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In the matter at hand, closing statements apportioned
$300,000, based on calculations by Mr. Shah, to a covenant not to
compete. Respondent now concedes on brief that the proper
valuation is $200,000. Petitioners have offered no evidence by
which a different value may be calculated and have instead merely
contended that the proper value is zero. Although we agree with
petitioners that the valuations computed by Mr. Shah and
respondent are in some respects arbitrary, we have decided that
allocation of some value to petitioners’ agreement is appropriate
and have not been given sufficient information upon which to base
an alternative measurement. We therefore sustain the deficiency
based upon the $200,000 value advocated by respondent.
Penalty Issue
Section 6662(a) and (b)(2) imposes an accuracy-related
penalty in the amount of 20 percent of any underpayment that is
attributable to a substantial understatement of income tax. A
“substantial understatement” is defined by section 6662(d)(1) to
exist where the amount of the understatement exceeds the greater
of 10 percent of the tax required to be shown on the return for
the taxable year or $5,000.
An exception to the section 6662(a) penalty is set forth in
section 6664(c)(1) and reads: “No penalty shall be imposed under
this part with respect to any portion of an underpayment if it is
shown that there was a reasonable cause for such portion and that
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