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respect to the underpayment resulting from the total amount of
the deficiency in that year.
Section 6662(a) imposes a 20-percent penalty on the portion
of an underpayment attributable to any one of various factors,
one of which is any substantial understatement of income tax.
Sec. 6662(b)(2). A substantial understatement of income tax
exists if the amount of the understatement exceeds the greater of
$5,000 or 10 percent of the tax required to be shown on the
return. Sec. 6662(d)(1)(A). Generally, the amount of an
understatement is reduced by the portion of the understatement
which is attributable to either (1) the tax treatment of any item
for which there is or was substantial authority, or (2) any item
with respect to which (a) the relevant facts were adequately
disclosed on the return or on a statement attached to the return,
and (b) the taxpayer had a reasonable basis for the tax treatment
thereof. Sec. 6662(d)(2)(B).
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion. 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 the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
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Last modified: May 25, 2011