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$5,000. For purposes of this computation, the amount of the
understatement is reduced to the extent attributable to an item:
(1) If there existed substantial authority for the taxpayer’s
treatment of the item, or (2) if the relevant facts affecting the
treatment of the item were adequately disclosed on the taxpayer’s
return or an attached statement, and there was a reasonable basis
for the taxpayer’s treatment of the item. See sec.
6662(d)(2)(B).
An exception to the section 6662(a) penalty is set forth in
section 6664(c)(1) and reads: “No penalty shall be imposed under
this part with respect to any portion of an underpayment if it is
shown that there was a reasonable cause for such portion and that
the taxpayer acted in good faith with respect to such portion.”
The taxpayer bears the burden of establishing that this
reasonable cause exception is applicable, as respondent’s
determination of an accuracy-related penalty is presumed correct.
See Rule 142(a).
Regulations interpreting section 6664(c) state:
The determination of whether a taxpayer acted with
reasonable cause and in good faith is made on a case-
by-case basis, taking into account all pertinent facts
and circumstances. * * * Generally, the most important
factor is the extent of the taxpayer’s effort to assess
the taxpayer’s proper tax liability. * * * [Sec.
1.6664-4(b)(1), Income Tax Regs.]
Applying these principles to the matter at hand, we are
constrained to rule that petitioners have failed to meet their
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Last modified: May 25, 2011