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1.6662-3(b)(2), Income Tax Regs., defines these actions as
follows:
A disregard of rules or regulations is “careless” if
the taxpayer does not exercise reasonable diligence to
determine the correctness of a return position that is
contrary to the rule or regulation. A disregard is
“reckless” if the taxpayer makes little or no effort to
determine whether a rule or regulation exists, under
circumstances which demonstrate a substantial deviation
from the standard of conduct that a reasonable person
would observe. A disregard is “intentional” if the
taxpayer knows of the rule or regulation that is
disregarded. * * *
The penalty does not apply, however, if the taxpayer demonstrates
that he had reasonable cause for the underpayment and he acted in
good faith with respect to the underpayment, as required by
section 6664(c). See sec. 1.6662-3(a), Income Tax Regs.
The record in this case supports a conclusion that
petitioners claimed they were in a trade or business of
“international transportation” in order to obtain a dollar-for-
dollar tax deduction for the funds invested in an attempt to
start a new business to purchase Russian airplanes. In so doing,
petitioners ignored their own documentation which, inadequate as
it may be, suggests that a foreign corporation, Quotum, was the
entity formed to acquire the airplanes. Petitioners’ reporting
position also ignored the promissory note given to James and the
stock certificate reflecting that Candid, not petitioners, owned
an interest in Quotum. Although petitioners’ accountant
testified that he researched the tax law, it appears that he did
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