- 21 - Petitioners failed to prove that they acted with reasonable cause and in good faith with respect to the disallowed business expense deductions. We therefore sustain respondent’s determination that petitioners are liable for the section 6662 accuracy-related penalty on the underpayment associated with the disallowed Schedule C deductions. With respect to the tax imposed under section 1401 on Mr. Vigil’s self-employment income from his ministry, petitioners relied on the advice of their C.P.A., who told them that Mr. Vigil was exempt. This reliance was reinforced by the July 1997 letter from the IRS which closed the examination of petitioners’ 1994 tax year with no change and from which petitioners logically and reasonably deduced that their Form 4361 must have been approved. We find that petitioners acted with reasonable cause and in good faith in claiming the exemption in 2001.6 Accordingly, we conclude that petitioners are not liable for the section 6662 accuracy-related penalty on the underpayment associated with the self-employment tax. 6 The Court notes that the tax returns contained in the record indicate that petitioners consistently entered “Exempt-- Form 4361” on the self-employment tax line of their Form 1040. Because we find that petitioners had reasonable cause and acted in good faith with respect to self-employment tax, we need not, and do not, decide whether this entry constituted “adequate disclosure” pursuant to sec. 1.6662-4(a), Income Tax Regs.Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 NextLast modified: March 27, 2008