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understatement is reduced by the portion of the understatement
attributable to an item for which there is substantial authority
for the treatment by the taxpayer or where the relevant facts
affecting the item's tax treatment are adequately disclosed in
the return or in a statement attached to the return. Sec.
6662(d)(2)(B).
The Kudos’ failure to maintain and to produce reliable
records of their financial transactions and taxable income
supports a conclusion of negligence. Crocker v. Commissioner, 92
T.C. 899, 917 (1989); Schroeder v. Commissioner, 40 T.C. 30, 34
(1963). Moreover, they cannot avoid the penalty on the grounds
of reliance on their tax preparer, because the Kudos did not
provide Nakamura with bank records or other records of the bank
deposits sufficient to prepare their returns accurately. Metra
Chem. Corp. v. Commissioner, 88 T.C. 654, 662 (1987). The
evidence justifies imposition of the penalty for negligence
and/or substantial understatement for each year.
We apply the penalty only to the portion of the
understatement attributable to unexplained bank deposits and to
the "Taxes Paid by Employer" issue for 1990, not to other items
raised in the notice of deficiency.
The Takaos
Unreported Income
Respondent contends that the Takaos had unreported income
for the years in issue, as evidenced by the unexplained bank
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