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one-third as paid in lieu of defending against the claim for
punitive damages. The amount allocated to Mr. Burditt's claim
for mental anguish ($66,667) is excludable from petitioners'
gross income as damages received on account of a personal injury,
sec. 104(a)(2), while the amount allocated to punitive damages
($33,333) is not. See O'Gilvie v. United States, 519 U.S. 79
(1996).
3. Section 6662 Penalty
For petitioners' 1992 tax year, respondent determined that
petitioners are liable for the section 6662(b)(2) penalty for the
substantial understatement of tax, or in the alternative, for the
section 6662(b)(1) penalty for negligence or disregard of the
rules or regulations. Respondent's determinations are presumed
correct, and petitioners bear the burden of proving that the
penalty does not apply. See Rule 142(a); Bixby v. Commissioner,
58 T.C. 757, 791-792 (1972).
Section 6662(a) imposes a penalty in an amount equal to 20
percent of the portion of an underpayment of tax attributable to
negligence or disregard for rules or regulations or any
substantial understatement of income tax. The term “negligence”
includes a failure to make a reasonable attempt to comply with
the provisions of the Internal Revenue laws, and “disregard”
includes any careless, reckless, or intentional disregard of
rules or regulations. Sec. 6662(c); sec. 1.6662-3(b)(1) and (2),
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