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c. Failure To Pay Tax Shown on 1997 Return
Petitioners did not complete making payments of the tax
liability shown on their 1997 return until November 24, 1999,
approximately 11 months after they had filed their return late.
The section 6651(a)(2) addition to tax for failure to pay
on time does not apply if the taxpayer can demonstrate that the
failure is due to “reasonable cause” and not willful neglect.
Petitioners may demonstrate reasonable cause for failure to
pay taxes by showing they exercised ordinary business care and
prudence in providing for payment of their tax liability and were
nevertheless either unable to pay the tax or would suffer an
undue hardship (as described in section 1.6161-1(b), Income Tax
Regs.) if they paid on the due date. Sec. 301.6651-1(c), Proced.
& Admin. Regs. Section 1.6161-1(b), Income Tax Regs., defines
“undue hardship” as:
more than an inconvenience to the taxpayer. It must
appear that substantial financial loss, for example,
loss due to the sale of property at a sacrifice price,
will result to the taxpayer from making payment on the
due date of the amount with respect to which the
extension is desired. If a market exists, the sale of
property at the current market price is not ordinarily
considered as resulting in an undue hardship.
Penalties or additions can be avoided if reasonable efforts
were made to conserve funds in marketable form to provide for the
expected tax liability, but not if “lavish” and excessive living
expenses deplete the taxpayer’s funds. Sec. 301.6651-1(c)(1),
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