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attempt at accurately reporting the bad debt. The fact that
petitioner mistakenly placed the $86,040 deduction on the wrong
line on the first page of the 1996 return corresponds with his
confusion in using Schedule D. On the basis of petitioners’
position and their reporting on page 1 of their 1996 return, they
should have reported the loss on Schedule C. Even if petitioners
had used a Schedule C, respondent contends that they would have
been negligent because the loss should have been shown on a
Schedule A as an itemized deduction.
In light of petitioner’s educational background, the
circumstances of this case, and the multiplicity of possibilities
for claiming business bad debts, petitioner has shown good faith
and reasonable cause for the way he reported the bad debt
deduction. We hold that the accuracy-related penalty does not
apply to the portion of the understatement attributable to the
adjustment concerning the bad debt.
Petitioners concede that they failed to report income from
interest, a State tax refund, and pensions in the total amount of
$33,415, resulting in a substantial underreporting of income.
Petitioners further concede that they “missed” or overlooked
Forms 1099 with the result that they underreported income.
The unreported income was substantial in amount because the
understatement of income tax exceeds the greater of 10 percent of
the tax required to be shown on the tax return or $5,000. The
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