David M. and Teri L. Saykally - Page 38

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          that portion of the understatement which is attributable to any              
          item if the relevant facts affecting the item’s tax treatment are            
          adequately disclosed on the return or a statement attached to the            
          return and there is a reasonable basis for the tax treatment of              
          such item.  Sec. 6662(d)(2)(B).                                              
               Section 6664(c) provides an exception to the penalty imposed            
          under section 6662(a).  “No penalty shall be imposed under this              
          part with respect to any portion of an underpayment if it is                 
          shown that there was a reasonable cause for such portion and that            
          the taxpayer acted in good faith with respect to such portion.”              
          Sec. 6664(c)(1).  The determination of whether the taxpayer acted            
          with reasonable cause and in good faith is made on a case-by-case            
          basis, contemplating all of the relevant facts and circumstances.            
          Sec. 1.6664-4(b)(1), Income Tax Regs.                                        
               With respect to the deduction of R&D expenses, we cannot                
          find under the facts before us that petitioners acted                        
          unreasonably by claiming the section 174 deductions.  The facts              
          of this case are unique, and petitioner testified that he relied             
          upon the advice of a tax professional.  See id.  Accordingly,                
          penalties associated with such deductions are not appropriate.               
               With respect to the penalties relating to the other                     
          disallowed deductions claimed on petitioners Schedules C for the             
          tax years 1994 and 1996, petitioners failed to substantiate the              
          deductions claimed.  As previously stated, petitioners are in the            






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