- 10 - 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.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
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