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Section 6662(a)
The final issue is whether petitioners are liable for a
penalty under section 6662. Section 6662(a) imposes a 20-percent
penalty on the portion of an underpayment of tax that is
attributable to, inter alia, any substantial understatement of
income tax. A substantial understatement of tax is defined as
the amount which exceeds the greater of 10 percent of the tax
required to be shown on the return for the taxable year or
$5,000. See sec. 6662(d)(1)(A). An understatement is reduced to
the extent it is: (1) Based upon substantial authority; (2)
adequately disclosed in the tax return or in a statement attached
to the return and there was a reasonable basis for the treatment
of the item. See sec. 6662(d)(2)(B). Petitioners must establish
error in respondent's determination that they are liable for the
penalty provided by section 6662(a). See Rule 142(a).
The section 6662 penalty does not apply to any portion of an
underpayment where it is shown that there was reasonable cause
and that the taxpayer acted in good faith. Sec. 6664(c)(1). The
decision as to whether the taxpayer acted with reasonable cause
and in good faith depends upon all pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Under the
circumstances of the instant case, we believe that the complexity
of section 465, and the lack of express guidance in the
regulations, led petitioners to an honest mistake of law for
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Last modified: May 25, 2011