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expenses resulted in a $55,814 understatement of income tax.
This amount is in excess of $5,000 and exceeds 10 percent of the
amount of tax required to be shown on the return.
Any understatement is reduced to the extent that it is
attributable to an item that was adequately disclosed and has a
reasonable basis, or for which there was substantial authority
for its tax treatment. Sec. 6662(d)(2)(B). Petitioners did not
make adequate disclosure, since they did not disclose on their
return or on a statement attached to the return the relevant
facts affecting the tax treatment of the sale of the Pacific
Grove property or of the reallocated items claimed on Schedule E.
See sec. 6662(d)(2)(B)(ii)(I).
The remaining question is whether there was substantial
authority for the tax treatment petitioners claimed. Substantial
authority exists when the weight of authority supporting the
treatment of an item is substantial as compared to the weight of
authority for the contrary treatment. Sec. 1.6662-4(d)(3)(i),
Income Tax Regs. In determining whether there is substantial
authority, all authorities relevant to the tax treatment of an
item, including those authorities pointing to a contrary result,
are taken into account. Id. For this purpose, authorities
include statutory and regulatory provisions, legislative history,
administrative interpretations of the Commissioner, and court
decisions, but not conclusions reached in treatises or legal
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Last modified: May 25, 2011