Frank and Virginia Muhich - Page 28




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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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