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had just finished successfully developing its commercially
promising and potentially significantly profitable new clean room
labels.
We hold that petitioner is entitled to a $406,000 deduction
under section 162 as reasonable compensation to Mr. Martin for
its year ended June 30, 1990.
Issue 2. Accuracy-Related Penalty
Respondent determined that petitioner was liable for a
penalty under section 6662(a) and (b)(2) for substantial
understatement of its income tax for the year ended June 30,
1990.
An understatement of income tax is substantial if it exceeds
the greater of: (1) 10 percent of the tax required to be shown
on the return, or (2) for a corporation, $10,000. Sec.
6662(d)(1). As relevant to the instant case,8 any understatement
is reduced by the portion of the understatement attributable to
an item for 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. 6662(d)(2)(B)(ii).9 For
8In the notice of deficiency, respondent determined that the
entire underpayment for the year ended June 30, 1990, was
attributable to non-tax-shelter items.
9The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993),
Pub. L. 103-66, sec. 13251(a), 107 Stat. 531, amended sec.
6662(d)(2)(B)(ii), to also require a reasonable basis for the tax
(continued...)
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