Kenneth and Dorothy Hitchen - Page 25

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          the deficiency in 1989 that is not attributable to the gross                
          valuation misstatement, discussed above.                                    
               C.  Substantial Understatements of Income Tax                          
               With respect to petitioners’ taxable years 1984, 1985, 1987,           
          and 1988, section 6661(a) imposes an addition to tax on any                 
          underpayment attributable to a substantial understatement of                
          income tax.  A substantial understatement of income tax exists if           
          the amount of an understatement in a taxable year exceeds the               
          greater of $5,000 or 10 percent of the tax required to be shown             
          on the return.  Sec. 6661(b)(1)(A).  An understatement, in turn,            
          is defined generally as the excess of the amount of tax required            
          to be shown on the return over the amount of tax shown.  Sec.               
               The amount of an understatement is reduced in certain                  
          situations where a taxpayer has substantial authority for the               
          treatment of an item, or where the taxpayer adequately discloses            
          the relevant facts affecting the treatment of that item.  Sec.              
          6661(b)(2)(B).  However, in the case of any item attributable to            
          a “tax shelter”, as defined in section 6661(b)(2)(C)(ii), the               
          adequate disclosure exception does not apply, and in order for              
          the substantial authority exception to apply the taxpayer must              
          reasonably believe that the treatment of the item was more likely           
          than not the proper treatment.  Sec. 6661(b)(2)(C).  Finally, the           
          Secretary has the discretion to waive all or part of the section            

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