Edward C. and Susan R. Hanna - Page 16

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          determined by the relevant facts and circumstances on a                     
          case-by-case basis.  See Stubblefield v. Commissioner, T.C.                 
          Memo. 1996-537; sec. 1.6664-4(b)(1), Income Tax Regs.                       
          “Circumstances that may indicate reasonable cause and good faith            
          include an honest misunderstanding of fact or law that is                   
          reasonable in light of all the facts and circumstances,                     
          including the experience, knowledge and education of the                    
          taxpayer.”  Sec. 1.6664-4(b)(1), Income Tax Regs.  A taxpayer is            
          not subject to the addition to tax for negligence where the                 
          taxpayer makes honest mistakes in complex matters, but the                  
          taxpayer must take reasonable steps to determine the law and to             
          comply with it.  Niedringhaus v. Commissioner, 99 T.C. 202, 222             
          (1992).  The most important factor is the extent of the                     
          taxpayer’s effort to assess the proper tax liability.                       
          Stubblefield v. Commissioner, supra; sec. 1.6664-4(b)(1), Income            
          Tax Regs.                                                                   
               At trial, respondent’s counsel acknowledged that the                   
          provisions under section 469 are complicated.  Petitioners had              
          limited experience with these provisions in 2000 because they               
          had begun their rental activities only a year earlier.                      
          Furthermore, despite working full-time jobs in addition to the              
          rental activities, petitioners created and/or maintained a                  
          number of records relating to the rental activities, such as                
          e-mails, receipts, and correspondence.  Although these records              
          fail to establish that Mrs. Hanna was a real estate                         

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