- 330 -
(3) Those with respect to which a penalty has been
imposed at a 40 percent rate (i.e., a penalty for a
gross valuation misstatement under sections 6662(b)(3)
and (h)).
(4) Those with respect to which a penalty has been
imposed at a 75 percent rate (i.e., a penalty for fraud
under section 6663). [Sec. 1.6664-3(b), Income Tax
Regs.]
Examples under the regulations, and our opinion in Lemishow
v. Commissioner, 110 T.C. 346 (1998), illustrate how the
regulations would apply to the cases at hand. Step 1 is to
determine the portion, if any, of the underpayment on which no
accuracy-related penalty or fraud penalty is imposed by
increasing reported taxable income for understated income that is
not subject to penalty (adjustment 1), recomputing the tax, and
comparing it to the tax shown on the return. Step 2 determines
the portion, if any, of the underpayment on which a penalty of 20
percent is imposed by increasing taxable income derived in step 1
for understated income subject to the 20-percent penalty
(adjustment 2), recomputing the tax, and comparing it to the tax
computed in step 2. Finally, step 3 determines the portion, if
any, of the underpayment on which a penalty of 40 percent is
imposed by computing the total underpayment attributable to all
understated income and subtracting the portions of such
underpayment calculated in steps 1 and 2. See Lemishow v.
Commissioner, 110 T.C. 346 (1998); see also Todd v. Commissioner,
Page: Previous 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 NextLast modified: May 25, 2011