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substantial understatement is defined as the greater of 10
percent of the tax required or $5,000. Sec. 6662(d)(1)(A).
Petitioners’ understatement does amount to greater than $5,000;
however, they qualify for a reduction of the understatement.
Sec. 6662(d)(2)(B). Section 6662(d)(2)(B) provides for a
reduction of an understatement due to the position of the
taxpayer and his disclosure of a disputed item. Generally, under
that provision, the amount of the understatement shall be reduced
by that portion of the understatement that is attributable, in
this case, to an item if the relevant facts affecting the item’s
tax treatment are adequately disclosed in the return or in a
statement attached to the return, and there is reasonable cause
for the tax treatment of such item and good faith on the part of
the taxpayer. Sec. 1.6662-3(b)(3), Income Tax Regs.
As previously discussed, petitioners consulted with and
relied on the advice of a tax preparation service. They attached
to their 1999 income tax return an explanation of why they
excluded a portion of Mr. Hurley’s wages. The explanation even
included the Code section they, albeit mistakenly, relied on to
take the exclusion. Mr. Hurley reasonably believed that section
104 provided for an exclusion because of his permanent
disability. The Court is satisfied that petitioners acted in
good faith and with reasonable cause. Therefore, the amount of
the understatement for purposes of determining whether it amounts
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Last modified: May 25, 2011