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Amount of Adjustment
Adjustment 1994 1995
Schedule E - depletion $51,627 $101,923
Ordinary income 751,988 --
Canadian royalty -- 56,504
Schedule C - production tax -- 5,353
Schedule C - IDC -- 97,790
Schedule C - depletion -- 53,067
Respondent subsequently conceded the Canadian royalty adjustment.
Russell and Clarice conceded the Schedule C and Schedule E
adjustments. Our decision on the ordinary income adjustment is
in Russell and Clarice’s favor. Consequently, we must decide
whether Russell and Clarice are liable for the accuracy-related
penalties with respect to the Schedule C and Schedule E
adjustments.
Section 6662(a) imposes a penalty equal to 20 percent of the
portion of an underpayment of tax attributable to a taxpayer’s
negligence, disregard of rules or regulations, or substantial
understatement of income tax. Sec. 6662(a), (b)(1), and (2).
“Negligence” has been defined as the failure to do what a
reasonable and ordinarily prudent person would do under the
circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985).
The term “disregard” includes any careless, reckless, or
intentional disregard of rules or regulations. Sec. 6662(c). An
understatement is “substantial” if it exceeds the greater of
$5,000 or 10 percent of the tax required to be shown on the
return. Sec. 6662(d)(1) and (2). The Commissioner’s
determination that a taxpayer was negligent is presumptively
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