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reduced by the portion of the understatement that the taxpayer
shows is attributable to either (1) the tax treatment of any item
for which there was substantial authority or (2) the tax treatment
of any item with respect to which the relevant facts were
adequately disclosed on the return. See sec. 6661(b)(2)(B).
Substantial authority exists when “the weight of the authorities
supporting the treatment is substantial in relation to the weight
of authorities supporting contrary positions.” Sec. 1.6661-
3(b)(1), Income Tax Regs. Adequate disclosure of the tax
treatment of a particular item may be made either in a statement
attached to the return or on the return itself. Sec. 1.6661-4(b)
and (c), Income Tax Regs.
If an understatement is attributable to a tax shelter item,
then different standards apply. First, in addition to showing the
existence of substantial authority, a taxpayer must show that he
or she reasonably believed that the tax treatment claimed was more
likely than not the proper treatment. Sec. 6661(b)(2)(C)(i)(II).
Second, disclosure, whether or not adequate, will not reduce the
amount of the understatement. Sec. 6661(b)(2)(C)(i)(I).
Petitioners appear to concede that there was a substantial
understatement of income tax within the meaning of section
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