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years in issue. This section imposes a penalty equal to 20
percent of the portion of an underpayment that is attributable
to, among other things, a substantial understatement of income
tax. An understatement is substantial if it exceeds the greater
of 10 percent of the tax required to be shown on the return or
$10,000 (for corporations). See sec. 6662(d)(1). The
understatement is reduced if it is based on substantial authority
or is adequately disclosed on the return or in a statement
attached to the return. See sec. 6662(d)(2). The reasonable
cause exception under section 6664(c)(1) may also be used to
avoid the penalty if proven by the taxpayer.
Midwest made no relevant disclosures on its returns.
Furthermore, the record does not disclose Midwest had substantial
authority for deducting the payments to the trust promoters.
Accordingly, for each year that the Rule 155 computation reflects
a substantial understatement within the meaning of section
6662(d)(1), Midwest will be liable for this penalty.
Section 6673
Respondent moved the Court at the end of trial to impose a
penalty under section 6673(a)(1). Respondent asserts the
Muhichs' position is frivolous and groundless, and that they
instituted this lawsuit primarily for delay. As relevant,
section 6673(a)(1)(A) and (B) provides that the Court may impose
a penalty of up to $25,000 wherever proceedings before us have
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