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The amount of an understatement on which the penalty is imposed
will be reduced by the portion of the understatement that is
attributable to (1) the tax treatment of an item that was
supported by substantial authority or (2) any item for which the
relevant facts affecting the item’s tax treatment were
“adequately disclosed in the return or in a statement attached to
the return” and there was a reasonable basis for the tax
treatment by the taxpayer. Sec. 6662(d)(2)(B)(I). Additionally,
no penalty will be imposed with respect to any portion of an
underpayment if it is shown that there was reasonable cause for
such portion and the taxpayer acted in good faith with respect to
such portion. Sec. 6664(c)(1).
Respondent determined that the understatement to which the
penalty applied was attributable to three items: (1) Deborah’s
failure to report as income $18,000 of distributions received
from Cox Tomato; (2) Deborah’s failure to report as income the
annual lease value ($7,750) of the corporate automobile; and (3)
Deborah’s reported flowthrough loss from Cox Tomato of $12,000.
Petitioners Burke do not contend, nor have they proven, that
they had substantial authority for the tax treatment of the items
in question or that they adequately disclosed all relevant facts
as to the tax treatment of those items. They also do not
contend, nor have they proven, that they had a reasonable basis
for their tax treatment of the items, or that they qualify for
relief under section 6664(c). Consequently, petitioners Burke
have failed to demonstrate that they are not liable for the
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