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on excluding the "negligent" income (i.e., the $102,519).2
Respondent then imposed the 20-percent penalty on the difference,
the difference representing the underpayment attributable to
negligence. Petitioner calculated the underpayment of tax
attributable to negligence as the excess of tax based on income
of $102,519 plus the reported income, over the tax shown on his
return. It is only because of the different tax rates at
different levels of taxable income that respondent's method
results in a higher penalty than the method petitioner
advocates.3
Section 1.6664-3, Income Tax Regs., provides the rules for
determining the order in which adjustments to a return are taken
into account for the purpose of computing the penalties imposed
under sections 6662 and 6663. The adjustments to the return are
made in the following order:
(1) Those with respect to which no penalties have
been imposed.
(2) Those with respect to which a penalty has been
imposed at a 20 percent rate (i.e., a penalty for
negligence or disregard of rules or regulations,
substantial understatement of income tax, or
substantial valuation misstatement, under sections
6662(b)(1) through 6662(b)(3), respectively).
2 Since this case only involves two adjustments, one with
respect to which no penalty applies and one to which a penalty
does apply, the underpayment excluding the "negligent" income is
the same as the underpayment that results from adding the
"nonnegligent" income to that shown on the return.
3 In this case, respondent's computation results in an
accuracy-related penalty of $8,119 and petitioner's in $5,298.
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Last modified: May 25, 2011