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return, based on respondent's adjustments, was $20,761.
Petitioners' return showed a tax of $4,939. Petitioners
understated their tax by $15,822, which clearly exceeds the
greater of $5,000 or 10 percent of the tax required to be shown
on the return (i.e., $2,076.10). It follows that petitioners'
understatement of tax was substantial for purposes of section
6662(d)(1)(A).6
The determination of whether a taxpayer acted with
reasonable cause and in good faith depends upon the facts and
circumstances of each particular case. Sec. 1.6664-4(b)(1),
Income Tax Regs. Relevant factors include the taxpayer's efforts
to assess his or her proper tax liability, the knowledge and
experience of the taxpayer, and reliance on the advice of a
professional, such as an accountant. Drummond v. Commissioner,
T.C. Memo. 1997-71. The most important factor is the extent of
the taxpayer's effort to determine the taxpayer's proper tax
liability. Sec. 1.6664-4(b)(1), Income Tax Regs. An honest
misunderstanding of fact or law that is reasonable in light of
the experience, knowledge, and education of the taxpayer may
indicate reasonable cause and good faith. Remy v. Commissioner,
6 The Court recognizes that, because of respondent's
concession that $5,000 of the $60,000 settlement is excludable
from gross income and petitioners' concession of $344 in
unreported interest income, the exact amount of the
understatement will be determined in the Rule 155 computation.
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