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Hyland’s February 10, 1999, letter that 62 lots could have been
developed. Respondent argues that Petroff (the appraiser), in
arriving at his property valuation, relied on the false premise
in the February 10 letter that petitioner could have built 62
lots “by-right”. More significantly, however, respondent argues
that Petroff’s assumption was that petitioner could have built
the additional 32 lots in the floodplain.
Petitioners represented to respondent, through Petroff’s
appraisal report, that the entire Grist Mill property could be
developed and that the conservation easement had been placed on
the floodplain, which, in fact, petitioner knew was unavailable
for development. The evidence shows, without doubt, that the
property was zoned R-2 and limited to 30 units, and approximately
one-half of the Grist Mill property was floodplain on which no
development was permitted. Most importantly, petitioner knew at
the time of filing the return that the assumption that the
existing R-2 zoning allowed the development of 62 lots on the
Grist Mill property was false. Petitioners have shown a lack of
care and due regard in claiming a deduction based on assumptions
known to be false or erroneous.
The accuracy-related penalty may be avoided by showing that
(1) there was reasonable cause for the underpayment, and (2) the
taxpayer acted in good faith with respect to such underpayment.
Sec. 6664(c)(1). Whether a taxpayer acted with reasonable cause
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