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The final issue for decision is whether petitioners are
liable for the accuracy-related penalties under section 6662(a).
Section 6662(a) imposes a 20-percent penalty on the portion
of an underpayment attributable to any one of various factors,
including (1) negligence or disregard of rules or regulations;
and (2) any substantial understatement of income tax. See sec.
6662(b)(1) and (2). Respondent determined that petitioners are
liable, with respect to each year in issue, for an accuracy-
related penalty due to one or both of these factors for an
underpayment equal to the total amount of the deficiency.
“Negligence” includes any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, see sec. 6662(c), including any failure to keep adequate
books and records or to substantiate items properly, see sec.
l.6662-3(b)(1), Income Tax Regs. “Disregard” includes any
careless, reckless, or intentional disregard. See sec. 6662(c).
A “substantial understatement” exists where the amount of
the understatement exceeds the greater of 10 percent of the tax
required to be shown on the return or $5,000. See sec.
6662(d)(1)(A). For purposes of this computation, the amount of
the understatement is reduced to the extent attributable to an
item: (1) If there exists or existed substantial authority for
the taxpayer’s treatment of the item; or (2) if the relevant
facts affecting the treatment of the item are adequately
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Last modified: May 25, 2011