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6662(a). In the notice and on brief, respondent asserted two
alternative grounds for the imposition of that penalty: A
substantial understatement of income tax under section 6662(b)(2)
and negligence under section 6662(b)(1).
Respondent concedes that if the Court were to hold that
petitioners must recognize the DOI income at issue, the accuracy-
related penalty should not be imposed on that portion of the
underpayment of tax attributable to that income. That is because
respondent takes the position that petitioners made an adequate
disclosure under section 6662(d)(2)(B)(ii)(I) and that they had a
reasonable basis under section 6662(d)(2)(B)(ii)(II) for their
treatment of such income in petitioners’ joint return.
Petitioners concede that the accuracy-related penalty should
be imposed on the remaining portion of the underpayment of tax
except to the extent it relates to the capital gain that they
concede on brief they realized and must recognize as a result of
the foreclosure sale of the Yantari (petitioners’ capital gain).
With respect to the accuracy-related penalty relating to the
portion of the underpayment of tax attributable to petitioners’
capital gain, petitioners contend that
Petitioners made the same disclosure as it applies to
the gain on sale as to the gain on forgiveness of debt.
If taxpayer, without having the ability of hindsight,
had believed the vessel only had a value of $60,000,
the gain from the deemed sale would be $0.00 and the
gain from the discharge of indebtedness would have
correspondingly increased from $35,000 to $77,000. The
same disclosure Petitioners made with respect to the
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