Gary W. McDonough - Page 20

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               Reasonable cause and good faith under section 6664(c) may be           
          established where there is an honest misunderstanding of fact or            
          law that is reasonable in the light of all facts and                        
          circumstances, including the experience, knowledge, and education           
          of the taxpayer.  Sec. 1.6664-4(b)(1), Income Tax Regs.                     
          Reasonable cause and good faith are not necessarily established             
          by reliance on facts that, unknown to the taxpayer, are                     
          incorrect.  Id.                                                             
          3.  Applicability of the Accuracy-Related Penalties                         
               a.  Gross Valuation Misstatement                                       
               In Durham Farms #1, J.V. v. Commissioner, T.C. Memo.                   
          2000-159, the Court held that TBS 89-1 did not receive the                  
          benefits and burdens of ownership of the cattle in dispute there            
          and was not entitled to the partnership deductions and losses               
          claimed with respect thereto.  The Court’s decision stated that             
          the partnership’s “Depreciation Expense” and “Depreciation after            
          1986”, each of which was reported as $1,056,720, were both zero.            
          The disallowance of those items resulted in a computational                 
          adjustment (and tax understatement) for 1989 of $7,574.  Because            
          petitioner’s adjusted basis for the depreciation expense                    
          deduction also was zero, the underpayment for 1989 resulting from           
          the disallowance of petitioner’s partnership loss from TBS 89-1,            
          all of which was attributable to a disallowed depreciation                  
          expense, is attributable to an overstatement of bases of more               

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Last modified: November 10, 2007