2005 Tax Ct. Summary LEXIS 42">*42 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
COUVILLION, Special Trial Judge: This case was heard pursuant to
Respondent determined a deficiency of $ 8,579 in petitioner's Federal income tax for the year 2001, 2005 Tax Ct. Summary LEXIS 42">*43 an addition to tax under
The issues for decision are: (1) Whether petitioner realized interest income from the redemption during 2001 of series E U.S. savings bonds inherited from his mother; (2) whether petitioner is liable for the addition to tax under
Some of the facts were stipulated, and those facts, with the annexed exhibits, are so found and are incorporated herein by reference. At the time the petition was filed, petitioner's legal residence was Lake Oswego, Oregon.
Petitioner is an accountant and was employed as finance manager for the County Housing Authority at Lake Oswego, Oregon. His work generally consisted of maintaining the books and records of his employer as well as handling financial transactions such as grants, loans, and the like between his employer and the U.S. Department of Housing and Urban Development.
The facts in this case are not in dispute. Petitioner's mother, Esther G. Cronk, died on June 3, 1999. She left a last will2005 Tax Ct. Summary LEXIS 42">*44 and testament and, under the terms of that will, bequeathed her entire estate to petitioner. The will was duly probated, petitioner was recognized as his mother's sole heir and legatee, and he was placed in possession of her estate. The record does not indicate what properties, other than the savings bonds, constituted the mother's estate. It appears that the probate/succession proceedings were concluded in early 2001.
Although the record is not entirely clear as to when the following events occurred, it appears that, at some point in 2001, petitioner received a notice from the bank where his mother did business, which stated that the annual fee for her safe deposit box was due. Petitioner was not aware that his mother had a safe deposit box, and he, accordingly, went through the necessary procedures to have the box opened. When the box was opened in 2001, petitioner discovered that his mother owned several series E U.S. savings bonds, which she had purchased over the years. The bonds totaled $ 30,000, and petitioner was the named beneficiary on the bonds. Petitioner then proceeded to redeem the bonds. Petitioner was paid the principal of the bonds and the interest that had accrued2005 Tax Ct. Summary LEXIS 42">*45 on the bonds. The interest totaled $ 31,980. For the year 2001, petitioner received from the payer bank two Forms 1099-INT, Interest Income, which totaled $ 31,980 for the interest. Petitioner did not include the interest as income on his 2001 Federal income tax return. The notice of deficiency, which petitioner thereafter received, attributed the $ 31,980 in interest as income to him. That income is the principal issue in this case.
The parties agree that, for the years in which petitioner's mother held the bonds, her income was minimal, and she did not file Federal income tax returns. Thus, income tax on the bond interest was never paid.
Shortly after petitioner received the notice of deficiency, he prepared, for the 2001 tax year, a Federal income tax return in the name of his mother, on which he reported the $ 31,980 as interest income. The tax shown on that return was $ 11,598, which included tax on the $ 31,980 in interest on the bonds. He mailed the return to the IRS and included a check of $ 11,598. The return was not accepted by the IRS for the reason that petitioner's mother died in 1999 and, therefore, was not a taxpayer in 2001. The $ 11,598 check petitioner sent with2005 Tax Ct. Summary LEXIS 42">*46 the return was not returned to him, nor was petitioner refunded that amount. 2 Petitioner, in the meantime, filed a timely petition with the Court.
With respect to series E U.S. savings bonds,
Petitioner's motive in having the interest taxable to his mother's estate is obvious. If the interest is taxed as her income, the tax amounts to approximately $ 3,300; whereas, if the interest is lumped with petitioner's salary and other income, the tax on the interest approximates $ 8,570. Respondent was not caught off guard by this strategy.
With respect to the first issue, whether petitioner realized interest income during 2001, the Court sustains respondent. The accrued interest on the bonds, as the Court held in a parallel situation in
(1) General rule.--The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period * * * shall be included in the gross income, for the taxable year when received, of: * * * * (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, * * *
Respondent agrees that, following his mother's death, petitioner, as her personal representative, could have filed a final return on her behalf2005 Tax Ct. Summary LEXIS 42">*49 for the year 1999, in which petitioner could have elected, on behalf of her estate, under
Respondent determined that petitioner's Federal income tax return for 2001 was not filed timely, and that he is liable for the addition to tax under
The final issue is respondent's determination that petitioner is liable for the penalty under
A substantial understatement exists where the amount of the understatement exceeds the greater of 10 percent of the tax required to be shown on the return for the taxable year or $ 5,000.
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis.
Petitioner is an accountant. His position is that, because he acquired the bonds by inheritance, he, therefore, had a "stepped-up" basis for the bonds, which basis would include the accrued interest. That rationale, however, has no bearing or relevance to the income tax liability for the accrued interest on the bonds. The Court, therefore, rejects that argument.
Petitioner also contends he relied on the representation of an Appeals officer of the IRS in the form of a letter he received in connection with the 2001 income tax return he prepared for his mother that was rejected by the IRS. It is apparent from the letter that the Appeals officer who signed the letter was not knowledgeable about the facts surrounding the bonds. Moreover, even if the letter is authoritative, the information in that letter clearly does not account for2005 Tax Ct. Summary LEXIS 42">*54 and take into consideration all the facts of this case. The law is well settled that the IRS is not bound by erroneous advice of its agents or employees.
Reviewed and adopted as the report of the Small Tax Case Division. To account for treatment of petitioner's payment of $ 11,598 that accompanied the 2001 income tax return on behalf of petitioner's mother that was not returned to petitioner,
Decision will be entered under Rule 155.
1. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The Court decides this case without regard to the burden of proof, except that, with respect to the addition to tax and the penalty, the burden of proof is on respondent.
2. A copy of the return was not offered into evidence. Petitioner did not explain how he arrived at the $ 11,598 tax liability shown on the return; however, it appears that the check tracks the deficiency determined in the notice of deficiency as well as the addition to tax and penalty plus an additional amount the Court assumes was interest. Counsel for respondent agreed that petitioner had sent a check for that amount but did not explain why the payment was not returned to petitioner. The decision in this case will presumably determine the disposition of those funds by respondent.↩
