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There is no statutory, regulatory, or case law guidance for
the calculation of the portion of the underpayment attributable
to a substantial or gross valuation understatement for estate or
gift tax purposes. However, section 1.6664-3, Income Tax Regs.,
provides rules for determining the order in which adjustments to
a return are taken into account to compute penalties imposed
under the first three components of the accuracy-related penalty
(i.e., penalties for negligence or disregard of rules or
regulations, substantial understatement of income tax, and
substantial (or gross) valuation misstatements under chapter 1).
See secs. 1.6662-1 and 1.6664-3, Income Tax Regs. Therefore, we
draw from those regulations to determine the portions of the
underpayments attributable to substantial or gross valuation
understatements in the cases at hand.
According to the regulations, in computing the portions of
an underpayment subject to penalties imposed under sections 6662
and 6663, adjustments to a return are considered made in the
following order:
(1) Those with respect to which no penalties have been
imposed.
(2) Those with respect to which a penalty has been
imposed at a 20 percent rate (i.e., a penalty for
negligence or disregard of rules or regulations,
substantial understatement of income tax, or substantial
valuation misstatement, under sections 6662(b)(1)
through 6662(b)(3), respectively).
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