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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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