HERNANDEZ v. COMMISSIONER

T.C. Summary Opinion 2001-9

UNITED STATES TAX COURT

JOHN R. HERNANDEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18151-98S. Filed February 6, 2001.

John R. Hernandez, pro se.

Ross Greenberg, for respondent.

WOLFE, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority. Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in
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effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency in petitioner’s 1994

Federal income tax of $4,706 and an accuracy-related penalty

under section 6662(a) of $941. The issues for decision are:

(1) Whether interest income realized upon the redemption of tax

certificates is attributable to petitioner, and (2) whether

petitioner is liable for an accuracy-related penalty under

section 6662(a).1

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioner resided in

Saint Leo, Florida, when the petition in this case was filed.

Petitioner has been in this Court before in a case involving

substantially the same facts as those presented here, Hernandez

v. Commissioner, T.C. Memo. 1998-46 (Hernandez I). In Hernandez

I, we held that interest paid on the redemption of tax

certificates sold by Pasco County, Florida, for delinquent taxes

owed on real property is not excluded from gross income under

section 103 because the tax certificates are not obligations of a

1
In the notice of deficiency, respondent determined that
petitioner was not entitled to the itemized deductions he claimed
on his 1994 Federal income tax return. In lieu of the itemized
deductions, respondent allowed petitioner a standard deduction.
This adjustment is a computational adjustment that is dependent
upon our determination whether petitioner failed to report
taxable interest income.
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State or political subdivision. See id. In Hernandez I, because

of petitioner’s failure to present evidence in support of his

claims, we also rejected his argument that amounts there in issue

were income to his grandson or his brother Vincent, or his

brother’s wife Mildred, among others, rather than to him.

Subsequently, petitioner made a motion requesting that we

reconsider our holding in Hernandez I with respect to that

portion of interest paid on redemption of tax certificates that

was attributable to special assessments. In Hernandez v.

Commissioner, T.C. Memo. 1998-329 (Hernandez II), we declined to

alter the result we reached in Hernandez I.

Petitioner is a certified public accountant. For several

years, petitioner purchased at public auctions tax certificates

sold by Pasco County, Florida, pursuant to Fla. Stat. Ann. sec.

197.432 (West 1989 & Supp. 1997). Pasco County and other

counties in Florida sell the certificates for amounts equal to

delinquent property taxes, interest accrued thereon, and other

costs and charges owed by property owners to the county. See

Hernandez I. The certificates provide a means for Florida

counties to fund current government expenditures by transferring

the indebtedness incurred by property owners for their property

tax delinquencies to the purchasers of the tax certificates. See

id. The certificates also provide a mechanism for eventual

collection of the delinquent taxes out of the property against
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which the assessment is made, either through redemption of the

certificates or eventual sale of the property. See id.

At the public auctions, potential purchasers bid to purchase

tax certificates in terms of the rate of interest payable on the

face amount up to a statutory maximum of 18 percent. The tax

certificates were sold to the party bidding the lowest rate. The

tax certificates have a term of 7 years and cannot be collected

after the expiration of that term.

When a tax certificate was redeemed, the Pasco County tax

collector (tax collector) paid an amount that included both the

principal and interest accrued at the rate bid for the purchase

of the certificate. For the years in issue, the tax collector

issued Forms 1099 showing the amount of interest paid on the

redeemed certificates and the names of the payees.

Petitioner and Oneta Hernandez (Mrs. Hernandez) filed a

joint Federal income tax return for 1994. Mrs. Hernandez died

prior to respondent’s issuance of the statutory notice of

deficiency. For 1994, the tax collector issued Forms 1099

listing either petitioner or Mrs. Hernandez as a payee. Many of

the Forms 1099 also listed a copayee. In many of these

instances, the Forms 1099 listed the copayee’s Social Security

number rather than petitioner’s or Mrs. Hernandez’s Social

Security numbers.
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On the 1994 joint Federal income tax return that he and his

late wife filed, petitioner reported taxable interest income of

$6,085 and tax-exempt interest income of $28,635.2 Respondent

determined that the interest income petitioner received from the

redemption of tax certificates was not tax exempt. Respondent

further determined that petitioner failed to report interest

income of $7,482. This amount represents interest reported on

Forms 1099, which listed copayees’ Social Security numbers.

Respondent also determined that petitioner failed to report

interest income from First Union National Bank of $99 and

interest income from Bankers Trust of $6. Accordingly,

respondent determined that petitioner failed to report taxable

interest income of $36,221.

In the present case, petitioner concedes $28,739 of the

$36,221 interest income adjustment contained in the notice of

deficiency. The interest income from First Union National Bank

and Bankers Trust is not disputed by petitioner. Petitioner also

does not argue that the interest income reported on the Forms

1099 issued by the tax collector is tax exempt. Instead,

petitioner contends that the interest income represented by Forms

1099 listing copayees’ Social Security numbers should not be

2
In the deficiency notice respondent determined that the
amount should have been $28,634, apparently because of an
arithmetic error.
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attributed to him because he received the interest income as a

nominee. To prevail, petitioner must carry the burden of proving

that such income is not attributable to him or to Mrs. Hernandez.

See Rule 142(a). As in Hernandez I, petitioner has failed to

present such proof.

There is no nominee agreement or other written documentation

that petitioner held the income in question as nominee or agent

for others. The money that petitioner received from the

redemption of tax certificates was deposited in petitioner’s bank

accounts.3 Petitioner has failed to provide any credible

evidence that demonstrates that such money was transferred to any

of the copayees. Petitioner has also failed to provide any

evidence that the copayees reported such interest income on their

Federal income tax returns. None of the copayees testified at

trial. Moreover, petitioner conceded that the interest income

reported on at least one Form 1099, which stated a copayee’s

Social Security number, belonged to him. Petitioner also

testified that he purchased tax certificates intending to give

the interest income to his grandchildren.

3
Since petitioner mentioned at trial that he had books and
records that he had failed to bring with him or to show
respondent previously, we held the record open and permitted the
parties to stipulate the contents of those records. The
stipulation shows that petitioner probably intended to transfer
sums to various relatives. But those persons did not testify in
this case, and we do not have proof that they supplied any of the
funds that petitioner invested, that they actually received
interest income from these investments, or that they reported on
their tax returns any income from petitioner’s investments.
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In Hernandez I, this Court’s comments about similar

circumstances were as follows:

With respect to amounts of interest received from
the redemption of certificates held in his or Mrs.
Hernandez’ name and those of Vincent or Mildred
Hernandez, respectively, petitioner produced no
evidence that such amounts were not his income other
than a document signed in 1984 by Vincent and Mildred
Hernandez purporting to give petitioner a power of
attorney. Neither Vincent nor Mildred Hernandez
testified at trial. With respect to the remaining
persons whose names appeared on the tax certificates as
alternate payees, petitioner produced no evidence at
all.

Unlike the taxpayer in the “Mexican Lottery Case”,
Diaz v. Commissioner, 58 T.C. 560, 565 (1972), whose
grandmother, “face-to-face with her priest in the
courtroom”, corroborated every word of his testimony
that the lottery tickets in question belonged to his
uncle, petitioner failed to bring a single witness,
neither brother, daughter, nor friend, to the courtroom
to corroborate his story that he was holding these
funds for them. In failing to do so, petitioner did
not carry his burden of proving that these funds
belonged to other taxpayers. * * *

Here the record does not include any purported power of attorney.

Instead, petitioner presented a letter from Vincent Hernandez,

his brother, claiming that the certificates purchased in

Vincent’s name after 1985 were purchased for him. As in

Hernandez I, Vincent Hernandez did not appear to testify about

the letter, and there is no evidence that any of the income in

issue was reported on a tax return by Vincent Hernandez or any of

the other copayees.

There is no question that the income here in issue is

interest income and therefore is includable in gross income under
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section 61(a)(4). Also, it has long been established that income

includes “undeniable accessions to wealth, clearly realized, and

over which the taxpayers have complete dominion.” Commissioner

v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

As in Hernandez I, petitioner has failed to bring a single

witness to the courtroom to corroborate his story. Moreover,

petitioner has failed to demonstrate that the amounts received

from the redemption of the tax certificates were paid to the

copayees. Petitioner has also failed to introduce any evidence

that shows that the copayees included any of these amounts on

their Federal income tax returns. Furthermore, petitioner

deposited these amounts in his own bank account. Based upon

these facts, we conclude that petitioner exercised dominion and

control over the interest income he received from the redemption

of the tax certificates.

For the foregoing reasons, and following our recent opinion

in Hernandez I involving the same taxpayer and closely similar

circumstances, we sustain in its entirety respondent’s adjustment

to petitioner’s income for 1994.

Section 6662(a) imposes a penalty of 20 percent of the

portion of the underpayment that is attributable to negligence or

disregard of rules or regulations. See sec. 6662(b)(1).

Negligence is the lack of due care or failure to do what a

reasonable and ordinarily prudent person would do under the
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circumstances. See Neely v. Commissioner, 85 T.C. 934, 947

(1985). The term “disregard” includes any careless, reckless, or

intentional disregard. Sec. 6662(c). A disregard of rules or

regulations is “careless” if the taxpayer does not exercise

reasonable diligence to determine the correctness of a return

position that is contrary to the rule or regulation. Sec.

1.6662-3(b)(2), Income Tax Regs. A taxpayer is not liable for

the penalty if he shows that there was reasonable cause for the

underpayment and that he acted in good faith. See sec. 6664(c).

From the record before us here, we find that petitioner was

negligent with respect to whether petitioner was entitled to

exclude tax certificate interest under section 103. Petitioner

is a certified public accountant. In spite of his experience and

knowledge, petitioner took a position on his 1994 Federal income

tax return that was contrary to case law. Long before petitioner

filed his Federal income tax return for 1994, this Court had

issued an opinion directly on point, Barrow v. Commissioner, T.C.

Memo. 1983-123. In Barrow v. Commissioner, supra, we decided

that interest income from tax certificates identical to the tax

certificates purchased by petitioner was not tax exempt.

With regard to petitioner’s failure to report tax

certificate interest income, which he contends is allocable to

other individuals, we find that petitioner did not produce

credible evidence that such interest income was attributable to
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other taxpayers. Instead, petitioner completely failed to

demonstrate that the copayees reported the interest income on

their Federal income tax returns. Furthermore, the evidence in

the record leaves no doubt that petitioner exercised dominion and

control over such interest income when he deposited the amounts

received from the redemption of the tax certificates into his own

bank account. Items over which a taxpayer has dominion and

control are attributable to him and must therefore be included in

income. See Hernandez I. The petition in this case was filed on

November 16, 1998, after the opinions in Hernandez I and

Hernandez II had been issued. Because of his professional

training and business experience, petitioner either knew or

should have known that the income in dispute was includable in

gross income and plainly should not simply have been omitted from

petitioner’s tax return.

Accordingly, we hold that petitioner is liable for an

accuracy-related penalty pursuant to section 6662(a) as

determined by respondent.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

for respondent.