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substantial understatement) for each of the years 1989 through
1994 and 1996. Alternatively, with respect to the years 1989
through 1994, respondent determined that petitioners are liable
for accuracy-related penalties under section 6662(a) and (b)(1)
(for negligence).
Section 6662(a) and (b)(2) imposes a penalty equal to 20
percent of the portion of an underpayment of income tax
attributable to any substantial understatement of tax. A
substantial understatement occurs when the amount of the
understatement exceeds the greater of 10 percent of the amount of
tax required to be shown on the return or $5,000 ($10,000 for
corporations). See sec. 6662(d)(1). The amount of an
understatement on which the penalty is imposed will be reduced by
the portion of the understatement that is attributable to the tax
treatment of an item (1) that was supported by “substantial
authority” or (2) for which the relevant facts were “adequately
disclosed in the return or in a statement attached to the
return”. See sec. 6662(d)(2)(B).21 Additionally, no penalty
will be imposed with respect to any portion of an underpayment if
it is shown that there was reasonable cause for such portion and
the taxpayer acted in good faith with respect to such portion.
See sec. 6664(c)(1).
21For 1993 and later years, adequate disclosure must be
coupled with “a reasonable basis for the tax treatment”. See
sec. 6662(d)(2)(B)(ii).
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