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property for their alleged substance. Therefore, we conclude
that petitioner did not have a reasonable basis for the position
taken on her 1997 and 1998 returns.
A taxpayer may also be liable for a penalty under section
6662(a) on the portion of an underpayment due to a substantial
understatement of income tax. Sec. 6662(b)(2). An
understatement of income tax is “substantial” if it exceeds the
greater of 10 percent of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A). An “understatement” is
defined as the excess of the tax required to be shown on the
return over the tax actually shown on the return, less any
rebate. Sec. 6662(d)(2)(A). In this case, the understatement on
each of petitioner’s returns satisfies the definition of
“substantial”. The amount of the understatement subject to the
penalty is reduced, however, to the extent it is attributable to
the tax treatment of any item by the taxpayer if there is or was
substantial authority for such treatment. Sec. 6662(d)(2)(B)(i).
Alternatively, the amount of the understatement may be reduced to
the extent it is attributable to any item if the relevant facts
affecting the item’s tax treatment are adequately disclosed in
the return or in a statement attached to the return and there is
a reasonable basis for the tax treatment of such item by the
taxpayer. Sec. 6662(d)(2)(B)(ii).
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