Gary E. and Rebecca L. Hurley - Page 13

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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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