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what a reasonable and prudent person would do under similar
circumstances." Chakales v. Commissioner, 79 F.3d 726, 729
(8th Cir. 1996), affg. T.C. Memo. 1994-408. Petitioners argue
that they were not negligent because they relied on their C.P.A.,
Joan Noske, to prepare their returns correctly, and they were
innocent bystanders with respect to any inaccuracies in the
returns. That argument is not persuasive.
Petitioners colluded with Ms. Noske in fictitiously
transferring their farming assets to Imperial, and they did so to
avoid their Federal tax liabilities. They knew or had reason to
know that Ms. Noske was incorrect when she omitted the bulk of
their farming income from their returns. We do not believe
petitioners' testimony that they failed to understand or
appreciate the returns' inaccuracies. We sustain respondent's
determinations of negligence in all regards.
Substantial Understatement
Section 6661 imposes an addition to tax for substantial
understatement of income tax. For additions assessed after
October 21, 1986, this addition equals 25 percent of the amount
attributable to the substantial understatement. Pallottini v.
Commissioner, 90 T.C. 498, 500-503 (1988). An understatement is
substantial if it exceeds the greater of 10 percent of the tax
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