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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. See 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 likely than not proper. See sec. 6661(b)(2)(C)(i)(II).
Second, disclosure, whether or not adequate, will not reduce the
amount of the understatement. See sec. 6661(b)(2)(C)(i)(I).4
Petitioners do not argue that they had substantial authority
for claiming the loss, nor do they argue that there was adequate
disclosure on the return. We find that the record does not
establish the presence of either. The only argument petitioners
make is that they acted with reasonable cause and in good faith
in claiming the loss.
Section 6661(c) provides the Secretary with the discretion
to waive the section 6661(a) addition to tax if the taxpayer
shows he acted with reasonable cause and in good faith. We
review the Secretary’s failure to waive the addition to tax for
4Respondent argues in his brief that “petitioners’ claimed
loss for 1982 was clearly a tax shelter item,” despite the fact
that the notice of deficiency stated that the underpayment “is
attributable to non-tax shelter items.” As a result of our
findings we need not decide whether the tax shelter provisions
are applicable in this case.
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