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cause and that the taxpayer acted in good faith. Sec. 6664(c);
sec. 1.6664-4(a), Income Tax Regs. Reasonable cause may be shown
by a good faith effort by the taxpayer to determine the correct
tax liability. Larson v. Commissioner, T.C. Memo. 2002-295.
Mr. Hurley testified that he discussed this exclusion with
numerous law enforcement individuals who were excluding a portion
of their income due to a permanent disability, and they confirmed
to him that this was a common practice among law enforcement
officers. In addition, petitioners conferred over the phone with
a representative of a tax return preparation service, H&R Block,
who also advised that such a reduction was allowable and common
practice. The Court finds Mr. Hurley’s testimony credible.
Petitioners made no effort to hide the reason they were excluding
30 percent of Mr. Hurley’s income; in fact, they attached a
written explanation of the exclusion to their 1999 Federal income
tax return. In addition, once petitioners received the notice of
deficiency, they included 100 percent of Mr. Hurley’s income on
their subsequent income tax returns while awaiting a decision by
this Court. Petitioners’ actions amount to reasonableness under
section 6662(c), and their actions are not considered by the
Court to amount to “careless, reckless, or intentional
disregard”.
Section 6662(b)(2) also provides a penalty in the amount of
20 percent for any “substantial understatement of income tax”. A
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