William T. and Kathryn A. Kees - Page 11

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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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