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Finally, petitioners argue that they acted with reasonable
cause and in good faith in claiming the loss. Section 6661(c)
provides the Secretary with the discretion to waive the section
6661(a) addition to tax if the taxpayer shows he acted with
reasonable cause and in good faith. Generally, we review the
Secretary’s failure to waive the addition to tax for abuse of
discretion. Martin Ice Cream Co. v. Commissioner, 110 T.C. 189,
235 (1998). The most important factor in determining whether a
taxpayer acted with reasonable cause and in good faith generally
is “the extent of the taxpayer’s effort to assess the taxpayer’s
proper tax liability under the law.” Sec. 1.6661-6(b), Income
Tax Regs. For the same reasons we found petitioners to be
negligent in claiming the reported loss as a deduction, we find
petitioners also lacked reasonable cause for doing so.
Consequently, petitioners are not entitled to a waiver under
section 6661(c), and they are liable for the addition to tax
under section 6661(a) for a substantial understatement of tax.7
7Respondent stated in his answer that this addition to tax
was in the amount of $512.40. As respondent argued in his pre-
trial memorandum and orally at trial, this amount is incorrect.
The correct computation under the provisions of section 6661(a)
results in an addition to tax of $1,281.
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