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system of reporting income and expenses, the tax attribut-
able to each year stands on its own. See Security Flour
Mills Co. v. Commissioner, 321 U.S. 281, 286 (1944); Bank
of Commerce v. Commissioner, 10 B.T.A. 73 (1928).
Similarly, we do not agree that the additions to tax
"cannot be properly calculated without taking into account
income reported and taxes paid by Petitioners in subsequent
years." The additions to tax in this case, the negligence
additions under section 6653(a) and the addition to tax
for substantial understatement of liability under section
6661(a), are both computed without regard to the "income
reported and taxes paid by Petitioners in subsequent
years." In the case of the negligence additions under
section 6653(a), the amount of the additions is a
percentage of the "underpayment" as defined by section
6653(c). In the case of the addition to tax for
substantial understatement of liability under section
6661(a), the addition is 25 percent of "any underpayment"
attributable to an "understatement".
We disagree with petitioners' contention that in
order to give full effect to our holding that the
transaction was a sham in substance, we must compute
petitioners' tax liability on a transactional basis. Our
decision not to offset the deductions and losses in earlier
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