Michael G. Harvey and Penny B. Harvey - Page 14




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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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