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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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