- 38 -
than to purchase tobacco or that they are deductible in
connection with an activity other than Beaufort Leaf's
business of purchasing and selling tobacco. Cf. Brizell
v. Commissioner, 93 T.C. 151 (1989).
Penalties and Additions to Tax
The third issue for decision is whether petitioners
are liable for the penalties and addition to tax determined
in the notices of deficiency. Respondent determined an
accuracy-related penalty under section 6662(a) with respect
to each petitioner's returns for 1990 and 1991. Section
6662 imposes a penalty of 20 percent of the portion of an
underpayment of tax related to, inter alia, "Negligence or
disregard of rules or regulations" or "Any substantial
understatement of income tax". For this purpose, the term
"negligence" includes any failure to make a reasonable
attempt to comply with the provisions of the income tax,
and the term "disregard" includes any careless, reckless,
or intentional disregard. Sec. 6662(c). In substance,
an understatement of income tax is the excess of the
amount of tax required to be shown on the taxpayer's return
over the amount that is shown on the return. See sec.
6662(d)(2)(A). A substantial understatement is defined
by section 6662(d)(1)(A) as an understatement exceeding
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