Opinion ID: 566858
Heading Depth: 2
Heading Rank: 2

Heading: Substantial underpayment of taxes under Section 6661

Text: 33 In addition to the penalty imposed for negligent underpayment of tax, the Tax Court also imposed liability for addition to tax under Section 6661(a) of the Internal Revenue Code. 6 Under Section 6661(a) (26 U.S.C.), the taxpayer owes an addition to tax in an amount equal to 25 percent of the amount of the substantial underpayment. Section 6661(b)(1)(A) establishes that a taxpayer has substantially underpaid when the underpayment exceeds the greater of either 10 percent of the amount of tax due or $5,000. 34 Taxpayer makes no argument with respect to the $9,903 deficiency imposed by the Commissioner on account of taxpayer's substantial understatement of liability under Section 6661 of the Code. As noted above, taxpayer substantially understated his income tax liability for the two years in question within the meaning of Section 6661. The provision therefore will apply by virtue of the fact that taxpayer's understatement exceeded the limits set forth in the statute. However, Section 6661 permits a reduction of the penalty for understatement in either of two situations: 35 (1) if there is or was substantial authority for such treatment (26 U.S.C. § 6661(b)(2)(B)(i)); 36 (2) if the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return (26 U.S.C. § 6661(b)(2)(B)(ii)). 37 Additionally, Section 6661(c) permits waiver of the entire penalty for understatement if there was reasonable cause for the understatement (or part thereof) and the taxpayer acted in good faith (Section 6661(c) (26 U.S.C.)). 38 The Tax Court found that taxpayer did not meet any of the above conditions, so that he was not entitled to a reduction in or waiver of the penalty for understatement. Taxpayer's claim that there was substantial authority supporting the deduction of legal fees is undercut by Treasury Regulation 1.6661-3(b)(1), limiting substantial authority to situations in which the weight of the authorities supporting the treatment is substantial in relation to the weight of the authorities supporting contrary positions. Treasury Regulations on Income Tax (23 C.F.R.). As the above discussion of the non-deductibility of taxpayer's legal fees amply demonstrates, there is a dearth of authority supporting his position, much less the balance of authorities required by the Treasury Regulation. 39 Furthermore, taxpayer did not provide relevant facts on his tax return sufficient to permit a reduction for adequate disclosure. He stated only that his deduction of $207,000 was for Legal fees re conservation of property held for production of income. This assertion falls short of the exposition of relevant facts required under Section 6661(b)(2)(B)(ii). Schirmer v. Commissioner, 89 T.C. 277, 285-286 (1987) (mere listing of income, expenses and claimed depreciation did not constitute disclosure of relevant facts). Particularly where taxpayer lacked substantial authority for his position and where he appeared to think that his deduction presented a novel legal issue, the mere declaration of a deduction does not entitle taxpayer to a reduced penalty for understatement of tax. 40 Finally, Section 6661(c) vests discretion in the Commissioner to reduce or waive the penalty for understatement if he believes that the taxpayer acted in good faith. As the preceding discussion of the penalty for negligent underpayment demonstrates, the record does not contain evidence of taxpayer's good faith. Given the absence of authority supporting his position, the Commissioner acted well within his discretion in concluding that the understatement was unreasonable. 41 The decision of the Tax Court is affirmed.