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for outside advice regarding the propriety of its deduction.
Despite these warnings, petitioner was not concerned with the tax
risks, and consequently neither personally investigated the tax
implications of the investment nor sought outside legal advice
related to them. Instead, he relied on Mr. Peterson’s treatment
of the loss when it came time to complete petitioners’ tax
return.
Because we hold that petitioner was negligent and that
petitioners’ reliance upon Mr. Peterson was not reasonable, we
uphold respondent’s determination that petitioners are liable for
the section 6653(a)(1) and (2) additions to tax for negligence.
The second issue for decision is whether petitioners are
liable for the addition to tax under section 6661 for a
substantial understatement of tax. 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. See 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
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