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6662(b)(2), (d). An understatement of income tax is a
substantial understatement of income tax if it exceeds the
greater of $5,000 or 10 percent of the tax required to be shown
on the taxpayer’s return. Sec. 6662(d)(1).
Ignoring conditions not relevant here, for purposes of
section 6662, an understatement is defined as the excess of the
amount of the tax required to be shown on the taxpayer’s return
over the amount of the tax which is shown on the return. Sec.
6662(d)(2)(A). In this case, for purpose of section 6662, the
difference between the amount of tax required to be shown on the
1998 return and the amount of tax shown on the return exceeds the
greater of 10 percent of the tax required to be shown on the 1998
return or $5,000. Consequently, respondent has satisfied his
burden of production with respect to the accuracy-related penalty
based on a substantial understatement.
However, section 6664(c)(1) provides that the penalty under
section 6662(a) shall not apply to any portion of an underpayment
if it is shown that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion.3 The determination of whether a taxpayer acted
with reasonable cause and in good faith is made on a case-by-case
3 While the Commissioner bears the burden of production
under sec. 7491(c), the taxpayer bears the burden of proof with
respect to reasonable cause. Higbee v. Commissioner, 116 T.C.
438, 446 (2001).
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Last modified: May 25, 2011