T.C. Memo. 2001-212

UNITED STATES TAX COURT

CHRISTOPHER M. AND THEANNE K. WEIL, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5919-00. Filed August 9, 2001.

Christopher M. Weil, for petitioners.

Kenneth L. Bressler, for respondent.

MEMORANDUM OPINION

WELLS, Chief Judge: Respondent determined the following

deficiencies in, addition to, and accuracy-related penalties with

respect to petitioners' Federal income taxes for taxable years

1995 and 1996:

 Accuracy-related

Addition to Tax Penalties 

 Year Deficiency Sec. 6651(a)(1) Sec. 6662 

 

 1995 $72,792 $11,258 $12,968.00

 1996 17,658 -– 3,531.60
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1Respondent conceded the following items: (1) The

adjustment in the notice of deficiency of $15,954 for alleged

unreported interest income for 1995; (2) $26,136 of the total

adjustment in the notice of deficiency for itemized deductions

for 1996; and (3) the accuracy-related penalty under sec. 6662 in

the amount of $12,968 for 1995. 

2Certain computational issues also remain for 1995,

resolution of which flows automatically from our resolution of

the determinations in the notice that we address herein. 

Unless otherwise indicated, 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. 

After concessions by respondent,1 we must decide the

following issues:2 (1) Whether petitioners are entitled to

deductions for interest that they paid with respect to delinquent

Federal income taxes for 1984, 1985, 1986, 1987, and 1993; (2)

whether petitioners are liable for the addition to tax under

section 6651(a) for 1995; and (3) whether petitioners are liable

for an accuracy-related penalty under section 6662(a) for 1996. 

Background

The parties submitted the instant case fully stipulated

pursuant to Rule 122. The stipulated facts are incorporated

herein by reference and are found as facts in the instant case. 

Petitioners resided in Dallas, Texas, when they filed their

petition.
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Petitioners were delinquent in paying their Federal income

taxes for 1984, 1985, 1986, 1987, and 1993. During the taxable

year 1995, petitioners paid $228,180.67 in statutory interest

under section 6601(a) on the aforementioned delinquent Federal

income tax liabilities. 

On April 15, 1996, petitioners filed with the Internal

Revenue Service (IRS) Form 4868, Application for Automatic

Extension of Time To File U.S. Individual Income Tax Return. On

August 14, 1996, petitioners filed with the IRS Form 2688,

Application for Additional Extension of Time To File U.S.

Individual Income Tax Return. The original due date of

petitioners' 1995 tax return was April 15, 1996, and with

extensions the due date was October 15, 1996. On June 16, 1997,

petitioners filed their joint 1995 Federal income tax return.

Petitioners claimed deductions on their 1995 and 1996 tax

returns for a portion of the $228,180.67 of statutory interest

that they paid on their delinquent taxes during 1995. In

particular, for 1995, petitioners reported $166,358 as an expense

on Schedule C, Profit or Loss From Business, and $41,589 as an

investment interest expense on Form 4952, Investment Interest

Expense Deduction. Of the $41,589 reported on Form 4952,

petitioners claimed a deduction of $18,674 on Schedule A,

Itemized Deductions, of their 1995 return and carried over the 
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balance of $22,915 as an interest expense on Schedule A of their

1996 return.

In the notice of deficiency sent to petitioners for 1995 and

1996, respondent determined that the deductions that petitioners

claimed for investment interest and Schedule C interest expenses

represented nondeductible personal interest expenses under

section 163(h).

Petitioners filed a petition contesting the notice of

deficiency. When the instant case was called for trial, the

parties agreed to submit the case as fully stipulated. The

Court, pursuant to Rule 151, ordered the submission of briefs 75

days following trial. Petitioners failed to submit a brief. 

After respondent submitted an initial brief, the Court granted

respondent's request for leave not to file a reply brief. 

Discussion

Interest Deductions for Delinquent Payment of Taxes

Petitioners contend in their petition that their deductions

were allowable as (1) interest paid or accrued on indebtedness

properly allocable to a trade or business, or (2) investment

interest. Respondent contends that the disputed amounts are

nondeductible personal interest expenses. It is well settled

that determinations made by the Commissioner to disallow

deductions in a notice of deficiency normally are presumed to be

correct, and the taxpayer bears the burden of proving that those
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determinations are erroneous. Rule 142(a); INDOPCO Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290

U.S. 111, 115 (1933). The parties do not contend otherwise.

Section 163(a) allows individual taxpayers a deduction from

taxable income for interest paid or accrued on indebtedness. 

Deductions for "personal interest", however, are not allowed for

individual taxpayers. Sec. 163(h)(1). Section 163(h)(2)(a)

excludes "interest paid or accrued on indebtedness properly

allocable to a trade or business (other than the trade or

business of performing services as an employee)" from the

definition of "personal interest" in section 163(h)(1). Section

163(h) does not directly address whether "personal interest"

includes interest paid on Federal income tax deficiencies.

We have held that interest paid on delinquent Federal income

tax liabilities is personal interest and nondeductible under

section 163(h) where the interest is not proved to be a normal or

usual incident of a business. See Tippin v. Commissioner, 104

T.C. 518, 529 (1995). In Tippin, the record was silent as to the

source of income or other circumstances that gave rise to the

underlying income tax deficiency. Id. at 530. In the instant

case, the record fails to disclose that the interest paid on

petitioners' delinquent income tax liabilities was attributable

to indebtedness allocable to a trade or business or to their

investment activity. Because, as in Tippin, the instant record
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3Sec. 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52

Fed. Reg. 48409 (Dec. 22, 1987), states that personal interest

includes interest "Paid on underpayments of individual Federal,

State or local income taxes and on indebtedness used to pay such

taxes (within the meaning of §1.168-8T), regardless of the source

of the income generating the tax liability". See Redlark v.

Commissioner, 106 T.C. 31 (1996), revd. 141 F.3d 936 (9th Cir.

1998).

is silent as to the sources of the delinquent tax liabilities, we

sustain respondent's determination that the deductions for

interest reported on petitioners' 1995 Federal income tax return

are personal interest and not allowed. 

Because we agree with respondent that petitioners failed to

prove that the interest expense was incurred on indebtedness

properly allocable to petitioners' trade or business or to their

investment activities, we need not and do not consider sec.

1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg.

48409 (Dec. 22, 1987), in this case.3

Addition to Tax

Respondent determined that petitioners are liable for an

addition to tax for 1995 pursuant to section 6651(a)(1), which

imposes an addition to tax for a taxpayer's failure to file a

required return on or before the date prescribed, including

extensions. The amount added to the tax under section 6651(a)(1)

is 5 percent for each month or fraction thereof during which the

return is late, up to a maximum of 25 percent. The addition to

tax is inapplicable, however, if the taxpayer's failure to file
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4As stated above, respondent conceded the accuracy-related

penalty for 1995.

the return is due to reasonable cause and not due to willful

neglect. Sec. 6651(a)(1). The taxpayer has the burden of

proving the addition is improper. Rule 142(a); United States v.

Boyle, 469 U.S. 241, 245 (1985).

With extensions, petitioners' return for taxable year 1995

was due on October 15, 1996. The parties have stipulated that

petitioners filed their return for 1995 on June 16, 1997,

approximately 8 months after it was due. The record is devoid of

any showing that petitioners' failure to file timely was due to

reasonable cause and not due to willful neglect. E.g., Williams

v. Commissioner, 114 T.C. 136 (2000). Accordingly, we hold that

petitioners are liable for the addition to tax determined under

section 6651(a)(1). 

Accuracy-Related Penalty

For 1996,4 respondent determined that petitioners are liable

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

which imposes a 20-percent penalty on the portion of an

underpayment of tax that is attributable to, inter alia, (1)

negligence or disregard of rules or regulation or (2) any

substantial understatement of income tax. The accuracy-related

penalty does not apply to any portion of an underpayment for

which there was reasonable cause and with respect to which the
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taxpayer acted in good faith. See sec. 6664(c); sec. 1.6664-

4(a), Income Tax Regs. Respondent's determination imposing the

accuracy-related penalty is presumed correct, and petitioners

must establish error in respondent's determination that they are

liable for the penalty. Rule 142(a); Estate of Monroe v.

Commissioner, 104 T.C. 352, 366 (1995).

The record contains no evidence as to petitioners'

reasonable cause or good faith for claiming the deductions in

issue nor any other evidence that would show error in

respondent's determination of the penalty. Accordingly, we

sustain respondent's determination that petitioners are liable

for the accuracy-related penalty under 6662(a) for 1996. 

To reflect the foregoing and respondent's concessions,

Decision will be entered

under Rule 155.