- 12 -
id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933).
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). 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).
Section 6664(c)(1) provides that no penalty shall be imposed
if the taxpayer demonstrates that there was reasonable cause for
the underpayment and the taxpayer acted in good faith. The
determination of whether a taxpayer acted with reasonable cause
and in good faith depends on the facts and circumstances of the
situation and includes an “honest misunderstanding of fact or
law”. Sec. 1.6664-4(b)(1)(c), Income Tax Regs. Insofar as Mr.
Tschetschot is concerned, petitioners have not demonstrated
either good faith or that there was reasonable cause for their
position. As to Mrs. Tschetschot, petitioners were clearly aware
of the mandate of section 165(d); their wish that it be
inapplicable to tournament poker does not constitute the type of
misunderstanding contemplated by the statutes or the regulations.
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