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Disregard of rules or regulations is careless if the taxpayer
does not exercise reasonable diligence to determine the
correctness of a return position that is contrary to the rule or
regulation. Sec. 1.6662-3(b)(2), Income Tax Regs. Negligence
also includes any failure by the taxpayer to keep adequate books
and records or to substantiate items properly. See sec. 1.6662-
3(b)(1), Income Tax Regs.
During the examination of petitioners’ 1998 and 1999 income
tax returns and at the trial, petitioners did not produce any
credible evidence to support the disputed NOL carryforward
deductions and charitable contribution deductions. Mr. Beery did
not testify that petitioners maintained adequate records or that
they ever had records to substantiate the disputed deductions.
Moreover, petitioners failed to present any colorable legal
argument in support of their position that they were entitled to
deduct the asserted 1975 NOL carryforwards on their 1998 and 1999
returns.
Section 6662(a) and (b)(2) imposes a penalty equal to 20
percent of the portion of an underpayment attributable to any
substantial understatement of tax. A substantial understatement
occurs when the amount of the understatement exceeds the greater
of 10 percent of the amount of tax required to be shown on the
return or $5,000. See sec. 6662(d)(1). The amount of an
understatement on which the penalty is imposed will be reduced by
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Last modified: May 25, 2011