                       T.C. Memo. 1997-92



                     UNITED STATES TAX COURT



               RICHARD JOHN KADUNC, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 5105-95.                 Filed February 24, 1997.


     Richard John Kadunc, pro se.

     Aretha Jones, for respondent.



                       MEMORANDUM OPINION


     COUVILLION, Special Trial Judge:   This case was heard

pursuant to section 7443A(b)(3)1 and Rules 180, 181, and 182.

     Respondent determined a deficiency of $858 in petitioner's

Federal income tax for 1991.


1
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
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     The issues for decision are:    (1) Whether a State income tax

refund of $1,738 received by petitioner during 1991 constitutes

taxable income for that year; (2) whether petitioner is entitled

to deduct home mortgage interest expenses in excess of an amount

allowed by respondent; and (3) whether petitioner is liable for

the penalty under section 6673(a)(1).    The remaining adjustment

in the notice of deficiency to petitioner's miscellaneous

deductions is computational and will be resolved by the Court's

holdings on the aforementioned issues.

     The parties submitted this case fully stipulated.   The

stipulation of facts and the annexed exhibits are so found and

are incorporated herein by reference.    At the time the petition

was filed, petitioner's legal residence was Springfield,

Virginia.

     Petitioner claimed a deduction on his 1990 Federal income

tax return for State and local income tax paid in 1990 in the

amount of $2,621.55.   During 1991, petitioner received a check

from the State of Virginia in the amount of $1,738, reflecting a

State income tax refund.   Petitioner failed to report this refund

on his 1991 Federal income tax return.   Further, on his 1991

return petitioner claimed an itemized deduction for home mortgage

interest in the amount of $16,896.

     In the notice of deficiency, respondent determined that the

State income tax refund received by petitioner during 1991
                               - 3 -


constituted gross income for 1991.     Respondent further allowed a

home mortgage interest deduction of $15,600, thereby disallowing

$1,296 of the amount claimed by petitioner.2

     The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden is on the

taxpayer to prove that the determinations are in error.    Rule

142(a); Welch v. Helvering, 290 U.S. 111 (1933).     Moreover,

deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving entitlement to any claimed deduction,

and that such deduction fits squarely within the ambit of the

statute providing the deduction.     New Colonial Ice Co. v.

Helvering, 292 U.S. 435 (1934).    This includes the burden of

substantiation.   Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),

affd. per curiam 540 F.2d 821 (5th Cir. 1976).    A taxpayer is

required to maintain records sufficient to establish the amount

of his or her income and deductions.    Sec. 6001.

     With respect to the State income tax refund, petitioner

claimed a deduction for State income taxes on his 1990 Federal

income tax return.   During 1991, petitioner received a $1,738

refund of State income tax.   Petitioner admitted receipt of such

refund; however, he failed to include this refund as income on

2
      The State of Virginia reported to respondent that, in 1991,
it paid a State income tax refund of $1,738 to petitioner.
Further, Gulf States Mortgage Co., Inc. (Gulf States), reported
to respondent that petitioner had paid mortgage interest during
1991 in the amount of $15,600.
                                - 4 -


his 1991 return.    Generally, under section 111 and the

regulations thereunder, if a tax was deducted on a prior year's

return that resulted in a reduction of tax and a tax benefit to

the taxpayer, a subsequent recovery by the taxpayer of such tax

must be included in gross income in the year the recovery is

received.    Prewitt v. Commissioner, T.C. Memo. 1995-24; Kadunc v.

Commissioner, T.C. Memo. 1992-61, affd. without published opinion

981 F.2d 1251 (4th Cir. 1992); Kass v. Commissioner, T.C. Memo.

1988-403; Tracy v. Commissioner, T.C. Memo. 1985-40, affd.

without published opinion 782 F.2d 1045 (7th Cir. 1985); Nyhus v.

Commissioner, T.C. Memo. 1979-519; Monroe v. Commissioner, T.C.

Memo. 1979-100.    Petitioner presented no evidence to show that he

had not realized a tax benefit from his deduction of State income

taxes on his 1990 return.    On the contrary, the copy of

petitioner's 1990 return reflects that petitioner unquestionably

enjoyed a tax benefit by his deduction of State income taxes for

1990.    On this record, the Court sustains respondent on this

issue.

     With respect to the $1,296 disallowed home mortgage interest

expenses, respondent received from Gulf States a "substitute"

Form 1098, "Annual Tax and Interest Statement" (Form 1098),

reflecting "net" interest paid by petitioner to Gulf States

during 1991 that totaled $15,600.83.    Although the Form 1098

showed total interest "applied" to 1991 as $16,896.33, the form
                              - 5 -


subtracted from that amount $1,295.50 of "prepaid interest" and,

thereby, exhibited a net figure of $15,600.83 in 1991 interest

payments made by petitioner during 1991.   The following statement

was printed in bold type at the bottom of the Form 1098, "1991

Net Interest Payments Reported to IRS ********** 15,600.83".

This statement is not ambiguous.   Petitioner failed to show that,

during 1991, he made any deductible payments of home mortgage

interest in excess of $15,6003 and, therefore, failed to prove

that he (as a cash basis taxpayer) is entitled to a deduction for

mortgage interest in excess of the amount shown on the Form 1098;




3
      Respondent introduced into evidence copies of petitioner's
Forms 1098 from Gulf States for both 1991 and 1992. The Form
1098 for 1992 reflects "Net Prepaid Interest - Prior Year" in the
amount of $1,295.50, which was included in the "Net Interest
Payments Reported to IRS" for 1992; i.e., the amount that was
deductible for 1992. The Form 1098 for 1991 reflects "Net
Prepaid Interest - Current Year" in the amount of $1,295.50,
which was deducted from the "Net Interest Payments Reported to
IRS" for 1991 (i.e., not deductible). The Court concludes from
these two forms that the $1,295.50 figure represents interest
applicable to the 1992 year that petitioner "prepaid" during the
1991 tax year. Sec. 461(g) provides that, if a cash method
taxpayer pays interest that is "properly allocable to any period
* * * which is after the close of the taxable year in which
paid", such interest shall be treated as paid in the period to
which such interest is allocable. Sec. 461(g)(2) provides an
exception to this treatment for the payment of "points" in
connection with the taxpayer's principal residence. However,
petitioner presented no evidence to show that he had paid
"points" that would entitle him to an interest deduction in the
year of payment.
                               - 6 -


i.e., $15,600.83, the amount allowed by respondent.4     Respondent,

therefore, is sustained on this issue.

     Respondent requested that this Court impose against

petitioner the penalty under section 6673(a)(1).     As relevant

herein, section 6673(a) authorizes this Court to require a

taxpayer to pay to the United States a penalty not in excess of

$25,000 whenever it appears that proceedings have been instituted

or maintained by the taxpayer primarily for delay or that the

taxpayer's position in such proceeding is frivolous or

groundless.

     A petition to the Tax Court is frivolous "if it is contrary

to established law and unsupported by a reasoned, colorable

argument for change in the law".     Coleman v. Commissioner, 791

F.2d 68, 71 (7th Cir. 1986).   Petitioner's positions, with regard

to his State income tax refund, consisted solely of stale and

time worn tax protester rhetoric.5     Further, petitioner has

repeatedly inundated this Court with an exorbitant amount of

meandering and immaterial documents.     Rather than attempting to


4
     Respondent actually allowed a deduction of $15,600.     The
difference of $.83 is due to rounding.
5
      For example, petitioner argued that an "Accord and
Satisfaction" had been executed between petitioner and respondent
and could not be violated; that the "black letter of the law" is
not the only law applicable to Federal income tax returns; that
the Internal Revenue Service has not incorporated by reference in
the Federal Register a requirement to make an income tax return,
etc.
                                - 7 -


challenge the merits of respondent's determinations with regard

to the State income tax refund, petitioner chose to repeatedly

and pointlessly advance bizarre and intricate mathematical

theories to support his contention that State income tax refunds

should not be taxable income.

     Furthermore, and most notably, petitioner is no stranger to

this Court.    In 1986, petitioner failed to include as income a

State income tax refund he received for overpayment of his 1985

State income taxes that he had deducted on his 1985 Federal

income tax return.    In Kadunc v. Commissioner, T.C. Memo. 1992-

61, this Court held that the State income tax refund constituted

gross income in the year received and should have been reported

on petitioner's Federal income tax return for the year in which

the refund was received.    The reasons for holding against

petitioner in that case were very well articulated by the Court.

Yet, petitioner persisted in failing to report such income on his

1991 return and chose to litigate that same issue again in this

proceeding.6   Petitioner endeavored to introduce as evidence in

this case documents and other evidence, including the trial

transcript, from his prior case before this Court.    Such evidence

did not sustain his cause in the previous case and is clearly

6
      Also, petitioner filed a petition with this Court, docket
No. 10165-95, regarding this same issue for a different tax year.
That petition was dismissed for lack of jurisdiction for the
reason that the petition was untimely filed. Petitioner has
appealed the dismissal.
                                - 8 -


immaterial in this case.    Moreover, petitioner had been placed on

notice, by the holding in his previous case, that such evidence

and the arguments in connection therewith possessed no merit.

     The voluminous documents petitioner presented to this Court

had no relevance to his case.   When that is coupled with his

nonsensical arguments, the Court is provoked to apply the penalty

under section 6673(a)(1).   The fact that petitioner believed, or

may have believed, that he was entitled to a larger home interest

deduction for 1991 than the amount allowed by respondent is of no

consequence in this matter.   In Sloan v. Commissioner, 102 T.C.

137, 148 (1994), affd. 53 F.3d 799 (7th Cir. 1995), this Court

observed that "The mere fact that not every one of petitioner's

arguments is frivolous or groundless does not eliminate the

applicability of section 6673."   See also Granado v.

Commissioner, 792 F.2d 91, 94 (7th Cir. 1986), affg. T.C. Memo.

1985-237.   Petitioner's possible belief with regard to his home

interest deduction does not shield him from the imposition of the

penalty under section 6673(a)(1).   By far, the majority of

petitioner's pleadings and arguments are frivolous and

demonstrate that petitioner regarded this case as a vehicle to

protest the tax laws of this country and espouse his own

misguided views.   This Court does not look with favor upon such

tactics.
                                - 9 -


     The Court is also convinced that petitioner instituted and

maintained this proceeding primarily, if not exclusively, for

purposes of delay.   Having to deal with this matter wasted the

Court's time, as well as respondent's.      Petitioner, likewise,

wasted his own time.   In view of the foregoing, this Court grants

respondent's request and exercises its discretion under section

6673(a)(1) by requiring petitioner to pay a penalty to the United

States in the amount of $300.    Coleman v. Commissioner, supra at

71-72; Crain v. Commissioner, 737 F.2d 1417, 1418 (5th Cir.

1984); Coulter v. Commissioner, 82 T.C. 580, 584-586 (1984);

Abrams v. Commissioner, 82 T.C. 403, 408-411 (1984).



                                             Decision will be entered

                                        for respondent.
