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The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment, however, 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. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs.
The determination of whether a taxpayer acted with reasonable
cause and in good faith is made on a case-by-case basis, taking
into account all the pertinent facts and circumstances, the most
important of which is the extent of the taxpayer’s effort to
assess his or her proper tax liability for the year. Sec.
1.6664-4(b)(1), Income Tax Regs. Circumstances that may indicate
reasonable cause and good faith include an honest
misunderstanding of law that is reasonable in light of all of the
facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
While the Commissioner bears the burden of production under
section 7491(c), the taxpayer bears the burden of proof with
respect to reasonable cause. Higbee v. Commissioner, supra at
446. The mere fact that we have held against petitioners on the
substantive issue does not, in and of itself, require holding for
respondent on the penalty. See Hitchins v. Commissioner, 103
T.C. 711, 719-720 (1994) (“Indeed, we have specifically refused
to impose * * * [a penalty] where it appeared that the issue was
one not previously considered by the Court and the statutory
language was not entirely clear.”).
We agree with petitioners that they made a reasonable
attempt to comply with the Code in circumstances involving an
issue of first impression. We note that respondent has not
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Last modified: May 25, 2011