Jerry J. and Susan N. LeBouef - Page 20




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          any failure by the taxpayer to keep adequate books and records or           
          to substantiate items properly.”  Sec. 1.6662-3(b)(1), Income Tax           
          Regs.                                                                       
               A “substantial understatement” is declared by section                  
          6662(d)(1) to exist where the amount of the understatement                  
          exceeds the greater of 10 percent of the tax required to be shown           
          on the return for the taxable year or $5,000 ($10,000 in the case           
          of a corporation).  For purposes of this computation, the amount            
          of the understatement is reduced to the extent attributable to an           
          item:  (1) For which there existed substantial authority for the            
          taxpayer’s treatment thereof, or (2) with respect to which                  
          relevant facts were adequately disclosed on the taxpayer’s return           
          or an attached statement and there existed 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.”             
               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.]                                     






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