Edward C. and Susan R. Hanna - Page 15

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          the passive activity loss in 2000.  Respondent’s determination              
          is sustained.                                                               
          Accuracy-Related Penalty Under Section 6662(a)                              
               Section 6662(a) provides that a taxpayer may be liable for             
          a penalty of 20 percent of the portion of an underpayment of tax            
          attributable to (1) a substantial understatement of tax or (2)              
          negligence or disregard of rules or regulations.  Sec. 6662(a),             
          (b)(1) and (2).  An “understatement of tax” is substantial if it            
          exceeds the greater of 10 percent of the tax required to be                 
          shown on the return or $5,000.  Sec. 6662(d)(1) and (2).  The               
          term “negligence” includes any failure to make a reasonable                 
          attempt to comply with the provisions of the Internal Revenue               
          Code.  Sec. 6662(c).  The term “disregard” includes any                     
          careless, reckless, or intentional disregard.  Id.  Respondent              
          has the burden of production with respect to the                            
          accuracy-related penalty.  See sec. 7491(c).                                
               In the present case, 10 percent of the tax required to be              
          shown on petitioners’ return was $5,592.90.  Petitioners                    
          understated their tax by $26,693.  Respondent therefore has met             
          his burden of production.                                                   
               An exception to the section 6662 penalty applies when the              
          taxpayer demonstrates (1) there was reasonable cause for the                
          underpayment, and (2) the taxpayer acted in good faith with                 
          respect to the underpayment.  Sec. 6664(c).  Whether the                    
          taxpayer acted with reasonable cause and in good faith is                   

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