- 22 -
with regard to the items in question. Crocker v. Commissioner,
92 T.C. 899, 917 (1989). Because of petitioners' failure to
maintain such records and because of petitioners' improper
calculation, without adequate explanation, of the tax basis of
the Aptos residence, we conclude that petitioners are liable for
the negligence additions to tax relating to the above items and
to all other adjustments in issue.
Section 6661(a) provides an addition to tax of 25 percent2
of the amount of any underpayment attributable to a substantial
understatement of tax. The term "understatement" is defined in
section 6661(b)(2)(A) as being the excess of the amount of tax
required to be shown on the return for a year over and above the
amount shown on the return. An understatement is substantial if
it exceeds the greater of 10 percent of the tax required to be
shown on the return or $5,000. The amount of the understatement
can be reduced if substantial authority exists for the taxpayer's
treatment of the item in dispute, or if the item is adequately
disclosed in the return or in a statement attached to the return.
Sec. 6661(b)(2)(B). For each year involved in this case, the
2 In their trial memorandum, petitioners state that a 10-
percent rate was in effect for 1985. However, sec. 8002 of the
Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, 100
Stat. 1951, increased the rate to 25 percent for penalties
assessed after Oct. 21, 1986. Therefore, the correct rate for
1985 is 25 percent. Licari v. Commissioner, 946 F.2d 690 (9th
Cir. 1991), affg. T.C. Memo. 1990-4.
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