Ronald L. DeVault - Page 14

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               Section 6662(a) imposes a penalty equal to 20-percent of any           
          underpayment of tax that is due to a substantial understatement             
          of income tax.  See sec. 6662(a) and (b)(2).  An individual                 
          substantially understates his or her income tax when the reported           
          tax is understated by the greater of 10-percent of the tax                  
          required to be shown on the return or $5,000.  Sec.                         
               The accuracy-related penalty does not apply to any portion             
          of an underpayment, however, if it is shown that there was                  
          reasonable cause for the taxpayer’s position and that the                   
          taxpayer acted in good faith with respect to that portion.  Sec.            
          6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.  The determination           
          of whether a taxpayer acted with reasonable cause and in good               
          faith is made on a case-by-case basis, taking into account all              
          the pertinent facts and circumstances.  Sec. 1.6664-4(b)(1),                
          Income Tax Regs.  The most important factor is the extent of the            
          taxpayer’s effort to assess his proper tax liability for such               
          year.  Id.  Circumstances that may indicate reasonable cause and            
          good faith include an honest misunderstanding of fact or law that           
          is reasonable in light of the experience, knowledge, and                    
          education of the taxpayer.  Sec. 1.6664-4(b), Income Tax Regs.;             
          see Higbee v. Commissioner,  116 T.C. 438, 449 (2001) (citing               
          Remy v. Commissioner, T.C. Memo. 1997-72).                                  

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