Austin L. Mitchell and Rebecca A. Mitchell - Page 18




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          residence under sections 162 and 167.  Similarly, they may not              
          deduct their loss on the sale of the house under section 165.               
          E.   Whether Petitioners Are Liable for Accuracy-Related                    
               Penalties for Negligence or Substantial Understatement of              
               Income Tax                                                             
               1.   Background                                                        
               We next decide whether petitioners are liable for the                  
          accuracy-related penalty under section 6662(a) for negligence or            
          substantial understatement of income tax for 1995, 1996, and                
          1997.                                                                       
               Taxpayers are liable for a penalty equal to 20 percent                 
          of the part of the underpayment attributable to negligence or               
          disregard of rules or regulations or to a substantial                       
          understatement of income tax.  Sec. 6662(a) and (b)(1) and (2).             
          Negligence includes failure to make a reasonable attempt to                 
          comply with internal revenue laws or to exercise ordinary and               
          reasonable care in preparing a tax return.  Sec. 6662(c).  An               
          understatement is substantial if it exceeds the greater of 10               
          percent of the tax required to be shown on the return or $5,000.            
          Sec. 6662(d)(1)(A).  An understatement is reduced to the extent             
          that it is (1) based on substantial authority, (2) adequately               
          disclosed on the return or in a statement attached to the return            
          and there is a reasonable basis for the tax treatment of that               
          item, or (3) due to reasonable cause and taxpayers acted in good            








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