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Indeed, as we have indicated, the evidence shows that the lump-
sum amount was not damages for a tort claim but settlement of a
contract dispute as to how much was owed petitioner under the
disability plan. Thus, section 104(a)(2) does not apply.
Accuracy-Related Penalty
Respondent determined an accuracy-related penalty under
section 6662 in the amount of $7,922, based on the determination
that petitioners’ underpayment was attributable to a “substantial
understatement of income tax” within the meaning of section
6662(d). However, the accuracy-related penalty will not be
imposed with respect to any portion of an underpayment if it is
shown that there was reasonable cause and that the taxpayer acted
in good faith. Sec. 6664(c)(1). The determination of whether
there was reasonable cause and good faith "is made on a case-by-
case basis, taking into account all pertinent facts and
circumstances." Sec. 1.6664-4(b)(1), Income Tax Regs.
“Generally, the most important factor is the extent of the
taxpayer’s efforts to assess the taxpayer’s proper tax
liability.” Id. Reasonable cause includes "an honest
misunderstanding of fact or law that is reasonable in light of
the experience, knowledge and education of the taxpayer." Id.
The taxpayer's mental and physical condition, as well as
sophistication with respect to the tax laws, at the time the
return was filed are relevant in deciding whether the taxpayer
acted with reasonable cause. Ruckman v. Commissioner, T.C. Memo.
1998-83; see also Carnahan v. Commissioner, T.C. Memo. 1994-163,
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