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was nondeductible personal interest under section 163(h),
however, the issue is moot.
We hold, therefore, that petitioners are taxable on
distributions from their terminated policies in the amount of
$38,117 and are not entitled to deductions for interest paid on
their policy loans.
Substantial Understatement of Income Tax
Respondent also determined an accuracy-related penalty under
section 6662 for a substantial understatement of tax for taxable
year 1995. Section 6662(a) imposes a 20-percent penalty on the
portion of an underpayment of tax attributable to, among other
things, a substantial understatement of income tax, which is
defined as an understatement that exceeds the greater of 10
percent of the tax required to be shown or $5,000. Sec.
6662(d)(1)(A). Petitioners reported total tax of $6,231 and
understated their tax in the amount of $10,756. Therefore, there
was a substantial understatement of tax.
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). Notwithstanding that
petitioners were issued Forms 1099-R indicating taxable
distributions upon termination of their insurance policies,
petitioners made no disclosure on their return of the relevant
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