[broiler]

You're welcome. I'm always up for a good discussion on tax related issues that pop up.

I don't think that the exclusion of this income would generate the substantial underpayment penalty. The IRS, in my experience, tends to look at that penalty in terms of tax impact of your position. Unfortunately, there is no solid rule on what any auditor will use as their magic number to assess such a penalty. The only cases that I can remember with these penalties involve outright fraudulent tax returns

I would add that the IRS is even more lenient on the preparer based penalties. The preparer based penalties seem to be held for preparers that do ridiculous things on tax returns. The only local cases that I can think of involve preparers that were using fraudulent deductions and documentation.