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a taxpayer establishes that there was reasonable cause for the
underpayment and that he acted in good faith with respect to that
portion. Sec. 6664(c)(1); sec. 1.6664-4(b), Income Tax Regs.;
see also Higbee v. Commissioner, 116 T.C. at 448. Although not
defined in the Code, “reasonable cause” is viewed in the
applicable regulations as the exercise of “ordinary business care
and prudence”. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.;
see United States v. Boyle, supra at 246. 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. Considering the taxpayer’s education, experience, and
knowledge, a reasonable misunderstanding of fact or law may
indicate reasonable cause and good faith. Higbee v.
Commissioner, supra at 449.
Generally, the most important factor is the extent of the
taxpayer’s effort to assess the proper tax liability, including
reliance on the advice of a tax return preparer. However,
reliance on a professional adviser, alone, is insufficient; the
reliance must be reasonable and the taxpayer must act in good
faith. Sec. 1.6664-4(b)(1), Income Tax Regs. Furthermore, a
substantial understatement of income tax is reduced by that
portion of the understatement attributable to the tax treatment
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Last modified: March 27, 2008