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individual items. He is therefore not entitled to the disputed
Schedule C deductions.
III. Penalty Under Section 6662(a)
The final issue is whether the Chongs are liable for a 20-
percent accuracy-related penalty under section 6662(a) for
neglecting or disregarding the tax rules and regulations, or for
substantially understating their income tax. The Chongs have the
burden of proving that the Commissioner’s imposition of this
penalty was in error. See Rule 142(a). They can do this by
showing that, under all the facts and circumstances, they acted
with reasonable cause and in good faith. Sec. 6664(c)(1); sec.
1.6664-4(b)(1), Income Tax Regs.
With regard to the partnership loss, we find that the Chongs
did have reasonable cause to claim the loss and acted in good
faith. Partnership tax law is a deceptively complex area. A
reasonable and prudent person with their background and
experience wouldn’t necessarily know to ask about such things as
adjusted basis and distributive shares. In fact, if such a
person received a balance sheet and profit-and-loss statement
like Yung did, it is much more likely that he would rely on the
totals provided in those papers. This is especially true in this
case, where Lok was a trained accountant (albeit not one trained
in U.S. accounting rules) who was in control of all the
partnership’s records.
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