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The examination of petitioners’ 1996 Federal income tax
return began after July 22, 1998, making section 7491(c)
applicable. We find, however, that respondent has met his burden
of production. Respondent introduced undisputed evidence that
petitioners received $27,703 in interest income and has alleged
that petitioners failed to include such amount in gross income.
We have found for respondent on that allegation. In petitioners’
circumstances, this omission would produce an understatement
exceeding the greater of $5,000 or 10 percent of the tax required
to be shown on their return. Accordingly, petitioners bear the
burden of establishing the applicability of the reasonable cause
exception.
We believe that petitioners’ reporting of the interest
received from the redeemed Florida tax certificates, albeit as
tax-exempt rather than taxable, suggests an “honest
misunderstanding of * * * law” within the meaning of the
regulations. We further believe that this misunderstanding was
reasonable given all the facts and circumstances, including Mr.
Penn’s advanced age and his health problems arising from a
diagnosis of stomach cancer in late 1995. These circumstances
constitute reasonable cause and good faith with respect to the
portion of the underpayment attributable to the interest received
from the redeemed Florida tax certificates, in our view.
Accordingly, we find that petitioners are not liable for the
accuracy-related penalty on this portion of their underpayment.
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Last modified: May 25, 2011