HERNANDEZ v. COMMISSIONER

T.C. Summary Opinion 2001-144

UNITED STATES TAX COURT

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

Docket No. 3792-00S. Filed September 18, 2001.

John R. Hernandez, pro se.

Ross M. Greenberg, for respondent.

PANUTHOS, Chief 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 effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
 - 2 -

Respondent determined deficiencies, additions to tax, and

penalties as follows:

Additions to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6654 Sec. 6662(a)

1993 $16,422 $3,584.25 $591.02 ---
1995 5,591 1,393.75 --- $1,118.20
1996 2,434 466.25 --- 486.80
1997 287 --- --- 57.40

After concessions,1 the issues for decision are: (1) Whether

interest income realized upon the redemption of tax certificates

is attributable to petitioner; (2) whether petitioner is entitled

to deductions related to rental properties for tax years 1995,

1996, and 1997; (3) whether petitioner is entitled to various

deductions on Schedule A for tax year 1995; (4) whether

petitioner is entitled to head-of-household filing status for tax

year 1996; (5) whether petitioner is liable for the additions to

tax under section 6651(a)(1) for tax years 1993, 1995, and 1996;

(6) whether petitioner is liable for the addition to tax under

section 6654 for tax year 1993; and (7) whether petitioner is

1
For tax year 1993, respondent conceded that petitioner
is entitled to the filing status of married filing jointly and is
entitled to two exemptions for himself and his wife. Petitioner
conceded that he failed to report pension income of $4,925 and
wages of $16,006.

For taxable year 1995, respondent conceded that petitioner
is entitled to deduct charitable contributions of $1,651.
Respondent also conceded that petitioner is entitled to
miscellaneous itemized deductions of $2,276 on Schedule A,
Itemized Deductions, for taxable year 1997.
 - 3 -

liable for the accuracy-related penalties under section 6662(a)

for tax years 1995, 1996, and 1997.2

Background

Some of the facts have been stipulated, and they are so

found. The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time of filing his

petition, petitioner resided in Saint Leo, Florida.

Prior to his retirement, petitioner was a certified public

accountant, and he owned an accounting service. Petitioner’s

wife, Oneta Hernandez (Mrs. Hernandez), became ill in 1990 and

died in 1995.

During the years at issue, petitioner purchased numerous tax

certificates sold by Pasco County, Florida (tax certificates).

For a thorough discussion regarding the details of the tax

certificates, see Hernandez v. Commissioner, T.C. Memo. 1998-46.

Petitioner received checks for the interest paid on the

redemption of the certificates. Petitioner and Mrs. Hernandez

negotiated the checks and deposited the amounts into a credit

union account. Petitioner also owned a house in the Bahamas

during the years in issue.

2
The notices of deficiency contain adjustments to
petitioner’s Social Security income, itemized deductions, and net
operating losses. These are computational adjustments which will
be affected by the outcome of the other issues to be decided, and
we do not separately address them.
 - 4 -

Eric, petitioner’s grandson, moved in with petitioner in the

latter half of 1996. Eric’s parents paid for all of Eric’s

clothing. Petitioner paid for Eric’s food and gave Eric

presents.

Petitioner did not file a Federal income tax return for

1993.

Petitioner filed his 1995 return on June 29, 1998.

Petitioner deducted $4,135 for investment interest and $6,129 for

other expenses on Schedule A, Itemized Deductions. Petitioner

also reported on Schedule E, Supplemental Income and Loss, a loss

of $10,202 related to the house in the Bahamas.

Petitioner filed his 1996 return claiming head-of-household

filing status on August 3, 1998. Petitioner reported a loss of

$10,758 on Schedule E related to the house in the Bahamas.

Petitioner timely filed his 1997 return. Petitioner

reported a loss of $10,333 on Schedule E related to the house in

the Bahamas.

Respondent mailed a notice of deficiency to petitioner on

January 7, 2000, for tax years 1993, 1996, and 1997, and a

separate notice on the same day for tax year 1995. Respondent

determined that petitioner failed to report interest income from

the tax certificates of $49,805, $19,249, $14,656, and $6,603 for

1993, 1995, 1996, and 1997, respectively. Respondent asserts
 - 5 -

that income from the tax certificates is taxable to petitioner,

citing Hernandez v. Commissioner, supra.

As to tax year 1995, respondent disallowed deductions for

investment interest and other expenses on Schedule A, as

petitioner failed to substantiate these deductions. For tax year

1996, respondent determined that petitioner’s filing status

should be single, asserting that petitioner did not qualify for

head-of-household filing status.

Respondent determined that petitioner was liable for

additions to tax under section 6651(a)(1) for tax years 1993,

1995, and 1996. Respondent also determined that petitioner was

liable for an addition to tax under section 6654 for tax year

1993, and accuracy-related penalties under section 6662(a) for

tax years 1995, 1996, and 1997.

Petitioner disputes all of respondent’s determinations.

Petitioner argues that interest from the tax certificates is not

taxable, and, even if it is taxable, the interest income belongs

to his clients.

Discussion

1. Tax Certificates

Petitioner is not a stranger to this Court. In both

Hernandez v. Commissioner, T.C. Memo. 1998-46 (regarding tax

years 1990, 1991, and 1992) (Hernandez I) and Hernandez v.

Commissioner, T.C. Summary Opinion 2001-9 (regarding tax year
 - 6 -

1994) (Hernandez II), we dealt with similar facts regarding

whether interest paid on the redemption of tax certificates sold

by Pasco County, Florida, for delinquent taxes owed on real

property is excluded from gross income. In both cases, we held

that the interest is not excluded from gross income under section

103 because the tax certificates are not obligations of a State

or political subdivision. Hernandez v. Commissioner, T.C. Memo.

1998-46. We follow our prior holdings, and we sustain

respondent’s determination that interest from the tax

certificates is includable in income under section 61(a)(4).

In Hernandez I and II, petitioner argued that he purchased

the tax certificates at auction on behalf of other people. At

both trials, petitioner failed to present witnesses and documents

to support his arguments, and we held that petitioner must

include the interest as his income.

In this case, petitioner also asserted that the tax

certificates were purchased on behalf of third parties. Vincent

Hernandez (Vincent), petitioner’s brother, testified generally

that he began investing in tax certificates through petitioner in

1984. Vincent also testified that all of the interest income he

received through petitioner was deposited in Vincent’s account,

and that Vincent reported all of the interest income on his

Federal income tax return. Vincent did not produce any of his

tax returns, bank statements, or other documents to lend credence
 - 7 -

to his testimony. We are not required to rely upon self-serving

testimony. Niedringhaus v. Commissioner, 99 T.C. 202, 219-220

(1992); Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). We do

not find Vincent’s testimony to be credible.

There are no agreements or other written documentation that

petitioner received the income in question as a nominee, agent,

or conduit for others. Petitioner also failed to provide any

credible evidence that any of the interest income was transferred

to other individuals, and that the individuals reported the

income on their Federal income tax returns.

Yet again, petitioner failed to corroborate his story. For

the same reasons as in Hernandez I and II, we sustain

respondent’s determination for 1993, 1995, 1996, and 1997 that

the interest income from the tax certificates is includable in

petitioner’s income under section 61(a)(4).

2. Rental Property Expenses

Petitioner deducted $10,202, $10,758, and $10,333 for tax

years 1995, 1996, and 1997, respectively, related to a property

in the Bahamas. Petitioner claimed at trial that he held the

property for rental purposes, although he did not rent the

property during the years at issue. Further, petitioner did not

report income related to the property during the years at issue.

Petitioner failed to produce receipts and records to substantiate

his claims.
 - 8 -

Section 212 provides a deduction for all ordinary and

necessary expenses paid or incurred with respect to management,

conservation, and maintenance of property held for the production

of income, including real property rental. Sec. 1.212-1(h),

Income Tax Regs. Since the record is void of adequate receipts

or records that would substantiate petitioner’s claimed expenses,

we sustain respondent’s determination.3

3. Schedule A Deductions for 1995

In 1995, petitioner deducted $4,135 for investment interest

on Schedule A. Petitioner attributed the amount to disallowed

investment interest from taxable year 1994.

In the case of a cash basis taxpayer, section 163(a) allows

for a deduction of all interest paid during the taxable year.

Individual taxpayers are not permitted to deduct personal

interest. Sec. 163(h)(1). Personal interest does not include

investment interest. Sec. 163(h)(2)(B). Investment interest is

any interest allowable as a deduction which is paid or accrued on

indebtedness properly allocable to property held for investment.

Sec. 163(d)(3)(A). A taxpayer may deduct investment interest up

to the amount of net investment income. Sec. 163(d)(1).

Petitioner did not establish that investment interest was

disallowed from 1994, nor did he establish that he paid

3
Even if petitioner had produced receipts and records to
support his deductions, petitioner did not hold the Bahamas
property for the production of income. Secs. 183(a), (c); 212.
 - 9 -

investment interest in 1995. We therefore sustain respondent’s

determination.

Petitioner also deducted other expenses of $6,129 on

Schedule A in 1995. At trial, petitioner argued that this amount

arose from an ordinary loss reported on Schedule K-1, Partner’s

Share of Income, Credits, Deductions, Etc., issued by Turtle

Futures Fund, L.P. However, petitioner also deducted the

ordinary loss on Schedule E, thereby giving petitioner two

deductions for the same expense. Petitioner did not establish

that he incurred other expenses of $6,129, and we sustain

respondent’s determination.

4. Filing Status

In order to qualify for head-of-household filing status, a

taxpayer must satisfy the requirements of section 2(b). Pursuant

to that section, and as relevant herein, an individual qualifies

as a head of household if the individual is not married at the

close of the taxable year and maintains as his home a household

that constitutes for more than one-half of the taxable year the

principal place of abode of a descendant of a son or daughter of

the taxpayer. Sec. 2(b)(1)(A)(i). A taxpayer is considered as

maintaining a household only if over half of the cost of

maintaining the household during the taxable year is furnished by

the taxpayer. Sec. 2(b)(1) (flush language). The expenses of

maintaining a household include food consumed on the premises,
 - 10 -

but do not include the cost of clothing. Sec. 1.2-2(d), Income

Tax Regs.

Petitioner testified that he paid for some of Eric’s

expenses, such as food and presents, but Eric’s parents paid for

Eric’s clothing and other expenses. He testified further that

Eric moved in with him in the latter part of 1996. Petitioner

failed to establish that his home constituted Eric’s principal

place of abode for more than one-half of the year. Therefore, we

sustain respondent’s determination.

5. Section 6651(a) Additions To Tax

Respondent determined that petitioner is liable for the

addition to tax under section 6651(a) for failure to file a

timely return for each of the 1993, 1995, and 1996 taxable years.

Section 6651(a)(1) provides for an addition to tax for

failure to file a timely return. The addition to tax is equal to

5 percent of the amount required to be shown as tax on the

return, with an additional 5 percent for each additional month or

fraction thereof that the return is filed late, not exceeding 25

percent in the aggregate.

A taxpayer may avoid the addition to tax by establishing

that the failure to file a timely return was due to reasonable

cause and not willful neglect. Rule 142(a); United States v.

Boyle, 469 U.S. 241, 245-246 (1985). A failure to file is due to

"reasonable cause" if the taxpayer exercised ordinary business
 - 11 -

care and prudence and was, nevertheless, unable to file his

return within the date prescribed by law. Crocker v.

Commissioner, 92 T.C. 899, 913 (1989); Estate of Vriniotis v.

Commissioner, 79 T.C. 298, 310 (1982); sec. 301.6651-1(c)(1),

Proced. & Admin. Regs. Willful neglect is viewed as a conscious,

intentional failure or reckless indifference to the obligation to

file. United States v. Boyle, supra.

Petitioner never filed a return for 1993. Petitioner filed

his 1995 return on June 29, 1998, and his 1996 return on August

3, 1998. Petitioner vaguely alluded to an illness in his

petition as a reason for his failure to timely file. Otherwise,

petitioner has not provided any explanation for the late filings

of the returns. Petitioner has not established his late filings

of his 1993, 1995, and 1996 Federal income tax returns were due

to reasonable cause and not willful neglect. Accordingly, we

hold petitioner is liable for the additions to tax under section

6651(a).

6. Section 6654(a) Addition to Tax

Section 6654(a) imposes an addition to tax in the case of

any underpayment of estimated tax by an individual. This Court

has jurisdiction to review respondent’s determination of this

addition to tax only if the taxpayer does not file a return for

the taxable year. Sec. 6665(b)(2); Meyer v. Commissioner, 97

T.C. 555, 562 (1991). Petitioner failed to file a return for the
 - 12 -

1993 taxable year. We therefore have jurisdiction to determine

whether petitioner is liable for the addition to tax under

section 6654(a).

Unless a statutory exception applies, the addition to tax

under section 6654(a) is mandatory. Sec. 6654(a), (e); Recklitis

v. Commissioner, 91 T.C. 874, 913 (1988); Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980); Estate of Ruben v.

Commissioner, 33 T.C. 1071, 1072 (1960). None of the statutory

exceptions under section 6654(e) applies in this case. Nor has

petitioner presented any arguments regarding this issue. We

sustain respondent’s determination.

7. Accuracy-Related Penalties

Respondent determined petitioner is liable for accuracy-

related penalties under section 6662(a) for 1995, 1996, and 1997.

The accuracy-related penalty is equal to 20 percent of any

portion of an underpayment of tax required to be shown on the

return that is attributable to the taxpayer’s negligence or

disregard of rules or regulations. Sec. 6662(a) and (b)(1).

“Negligence” consists of any failure to make a reasonable attempt

to comply with the provisions of the Internal Revenue Code and

also includes any failure to keep adequate books and records or

to substantiate items properly. Sec. 6662(c); 1.6662-3(b)(1),

Income Tax Regs. “Disregard” consists of any careless, reckless,

or intentional disregard. Sec. 6662(c).
 - 13 -

An exception applies to the accuracy-related penalty when

the taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) he acted in good faith with respect to such

underpayment. Sec. 6664(c). Whether the taxpayer acted with

reasonable cause and in good faith is determined by the relevant

facts and circumstances. The most important factor is the extent

of the taxpayer’s effort to assess his proper tax liability.

Stubblefield v. Commissioner, T.C. Memo. 1996-537; sec. 1.6664-

4(b)(1), Income Tax Regs. Section 1.6664-4(b)(1), Income Tax

Regs., specifically provides: “Circumstances that may indicate

reasonable cause and good faith include an honest

misunderstanding of fact or law that is reasonable in light of

* * * the experience, knowledge, and education of the taxpayer.”

See Neely v. Commissioner, 85 T.C. 934 (1985).

It is the taxpayer’s responsibility to establish that he is

not liable for the accuracy-related penalty imposed by section

6662(a). Rule 142(a); Tweeddale v. Commissioner, 92 T.C. 501,

505 (1989). Petitioner did not address this issue at trial.

Petitioner claimed deductions that he failed to explain or

substantiate. Petitioner is an accountant who presumably should

be familiar with the provisions of the Internal Revenue Code

applicable to his case; yet he did not follow the applicable law

in preparing his Federal income tax returns. On the basis of the

entire record, we conclude petitioner has not established that
 - 14 -

the underpayments were due to reasonable cause or that he acted

in good faith. Accordingly, we hold petitioner is liable for the

accuracy-related penalties.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be

entered under Rule 155.