Kenneth W. and Fayetta Graves - Page 14

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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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