Bernard J. Penn and Thelma I. Penn - Page 10




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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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