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respect to any portion of the understatement 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 the taxpayer acted with reasonable cause
and good faith depends upon all the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
The term “understatement” is defined as the excess of the
amount of tax required to be shown on the return for the taxable
year over the amount of tax shown on the return for the taxable
year. Sec. 6662(d)(2)(A). A substantial understatement exists
if the understatement exceeds the greater of (1) 10 percent of
the tax required to be shown on the return or (2) $5,000. The
$2 million that petitioners failed to report accounts for all
(using a stacking basis) or almost all (using a proportional
basis) of the deficiency, which exceeds the greater of 10 percent
of the tax required to be shown on petitioners’ tax return or
$5,000. Accordingly, respondent’s burden of production under
section 7491(c) is satisfied.
Petitioners contend that they are not liable for the penalty
under section 6662(a) because “the effective date of the SBJPA
was unclear, at best”. Petitioners argue that “it is
inconceivable that an individual self-preparing an income tax
return would have knowledge of a purported change to the tax code
which occurred in the middle of the tax year.” Petitioners,
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Last modified: May 25, 2011