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The accuracy-related penalty does not apply with respect to
any portion of an underpayment if it is shown that there was
reasonable cause for such portion of an underpayment and that the
taxpayer acted in good faith with respect to such portion. See
sec. 6664(c)(1). The determination of whether the taxpayer acted
with reasonable cause and in good faith depends upon the
pertinent facts and circumstances. See sec. 1.6664-4(b)(1),
Income Tax Regs. The most important factor is the extent of the
taxpayer's effort to assess the proper tax liability for the
year. See id.
Respondent argues that petitioner is liable for the
accuracy-related penalty because petitioner negligently
disregarded the economic substance of the ADR transaction;
petitioner failed to meet its burden of proving that the
underpayment was not due to negligence; and petitioner failed to
offer evidence that there was reasonable cause for its return
position for the ADR transaction or that it acted in good faith
with respect to such item. Petitioner argues that there is no
basis for a negligence penalty because the return position was
reasonable, application of the economic substance doctrine to the
ADR transaction is "inherently imprecise", and application of the
economic substance doctrine to disregard a foreign tax credit
raises an issue of first impression. We agree with respondent.
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