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prudent person to be ‘too good to be true’ under the
circumstances”. Sec. 1.6662-3(b)(1)(ii), Income Tax Regs. The
regulations further provide that negligence “also includes any
failure by the taxpayer to keep adequate books and records or to
substantiate items properly.” Sec. 1.6662-3(b), Income Tax Regs.
Negligence is defined as the “‘lack of due care or failure
to do what a reasonable and ordinarily prudent person would do
under the circumstances.’” Neely v. Commissioner, 85 T.C. 934,
947 (1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506
(5th Cir. 1967), affg. in part and remanding in part on another
ground 43 T.C. 168 (1964) and T.C. Memo. 1964-299); see Allen v.
Commissioner, 925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1
(1989). Negligence is determined by testing the taxpayer’s
conduct against that of a reasonable, prudent person. Zmuda v.
Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984), affg. 79 T.C.
714 (1982).
No penalty is imposed under section 6662 if there is
reasonable cause for the underpayment of tax and the taxpayer has
acted in good faith. Sec. 6664(c)(1). The determination of
whether a taxpayer acted with reasonable cause and in good faith
depends upon the facts and circumstances of each particular case.
Sec. 1.6664-4(b)(1), Income Tax Regs. Circumstances that may
indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable considering
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Last modified: March 27, 2008