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be shown on the return over the amount of tax that is actually
shown on the return. Sec. 6662(d)(2)(A). A “substantial
understatement” of income tax exists if the amount of the
understatement for the taxable year exceeds the greater of (1) 10
percent of the tax required to be shown on the return or (2)
$5,000.8 Sec. 6662(d)(1)(A). On the basis of the record in the
instant case, we conclude that each of the underpayments for
petitioners’ 2000 and 2001 tax years is attributable to a
substantial understatement of income tax.
Notwithstanding section 6662(a), section 6664(c)(1) provides
that the accuracy-related penalty shall not apply to any portion
of an underpayment if it is shown that there was reasonable cause
for the taxpayer’s position with respect to that portion and that
the taxpayer acted in good faith with respect to that portion.
The determination of whether a taxpayer acted with reasonable
cause and in good faith within the meaning of section 6664(c)(1)
is made on a case-by-case basis, taking into account all the
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs. The most important factor is the extent of the
8Sec. 6662(d)(2)(B) provides that the amount of an
understatement is reduced by any portion for which (1) there was
substantial authority for the taxpayer’s treatment, or (2) the
relevant facts affecting the item’s tax treatment were adequately
disclosed and there is a reasonable basis for the tax treatment.
In light of our holding below that there was reasonable cause for
petitioners’ position and that petitioners acted in good faith,
we need not decide whether petitioners’ understatement is
properly reduced pursuant to sec. 6662(d)(2)(B).
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Last modified: May 25, 2011