Albert Lemishow - Page 5

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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               4  Sec. 6661 was repealed in 1989, and the substantial                 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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