(b)

1. (1)

   1. (A) For purposes of this section, there is a substantial understatement of tax for any taxable period if the amount of the understatement for the taxable period exceeds the greater of ten percent of the tax required to be shown on the return for the taxable period or five thousand dollars.
   2. (B) In the case of a corporation other than an S corporation or a personal holding company (as defined in IRC Section 542), paragraph (1) must be applied by substituting "ten thousand dollars" for "five thousand dollars".

2. (2)

   1. (A) For purposes of paragraph (1), "Understatement" means the excess of the amount of the tax required to be shown on the return for the taxable period over the amount of the tax imposed which is shown on the return.
   2. (B) The amount of the understatement under subparagraph (A) must be reduced by that portion of the understatement which is attributable to (i) the tax treatment of any item by the taxpayer if there is or was substantial authority for such treatment or (ii) any item with respect to which the relevant facts affecting the item's tax treatment are adequately disclosed in the return or in a statement attached to the return.

   3. (C)

      1. (i) In case of any item attributable to a tax shelter:
      2. (I) subparagraph (B)(ii) does not apply; and
      3. (II) subparagraph (B)(i) does not apply unless (in addition to meeting the requirements of the subparagraph) the taxpayer reasonably believed that the tax treatment of the item by the taxpayer was more likely than not the proper treatment.
      4. (ii) For purposes of clause (i), "tax shelter" means:
      5. (I) a partnership or other entity;
      6. (II) and investment plan or arrangement, or
      7. (III) any other plan or arrangement if the principal purpose of the partnership, entity, plan, or arrangement is the avoidance or evasion of income tax.