Gary W. McDonough - Page 18

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          suspect tax claims as to put a reasonable taxpayer under a duty             
          of inquiry, a good faith investigation of the underlying                    
          viability, financial structure, and economics of the investment             
          is required.  Roberson v. Commissioner, T.C. Memo. 1996-335                 
          (citing LaVerne v. Commissioner, 94 T.C. 637, 652-653 (1990),               
          affd. without published opinion 956 F.2d 274 (9th Cir. 1992),               
          affd. without published opinion sub nom. Cowles v. Commissioner,            
          949 F.2d 401 (10th Cir. 1991), and Horn v. Commissioner, 90 T.C.            
          908, 942 (1988)), affd. without published opinion 142 F.3d 435              
          (6th Cir. 1998).                                                            
               c.  Substantial Understatement of Income Tax                           
               An understatement of income tax is substantial 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).  An understatement is the excess of the amount of tax           
          required to be shown on the return over the amount of tax                   
          actually reported on the return.  Sec. 6662(d)(2).                          
               d.  Gross Valuation Misstatements                                      
               Section 6662(h) provides that a taxpayer may be liable for a           
          40-percent penalty on any portion of an underpayment of tax                 
          attributable to gross valuation misstatements.  No penalty is               
          imposed under that section, however, unless the portion exceeds             
          $5,000.  Sec. 6662(e)(2).  A gross valuation misstatement denotes           
          any substantial valuation misstatement, as determined under                 

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