James G. and Linda C. Jaroff - Page 16

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          given portion of an underpayment (or 40 percent if such portion             
          is attributable to a gross valuation misstatement).                         
               Petitioners concede that they were not entitled to claim               
          Schedule F losses of $184,000 for taxable year 1994 and $46,395             
          for taxable year 1995.  After adjustment of petitioners’ income             
          tax returns to account for the disallowance of the Schedule F               
          losses, petitioners’ understatements of income tax for 1994 and             
          1995 exceeded 10 percent of the tax required to be shown on the             
          return and $5,000.  Accordingly, there was a “substantial                   
          understatement of income tax” in 1994 and 1995 for purposes of              
          section 6662(d).  Because the “anti-stacking rule” of section               
          1.6662-2(c), Income Tax Regs., limits the accuracy-related                  
          penalty under section 6662 to 20 percent, it is not necessary for           
          us to consider whether petitioners were negligent for purposes of           
          section 6662(c).                                                            
               However, since the 20-percent penalty may be increased to 40           
          percent if the portion of the underpayment is attributable to a             
          gross valuation misstatement, we must consider the applicability            
          of section 6662(h).  On their 1994 return, petitioners claimed              
          “depreciation and section 179 expenses” of $165,625 and “Expense            
          for the Cost Basis of Purchased Cattle that Died in 1994" of                
          $51,162.  On their 1995 return, petitioners reported $46,395 in             
          “depreciation and section 179 expenses” and a net $3 loss from              
          the sale of cattle based upon a gross sale price of $178,500 less           

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