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A taxpayer may be liable for a penalty under section 6662(a)
on the portion of an underpayment due to a substantial
understatement of income tax. Sec. 6662(b)(2). An
understatement of income tax is “substantial” if it exceeds the
greater of 10 percent of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A). An “understatement” is
defined as the excess of the tax required to be shown on the
return over the tax actually shown on the return, less any
rebate. Sec. 6662(d)(2)(A). Respondent has the burden of
production under section 7491(c) and must come forward with
sufficient evidence indicating that it is appropriate to impose
the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446-447
(2001). In this case, the understatement on each of petitioners’
returns satisfies the definition of “substantial”, so respondent
has met that burden of production. Once respondent meets the
burden of production, the taxpayer must come forward with
persuasive evidence that respondent’s determination is incorrect.
Id.
The section 6662(a) penalty will not be imposed with respect
to any portion of the underpayment as to which the taxpayer acted
with reasonable cause and in good faith. Sec. 6664(c)(1); Higbee
v. Commissioner, supra at 448-449. The decision as to whether a
taxpayer acted with reasonable cause and in good faith is made by
taking into account all of the pertinent facts and circumstances.
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