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amount of the understatement for the taxable year exceeds the
greater of (1) 10 percent of the tax required to be shown on the
return or (2) $5,000. Sec. 6662(d)(1)(A). For purposes of
section 6662(d)(1), "understatement" is defined as the excess of
tax required to be shown on the return over the amount of tax
that is shown on the return reduced by any rebate. Sec.
6662(d)(2)(A).
After adjustments,16 respondent determined that the amounts
of tax required to be shown on the returns are $1,194,296 and
$45,969, and the amounts of the understatements of tax are
$1,188,920 and $33,037 for 1991 and 1992, respectively. As each
of these understatement amounts exceeds the greater of 10 percent
of the tax required to be shown on the return or $5,000 for the
year at issue, respondent applied the penalty.
Section 6662(d)(2)(B)(i) provides that the amount of the
understatement shall be reduced by the portion of the
understatement that is attributable to the tax treatment of any
item if there is or was substantial authority for such treatment.
The substantial authority standard is an objective standard
16 Respondent determined that computational adjustments
should be made for 1991 which would preclude petitioners from
claiming deductions for personal exemptions, eliminated their
deductions for medical expenses, adjusted the amounts of self-
employment tax and the deduction for self-employment tax, and
increased the allowance for charitable contributions.
Respondent determined that computational adjustments should
be made for 1992 which would adjust petitioners' deduction for
charitable contributions to conform with the percentage
limitations.
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