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underpayment. See sec. 6664(c)(1). In determining the
applicability of section 6664(c)(1), we weigh the particular facts
and circumstances of each case. See sec. 1.6664-4(b), Income Tax
Regs.
Petitioners maintain that the section 6662(a) accuracy-related
penalties should not be imposed because they made a reasonable
attempt to prepare accurate tax returns and relied upon the advice
of a professional tax preparer. In addition, petitioners note that
their returns for 1994 and earlier years were audited and resulted
in the Internal Revenue Service’s accepting the Schedule C activity
losses as reported on those returns.
On the other hand, respondent maintains that petitioners, as
educated individuals, should have known that “the size of the
losses claimed * * * in relation to their sales, combined with the
enjoyment and tax benefits they derived from the activity, was
‘too good to be true’”. Moreover, respondent asserts that
petitioners’ misclassification of their rental activities as
“consulting” on their tax returns, as well as petitioners’
overstatement of their automobile business mileage, see supra note
4, mandates the imposition of the section 6662(a) accuracy related
penalties.
Although we are troubled by petitioners’ misclassification of
their rental activities and the overstatement of their business
mileage, on balance, we agree with petitioners, and thus hold, that
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