Herman N. and Veronica Welter - Page 8

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          that the corporations were devoid of substance or were merely Mr.           
          Welter’s alter egos; indeed, the evidence points to the contrary.           
          Thus, while it may have been more convenient for Mr. Welter to              
          maintain the existing brokerage accounts in his own name                    
          following the incorporation of petitioners’ farming operations,             
          the commodities transactions he engaged in through those accounts           
          during the years at issue do not qualify as hedging transactions            
          within the meaning of former section 1.1221-2(b).  It follows               
          that gains and losses attributable to such transactions are                 
          capital in nature.  We therefore sustain respondent’s adjustments           
          with respect to Mr. Welter’s commodities trading activity.                  
          II.  Penalties                                                              
               Section 6662 imposes a penalty equal to 20 percent of the              
          portion of any underpayment which is attributable to, among other           
          things, a substantial understatement of income tax.  Sec. 6662(a)           
          and (b)(2).  An understatement of income tax is deemed                      
          substantial if it exceeds the greater of:  (1) 10 percent of the            
          tax required to be shown on the return for the year, or (2)                 
          $5,000.  Sec. 6662(d)(1)(A).  For these purposes, the amount of             
          an understatement is reduced to the extent it is attributable to            
          a position (1) for which there is substantial authority, or (2)             
          which the taxpayer adequately disclosed on his return and for               
          which there is a reasonable basis.  Sec. 6662(d)(2)(B). In                  
          addition, the section 6662 penalty does not apply to the extent             

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