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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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