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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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