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the portion of the understatement that is attributable to the tax
treatment of an item (1) that was supported by “substantial
authority” or (2) for which the relevant facts were “adequately
disclosed in the return or in a statement attached to the
return”, and there was a reasonable basis for the tax treatment
by the taxpayer. Sec. 6662(d)(2)(B).
Mr. Beery testified at trial that petitioners relied on
prior-year tax audits to support the NOL carryforward deductions
that they claimed. Mr. Beery testified that respondent audited
amended income tax returns for taxable years before 1998 and
issued refunds after allowing 1975 NOL carryforward deductions.
However, petitioners offered no credible evidence to prove that
the audits ever took place.
Section 6664(c)(1) provides that the accuracy-related
penalties contained in section 6662 shall not be imposed with
respect to any portion of an underpayment if it is shown that a
taxpayer acted in good faith and that there was reasonable cause
for the underpayment. Reasonable cause and good faith may be
indicated by an honest misunderstanding of fact or law that is
reasonable in light of the experience, knowledge, and education
of the taxpayer. Sec. 1.6664-4(b), Income Tax Regs. The
determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case by case basis, taking into
account all pertinent facts and circumstances. See sec. 1.6664-
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Last modified: May 25, 2011