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persons under the circumstances. Consequently, the Court holds
that petitioners are liable for the negligence additions to tax
under section 6653(a)(1) and (2) for each of the years at issue.
Respondent is sustained on this issue.
The second issue is whether petitioners are liable for the
addition to tax under section 6661(a) for a substantial
understatement of tax for 1982. Section 6661(a), as amended by
the Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509,
sec. 8002, 100 Stat. 1951, provides for an addition to tax of 25
percent of the amount of any underpayment attributable to a
substantial understatement of income tax for the taxable year. A
substantial understatement of income tax exists if the amount of
the understatement exceeds the greater of 10 percent of the tax
required to be shown on the return, or $5,000. Sec.
6661(b)(1)(A). Generally, the amount of an understatement is
reduced by the portion of the understatement which the taxpayer
shows is attributable to either (1) the tax treatment of any item
for which there was substantial authority, or (2) the tax
treatment of any item with respect to which the relevant facts
were adequately disclosed on the return. Sec. 6661(b)(2)(B). If
an understatement is attributable to a tax shelter item, however,
different standards apply. First, in addition to showing the
existence of substantial authority, a taxpayer must show that he
reasonably believed that the tax treatment claimed was more
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