Yair Alonim, Petitioner

Submitted J . Gerbe r JM P T .C Memo . 2010-19 0

UNITED STATES TAX COUR T

YAIR ALONIM, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 28516-08 .

Filed August 30, 2010 .

Ya .ir Alonim, pro se .

Halvor R . Melom , for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINION'

f h GERBER, Judge : Respondent determined a $19,748 income tax deficiency and a $3,950 accuracy-related penalty under sectio n 'Petitioner filed his provisions of sec . 7463(a) designation and the Court indicated, all section ref Code applicable to the period under consideration .

(ranted his motion . Unless otherwise :rences are to the Internal Revenu e petition as a small tax case under the Petitioner moved for removal. of tha t I SERVED Aug 30 2010 6662(a) for petitioner's 2006 tax year . The issues presented for our consideration are whether petitioner is required to repor t certain interest income for 2006 and whether petitioner is liabl e for a section 6662(a) penalty .

FINDINGS OF FACT2

Petitioner maintained dual citizenship in the United States and Israel and at all times pertinent to thiscase resided i n California, including the time his petition was filed . During 2006 petitioner was retired, and his sources of income wer e interest on certificates of deposit (CDs) and Social Securit y benefits . For 2006 petitioner reported $53,0 :51 of interest and II $4,748 of Social Security benefits as income .

~Dur.ing 2006 and in prior years, petitioner earned interes t income by investing in CDs . It was his practice to seek out th e best possible interest rates . He would move his money . fro m institution to institution seeking more favorable rates at the end of the holding period of his current CDs .

ll The CDs were generally of 9- or 12-month`! duration . Th e terms of the CDs provided for a penalty if funds were withdrawn before the maturity date of the certificate . .At the end of eac h calendar year accumulated interest was credited to the C D balance, and petitioner was sent notification, in a Form 1099-INT , 2The parties' stipulation of facts and the exhibits are incorporated by this reference .

Interest-Income, reflecting'the interest that had accrued on hi s certificate . The accumulated interest that was credited to hi s CD account would theh accrue interest in addition to the original principal . On occasions where petitioner withdrew his funds before maturity, he was penalized . On one such occasion (not during 2006), some of the institutions holding his CDs becam e unstable and appeared unable to meet their obligations .

i Petitioner was then forced to withdraw before maturity, and th e early withdrawal penalty eliminated some portion of the accumulated interest that had been-earned on the certificates .

For each year , i.ncludring 2006, petitioner would report the amount reflected on the Forms 1099-INT only if the underlying CD had matured during that year ., On the basis of that approac h petitioner reported $ 53,05,1 of interest income for 2006 . .

Conversely , respondent received notification of the issuance of Forms 1099 -INT for petitioner reflecting interest in the tota l amount of $126,676 or a difference of $73,625 resulting in a $19,748 income tax deficiency for 2006 .

A notice 'of deficiency was issued to petitioner, and he petitioned this Court .

OPINIO N

We consider whether petitioner was required to report the interest credited to his CD accounts even though, as he contends, they remained subject to a penalty for early withdrawal . Gross w income comprises all income including interest income . Sec .

61(a)(4) .

In some cases involving unreported income, th e Commissioner must introduce evidence that reflects that a taxpayer received income that was not reported .

Hardy v .

Commissioner , 181 F .3d 1002, 1004 (9th Cir . 14999), affg . T .C .

Memo . 1997-97 . Respondent introduced certified documents reflecting that the Internal Revenue Service,had .been informed that .Forms 1099-INT had been issued to petitioner for the interest income that was not included on petitioner's 2006 tax return . Accordingly, . petitioner has the burden of showing that respondent's determination is in error .

There is no question that accrued interest was credited to petitioner's CD accounts as of the end of the12006 calendar year .

The only question petitioner raises is whether the potential fo r a penalty if the interest or principal had been withdrawn early is a restriction that would render the interest not subject t o tax . Petitioner's argument is addressed in section 1 .451-2, Income Tax Regs .3 That regulation provides that a taxpayer is not in constructive receipt of income if, the taxpayer's contro l of its receipt is subject to "substantial limitations or i restrictions ." Sec . 1 .451-2(a), Income Tax Regs . In the case o f interest, dividends, or other earnings on deposits in a bank o r 3Neither party cited this regulation ; we consider it because it bears on petitioner's argument and position in this case .

similar institution, section 1 .451-2(a)(2), Income Tax Regs ., provides that the following is not a substantial limitation or restriction on the taxpayer's control over the receipt of such earnings :

The fact that the taxpayer would,= by withdrawing the earnings during the taxable year, receive earnings that are not substantially less,in comparison with the earnings for the corresponding period to which th e taxpayer would be entitled had he left the account on deposit until a later ldate (for example, if an amount equal to three months[ interest must be forfeited upon- withdrawal or redemption before maturity of a one year or less certificate of deposit, time deposit, bonus plan, or other deposit arrangement then the earnings payable on the premature withdrawal or redemption would be substantially lesslwhen compared with the earnings available at maturity) ; In other words, if the owner of a certificate of deposit with a duration of a year or less would forfeit 3 months of interes t for an early withdrawal, the regulation might furnish protection from constructive receipt of accrued but unwithdrawn interest .

Petitioner testified, in vague terms, about situations wher e he was penalized for earl :withdrawal . He did not, however , provide the terms reflecting the amounts of penalty for premature withdrawal of the CDs under consideration . Accordingly, there is no way for the Court to judge whether early withdrawal in this case was subject to "substantial limitations or restrictions . " Petitioner did not withdraw ; principal or interest during 2006, and accordingly his CD accounts were credited with accumulated interest unreduced by any penalty . There were no Y penalties to petitioner for . his 2006 tax year . In the circumstances of this case petitioner is required to report al l of the interest credited to his accounts for which Forms 1099-IN T were issued .

Petitioner also alleges that he did not receive Forms 1099- I NT for the $73,625 of interest that he failed to include on hi s 2006 tax return . We find petitioner's allegations to be disingenuous and in conflict with the evidence before the Court .

The record reflects that the unreported porti on of the interest ($73,625) is represented by 15 Forms 1099-INT it . Those Forms 1099- INT were issued by some of the same financial,linstitutions as those for which petitioner did report interest . Moreover, petitioner reported only approximately 42 per,,cent of the total interest credited to his account during 2006 fl($53,051 e $126,676) and failed to report 58 percent of the interest earned ($73,62 5 $126,676) . For the 2006 taxable year, the interest from petitioner's CDs represented most of his income . He carefully monitored the interest rates, maturity dates,lland related matters throughout the year . Applying his theory that interest was reportable only if there was no possibility of an early withdrawal penalty, he had to review each CD to make the decision to report only a portion of the interest credited to his account .

Petitioner's allegations that he did not receive or was not aware I of the interest are withou t any credibility and belie the realit y of the circumstances .

Accordingly, we hold hat petitioner was required and'faile d to report $73,625 of interbst'income for 2006 . Having decided that the interest was taxable, we proceed to,decide whether the section 6662(a) accuracy=related penalty applies to the resultin g underpayment .

Section 6662(a) and ( b ) (1) and (2) imposes an accuracy- related penalty of 20 percent on-the portion of an underpaymen t attributable to negligence disregard of rules or regulations, o r a substantial understatement of income tax . Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Code or to exercise ordinary and reasonabl e care in the preparation of a tax return . Sec . 1 .6662-3(b)(1) , Income Tax Regs . Negligence is strongly indicated where a taxpayer fails to report income reflected on Forms 1099-INT .

Id .

There is a substantial understatement of income tax under section 6662(b)(2) if the amount of the understatement exceeds th e greater of either 10 percent of the tax required to be -shown o n the return, or $5,000 .

Sec' . 6662(a), (b) (1) and- (2) (d) (1) (A) ; sec . 1 .6662-4(a), Income Tax Regs. - The Commissioner bear . the burden of production with respect to penalties . Sec . 7491(c) ; Higbee v . Commissioner , 116 T .C .

438, 446-447 (2001) . Once the burden of production is met, the I I taxpayer must come forward with evidence sufficient to show tha t the penalty does not apply .

Id . at 447 . Petitioner' s understatement of income tax is $19 .,748 . Theljunderstatement exceeds the greater of 10 percent of the tax required to be show n or $5,000 . Thus, the . understatement is substantial for purpose s of .section 6662(d)(1)(A), and respondent has met . his burden o f production .

Section 6664(c)(1) provides a defense t& the section 666 2 penalty for any portion of an underpayment where reasonable caus e existed and the taxpayer acted in good faith .

Generally, th e most important factor is the extent of the taxpayer's effort to assess the proper tax liability . Sec . 1 .6664L-4(b)(1), Income Tax Regs . Petitioner's explanation of his failure to report accrue d interest lacked credibility . More important, petitioner did no t seek advice and provided no evidence of the terms of the earl y withdrawal penalties to support his argumenti~that the interest i s not reportable .

We have also considered the volume of unreported income (more than 58 percent of the .interest earned) ;, and the possibility of an "honest mistake" or oversight is remote . Unde r the circumstances, we hold that petitioner is liable for the section 6662(a) accuracy-related penalty on the entire underpayment .

To reflect the foregoing, Decision will be entere d for respondent .