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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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