                  T.C. Summary Opinion 2004-101



                     UNITED STATES TAX COURT



              JOSEPH EMILIO DIFLORA, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6906-03S.               Filed July 27, 2004.


     Joseph Emilo DiFlora, pro se.

     Alex Shlivko, for respondent.



     PAJAK, 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.    Unless otherwise

indicated, section references are to the Internal Revenue Code in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.    The decision to be

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

should not be cited as authority.
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     Respondent determined a deficiency of $5,144 in petitioner’s

2000 Federal income tax, an addition to tax of $257 under section

6651(a)(1), and an accuracy-related penalty of $1,029 under

section 6662(a).

     After concessions by the parties as to petitioner’s

unreported interest of $106, and petitioner’s unreported ordinary

dividends of $129 and $21, the issues for decision are:     (1)

Whether petitioner failed to include in gross income ordinary

dividend income in the amount of $18,432; (2) whether petitioner

is liable for an addition to tax under section 6651(a)(1); and

(3) whether petitioner is liable for an accuracy-related penalty

under section 6662(a).

     Some of the facts in this case have been stipulated and are

so found.   Petitioner resided in Eastchester, New York, at the

time he filed his petition.

     Section 7491(a) does not affect the outcome because

petitioner’s liability for the deficiency is decided on the

preponderance of the evidence.

     During taxable year 2000, petitioner owned 200 shares of

Bell Canada Enterprise, Inc. (BCE).      In May 2000, pursuant to a

planned “Joint Arrangement” to distribute its Nortel Networks

Corp. (Nortel) stock, BCE distributed to petitioner 314 shares of

Nortel stock with a fair market value of approximately $18,432.

     On Form 1099-DIV, Dividends and Distributions 2000,
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petitioner’s investment bank reported $34,496.90 in ordinary

dividends, which included the $18,432 at issue here.    Petitioner

did not report the $18,432 on his Form 1040, U.S. Individual

Income Tax Return, for the year 2000.

     Petitioner contends that the distribution of Nortel stock

was not a taxable dividend, but rather a tax-free “spinoff” as

part of a section 354 reorganization.

     Section 61(a) provides that gross income includes all income

from whatever source derived, unless excludable by a specific

provision of the Code.   Section 61(a)(7) lists dividends as

includable in gross income.   Section 316(a) defines a dividend as

any distribution of property made by a corporation to its

shareholders out of accumulated or current earnings and profits.

     Section 301(a) provides that a distribution of property (as

defined in section 317(a)) made by a corporation to a shareholder

with respect to its stock shall be treated in the manner provided

in subsection (c).   Section 317(a) defines property as money,

securities, and any other property, except stock in the

corporation making the distribution.    Section 301(c) provides

that a distribution which is a dividend (as defined in section

316) is includable in gross income.    Section 301(b)(1) provides

that the amount of any distribution shall be the amount of money

received, plus the fair market value of the other property

received.
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       As stated, petitioner contends that the distribution was a

tax-free spinoff as part of a section 354 reorganization.

Section 354 provides that no gain or loss is recognized if under

a plan of reorganization, stock or securities in a corporation

that is a party to a reorganization are exchanged solely for

stock or securities in such a corporation or in another

corporation that is a party to the reorganization.    Section

7701(a)(3) defines the term “corporation” to include

associations, joint-stock companies and insurance companies.

Distributions to individual taxpayers, such as petitioner, are

not covered by section 354.    Although petitioner referred to the

distribution as a spinoff, he did not contend that it qualified

as a distribution under section 355.

        What is relevant is that the Notice of Application and

Joint Arrangement Circular Arrangement Involving BCE, Inc. and

Nortel Networks Corporation (Circular), dated February 29, 2000,

addresses U.S. shareholders, such as petitioner, and explains

that

       For a BCE Common Shareholder that is a United States
       taxpayer, the receipt of New Nortel Common Shares will be a
       taxable distribution for United States federal income tax
       purposes, resulting in a taxable dividend approximately
       equal to the fair market value of the New Nortel Common
       Shares received. United States holders, in particular, are
       urged to consult their own tax advisors.

       The Circular further stated that “The Arrangement is

expected to result in significant taxable income to U.S. Holders
                               - 5 -

of BCE Common Shares that receive New Nortel Common Shares.   U.S.

Holders of BCE Common Shares are strongly urged to consult their

own tax and financial advisors”.

     Finally, the Circular stated that

     In the opinion of Davis Polk & Wardwell, U.S. counsel to
     BCE, for U.S. federal income tax purposes a U.S. Holder of
     BCE Common Shares will be treated as receiving a taxable
     distribution of the New Nortel Common Shares as a result of
     the Arrangement and be taxed at ordinary income rates on a
     dividend in the amount of the fair market value, as of the
     date of the distribution, of the New Nortel Common Shares
     received, to the extent the distribution is out of the
     earnings and profits (“E&P”) of BCE calculated under
     applicable U.S. federal income tax principles. BCE expects
     to have E&P adequate to render all or nearly all of the
     distribution received by a U.S. Holder taxable as a
     dividend.

     Petitioner did not attempt to prove that BCE did not have

earnings and profits such that all or some of the distribution

was nontaxable.   In fact, on July 6, 2004, this Court analyzed

the same BCE distribution of Nortel stock and held that the

retained earnings statement clearly reflected that BCE made the

Nortel stock distribution from BCE’s earnings and profits.

Koppel v. Commissioner, T.C. Memo. 2004-158.

     We find that the distribution of Nortel stock was a

dividend.   Thus, we conclude that, as such, the distribution of

Nortel stock was includable in petitioner’s gross income as a

taxable ordinary dividend.   Accordingly, we sustain respondent’s

determination on this issue.

     We next address the addition to tax under section 6651(a)(1)
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and the accuracy-related penalty under section 6662(a).

     Section 6651(a)(1) imposes an addition to tax for failure to

timely file a tax return, unless failure to do so is due to

reasonable cause and not willful neglect.     The taxpayer must

prove both reasonable cause and lack of willful neglect.      Crocker

v. Commissioner, 92 T.C. 899, 912 (1989).     “Reasonable cause”

requires the taxpayer to demonstrate that he exercised ordinary

business care and prudence.   United States v. Boyle, 469 U.S.

241, 246 (1985).   Willful neglect is defined as a “conscious,

intentional failure or reckless indifference.”     Id. at 245.

     Respondent presented the Certificate of Assessments,

Payments, and Other Specified Matters for petitioner’s 2000 tax

account, which showed that petitioner’s 2000 tax return was filed

on April 28, 2001.   Thus, respondent has satisfied his burden of

production with respect to the addition to tax under section

6651(a)(1).   Sec. 7491(c).

     Petitioner presented no evidence that his failure to timely

file his 2000 tax return was due to reasonable cause and not

willful neglect.   On this record, we conclude that petitioner is

liable for the addition to tax under section 6651(a)(1), as

determined by respondent.

     Section 6662(a) imposes a 20-percent penalty on the portion

of any underpayment of tax attributable to negligence or

disregard of rules or regulations.     Sec. 6662(b)(1).   Negligence
                                - 7 -

is any failure to make a reasonable attempt to comply with the

provisions of the internal revenue laws.    Sec. 6662(c).

Moreover, negligence is the failure to exercise due care or

failure to do what a reasonable and prudent person would do under

the circumstances.    Neely v. Commissioner, 85 T.C. 934, 947

(1985).    Disregard includes any careless, reckless, or

intentional disregard of rules or regulations.    Sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs.    No penalty will be imposed

with respect to any portion of any underpayment if it is shown

that there was a reasonable cause for such portion and that the

taxpayer acted in good faith with respect to such portion.      Sec.

6664(c).

     Respondent has satisfied his burden of production with

respect to the accuracy-related penalty under section 6662(a).

Sec. 7491(c).    At trial, petitioner admitted that he took it upon

himself to “subtract” the $18,432 from his gross income because

he “didn’t think this was a dividend”.    However, caveats about

the tax implications of the distribution of Nortel stock

permeated the Circular.    Petitioner’s investment bank issued a

Form 1099-DIV, which reported the Nortel stock as an ordinary

dividend.    In response to petitioner’s inquiry to the law firm

that handled the Joint Arrangement, petitioner was referred to

the tax implication sections in the Circular.

     We find that petitioner has not shown reasonable cause for
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his failure to include the $18,432 in his gross income.   Rather,

the evidence presented in this case overwhelmingly shows that

petitioner had no reason to believe that his receipt of the

Nortel stock was anything other than a distribution taxable as an

ordinary dividend.   On this record, we conclude that petitioner

is liable for the accuracy-related penalty under section 6662(a),

as determined by respondent.

     Contentions we have not addressed are irrelevant, moot, or

without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.



                                         Decision will be entered

                                    under Rule 155.
