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section 6662(a) because the underpayment of tax for those years
was due to a substantial understatement of their income tax.
Petitioners contend that they are not liable for the accuracy-
related penalties for substantial understatement of income tax.
Section 6662(a) and (b)(2) imposes a penalty equal to 20
percent of the portion of an underpayment attributable to any
substantial understatement of tax. A substantial understatement
occurs when the amount of the understatement exceeds the greater
of 10 percent of the amount of tax required to be shown on the
return or $5,000 ($10,000 for corporations). See sec.
6662(d)(1). The amount of an understatement on which the penalty
is imposed will be reduced by the portion of the understatement
that is attributable to the tax treatment of an item (1) that was
supported by “substantial authority” or (2) for which the
relevant facts were “adequately disclosed in the return or in a
statement attached to the return.” Sec. 6662(d)(2)(B).17
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. See sec. 6664(c)(1).
Petitioners do not contend that they have substantial
authority for the tax treatment of the items that we have
17For 1993 and later years, adequate disclosure must be
coupled with “a reasonable basis for the tax treatment”. See
sec. 6662(d)(2)(B)(ii).
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