                  T.C. Memo. 1998-46



                UNITED STATES TAX COURT



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



Docket No. 17244-96.               Filed February 5, 1998.



     Tax certificates are sold at public auction by the
tax collector for Pasco County, Florida, for an amount
equal to delinquent real property taxes, interest
accrued thereon, and other costs and charges owed by
the real property owner. Purchasers bid for the tax
certificates in terms of the rate of interest to be
paid on the face amount of the certificate. The tax
certificates must be either redeemed or converted into
a tax deed within 7 years of being sold at auction. P
purchased tax certificates from the Pasco County tax
collector that were redeemed in tax years 1990, 1991,
and 1992 for the face amount of each certificate plus
accrued interest at the rate bid.

     1. Held: The statutory notice of deficiency was
issued within period of limitations as properly
extended.

     2. Held, further, respondent is not estopped from
issuing a statutory notice of deficiency by either the
                               - 2 -


     doctrine of equitable estoppel or as a second
     examination of books and records. Sec. 7605(b), I.R.C.

          3. Held, further, tax certificates sold by tax
     collectors in Florida for delinquent taxes owed on real
     property are not obligations of a State or political
     subdivision thereof, and the interest paid thereon is
     not excluded from gross income under sec. 103, I.R.C.

          4. Held, further, interest paid on redemption of
     tax sale certificates but not reported on P’s joint
     returns is attributed to P by reason of his dominion
     and control over amounts received on redemption of the
     certificates and his failure to show that the income
     belonged to or should be attributed to other persons.

          5. Held, further, P is liable for accuracy-
     related penalties for substantial understatements of
     income tax. Sec. 6662, I.R.C.



     John R. Hernandez, pro se.

     Charles Baer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined the following

deficiencies and accuracy-related penalties in petitioner’s

Federal income tax:
         Accuracy-Related Penalty
     Year               Deficiency                Sec. 6662
     1990                  $7,680                  $1,536
     1991                   7,139                   1,428
     1992                  12,209                   2,442

     The issues for decision in this case are:   (1) Whether the

statutory notice of deficiency was issued within the period of
                                 - 3 -


limitations; (2) whether respondent is estopped from issuing the

notice; (3) whether interest income from the redemption of tax

certificates issued by Pasco County, Florida, is excluded from

gross income under section 103;1 (4) the extent to which receipts

from the redemption of the tax certificates are attributable to

petitioner; and (5) whether petitioner is liable for accuracy-

related penalties under section 6662(d) for substantial

understatements of income tax.    We sustain respondent’s

determinations in all respects.

                         FINDINGS OF FACT

     The parties stipulated some of the facts, which, with the

corresponding exhibits, are so found and incorporated herein by

reference.   Petitioner resided in Saint Leo, Florida, at all

times relevant to this case.

     During the tax years at issue, petitioner was a certified

public accountant who was the business manager of an S

corporation and operated an accounting service that prepared tax

returns for others.   Petitioner and Oneta Hernandez (Mrs.

Hernandez) had two daughters, Deborah H. Craig (Mrs. Craig) and




     1
       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, unless otherwise
indicated.
                               - 4 -


Theresa Collins (Mrs. Collins).2   Mrs. Hernandez died prior to

respondent’s issuance of the statutory notice of deficiency.3

     For several years, petitioner purchased at public auction

tax certificates sold by Pasco County pursuant to Fla. Stat. Ann.

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

counties in Florida sold certificates for amounts equal to

delinquent property taxes, interest accrued thereon, and other

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

certificates serve as a means by which the counties fund current

government expenditures by transferring the indebtedness incurred

by property owners for their property tax delinquencies to the

purchasers of the tax certificates.    They also provide a

mechanism for eventual collection of the delinquent taxes out of

the property against which the assessment was made, either

through redemption of the certificates or eventual sale of the

property.   Potential purchasers bid at auction to purchase tax



     2
       The record also refers to Mrs. Collins as “T.H. Coleman”,
her name from a subsequent marriage.
     3
       On May 10, 1996, respondent issued a statutory notice of
deficiency to petitioner and Mrs. Hernandez, pursuant to joint
returns they filed for the years in issue. On Aug. 9, 1996,
petitioner timely filed a petition with this Court. On Sept. 30,
1996, respondent filed a Motion to Dismiss for Lack of
Jurisdiction as to Oneta B. Hernandez and to Change Caption.
Petitioner was served with that motion but did not respond to
show that the petition was filed by a fiduciary entitled to
institute a case on behalf of Mrs. Hernandez. On Nov. 5, 1996,
this Court granted respondent’s motion, dismissing Mrs. Hernandez
as a party to this case.
                                - 5 -


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

amount of the certificate up to a statutory maximum of 18

percent, with the certificate being sold to the party bidding the

lowest rate.4

     The sale of a certificate creates a tax lien in favor of the

certificate holder that is superior to all other liens.5    Florida

law allows property owners or other persons to redeem tax

certificates and extinguish the tax liens created thereby by

payment to the tax collector of the face amount of the

certificate and interest accrued thereon at the rate bid from the

date of sale of the tax certificate until the date of

redemption.6    The county tax collector pays the amount received,

less service charges, to the certificate holder, who then

surrenders the certificate.



     4
       The interest rate is limited to 18 percent, accrued
monthly. Fla. Stat. Ann. sec. 197.172 (West 1989 & Supp. 1997).
     5
       The holder of a tax certificate could convert the tax lien
and certificate into a tax deed at any time after it had been
held for at least 2 years from Apr. 1 of the year of issuance,
but prior to its expiration 7 years after the date of issuance.
Fla. Stat. Ann. secs. 197.482, 197.502 (West 1989 & Supp. 1997).
We note that the tax certificate is worthless once it and the tax
lien expire without having been redeemed or converted into a tax
deed. See In re General Dev. Corp., 147 Bankr. 610, 613 (Bankr.
S.D. Fla. 1992).
     6
       The person redeeming the certificate must pay the tax
collector all taxes, interest, costs, charges, and omitted taxes,
as provided for by law, and, in addition, make additional
payments for costs incurred and the interest earned on the
certificate.
                                 - 6 -


     Petitioner purchased tax certificates with his own funds and

with borrowed funds.7    Although the Pasco County tax collector

issued the certificates purchased by petitioner in several

combinations of names, they all listed either petitioner or

Mrs. Hernandez as one of the coholders.    For each certificate

redeemed, the tax collector issued checks made out to the same

persons listed as certificate holders.    Some certificates were

issued to Mrs. Hernandez “et al.”    Other certificates were issued

to Mrs. Hernandez and one or more other persons who were listed

on the certificates as alternate holders.    Some certificates were

issued to petitioner and one or more alternate holders.    The rest

of the certificates were issued to petitioner and Mrs. Hernandez

as coholders.8

     Each time one of the certificates at issue was redeemed, the

tax collector paid an amount by check that included both the

principal and interest accrued at the rate bid for the purchase

of the certificate to the persons listed as coholders of that

certificate.     In each tax year at issue, the tax collector issued



     7
       Petitioner’s daughter Mrs. Craig may also have been a
source of funds, although whether, and the extent to which,
she bought tax sale certificates is unclear from the record.
However, the proceeds from the redemption of all the tax
certificates at issue were deposited into an account in
Mrs. Hernandez’ name.
     8
       Petitioner also bought certificates in the name of Holy
Ghost Fathers, Inc., a religious order, which were redeemed in
each of the tax years in issue. Respondent determined in the
statutory notice of deficiency that none of the interest income
from those certificates was income to petitioner.
                                       - 7 -


Forms 1099 showing the amount of interest paid on the redeemed

certificates and the names of the persons listed as payees:

       Names on Checks
        and Forms 1099              1990                1991             1992


 O. Hernandez et al.            $23,983.93               ---              ---
                                   1
 D. or T. Collins or                   445.09            ---              ---
  J.R. Hernandez
 Mark Craig or                    5,666.40        $12,727.23       $10,467.89
  J.R. Hernandez
                                                                    2
 V.H. Hernandez or                1,911.16               758.26         1,070.18
  M.L. Hernandez or
  J.R. Hernandez
 D.H. Craig or O. Hernandez,           ---          4,713.06              974.56
  or J.R. Hernandez
 O. Hernandez or                       ---          6,183.88        20,353.64
  T.H. Coleman
 O. Hernandez or                       ---          8,256.03        22,420.97
  J.R. Hernandez
 Eric B. Craig or                      ---               ---            2,318.06
  O. Hernandez
                                                    1                     2
 T. Coleman or J. Hernandez            ---              330.53                28.02
 F.E. Reaves or O. Hernandez           795.82            ---              525.91
                                   1                                3
 J. Campbell or J. Hernandez           737.50            ---            7,139.70


 O. Hernandez, Trustee                 ---               ---                  96.11
 Nicole E. Craig or
  O. Hernandez                         ---               ---            2,462.39
 Total interest                  33,539.90         32,968.99        67,857.43
 Amount not included in
  income by respondent           (1,182.59)             (330.53)    (4,668.05)
 Interest income adjustment      32,357.00         32,638.00        63,189.00
  on statutory notice of
  deficiency (rounded)
 Interest income reported by     23,984.00         14,440.00        42,871.00
  petitioner as tax-exempt
  interest income on line 8b
  of Form 10404
   1
      Amount not included in respondent’s adjustment to income in statutory
notice of deficiency because it was reported on an income tax return by
another person as either income or as tax-exempt income under sec. 103.
    2
      Amount not included in statutory notice of deficiency. The record does not
reveal whether respondent attributed all or part of this amount to another taxpayer.
                                     - 8 -


   3
      Only half of this amount ($3,569.85) was included in respondent’s
adjustment to income in statutory notice of deficiency because J. Campbell
reported other half as income.

   4
     Sec. 6012(d) requires that taxpayers report all interest received or
accrued that is exempt from the tax imposed by ch. 1.

       “T. Collins” was petitioner’s daughter, Mrs. Collins.                 “D.

Collins” was petitioner’s granddaughter, Mrs. Collins’ daughter.

Mrs. Collins was also listed as an alternate payee under the name

“T.H. Coleman”.      Mrs. Collins reported $445.09 of interest on her

income tax return for tax year 1990 and $330.53 on her income tax

return for tax year 1991 as either income or tax-exempt interest.

       “D.H. Craig” was Mrs. Craig, petitioner’s other daughter.

“Mark Craig” was petitioner’s grandson.            Mrs. Craig was his

mother.    Mark Craig did not report any interest from amounts

received in redemption of tax certificates on income tax returns

during those years.       In a letter response to an inquiry by

respondent’s counsel, Mrs. Craig stated that petitioner was

acting as her agent in holding the amounts of $4,713.06 for 1991

and $974.56 for 1992 of her income.           However, Mrs. Craig did not

disclose those amounts on her income tax returns for either year

as either income or tax-exempt interest, nor does the record show

that petitioner held such amounts in trust or that he paid taxes

on those amounts as trustee.

       Mrs. Craig had two other children who were listed as

“Eric B. Craig” and “Nicole E. Craig” as alternate payees of

interest received in redemption of tax certificates.               Neither
                                - 9 -


child filed an income tax return reporting any portion of such

interest, nor did any other individual report any such amount on

any of his income tax returns as either income or tax-exempt

interest.

     “V.H. Hernandez” and “M.L. Hernandez” were petitioner’s

brother, Vincent, and his brother’s wife, Mildred, respectively.

For tax year 1992, respondent did not include $1,070.18 in

adjustments to petitioner’s income from interest received in

redemption of tax certificates held by petitioner jointly with

Vincent or Mildred Hernandez.   With respect to amounts reported

on Forms 1099 bearing their names and petitioner’s name for tax

years 1990 and 1991, neither Vincent nor Mildred Hernandez filed

an income tax return that reported interest from the redemption

of the tax certificates in question as either income or tax-

exempt interest.   Vincent and Mildred Hernandez signed a document

dated February 27, 1984, that purported to appoint petitioner as

“Attorney-in-fact” to “represent them before the Tax Collector *

* * of Pasco County”.   This document had no expiration date.

     “F.E. Reaves” was Mrs. Hernandez’ mother, who died prior to

trial at a time not indicated in the record.   Ms. Reaves did not

file an income tax return in any year at issue that reported

amounts of interest earned in redemption of Pasco County tax

certificates as either income or tax-exempt interest.
                              - 10 -


     “J. Campbell” was a friend of petitioner.    Petitioner

testified at trial that Mr. Campbell was a “coventurer” in

respect of the certificates issued in their names.     Respondent

did not include in petitioner’s income $737.50 of interest

received in 1990 on the ground that that interest was attributed

to Mr. Campbell.   In 1992, respondent attributed $3,569.85 to

Mr. Campbell, or half the interest income reported on the Form

1099 to “J. Campbell or J. Hernandez” for that year.

     Every check issued in redemption of the tax certificates at

issue, and listed in the amounts described above, was deposited

in an account at Florida Federal Savings & Loan Association in

Mrs. Hernandez’ name to which petitioner had access, including

those amounts not contained in respondent’s adjustments to

petitioner’s income.

       On September 19, 1991, petitioner and Mrs. Hernandez filed

a joint income tax return for tax year 1990.     On September 18,

1992, petitioner and Mrs. Hernandez filed a joint income tax

return for tax year 1991.   On October 28, 1993, petitioner and

Mrs. Hernandez filed a joint income tax return for tax year 1992.

     On August 26, 1994, petitioner and Mrs. Hernandez signed a

Form 872, printed by the Government Printing Office on green

paper, consenting to extend the period of limitations for tax

year 1990 until December 31, 1995.     Respondent’s authorized agent

signed the form on August 29, 1994.    On March 20, 1995,
                               - 11 -


petitioner and Mrs. Hernandez signed a second Form 872 with

ballpoint pen or pens, extending the period of limitations for

tax years 1990 and 1991 until June 30, 1996.    Respondent’s

Appeals officer signed the form on March 27, 1995.    This form was

a two-page facsimile copy on white paper of a blank printed Form

872.

                               OPINION

Issue 1. The Statutory Notice of Deficiency Was Issued Within
the Period of Limitations

       Section 6501(a) provides:

       Except as otherwise provided in this section, the
       amount of any tax imposed by this title shall be
       assessed within 3 years after the return was filed
       (whether or not such return was filed on or after the
       date prescribed) * * * and no proceeding in court
       without assessment for the collection of such tax shall
       be begun after the expiration of such period.

Section 6501(c)(4) provides for an extension of the period of

limitations by agreement:

       Where, before the expiration of the time prescribed in
       this section for the assessment of any tax imposed by
       this title * * * both the Secretary and the taxpayer
       have consented in writing to its assessment after such
       time, the tax may be assessed at any time prior to the
       expiration of the period agreed upon. The period so
       agreed upon may be extended by subsequent agreements in
       writing made before the expiration of the period
       previously agreed upon.

       Petitioner pleaded in his petition the expiration of the

period of limitations as an affirmative defense.    In order to

prevail on this issue, petitioner must carry the burden of proof.

Rules 39, 142(a); Adler v. Commissioner, 85 T.C. 535, 540 (1985).
                              - 12 -


In cases such as this one, in which respondent has issued the

notice of deficiency to petitioner beyond the 3-year period in

2 of the 3 years at issue, the burden of going forward is on

respondent to show that a valid extension of the period of

limitations was executed for those years.   If respondent makes

the required showing, the burden of going forward shifts back to

petitioner.   The burden of proof, i.e., the burden of ultimate

persuasion, however, never shifts from the taxpayer.    Concrete

Engg. Co. v. Commissioner, 58 F.2d 566, 568 (8th Cir. 1932),

affg. 19 B.T.A. 212 (1930); Stern Bros. & Co. v. Burnet, 51 F.2d

1042, 1045 (8th Cir. 1931), affg. 17 B.T.A. 848 (1929); Adler v.

Commissioner, supra at 540.

     For tax year 1990, petitioner and Mrs. Hernandez signed a

valid Form 872, printed on green paper, that extended the period

of limitations for that year until December 31, 1995.   On

March 20, 1995, petitioner and Mrs. Hernandez signed a second

Form 872 for years 1990 and 1991, extending the period of

limitations for those years until June 30, 1996.

     Petitioner argues on brief that the signatures on the

signature page of the second extension form were forgeries

because the signature page had been altered in some unspecified

way, and that the paper of the Form 872 in the exhibit was white,

whereas he signed a green Form 872.    We have found as fact that

the Form 872 dated March 20, 1995, was a two-page facsimile copy
                              - 13 -


on white paper of a blank Form 872, signed in ballpoint pen by

petitioner and Mrs. Hernandez.   Although the Court is not a

handwriting expert, cf. Bagby v. Commissioner, 102 T.C. 596, 606

(1994), the signatures of Mr. and Mrs. Hernandez on the form

appear to be similar, indeed virtually identical, to their

signatures on the first extension of the period of limitations

and their signatures on the Forms 1040 they filed for each of the

years in issue.   Furthermore, petitioner’s insistence that the

March 20, 1995, Form 872 was printed on green paper may be easily

explained by the fact that he and Mrs. Hernandez signed the first

extension, for tax year 1990, which was printed on green paper,

and that he incorrectly recollects that extension as the second

Form 872 signed by petitioner and Mrs. Hernandez on March 20,

1995, which is on white paper.

     Petitioner has produced no evidence to show that the Form

872 dated March 20, 1995, was altered in any way or that the

signatures on the form were not those of him and Mrs. Hernandez.

Petitioner has neither carried his burden of proof by going

forward with evidence that this Form 872 is a forgery, nor has he

carried his burden of ultimate persuasion.   Rule 142(a); see also

Bybee v. Commissioner, T.C. Memo. 1996-411, affd. without

published opinion 129 F.3d 124 (9th Cir. 1997) (taxpayer failed

to show that signatures on Form 872 were forgeries).   We find

that the Form 872 dated March 20, 1995, is a valid extension,
                               - 14 -


until June 30, 1996, of the period of limitations for tax years

1990 and 1991.

     Petitioner did not file an income tax return for tax year

1992 until October 28, 1993.   On May 10, 1996, respondent issued

a statutory notice of deficiency to petitioner for each of the 3

tax years at issue, well within the period of limitations for

each such year.

Issue 2. Respondent Is Not Estopped From Issuing Statutory
Notice of Deficiency

     Petitioner contends that respondent is equitably estopped

from issuing a statutory notice of deficiency for any of the tax

years in issue because respondent “has, for a number of years,

including 1990, approved Petitioners reporting of tax certificate

interest as ‘tax-exempt’ under * * * section 103”.

     Petitioner presented no evidence to support this argument

until he submitted to the Court a copy of a closing (no-change)

letter for tax year 1990, Notice Number CP-2005, dated December

28, 1992, as an attachment to his brief.    Petitioner did not file

a motion with the Court for leave to submit evidence after the

time provided in our Standing Pre-Trial Order, which was served

on the parties on November 21, 1996.    We may exclude from

evidence materials not provided in compliance with our pretrial

orders, Moretti v. Commissioner, 77 F.3d 637, 644 (2d Cir. 1996);

see also Owens v. Commissioner, T.C. Memo. 1997-538, as an

improper attempt to introduce evidence after the record has
                              - 15 -


closed, Rules 143(b), 151; see also Speer v. Commissioner, T.C.

Memo. 1996-323.   We therefore do not admit this document into

evidence.   Rule 160.9

     Even if we were to admit the letter into evidence, its

issuance would not preclude respondent from later issuing a

statutory notice of deficiency for that tax year, neither on the

grounds of equitable estoppel, Opine Timber Co. v. Commissioner,

64 T.C. 700 (1975), affd. without published opinion 552 F.2d 368

(5th Cir. 1977); see also Fitzpatrick v. Commissioner, T.C. Memo.

1995-548, nor by reason of respondent’s possible failure to

follow Rev. Proc. 94-68, 1994-2 C.B. 803, and Rev. Proc. 85-13,

1985-1 C.B. 514, Collins v. Commissioner, 61 T.C. 693, 700-701

(1974) (revenue procedure is a directory, not mandatory, set of

internal procedures that does not provide a basis for rejecting a

statutory notice of deficiency because of a violation of its

provisions); see also Fitzpatrick v. Commissioner, supra.

     Petitioner also argues that the statutory notice of

deficiency is invalid because it is based on a second examination

of books and records for tax year 1990.   Section 7605(b) provides

that the Commissioner, before undertaking a second inspection “of

a taxpayer’s books of account”, must notify the taxpayer in

writing that the additional inspection is necessary.   However,

     9
       Petitioner also provided other material with his brief,
such as facsimile copies of Florida law on the subject of tax
certificates, of which we take judicial notice.
                              - 16 -


section 7605(b) does not prevent the Commissioner from reviewing

a taxpayer’s income tax return after inspecting his books and

records because a “review of the Form 1040, and accompanying

schedules, does not constitute an inspection of a taxpayer’s

‘books of account.’”   Curtis v. Commissioner, 84 T.C. 1349, 1351

(1985) (quoting Benjamin v. Commissioner, 66 T.C. 1084, 1097

(1976), affd. 592 F.2d 1259 (5th Cir. 1977)).   We have found

nothing in the record to indicate that, for tax year 1990, a

second examination of petitioner’s books and records occurred

within the meaning of section 7605(b).   Because we find that no

violation of section 7605(b) occurred, we do not reach whether

invalidation of the deficiency notice is the proper remedy for

such a violation.   Curtis v. Commissioner, supra at 1356.

Issue 3. Income From the Redemption of Pasco County, Florida,
Tax Certificates Is Not Excluded From Gross Income Under Section
103

     Petitioner contends that interest received on redemption of

Florida tax certificates purchased from the tax collector of

Pasco County, Florida, is excluded from gross income under

section 103(a) as interest earned on State or local bonds.

Petitioner argues that tax certificates are State or local bonds

voluntarily entered into because they are contracts, between

Pasco County and the purchasers, and thus obligations of Pasco

County, a political subdivision of the State of Florida.

Respondent argues that the tax certificates are not obligations
                                     - 17 -


of a State or political subdivision and that therefore the

interest on them is not excluded from gross income under section

103(a).    Against the background of our opinion in Barrow v.

Commissioner, T.C. Memo. 1983-123, we agree with respondent.

     In Barrow v. Commissioner, supra, we considered whether

interest earned on redemption of Florida tax certificates was

excludable from the holder’s gross income under section 103(a).

We held, on a motion for summary judgment, that interest on

Florida tax certificates was not excluded from gross income

because the certificates were neither an exercise of sovereign

borrowing power nor obligations of the State of Florida or a

political subdivision thereof.

     Subsections (a) and (c)(1) of section 103, by their literal

terms, exclude from gross income interest on any State or local

bond, defined as an obligation of a State or political

subdivision thereof.10       See Newman v. Commissioner, 68 T.C. 433,

446 (1977) (section 103 obligation must be in writing); Kansas

     10
          In pertinent part, sec. 103 provides:

          SEC. 103(a). Exclusion.-- * * * gross income does
     not include interest on any State or local bond.

            *     *      *       *       *    *    *

          (c) Definitions.--For purposes of this section and
     part IV--

                 (1) State or local bond.--The term "State or
            local bond" means an obligation of a state or
            political subdivision thereof.
                              - 18 -


City S. Ry. Co. & Affiliated Cos. v. Commissioner, 16 B.T.A. 665,

694 (1929) (“the term ‘obligations of the United States’ * * *

[includes] bonds or other similar evidences of indebtedness”),

affd. in part and revd. in part on another issue and remanded 52

F.2d 372 (8th Cir. 1931); see also United States Trust Co. v.

Anderson, 65 F.2d 575, 577 (2d Cir. 1933); Newlin Machinery Corp.

v. Commissioner, 28 T.C. 837, 841-842 (1957); sec. 1.103-1(b),

Income Tax Regs.

     Consistent with the notion that exclusions from gross income

are to be construed narrowly, Commissioner v. Schleier, 515 U.S.

323, 328 (1995); Harbor Bancorp & Subs. v. Commissioner, 105 T.C.

260, 287 (1995), affd. 115 F.3d 722 (9th Cir. 1997), not all

interest-bearing obligations issued by State and local

governments qualify as section 103(c)(1) obligations.    Courts

have long held that, in order to entitle the holder to an

exclusion from gross income for interest earned thereon, the

subject obligation must have been issued by the State or

political subdivision as an exercise of its sovereign borrowing

power.   See, e.g., Stewart v. Commissioner, 714 F.2d 977, 981-982

(9th Cir. 1983), affg. T.C. Memo. 1982-209; Drew v. United

States, 551 F.2d 85, 87 (5th Cir. 1977); United States Trust Co.

v. Anderson, supra at 577-578; King v. Commissioner, 77 T.C.

1113, 1118 (1981).   This limitation derives from the notion that

the purpose of the section 103 exclusion is to enable States and
                                - 19 -


localities to obtain capital at lower than market rates of

interest; the exclusion causes purchasers of tax-exempt bonds to

accept interest at lower rates equal to the lower after-tax rates

of interest earned by holders of taxable bonds of equivalent

risk.    United States Trust Co. v. Anderson, supra; see Drew v.

United States, supra; King v. Commissioner, supra; see also

Bradford, Untangling the Income Tax 243-254 (1986).     In the line

of cases that formulated and applied this notion, qualification

for the exclusion depends on whether the governmental obligation

was incurred by operation of law, as where interest is paid at a

rate fixed by statute in a condemnation proceeding, or as the

result of a voluntary bargain between the State or local issuer

and the purchaser, where the rate of interest is established in

the marketplace.    See also Consolidated Edison Co. v. United

States, 10 F.3d 68 (2d Cir. 1993); Stewart v. Commissioner,

supra; Drew v. Commissioner, supra.      Compare, e.g., United States

Trust Co. v. Anderson, supra, with Commissioner v. Meyer, 104

F.2d 155, 156 (2d Cir. 1939).

        The distinction is illustrated by King v. Commissioner,

supra.    There we held that interest received on warrants issued

as part of the consideration for land sold to the Trinity River

Authority under the threat of condemnation was not excludable

from gross income under section 103(a), but that interest

received from warrants issued as part of the consideration for
                               - 20 -


land sold to the Trinity River Authority in a voluntary

transaction was so excludable.   The difference in outcome turned

on whether the Trinity River Authority had the power to condemn,

as it did in respect of the warrants whose interest was not

excludable and did not have in respect of the warrants whose

interest was excludable.   Id. at 1124.

     In the case at hand, there was a voluntary bargain or

contract, as petitioner insists.   Each of the tax certificates

issued by Pasco County was a contract between the county and

petitioner, purchased at auction by petitioner by reason of

having submitted the lowest bid in terms of the rate of interest

he was willing to accept.11   State ex rel. Seville Holding Co. v.

Draughon, 173 So. 353, 354 (Fla. 1937); see also In re General

Dev. Corp., 147 Bankr. 610, 613 (Bankr. S.D. Fla. 1992).

However, the voluntary bargain that petitioner entered into with

the county arose out of petitioner’s having made the lowest bid

     11
       We note that one of the components of the face amount
paid by the buyer of a tax sale certificate to the issuer is
interest accrued at the statutorily fixed rate of 18 percent from
the date of delinquency until the date of sale of the
certificate. Fla. Stat. Ann. sec. 197.172(1) (West 1989 & Supp.
1997). This interest rate is statutorily fixed, just like the
rate of interest paid on obligations incurred in the exercise of
eminent domain. However, the interest component accruing prior
to the sale of the certificate has no bearing on whether the
holder of the tax certificate entered into the contract
voluntarily; it is part of the face amount of the certificate.
The interest component that bears on the purchaser’s bargain is
the rate of interest bid at auction, which accrues from the date
of the auction until the date of redemption of the tax
certificate.
                              - 21 -


in relation to the other participants in the auction with respect

to the rate of interest accruing thereafter that he would accept;

this voluntary bargain did not change or otherwise affect the

amount of the payment received by the county from petitioner or

that the county would have received from any other potential

purchaser, which was the face amount of the certificate.

Accordingly, the decision in this case turns, not on whether

petitioner voluntarily contracted with the county, which he did,

but rather on the antecedent question of whether a Florida tax

certificate is an obligation of a State or political subdivision

within the meaning of section 103(c)(1).   Newman v. Commissioner,

68 T.C. 433 (1977); Kansas City S. Ry. Co. and Affiliated Cos. v.

Commissioner, supra.

     In Barrow v. Commissioner, T.C. Memo. 1983-123, we discussed

the nature of tax certificates under Florida law, the salient

points of which remain unchanged.   We cited Florida court

opinions that characterize tax certificates as nothing more than

evidence of a lien created solely to facilitate expedient

enforcement of the obligation of a landowner to pay taxes

lawfully assessed.   Beebe v. State Supreme Court, 151 So. 298,

299 (Fla. 1933); see also Smith v. City of Arcadia, 185 So. 2d

762, 767 (Fla. Dist. Ct. App. 1966) (“Tax certificates are only a

means of evidencing unpaid taxes and to enable the sale thereof
                              - 22 -


for the purpose of realizing funds for current governmental expenditures”).

     As we pointed out in Barrow, even though tax certificates

are contracts between the issuing locality and the certificate

holder, State ex rel. Seville Holding Co. v. Draughon, supra at

354, their sale does not create a contractual relationship of

indebtedness between the issuer and purchaser.    The sale of the

tax certificate at auction is an assignment to the purchaser by

the issuer of the landowner’s indebtedness to the issuer.    The

State or local government incurs no obligation to pay any amount

to the holder of the tax certificate.   In effect, the sale of tax

certificates substitutes the holder for the State or local

government as creditor of the landowner debtor.   At most, the tax

collector

     might be called on to act in the capacity of a
     collection agent for the certificate holder, by taking
     funds from a landowner who wishes to clear title to his
     land by paying the taxes, penalties and interest,
     together with the interest due to the holder of the tax
     certificate, and transferring those funds to the holder
     of the tax certificate. * * * [Barrow v.
     Commissioner, supra.]

     In light of the analysis in Barrow and current Florida law,

as we apply them to the evidence in the record in this case, we

hold that a Florida tax certificate is not an obligation of the

State of Florida or of any political subdivision thereof for

purposes of section 103.   Accordingly, section 103(a) does not

exclude from gross income any interest realized at redemption of

such certificates.
                               - 23 -


Issue 4. Income From the Redemption of Tax Certificates Is
Attributable to Petitioner as Determined by Respondent

     Petitioner argues that the interest received from the

redemption of tax certificates, but not reported on the joint

returns for tax years 1990 through 1992, was not income properly

attributable to him or to Mrs. Hernandez.   To prevail, petitioner

must carry the burden of proving that such income is not

attributable to him or to Mrs. Hernandez.   Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933); see also Smith v. Commissioner,

T.C. Memo. 1995-402, affd. without published opinion 116 F.3d 492

(11th Cir. 1997).

     In each year at issue, petitioner received interest income

that was not reported on his joint return for that year from the

redemption of certificates held either in his name and the name

of another individual or in the name of his wife and the name of

another individual.   These amounts were not reported as either

gross income, secs. 61, 6012(a), or as tax-exempt interest as

required by section 6012(d).   In each instance, the money

received from the redemption of the certificates was deposited in

Mrs. Hernandez’ bank account, to which petitioner had access.     In

each instance, the funds used to purchase the tax certificates

came from petitioner.   With respect to amounts included in

respondent’s redetermination of petitioner’s taxable income, none

of the alternate payees listed on the tax certificates reported

these amounts as income on their income tax returns, nor did they
                               - 24 -


report them as tax-exempt interest as required by section

6012(d).    In those instances in which the alternate payee did

report such amounts as either income or interest excludable from

income under section 103, respondent did not include those

amounts in petitioner’s income.

     With respect to amounts that petitioner claims were income

to Mark Craig, petitioner proffered in evidence a letter from his

daughter--Mark’s mother, Mrs. Craig--claiming that petitioner was

holding these amounts “as agent for * * * [Mrs Craig] and * * *

[her] minor children”.   Mrs Craig did not testify at trial.

     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
                                 - 25 -


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.      By

reason of the evidence in the record that the alternate payees

did not report these amounts on their income tax returns, and

that petitioner exercised dominion and control over these amounts

when they were deposited in Mrs. Hernandez’ bank account,

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

(“undeniable accessions to wealth, clearly realized, and over

which the taxpayers have complete dominion”), we sustain in its

entirety respondent’s adjustment to petitioner’s income for each

year in question.

Issue 5. Petitioner Is Liable for the Accuracy-Related Penalty
Under Section 6662(d) for Substantial Understatements of Income
Tax

     Section 6662(a) provides for an accuracy-related penalty of

20 percent “of the portion of the underpayment to which this

section applies”, which is “the portion of any underpayment which

is attributable to * * *     Any substantial understatement of

income tax.”     Sec. 6662(b)(2).12   Section 6662(d) defines a


     12
       For purposes of sec. 6662, sec. 6664(a) provides that an
underpayment is

     the amount by which any tax imposed by this title
     exceeds the excess of--

             (1) the sum of--
                                                       (continued...)
                                 - 26 -


substantial understatement as an understatement of income tax for

the taxable year that exceeds the greater of 10 percent of the

tax required to be shown or $5,000.       Sec. 6662(d)(1).   We have

sustained respondent’s determinations of adjustments to

petitioner’s income in their entirety in each of the tax years in

question; petitioner’s understatement of tax exceeds $5,000 and

10 percent of the tax required to be shown on his return.

     Respondent is foreclosed from imposing the accuracy-related

penalty if a taxpayer has substantial authority for the treatment

of the items at issue or if the taxpayer adequately disclosed

such items.     Sec. 6662(d)(2)(B)(i) and (ii).    Petitioner has the

burden of showing either that he had substantial authority for

the tax treatment of the tax certificate interest or that he

adequately disclosed his treatment on the returns for each year

in issue.     Rule 142(a).

     The substantial authority standard is “an objective standard

involving an analysis of the law and application of the law to

relevant facts.     The substantial authority standard is less

stringent than the `more likely than not’ standard, * * * but



     12
          (...continued)
                 (A) the amount shown as the tax by the
              taxpayer on his return, plus

                (B) amounts not so shown previously
             assessed (or collected without assessment),
             over

             (2) the amount of rebates made.
                              - 27 -


more stringent than the reasonable basis standard”.     Sec. 1.6662-

4(d)(2), Income Tax Regs.

     Section 1.6662-4(d)(3)(i), Income Tax Regs., states that

substantial authority for a taxpayer’s treatment of an item

exists “only if the weight of the authorities supporting the

treatment is substantial in relation to the weight of authorities

supporting contrary treatment.”

     With respect to the issue of whether petitioner may exclude

tax certificate interest under section 103(a), petitioner did not

have substantial authority to support such an exclusion.     This

Court had issued a Memorandum Opinion directly on point, Barrow

v. Commissioner, T.C. Memo. 1983-123, long before petitioner

filed his income tax return for any of the tax years in question.

That Memorandum Opinion is substantial authority that directly

contradicts petitioner’s position.     Sec. 1.6662-4(d)(3)(iii),

Income Tax Regs.

     Petitioner stated in open court that he would show that our

opinion in Barrow v. Commissioner, supra, is wrong.     He has

failed to do so.   Indeed, he has cited no authority at all to

support his position, nor has he provided any persuasive

reasoning to support his assertions so as to invoke section

1.6662-4(d)(3)(ii), Income Tax Regs.

     Petitioner did not cite any authority supporting his failure

to report additional tax certificate interest income in the tax

years in question, nor did he adduce any credible evidence that
                               - 28 -


the items in issue were attributable to other taxpayers.    Indeed,

the alternate payees did not report--or even disclose--these

items on their income tax returns for the years in question.

Furthermore, the evidence in the record leaves no doubt that

petitioner exercised dominion and control over those items of

income when they were deposited into Mrs. Hernandez’ bank

account.   The Supreme Court’s pronouncement in Commissioner v.

Glenshaw Glass Co., supra, has made it axiomatic that items over

which a taxpayer has dominion and control are attributable to him

and must therefore be included in income.   Petitioner had no

substantial authority for failing to include items of tax

certificate interest income on his tax returns for the tax years

in question.

     Neither did petitioner adequately disclose his position

regarding the treatment of tax certificate interest income.     A

taxpayer's position may be adequately disclosed either on the

return or on a statement attached to the return.   Sec.

6662(d)(2)(B)(ii).   Petitioner did not attach a statement to his

tax returns for the 1990, 1991, and 1992 tax years explaining his

position regarding the tax certificate interest income.    We

therefore examine whether petitioner adequately disclosed his

position on his tax returns.

     Section 1.6662-4(f)(2), Income Tax Regs., provides that the

Commissioner may by revenue procedure prescribe the circumstances

under which information provided on the return will constitute
                              - 29 -


adequate disclosure for purposes of section 6662.   The

Commissioner issued Rev. Proc. 91-19, 1991-1 C.B. 523, Rev. Proc.

92-23, 1992-1 C.B. 737, and Rev. Proc. 93-33, 1993-2 C.B. 470,

listing categories of items for which disclosure on the return

constitutes adequate disclosure for the 1990, 1991, and 1992 tax

years.   None of these revenue procedures lists tax-exempt

interest income, which is at issue here.

     A taxpayer may also satisfy the requirements for adequate

disclosure by providing sufficient information on the face of the

return that enables the Commissioner to identify the potential

controversy.   Schirmer v. Commissioner, 89 T.C. 277, 285-286

(1987) (citing S. Rept. 97-494, at 274 (1982)); Elliott v.

Commissioner, T.C. Memo. 1997-294; Horwich v. Commissioner, T.C.

Memo. 1991-465.   This method of disclosure requires more than a

production of a "clue" with respect to the nature of the

controversy.   Horwich v. Commissioner, supra (citing Staff of the

Joint Comm. on Taxation, General Explanation of the Revenue

Provisions of the Tax Equity and Fiscal Responsibility Act of

1982, at 218 (J. Comm. Print 1982)).

     In the case at hand, the controversy concerning the interest

income concerns whether tax certificates sold by a Florida county

tax collector were obligations of a State or political

subdivision thereof, making the interest paid thereon excludable

from income under section 103.   Petitioner's reporting of

interest income on line 8b of his Form 1040 returns, entitled
                               - 30 -


"Tax-exempt interest income", did not provide respondent with any

clue that there was a potential controversy.    The inclusion of

the amounts on line 8b, indicating petitioner's position that the

amounts set forth were exempt under section 103, did not do the

job.   Identification of the correct section of the Code to

support a reported position does not, without more, provide

sufficient information to enable the Commissioner to identify the

potential controversy.    Elliott v. Commissioner, supra.

       For the foregoing reasons, we find that petitioner neither

had substantial authority nor provided adequate disclosure of his

position for the treatment of the items at issue.      Accordingly,

we hold petitioner liable for accuracy-related penalties for

substantial understatements of income tax under section 6662.

       To reflect the foregoing,


                                          Decision will be entered

                                     under Rule 155.
