his unique skills and ability. Considering the
circumstances of this case, we find that petitioner is not liable
for the accuracy-related penalties under section 6662(a) with
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