Scott Owen Schubert & Amy K. Moore - Page 12

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          adequate books and records or to substantiate items properly.               
          See sec. 1.6662-3(b)(1), Income Tax Regs.                                   
               In interpreting section 6662, the Court has defined the term           
          “negligence” as a “‘lack of due care or the failure to do what a            
          reasonable and ordinarily prudent person would do under the                 
          circumstances.’”  Freytag v. Commissioner, 89 T.C. 849, 887                 
          (1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th            
          Cir. 1967), affg. 43 T.C. 168 (1964) and T.C. Memo. 1964-299, and           
          citing Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th Cir.                 
          1984), affg. 79 T.C. 714 (1982)), affd. 904 F.2d 1011 (5th Cir.             
          1990), affd. 501 U.S. 868 (1991).                                           
               Section 6664(c)(1) provides an exception to the section                
          6662(a) penalty:  no penalty is imposed with respect to any                 
          portion of an underpayment if it is shown that there was                    
          reasonable cause therefor and the taxpayer acted in good faith.             
          Section 1.6664-4(b)(1), Income Tax Regs., incorporates a facts              
          and circumstances test to determine whether the taxpayer acted              
          with reasonable cause and in good faith.  The most important                
          factor is the extent of the taxpayer’s effort to assess his                 
          proper tax liability.  Id.  Circumstances that may indicate                 
          reasonable cause and good faith include an honest                           
          misunderstanding of fact or law that is reasonable in view of the           
          taxpayer’s experience, knowledge, and education.  Id.                       

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