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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.
6661(b)(2)(A).
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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