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preparer, who told them that they could deduct NOL’s for their
investments in and loans made to Pharmacare, The Chamberlin
Corp., or Chamberlin Parenteral. Therefore, petitioners are not
liable for negligence penalties from 1985 through 1993.
Substantial Understatement
Taxpayers are liable for penalties for substantial
understatement of tax liability pursuant to section 6662(b)(2) if
the understatement exceeds the greater of 10 percent of the
correct tax or $5,000. See sec. 6662(d)(1)(A) and (B). The term
"understatement" is defined as the excess of the amount of tax
required to be shown on the return for the taxable year over the
amount of tax shown on the return for the taxable year. Sec.
6662(d)(2)(A). An exception exists where the taxpayer has relied
on invalid advice of a paid tax preparer if, under all
circumstances, such reliance was reasonable and the taxpayer
acted in good faith. See sec. 1.6662-4(g)(4), Income Tax Regs.
For the reasons previously discussed under the negligence
analysis above, we conclude that petitioners’ reliance on the tax
liability calculated by their paid tax preparer was reasonable.
Therefore, penalties for substantial understatement shall not
apply.
To reflect the foregoing,
Decision will be entered
under Rule 155.
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