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Revenue Code, and “disregard” is defined as any careless,
reckless, or intentional disregard. Sec. 6662(c). An
understatement of income tax is substantial if it 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). For
purposes of this computation, the amount of the understatement is
reduced to the extent: (1) There is or was substantial authority
for the taxpayers’ treatment of an item; or (2) the relevant
facts affecting an items’ tax treatment were adequately disclosed
in the taxpayers’ return or in an attached statement, and there
is a reasonable basis for the tax treatment of such item. See
sec. 6662(d)(2)(B).
The accuracy-related penalty does not apply if petitioners
had reasonable cause for the underpayment and acted in good faith
with respect to the underpayment. See sec. 6664(c). Whether a
taxpayer acted with reasonable cause and in good faith is
determined case by case, taking into account all pertinent facts
and circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.
The most important factor generally is the extent of the
taxpayers’ effort to assess their proper tax liability. See id.
An honest misunderstanding of fact or law that is reasonable in
light of all the facts and circumstances may indicate reasonable
cause. See id.
As respondent has the burden of proving new matters pleaded
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Last modified: May 25, 2011