T.C. Memo. 2001-212
UNITED STATES TAX COURT
CHRISTOPHER M. AND THEANNE K. WEIL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5919-00. Filed August 9, 2001.
Christopher M. Weil, for petitioners.
Kenneth L. Bressler, for respondent.
MEMORANDUM OPINION
WELLS, Chief Judge: Respondent determined the following
deficiencies in, addition to, and accuracy-related penalties with
respect to petitioners' Federal income taxes for taxable years
1995 and 1996:
Accuracy-related
Addition to Tax Penalties
Year Deficiency Sec. 6651(a)(1) Sec. 6662
1995 $72,792 $11,258 $12,968.00
1996 17,658 -– 3,531.60
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Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions by respondent,1 we must decide the
following issues:2 (1) Whether petitioners are entitled to
deductions for interest that they paid with respect to delinquent
Federal income taxes for 1984, 1985, 1986, 1987, and 1993; (2)
whether petitioners are liable for the addition to tax under
section 6651(a) for 1995; and (3) whether petitioners are liable
for an accuracy-related penalty under section 6662(a) for 1996.
Background
The parties submitted the instant case fully stipulated
pursuant to Rule 122. The stipulated facts are incorporated
herein by reference and are found as facts in the instant case.
Petitioners resided in Dallas, Texas, when they filed their
petition.
1
Respondent conceded the following items: (1) The
adjustment in the notice of deficiency of $15,954 for alleged
unreported interest income for 1995; (2) $26,136 of the total
adjustment in the notice of deficiency for itemized deductions
for 1996; and (3) the accuracy-related penalty under sec. 6662 in
the amount of $12,968 for 1995.
2
Certain computational issues also remain for 1995,
resolution of which flows automatically from our resolution of
the determinations in the notice that we address herein.
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Petitioners were delinquent in paying their Federal income
taxes for 1984, 1985, 1986, 1987, and 1993. During the taxable
year 1995, petitioners paid $228,180.67 in statutory interest
under section 6601(a) on the aforementioned delinquent Federal
income tax liabilities.
On April 15, 1996, petitioners filed with the Internal
Revenue Service (IRS) Form 4868, Application for Automatic
Extension of Time To File U.S. Individual Income Tax Return. On
August 14, 1996, petitioners filed with the IRS Form 2688,
Application for Additional Extension of Time To File U.S.
Individual Income Tax Return. The original due date of
petitioners' 1995 tax return was April 15, 1996, and with
extensions the due date was October 15, 1996. On June 16, 1997,
petitioners filed their joint 1995 Federal income tax return.
Petitioners claimed deductions on their 1995 and 1996 tax
returns for a portion of the $228,180.67 of statutory interest
that they paid on their delinquent taxes during 1995. In
particular, for 1995, petitioners reported $166,358 as an expense
on Schedule C, Profit or Loss From Business, and $41,589 as an
investment interest expense on Form 4952, Investment Interest
Expense Deduction. Of the $41,589 reported on Form 4952,
petitioners claimed a deduction of $18,674 on Schedule A,
Itemized Deductions, of their 1995 return and carried over the
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balance of $22,915 as an interest expense on Schedule A of their
1996 return.
In the notice of deficiency sent to petitioners for 1995 and
1996, respondent determined that the deductions that petitioners
claimed for investment interest and Schedule C interest expenses
represented nondeductible personal interest expenses under
section 163(h).
Petitioners filed a petition contesting the notice of
deficiency. When the instant case was called for trial, the
parties agreed to submit the case as fully stipulated. The
Court, pursuant to Rule 151, ordered the submission of briefs 75
days following trial. Petitioners failed to submit a brief.
After respondent submitted an initial brief, the Court granted
respondent's request for leave not to file a reply brief.
Discussion
Interest Deductions for Delinquent Payment of Taxes
Petitioners contend in their petition that their deductions
were allowable as (1) interest paid or accrued on indebtedness
properly allocable to a trade or business, or (2) investment
interest. Respondent contends that the disputed amounts are
nondeductible personal interest expenses. It is well settled
that determinations made by the Commissioner to disallow
deductions in a notice of deficiency normally are presumed to be
correct, and the taxpayer bears the burden of proving that those
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determinations are erroneous. Rule 142(a); INDOPCO Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290
U.S. 111, 115 (1933). The parties do not contend otherwise.
Section 163(a) allows individual taxpayers a deduction from
taxable income for interest paid or accrued on indebtedness.
Deductions for "personal interest", however, are not allowed for
individual taxpayers. Sec. 163(h)(1). Section 163(h)(2)(a)
excludes "interest paid or accrued on indebtedness properly
allocable to a trade or business (other than the trade or
business of performing services as an employee)" from the
definition of "personal interest" in section 163(h)(1). Section
163(h) does not directly address whether "personal interest"
includes interest paid on Federal income tax deficiencies.
We have held that interest paid on delinquent Federal income
tax liabilities is personal interest and nondeductible under
section 163(h) where the interest is not proved to be a normal or
usual incident of a business. See Tippin v. Commissioner, 104
T.C. 518, 529 (1995). In Tippin, the record was silent as to the
source of income or other circumstances that gave rise to the
underlying income tax deficiency. Id. at 530. In the instant
case, the record fails to disclose that the interest paid on
petitioners' delinquent income tax liabilities was attributable
to indebtedness allocable to a trade or business or to their
investment activity. Because, as in Tippin, the instant record
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is silent as to the sources of the delinquent tax liabilities, we
sustain respondent's determination that the deductions for
interest reported on petitioners' 1995 Federal income tax return
are personal interest and not allowed.
Because we agree with respondent that petitioners failed to
prove that the interest expense was incurred on indebtedness
properly allocable to petitioners' trade or business or to their
investment activities, we need not and do not consider sec.
1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg.
48409 (Dec. 22, 1987), in this case.3
Addition to Tax
Respondent determined that petitioners are liable for an
addition to tax for 1995 pursuant to section 6651(a)(1), which
imposes an addition to tax for a taxpayer's failure to file a
required return on or before the date prescribed, including
extensions. The amount added to the tax under section 6651(a)(1)
is 5 percent for each month or fraction thereof during which the
return is late, up to a maximum of 25 percent. The addition to
tax is inapplicable, however, if the taxpayer's failure to file
3
Sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52
Fed. Reg. 48409 (Dec. 22, 1987), states that personal interest
includes interest "Paid on underpayments of individual Federal,
State or local income taxes and on indebtedness used to pay such
taxes (within the meaning of §1.168-8T), regardless of the source
of the income generating the tax liability". See Redlark v.
Commissioner, 106 T.C. 31 (1996), revd. 141 F.3d 936 (9th Cir.
1998).
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the return is due to reasonable cause and not due to willful
neglect. Sec. 6651(a)(1). The taxpayer has the burden of
proving the addition is improper. Rule 142(a); United States v.
Boyle, 469 U.S. 241, 245 (1985).
With extensions, petitioners' return for taxable year 1995
was due on October 15, 1996. The parties have stipulated that
petitioners filed their return for 1995 on June 16, 1997,
approximately 8 months after it was due. The record is devoid of
any showing that petitioners' failure to file timely was due to
reasonable cause and not due to willful neglect. E.g., Williams
v. Commissioner, 114 T.C. 136 (2000). Accordingly, we hold that
petitioners are liable for the addition to tax determined under
section 6651(a)(1).
Accuracy-Related Penalty
For 1996,4 respondent determined that petitioners are liable
for the accuracy-related penalty provided under section 6662(a),
which imposes a 20-percent penalty on the portion of an
underpayment of tax that is attributable to, inter alia, (1)
negligence or disregard of rules or regulation or (2) any
substantial understatement of income tax. The accuracy-related
penalty does not apply to any portion of an underpayment for
which there was reasonable cause and with respect to which the
4
As stated above, respondent conceded the accuracy-related
penalty for 1995.
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taxpayer acted in good faith. See sec. 6664(c); sec. 1.6664-
4(a), Income Tax Regs. Respondent's determination imposing the
accuracy-related penalty is presumed correct, and petitioners
must establish error in respondent's determination that they are
liable for the penalty. Rule 142(a); Estate of Monroe v.
Commissioner, 104 T.C. 352, 366 (1995).
The record contains no evidence as to petitioners'
reasonable cause or good faith for claiming the deductions in
issue nor any other evidence that would show error in
respondent's determination of the penalty. Accordingly, we
sustain respondent's determination that petitioners are liable
for the accuracy-related penalty under 6662(a) for 1996.
To reflect the foregoing and respondent's concessions,
Decision will be entered
under Rule 155.