Joseph P. and Mary B. McDonald - Page 17




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          have claimed these deductions under the circumstances of this               
          case.  We sustain respondent’s determination that petitioners are           
          liable for the section 6653(a)(1) and (2) additions to tax for              
          negligence.                                                                 
          Substantial Understatement                                                  
               Section 6661(a), as amended by the Omnibus Budget                      
          Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002, 100 Stat.            
          1951, applicable to penalties assessed after October 21, 1986,              
          the date of enactment, provides for an addition to tax of 25                
          percent of the amount of any underpayment attributable to a                 
          substantial understatement of income tax for the taxable year.  A           
          substantial understatement of income tax exists if the amount of            
          the understatement exceeds the greater of 10 percent of the tax             
          required to be shown on the return, or $5,000.  Sec.                        
          6661(b)(1)(A).  Generally, the amount of an understatement is               
          reduced by the portion of the understatement which 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.  Sec. 6661(b)(2)(B).  If           
          an understatement is attributable to a tax shelter item, however,           
          different standards apply.  First, in addition to showing the               
          existence of substantial authority, a taxpayer must show that he            
          reasonably believed that the tax treatment claimed was more                 






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