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or inform Duro-Last of any physical injury or sickness. In
short, petitioner’s settlement award was not received on account
of physical injury and is therefore includable in his gross
income.2
Respondent in his notice of deficiency determined that
petitioner was liable for a section 6662(a) accuracy-related
penalty. Section 6662(a) imposes a penalty equal to 20 percent
of the amount of any underpayment attributable to a substantial
understatement of income tax. Sec. 6662(b)(2). An
understatement is the amount by which the correct tax exceeds the
tax reported on the return. Sec. 6662(d)(2)(a). The
understatement is substantial if it exceeds the greater of $5,000
or 10 percent of the tax required to be shown on the return.
Sec. 6662(d)(1)(A)(i) and (ii).
An understatement is reduced by the portion of the
understatement that is attributable to the tax treatment of an
item for which there is substantial authority or with respect to
which there is adequate disclosure and a reasonable basis. See
sec. 6662(d)(2)(B); sec. 1.6662-4(a), (e)(2)(i), Income Tax Regs.
Reasonable basis is a “relatively high standard of tax reporting,
that is, significantly higher than not frivolous or not patently
improper.” Sec. 1.6662-3(b)(3), Income Tax Regs. The reasonable
2 Sec. 7491(a) is inapplicable because petitioner failed to
introduce credible evidence within the meaning of sec.
7491(a)(1).
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Last modified: November 10, 2007