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Despite these red flags, petitioner did not consult a tax
attorney or an accountant outside of the Hoyt organization, nor
did he have his returns reviewed by an independent tax return
preparer. Petitioner claimed the tax benefits from the Schedule
F losses solely on the advice he received from the promoters of
the investment. He relied exclusively on Laguna, a Hoyt entity,
to prepare his returns. In other words, he relied on the same
people who were to receive 75 percent of his tax refunds. Given
the suspect tax claims, petitioner did not meet his duty of
inquiry or make a good faith investigation. Petitioner did not
exercise due care and failed to do what a reasonable or
ordinarily prudent person would do given the facts surrounding
petitioner’s investment. Therefore, we find that respondent has
met his burden of proof and hold that petitioner’s underpayments
of tax for 1994 and 1995 were the result of negligence. Unless
petitioner had reasonable cause, petitioner will be liable for
20-percent penalties under section 6662(b)(1) on his
underpayments of tax to the extent that those underpayments are
not already subject to the 40-percent penalties under section
6662(h).
E. Section 6662(b)(2): Substantial Understatement of Income
Tax
The accuracy-related penalty under section 6662 cannot
exceed 20-percent of the underpayment of tax (or 40 percent if
attributable to gross valuation misstatements). Sec. 1.6662-
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