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2. Substantial Understatements
Section 6661 provides for a 25-percent addition to tax on
any substantial understatement. A substantial understatement is
one that exceeds the greater of 10 percent of the tax required to
be shown on the return or $5,000. See sec. 6661(b)(1). The
amount of the understatement, for purposes of section 6661, is to
be reduced by the portion attributable to any item for which
there was substantial authority or any item that was adequately
disclosed. See sec. 6661(b)(2)(B). In addition, the
Commissioner may waive all or part of a section 6661 addition to
tax upon a showing by the taxpayer that there was reasonable
cause for the understatement and that the taxpayer acted in good
faith. See sec. 6661(c).
Petitioners have not claimed substantial authority or
adequate disclosure. Rather, petitioners argue they had
reasonable cause and acted in good faith and that respondent
abused his discretion in denying them relief. To show reasonable
cause and good faith, petitioners rely upon the same arguments
and explanations they employed in an effort to show that they
lacked fraudulent intent. These arguments are no more persuasive
here, nor do we see how petitioners can reconcile their
convictions under section 7206(1) with a showing of reasonable
cause or good faith. For the foregoing reasons we do not find
that respondent acted “arbitrarily, capriciously, or without
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Last modified: May 25, 2011