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understatement” of income tax exists if the amount of the
understatement for the taxable year exceeds the greater of (1) 10
percent of the tax required to be shown on the return or (2)
$5,000. Sec. 6662(d)(1)(A). However, the amount of an
understatement is reduced by any portion for which (1) there was
substantial authority for the taxpayer’s treatment, (2) or the
relevant facts affecting the item’s tax treatment were adequately
disclosed in the return or in a statement attached to the return
and there is a reasonable basis for the tax treatment. In
addition, no penalty under section 6662 may be imposed with
respect to any portion of an underpayment if it is shown that
there was a reasonable cause for the portion and that the
taxpayer acted in good faith with respect to the portion. Sec.
6664(c)(1).
Pursuant to section 7491(c), respondent bears the burden of
production with respect to the determined accuracy-related
penalty. Consequently, respondent must produce sufficient
evidence to demonstrate that the accuracy-related penalty is
appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446
(2001). Once respondent meets his burden of production,
petitioner must produce sufficient evidence to persuade the Court
that respondent’s determination is incorrect. Id. at 447.
The evidence demonstrates that the Federal income tax
liability for petitioners’ 2000 tax year is $91,763 but that
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