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Accordingly, the questions in terms of the instant case are: (1)
Whether the Code clearly provides how to compute the portion of
the underpayment which is attributable to negligence; and, if
not, (2) whether section 1.6664-3(b), Income Tax Regs., is a
permissible construction of sections 6662(a) and (b) and 6664(a).
In United States v. Craddock, ___ F.3d ___ (10th Cir.,
May 1, 1998), the Commissioner determined an addition to tax for
substantial understatement of tax under section 6661 for the
taxable year 1985.4 The taxpayer had disclosed one of the
unreported income items in the return. Section 6661(a) imposed a
25-percent addition to tax on the amount of any underpayment
attributable to a substantial understatement, but section
6661(b)(2)(B) provided that the amount of the understatement be
reduced by "that portion of the understatement which is
attributable to" items which the taxpayer disclosed. The
Commissioner computed the addition to tax in accordance with
section 1.6661-2, Income Tax Regs., comparing the total tax
required with that calculated as if the disclosed item had been
reported on the return, to determine the amount of the
understatement. The taxpayer argued, as does petitioner herein,
that the understatement should be computed by calculating the tax
4 Sec. 6661 was repealed in 1989, and the substantial
understatement penalty was placed, along with the negligence
penalty at issue herein, in a new sec. 6662. Omnibus Budget
Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(a),
(c)(2), 103 Stat. 2106, 2395, 2399.
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