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Section 6662--Penalty
Section 6662(a) provides a penalty in an amount equal to 20
percent of the portion of any underpayment attributable to, among
other things, “Any substantial understatement of income tax”.
Sec. 6662(b)(2). A substantial understatement of income tax
exists “if the amount of the understatement for the taxable year
exceeds the greater of--(i) 10 percent of the tax required to be
shown on the return for the taxable year, or (ii) $5,000.” Sec.
6662(d)(1)(A). For purposes of section 6662(a), an
understatement may be reduced if there is “substantial authority”
for the position taken, or if the facts were adequately disclosed
in the return and there was a “reasonable basis” for the position
taken. Sec. 6662(d)(2)(B). Further, no penalty will be imposed
if there was a reasonable cause for the understatement and the
taxpayer acted in good faith. Sec. 6664(c). There is no
substantial authority for the position taken here. The facts
concerning the unreported items of income that petitioner
conceded, supra note 2, were obviously not disclosed and are not
subject to the section 6662(d)(2)(B) exception from the penalty.
While petitioner did disclose the fact that there was a casualty
loss deduction, we cannot say there was a reasonable ground for
the amount of the deduction claimed as a loss. Petitioner made
no attempt to ascertain the correct tax treatment of the items
composing the casualty loss deduction claimed. A “reasonable”
basis or reasonable cause cannot be transmuted from intentional
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Last modified: May 25, 2011