Nathaniel H. and Carol A. Garfield - Page 7

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          understatement of income tax.  Sec. 6662(b)(2).  An                         
          understatement is the amount by which the correct tax exceeds               
          the tax reported on the return.  Sec. 6662(d).  The                         
          understatement is substantial if it exceeds the greater of                  
          $5,000 or 10 percent of the tax required to be shown on the                 
          return.  Sec. 6662(d)(1)(A)(i) and (ii).  Petitioners                       
          erroneously reported income resulting in understatements of tax             
          of $48,603, $40,497, and $37,442 for 2000, 2001, and 2002,                  
          respectively.                                                               
               An understatement is reduced by the portion of the                     
          understatement that is attributable to the tax treatment of an              
          item for which there is substantial authority or with respect to            
          which there is adequate disclosure and a reasonable basis.  See             
          sec. 6662(d)(2)(B); sec. 1.6662-4(a), Income Tax Regs.                      
          Petitioners did not have substantial authority for their                    
          position, nor did they adequately disclose their position.  No              
          reduction, therefore, is appropriate.                                       
               Section 6664(c)(1) provides that no penalty shall be                   
          imposed if a taxpayer demonstrates that there was reasonable                
          cause for the underpayment and the taxpayer acted in good faith.            
          The determination of whether a taxpayer acted with reasonable               
          cause and in good faith depends upon the facts and                          
          circumstances.  See sec. 1.6664-4(b)(1), Income Tax Regs.                   
          Petitioners do not contend that they followed, or even sought,              






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