Bernard J. Penn and Thelma I. Penn - Page 9




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          “substantial understatement” as an understatement of income tax             
          for the taxable year that exceeds the greater of 10 percent of              
          the tax required to be shown on the return or $5,000.                       
               Section 6664(c)(1) provides an exception to the accuracy-              
          related penalty as it applies to any portion of an underpayment             
          where the taxpayer shows 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)(1) 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.  Circumstances                    
               that may indicate reasonable cause and good faith                      
               include an honest misunderstanding of fact or law that                 
               is reasonable in light of all the facts and                            
               circumstances, including the experience, knowledge and                 
               education of the taxpayer. * * * [Sec. 1.6664-4(b)(1),                 
               Income Tax Regs.]                                                      
               In court proceedings that arise in connection with                     
          examinations commencing after July 22, 1998, the Commissioner               
          bears the burden of producing sufficient evidence to indicate               
          that it is appropriate to impose any penalty provided for in the            
          Internal Revenue Code.  Sec. 7491(c); Higbee v. Commissioner, 116           
          T.C. 438, 446-447 (2001).  Once the Commissioner’s burden is met,           
          the taxpayer bears the burden of establishing that the section              
          6664(c)(1) reasonable cause exception is applicable.  Higbee v.             
          Commissioner, 116 T.C. at 447.                                              





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