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including negligence or disregard of rules or regulations and a
substantial understatement of income tax. See sec. 6662(b)(1)
and (2). “Negligence” includes any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, including any failure to keep adequate books and records or
to substantiate items properly. See sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. A “substantial understatement”
includes an understatement of tax that exceeds the greater of 10
percent of the tax required to be shown on the return or $5,000.
See sec. 6662(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs.
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion. The determination of whether a taxpayer acted
with reasonable cause and in good faith is made on a case-by-case
basis, taking into account all the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
important factor is the extent of the taxpayer’s effort to assess
his proper tax liability for the year. Id.
Petitioners had a substantial understatement of tax for 2002
since the understatement amount exceeded the greater of 10
percent of the tax required to be shown on the return or $5,000.
Petitioners claimed deductions for 2003 farm expenses to which
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Last modified: March 27, 2008