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Section 6662(a) imposes a penalty of 20 percent of the
portion of the underpayment to which section 6662 applies. As
relevant to this case, the penalty applies to any portion of the
underpayment that is attributable to a substantial understatement
of income tax. Sec. 6662(b)(2). There is a “substantial
understatement of income tax” if the amount of the understatement
exceeds the greater of 10 percent of the tax required to be shown
on the return or $5,000. Sec. 6662(d)(1)(A).
The Commissioner bears the burden of production with respect
to penalties. Sec. 7491(c); Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001). Once the burden of production is met, the
taxpayer must come forward with evidence sufficient to show that
the penalty does not apply. Higbee v. Commissioner, supra at
447.
According to our determination above, the tax required to be
shown on petitioners’ tax return was $47,512. Ten percent of
that amount is less than $5,000. Thus, petitioners’
understatement is substantial if it exceeds $5,000. Petitioners
reported an income tax liability of $23,216, resulting in an
understatement of $24,296. Respondent has satisfied his burden
of production by showing that petitioners’ understatement of tax
was substantial.
For purposes of determining the accuracy-related penalty,
the amount of the understatement is reduced by the portion of the
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