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Moreover, the accuracy-related penalty does not apply with
respect to any portion of an underpayment if it is shown that
there was reasonable cause for the underpayment and the taxpayer
acted in good faith with respect to the underpayment. Sec.
6664(c); sec. 1.6664-4(b), Income Tax Regs.; see United States v.
Boyle, 469 U.S. 241, 242 (1985). The determination of whether a
taxpayer acted with reasonable cause and in good faith is made on
a case-by-case basis, taking into account all the pertinent facts
and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The
most important factor is the extent of a taxpayer’s effort to
assess the taxpayer’s proper tax liability for such year. Id.
Based on our holding on the first issue as well as
respondent’s concession, see supra note 2, we hold that
respondent did not satisfy the burden of production under section
7491(c) because petitioners did not substantially understate the
income tax on their return. Sec. 6662(d)(1)(A); Higbee v.
Commissioner, 116 T.C. 438, 442 (2001). Accordingly, we hold for
petitioners on this issue.
Conclusion
We have considered all of the other arguments made by the
parties, and, to the extent that we have not specifically
addressed them, we conclude that they are without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
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