                        T.C. Memo. 2010-190



                      UNITED STATES TAX COURT



                   YAIR ALONIM, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 28516-08.               Filed August 30, 2010.



     Yair Alonim, pro se.

     Halvor R. Melom, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION1


     GERBER, Judge:   Respondent determined a $19,748 income tax

deficiency and a $3,950 accuracy-related penalty under section



     1
      Petitioner filed his petition as a small tax case under the
provisions of sec. 7463(a). Petitioner moved for removal of that
designation and the Court granted his motion. Unless otherwise
indicated, all section references are to the Internal Revenue
Code applicable to the period under consideration.
                                 - 2 -

6662(a) for petitioner’s 2006 tax year.     The issues presented for

our consideration are whether petitioner is required to report

certain interest income for 2006 and whether petitioner is liable

for a section 6662(a) penalty.

                        FINDINGS OF FACT2

     Petitioner maintained dual citizenship in the United States

and Israel and at all times pertinent to this case resided in

California, including the time his petition was filed.    During

2006 petitioner was retired, and his sources of income were

interest on certificates of deposit (CDs) and Social Security

benefits.   For 2006 petitioner reported $53,051 of interest and

$4,748 of Social Security benefits as income.

     During 2006 and in prior years, petitioner earned interest

income by investing in CDs.   It was his practice to seek out the

best possible interest rates.    He would move his money from

institution to institution seeking more favorable rates at the

end of the holding period of his current CDs.

     The CDs were generally of 9- or 12-month duration.    The

terms of the CDs provided for a penalty if funds were withdrawn

before the maturity date of the certificate.    At the end of each

calendar year accumulated interest was credited to the CD

balance, and petitioner was sent notification in a Form 1099-INT,



     2
      The parties’ stipulation of facts and the exhibits are
incorporated by this reference.
                                 - 3 -

Interest Income, reflecting the interest that had accrued on his

certificate.   The accumulated interest that was credited to his

CD account would then accrue interest in addition to the original

principal.   On occasions where petitioner withdrew his funds

before maturity, he was penalized.       On one such occasion (not

during 2006), some of the institutions holding his CDs became

unstable and appeared unable to meet their obligations.

Petitioner was then forced to withdraw before maturity, and the

early withdrawal penalty eliminated some portion of the

accumulated interest that had been earned on the certificates.

     For each year, including 2006, petitioner would report the

amount reflected on the Forms 1099-INT only if the underlying CD

had matured during that year.    On the basis of that approach

petitioner reported $53,051 of interest income for 2006.

Conversely, respondent received notification of the issuance of

Forms 1099-INT for petitioner reflecting interest in the total

amount of $126,676 or a difference of $73,625 resulting in a

$19,748 income tax deficiency for 2006.

     A notice of deficiency was issued to petitioner, and he

petitioned this Court.

                                OPINION

     We consider whether petitioner was required to report the

interest credited to his CD accounts even though, as he contends,

they remained subject to a penalty for early withdrawal.       Gross
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income comprises all income including interest income.         Sec.

61(a)(4).       In some cases involving unreported income, the

Commissioner must introduce evidence that reflects that a

taxpayer received income that was not reported.          Hardy v.

Commissioner, 181 F.3d 1002, 1004 (9th Cir. 1999), affg. T.C.

Memo. 1997-97.       Respondent introduced certified documents

reflecting that the Internal Revenue Service had been informed

that Forms 1099-INT had been issued to petitioner for the

interest income that was not included on petitioner’s 2006 tax

return.       Accordingly, petitioner has the burden of showing that

respondent’s determination is in error.

       There is no question that accrued interest was credited to

petitioner’s CD accounts as of the end of the 2006 calendar year.

The only question petitioner raises is whether the potential for

a penalty if the interest or principal had been withdrawn early

is a restriction that would render the interest not subject to

tax.       Petitioner’s argument is addressed in section 1.451-2,

Income Tax Regs.3      That regulation provides that a taxpayer is

not in constructive receipt of income if the taxpayer’s control

of its receipt is subject to “substantial limitations or

restrictions.”       Sec. 1.451-2(a), Income Tax Regs.    In the case of

interest, dividends, or other earnings on deposits in a bank or



       3
      Neither party cited this regulation; we consider it because
it bears on petitioner’s argument and position in this case.
                              - 5 -

similar institution, section 1.451-2(a)(2), Income Tax Regs.,

provides that the following is not a substantial limitation or

restriction on the taxpayer’s control over the receipt of such

earnings:

          The fact that the taxpayer would, by withdrawing
     the earnings during the taxable year, receive earnings
     that are not substantially less in comparison with the
     earnings for the corresponding period to which the
     taxpayer would be entitled had he left the account on
     deposit until a later date (for example, if an amount
     equal to three months’ interest must be forfeited upon
     withdrawal or redemption before maturity of a one year
     or less certificate of deposit, time deposit, bonus
     plan, or other deposit arrangement then the earnings
     payable on the premature withdrawal or redemption would
     be substantially less when compared with the earnings
     available at maturity);

In other words, if the owner of a certificate of deposit with a

duration of a year or less would forfeit 3 months of interest

for an early withdrawal, the regulation might furnish protection

from constructive receipt of accrued but unwithdrawn interest.

     Petitioner testified, in vague terms, about situations where

he was penalized for early withdrawal.   He did not, however,

provide the terms reflecting the amounts of penalty for premature

withdrawal of the CDs under consideration.   Accordingly, there is

no way for the Court to judge whether early withdrawal in this

case was subject to “substantial limitations or restrictions.”

     Petitioner did not withdraw principal or interest during

2006, and accordingly his CD accounts were credited with

accumulated interest unreduced by any penalty.   There were no
                               - 6 -

penalties to petitioner for his 2006 tax year.     In the

circumstances of this case petitioner is required to report all

of the interest credited to his accounts for which Forms 1099-INT

were issued.

     Petitioner also alleges that he did not receive Forms 1099-

INT for the $73,625 of interest that he failed to include on his

2006 tax return.   We find petitioner’s allegations to be

disingenuous and in conflict with the evidence before the Court.

The record reflects that the unreported portion of the interest

($73,625) is represented by 15 Forms 1099-INT.     Those Forms 1099-

INT were issued by some of the same financial institutions as

those for which petitioner did report interest.     Moreover,

petitioner reported only approximately 42 percent of the total

interest credited to his account during 2006 ($53,051 ÷ $126,676)

and failed to report 58 percent of the interest earned ($73,625 ÷

$126,676).   For the 2006 taxable year, the interest from

petitioner’s CDs represented most of his income.    He carefully

monitored the interest rates, maturity dates, and related matters

throughout the year.   Applying his theory that interest was

reportable only if there was no possibility of an early

withdrawal penalty, he had to review each CD to make the decision

to report only a portion of the interest credited to his account.

Petitioner’s allegations that he did not receive or was not aware
                                - 7 -

of the interest are without any credibility and belie the reality

of the circumstances.

     Accordingly, we hold that petitioner was required and failed

to report $73,625 of interest income for 2006.   Having decided

that the interest was taxable, we proceed to decide whether the

section 6662(a) accuracy-related penalty applies to the resulting

underpayment.

     Section 6662(a) and (b)(1) and (2) imposes an accuracy-

related penalty of 20 percent on the portion of an underpayment

attributable to negligence, disregard of rules or regulations, or

a substantial understatement of income tax.   Negligence includes

any failure to make a reasonable attempt to comply with the

provisions of the Code or to exercise ordinary and reasonable

care in the preparation of a tax return.   Sec. 1.6662-3(b)(1),

Income Tax Regs.   Negligence is strongly indicated where a

taxpayer fails to report income reflected on Forms 1099-INT.      Id.

There is a substantial understatement of income tax under section

6662(b)(2) if the amount of the understatement exceeds the

greater of either 10 percent of the tax required to be shown on

the return, or $5,000.   Sec. 6662(a), (b)(1) and (2), (d)(1)(A);

sec. 1.6662-4(a), Income Tax Regs.

     The Commissioner bears the burden of production with respect

to penalties.   Sec. 7491(c); Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001).    Once the burden of production is met, the
                                - 8 -

taxpayer must come forward with evidence sufficient to show that

the penalty does not apply.    Id. at 447.   Petitioner’s

understatement of income tax is $19,748.     The understatement

exceeds the greater of 10 percent of the tax required to be shown

or $5,000.    Thus, the understatement is substantial for purposes

of section 6662(d)(1)(A), and respondent has met his burden of

production.

     Section 6664(c)(1) provides a defense to the section 6662

penalty for any portion of an underpayment where reasonable cause

existed and the taxpayer acted in good faith.     Generally, the

most important factor is the extent of the taxpayer’s effort to

assess the proper tax liability.   Sec. 1.6664-4(b)(1), Income Tax

Regs.   Petitioner’s explanation of his failure to report accrued

interest lacked credibility.    More important, petitioner did not

seek advice and provided no evidence of the terms of the early

withdrawal penalties to support his argument that the interest is

not reportable.

     We have also considered the volume of unreported income

(more than 58 percent of the interest earned), and the

possibility of an “honest mistake” or oversight is remote.     Under

the circumstances, we hold that petitioner is liable for the

section 6662(a) accuracy-related penalty on the entire

underpayment.
                            - 9 -

To reflect the foregoing,


                                         Decision will be entered

                                    for respondent.
