T.C. Memo. 1996-447

UNITED STATES TAX COURT

JONATHAN B. GEFTMAN, Petitioner v. 

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22392-91. Filed September 30, 1996.

D's will formed 3 trusts: Trust A, Trust B, and

Trust C. P was the sole beneficiary of Trust C. Trust

C distributed $46,936 to P during his 1985 taxable 

year. Trust C's distributable net income consisted of

taxable income and tax-exempt income.

1. Held: P's gross income includes a portion of

the distribution based on the ratio between the taxable

items and the nontaxable items making up Trust C's

distributable net income.

2. Held, further, P is liable for the addition

to tax under sec. 6651(a), I.R.C.

3. Held, further, P is liable for the addition

to tax under sec. 6654(a), I.R.C.
- 2 -

1 Respondent also determined that petitioner was liable for

additions to tax under sec. 6653(a)(1) and (2), but these

additions have been conceded by respondent.

Petitioner initially disputed only the additions to tax and

not the deficiency in tax. Later, in his amended petition,

petitioner contested the deficiency as well as the additions to

tax.

Steven M. Kwartin, Martin J. Nash, Michael B. Axman, and 

William J. Palmer, for petitioner.

Stephen R. Doroghazi and Kenneth A. Hochman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Jonathan B. Geftman petitioned the Court to

redetermine respondent's determination of a $13,043 deficiency in

his 1985 Federal income tax, a $3,261 addition thereto under

section 6651(a), and a $754 addition thereto under section

6654(a).1

We must decide:

1. Whether amounts paid to petitioner, as sole beneficiary

of a trust, are includable in his 1985 gross income. We hold

that a portion of the amounts is. 

2. Whether petitioner is liable for an addition to tax

under section 6651(a). We hold that he is.

3. Whether petitioner is liable for an addition to tax

under section 6654(a). We hold that he is.
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2 In addition to those five individuals, the Will appointed

(continued...)

Unless otherwise indicated, section references are to the

Internal Revenue Code applicable to the year in issue. Rule

references are to the Tax Court Rules of Practice and Procedure. 

Dollar amounts are rounded to the nearest dollar.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulations and the exhibits attached thereto are

incorporated herein by this reference. Raymond Geftman

(Decedent), petitioner's father, died on February 28, 1983. He

resided in Fort Lauderdale, Florida, at the time of his death. 

Petitioner resided in Gladwyne, Pennsylvania, when he filed his

petition. He became 16 years old during 1985.

Three testamentary trusts were established pursuant to

Decedent's last will and testament (Will): Trust A, Trust B, and

Trust C. Trust A was funded with 40 percent of Decedent's

residuary estate. Trust B and Trust C were each funded with 30

percent of Decedent's residuary estate. The estate, trusts, and

petitioner all had different taxable years: The estate had a

fiscal year ending March 31, each of the trusts had a fiscal year

ending February 28, and petitioner was on the calendar year.

Pursuant to the Will, five individuals appointed as co-personal

representatives of the estate were also appointed as cotrustees

of the testamentary trusts.2
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2(...continued)

Edith Kermer, the income beneficiary of Trust B, as an additional

cotrustee for Trust B only. The will also appointed petitioner

as an additional cotrustee of Trust A, Trust B, and Trust C upon

his reaching the age of 21.

3 The Trust C instrument provides "twenty (20%) percent of

the principal of this Trust (based upon the then current market

value of the same) shall be distributed to the * * * [petitioner]

upon his successful completion of any state bar examination for

the admission to the practice of law." The Trust C instrument

further provides that any remaining principal of Trust C shall be

distributed to petitioner as follows:

(b) One-sixth (1/6) thereof upon attaining the

age of thirty (30) years.

(c) One-fifth (1/5) of the remaining balance upon

attaining the age of thirty-two (32) years of

age.

(d) One-fourth (1/4) of the remaining balance

upon attaining the age of thirty-four (34)

years of age.

(e) One-third (1/3) of the remaining balance upon

attaining the age of thirty-six (36) years of

age.

(f) One-half (1/2) of the remaining balance upon

attaining the age of thirty-eight (38) years

of age.

(g) The entire remaining balance thereof upon

attaining the age of forty (40) years of age.

Petitioner is the sole beneficiary of Trust C. The Trust C

instrument provides a schedule for the payment of the trust's

principal based on petitioner's age.3 However, the trustees

could invade the income or principal for petitioner under the

following circumstances:

During the term of this Trust, the Trustees shall

invade the current income or principal hereof for the

* * * [petitioner's] health, support, maintenance and

education, including, but not limited to, tuition,

books, room and board, while the * * * [petitioner] is

attending an institution of higher learning. The

Trustees shall also invade the current income or
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4 All beneficiaries under Trust A, Trust B, and Trust C

provided consents authorizing this transfer of municipal bonds. 

Since petitioner was a minor at the time of the transfer, his

mother executed a consent on his behalf.

principal of this Trust as reasonably needed to assist

the * * * [petitioner] in starting and operating any

lawful profession or business which, in the reasonable

opinion of the Trustees, will be a profitable venture

of the * * * [petitioner].

The Will further stated that

It is to be understood by my Personal Representatives

and Trustees that the primary purpose to be considered

throughout this Last Will and Testament and in

connection with any ambiguities or questions which may

arise under any of its terms is to provide for the

benefit of my son, JONATHAN B. GEFTMAN. No action

should be taken by my Personal Representative and

Trustees which would unreasonably detract from my son's

ability to receive the maximum income and principal to

which he is entitled under the terms of this Last Will

and Testament.

In August 1983, the Personal Representatives transferred

approximately $3 million of tax-free municipal bonds to brokerage

accounts at E.F. Hutton and Paine Webber, titled in the names of

the trusts.4 The trusts earned $252,408 of nontaxable interest

on these funds during their taxable year ended February 28, 1985. 

From December 1983 through September 7, 1984, the trustees

borrowed funds on margin from the same brokerage accounts and

transferred the funds to the estate, utilizing the municipal

bonds as collateral. The total borrowing on margin, as of

August 31, 1984, was $2,850,408.

The trusts lent all of the funds received from this

borrowing on margin to the estate or corporations owned by the
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estate. Although there were no repayment schedules, no fixed

maturity dates, and no notes with respect to the debts, the debts

were mentioned in a memorandum and in the trusts' journal

entries. The January 17, 1984, Memorandum of Combined Meeting of

the Personal Representatives and Board of Directors of the

corporations owned by the estate stated that: 

The actions necessary to pay or transfer estate assets

needed for the settlement was also ratified, however

there was lengthy discussion on the issue as to the

ratification of the borrowing from the stockbroker by

using trust assets as collateral as opposed to the sale

of estate assets to pay the sums due for settlement. 

The action which had been taken to borrow was ratified

* * *

Further, the trusts' journal indicates that mortgages were

transferred to satisfy the estate's "partial debt settlement". 

The interest due on the margin accounts was solely the legal

obligation of the trusts. The trusts would pay the margin

interest to E.F. Hutton, and the estate would pay the trusts

equal amounts as interest on their loans to the estate. The E.F.

Hutton statements for April through August 1984 reflect

handwritten notations indicating the estate's portion of the

margin interest incurred by the trusts. They also reflect 

deposits the subsequent months which correspond directly to the

handwritten notations, as shown in the following table:

 Handwritten Notations

 Indicating Deposits to the

Date Estate Interest E.F. Hutton Account

4/84 $16,086 ---
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5/84 20,538 $16,086

6/84 21,580 20,538

7/84 24,560 21,580

8/84 --- 24,560

 Total 82,764 82,764

Any payment of interest to the trusts by the estate resulted in a

wash transaction, whereby for each dollar that the trusts owed in

margin interest to E.F. Hutton they received exactly $1 from the

estate.

The estate transferred these funds to corporations

controlled by the estate. The corporations used the funds

borrowed from the trusts to develop condominiums. After the

corporations developed the condominiums, the corporations sold

them and held their first mortgages. The estate formed Berkley

Mortgage Corp. (Berkley) as a nominee corporation to hold title

in the mortgages and service the mortgage payments on these

instruments. At all times, the estate owned all interests in

Berkley. Berkley serviced mortgages, accepted payments for

mortgages, and accounted for the money to the beneficiaries of

the trusts. Berkley segregated mortgages on its books indicating

ownership of particular mortgages by the estate or the trusts. 

The trusts owned mortgages in La Playa and Blue Grass

developments during the trusts' fiscal year ended February 28,

1985. All mortgages on condominiums in the La Playa and Blue

Grass developments were taken in the name of Berkley as

mortgagee. Berkley transferred mortgages on the properties to

the trusts. The trusts' journal entries, for the fiscal year
- 8 -

ended February 28, 1985, reflect a $2,029,390 entry for the La

Playa Condominium mortgages and a $79,990 accrued mortgage

receivable for the mortgages through March 16, 1985. The journal

indicates that these mortgages were transferred from the estate

to the trusts as a "partial debt settlement". All transfers of

mortgages were accomplished by book entries on the records of

Berkley.

Berkley made intermittent transfers of funds to the trusts. 

Berkley made the following transfers to the trusts during the

fiscal year ended February 28, 1985:

Oct. 17, 1984 $12,000

Nov. 9, 1984 5,000

Jan. 4, 1985 25,000

Jan. 29, 1985 1,000

Feb. 5, 1985 14,000

Feb. 14, 1985 1,000

Feb. 20, 1985 1,000

 Total 59,000

Berkley's transfers of funds to the trusts were noted in the

trusts' ledger under the "Berkley Mortgage Corporation" account. 

The estate had no distributable net income (DNI) in its

fiscal years ended March 31, 1984 and 1985. For its fiscal year

ended March 31, 1985, the estate's Form 1041, U.S. Fiduciary

Income Tax Return, reported negative total income of $327,946. 

Trust C reported DNI of $101,890 on its Form 1041 for its taxable

year ending February 28, 1985.

During 1985, Trust C distributed $46,936 to petitioner, and

$52,101 remained in a brokerage account in petitioner's name on
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5 The parties have not explained respondent's indirect

method. The record indicates that respondent treated all of the

checks distributed to petitioner as taxable to him.

6 Petitioner alleges that the burden is on respondent

because respondent's reliance upon the Schedule K-1 is arbitrary

and erroneous. We disagree. The burden of proof is on

petitioner.

December 31, 1985. Petitioner did not file a Federal income tax

return for his 1985 taxable year. Respondent determined that all

$46,936 of petitioner's distribution was includable in his gross

income. Respondent's determination is based on an "indirect

method".5

OPINION

A. Income Tax on Distribution to Petitioner

The primary issues we must decide are whether and to what

extent Trust C's distribution of $46,936 to petitioner during

1985 is includable in his gross income for that year. Respondent

determined that the whole of the distribution was includable in

gross income because Trust C had sufficient DNI for its taxable

year ended February 28, 1985, as indicated on its Schedule K-1,

Beneficiary's Share of Income, Deductions, Credits, etc. 

Respondent's determination is presumed correct, and the burden is

on petitioner to disprove her determination.6 Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Laird v.

Commissioner, 85 F.2d 598, 599 (3d Cir. 1935), affg. 29 B.T.A.

196 (1933). Petitioner contends that Trust C's distribution to

him is not includable in his 1985 gross income because Trust C
- 10 -

did not have DNI for its taxable year ended February 28, 1985. 

We conclude that the trust did have DNI for that year and that a

portion of the distribution is includable in petitioner's gross

income based on the ratio between the taxable and nontaxable

items making up the trust's DNI. For tax purposes, trusts are in

certain circumstances treated as conduits, whose distributable

income is taxable to the beneficiaries. See Hammond v. United

States, 764 F.2d 88, 96 (2d Cir. 1985); Estate of Petschek v.

Commissioner, 738 F.2d 67, 70 (2d Cir. 1984), affg. 81 T.C. 260

(1983); see also United Cal. Bank v. United States, 439 U.S. 180,

199 (1978); Freuler v. Helvering, 291 U.S. 35 (1934); De Brabant

v. Commissioner, 34 B.T.A. 951, 955-956 (1936), affd. 90 F.2d 433

(2d Cir. 1937). 

Income distributed by a trust to a beneficiary is 

includable in the latter's gross income as provided in subchapter

J of the Internal Revenue Code. Secs. 61(a)(15), 652(a), 662(a);

see also Rogers v. Commissioner, T.C. Memo. 1980-495. In the

case of a so-called complex trust such as Trust C, the amount

includable in the beneficiary's income is limited by the trust's

DNI. Sec. 662(a). This income is includable in the taxable year

of the beneficiary within which the taxable year of the trust

ends. Sec. 662(c). 
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7 The regulations describe the effects of DNI as follows:

It limits the deductions allowable to estates and

trusts for amounts paid, credited or required to be

distributed to beneficiaries and is used to determine

how much of an amount paid, credited, or required to be

distributed to a beneficiary will be includable in his

gross income. It is also used to determine the

character of distributions to the beneficiaries. 

[Sec. 1.643(a)-0, Income Tax Regs.]

The DNI of an estate or trust limits the amount on which

beneficiaries can be taxed under section 662.7 DNI is an

"artificial concept" which ensures that trust beneficiaries are

not taxed on more than "the trust's actual net income." 

Estate of Petschek v. Commissioner, supra at 71. The Internal

Revenue Code defines DNI as the taxable income of the estate or

trust modified for deductions for distributions, deductions for

personal exemptions, capital gains and losses, extraordinary

dividends and taxable stock dividends, tax-exempt interest, and

income of foreign trusts. Sec. 643(a). DNI includes tax-exempt

interest under section 103, reduced by any amounts "which would

be deductible in respect of disbursements allocable to such

interest but for the provisions of section 265 (relating to

disallowance of certain deductions)." Sec. 643(a)(5). It is

usually not calculated until the end of the taxable year. See

Estate of Petschek v. Commissioner, supra at 71. 

Where the trust distributes an amount greater than its DNI,

each beneficiary includes in his or her gross income only "an

amount equivalent to his proportionate share of such
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distributable net income." Sec. 1.652(a)-2(b), Income Tax Regs. 

If a beneficiary has gross income under subchapter J, the

character of the income to the beneficiary is the same as the

character would be in the hands of the trust. Sec. 1.662(b)-1,

Income Tax Regs. Under the character rule, when a trust earns

income from various sources, the income is: 

treated as consisting of the same proportion of each

class of items entering into the computation of

distributable net income as the total of each class

bears to the total distributable net income of the

estate or trust unless the terms of the governing

instruments specifically allocate different classes of

income to different beneficiaries * * * [Id.]

Thus, to determine whether petitioner is subject to income

tax on his receipt of the $46,936 distribution, we must first

determine whether Trust C had DNI for its taxable year ended

February 28, 1985. If Trust C had DNI equal to or greater than

$46,936 for its taxable year ended February 28, 1985, then

petitioner must include a percentage of the $46,936 distribution

in his 1985 gross income, equal to the proportion of Trust C's

DNI that consists of taxable items. 

Respondent determined that the trusts earned income from

three sources during the years in question: (1) Interest on

municipal bonds, (2) interest on the loans from the trusts to the

estate, and (3) interest on the La Playa and Blue Grass

mortgages. Petitioner contests respondent's determination; he

alleges that Trust C did not have sufficient DNI for the year in

issue. Since respondent concedes that the trusts earned $252,408
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of interest on municipal bonds received from the estate, we

conclude that Trust C earned $75,722 of nontaxable interest

income, 30 percent of the total municipal bond interest. For the

reasons stated below, we find that Trust C had DNI of $75,722

from interest on municipal bonds, $24,829 from interest on the

loans from the trusts to the estate, and $27,179 mortgage

interest income. Since $52,008, or 41 percent of Trust C's total

DNI of $127,730, consists of taxable (i.e., nonexempt) income,

under the characterization rule, petitioner should include only

$19,111 in his gross income, 41 percent of the $46,936

distribution.

1. Interest on Loans Between the Estate and the Trusts

Respondent determined that the trusts earned $82,763 in

interest on loans from the trusts to the estate. Petitioner

argues that the trusts did not earn interest on any loan from the

trusts to the estate because the estate and the trusts did not

have a valid debtor/creditor relationship.

Petitioner further argues that even if there was a valid

debt, Trust C had no DNI because the estate did not have DNI for

the fiscal year in issue to distribute to Trust C. We agree with

respondent.

A transfer of money will be characterized as a loan for

Federal income tax purposes where, "at the time the funds were

transferred, [there was] an unconditional intention on the part

of the transferee to repay the money, and an unconditional
- 14 -

intention on the part of the transferor to secure payment." 

Haag v. Commissioner, 88 T.C. 604, 616 (1987), affd. 855 F.2d 855

(8th Cir. 1988); see also Haber v. Commissioner, 52 T.C. 255

(1969), affd. 422 F.2d 198 (5th Cir. 1970); Saigh v.

Commissioner, 36 T.C. 395, 419 (1961). Often there is no direct

evidence of a taxpayer's intention. Courts have focused on the

following objective factors to determine whether a bona fide loan

exists: "(1) The existence or nonexistence of a debt instrument;

(2) provisions for security, interest payments and a fixed

repayment date; (3) treatment of the funds on the corporation's

books; [and] (4) whether repayments were made". Haag v.

Commissioner, supra at 616 n.6; see United States v. Uneco, Inc.,

532 F.2d 1204, 1208 (8th Cir. 1976); In re Indian Lakes Est.

Inc., 448 F.2d 574, 578-579 (5th Cir. 1971); Haber v.

Commissioner, supra at 266; Slear v. Commissioner, T.C. Memo.

1987-395; Baird v. Commissioner, T.C. Memo. 1982-220;

Astleford v. Commissioner, T.C. Memo. 1974-184, affd. per curiam

516 F.2d 1394 (8th Cir. 1975). This is a factual issue, to be

decided upon all the facts and circumstances in each case. See

Estate of Chism v. Commissioner, 322 F.2d 956, 960 (9th Cir.

1963), affg. T.C. Memo. 1962-6; Electric & Neon, Inc. v.

Commissioner, 56 T.C. 1324, 1338-1339 (1971), affd. without

published opinion 496 F.2d 876 (5th Cir. 1974). The above

factors are not exclusive, and no one factor is determinative. 

See Kelley Co. v. Commissioner, 326 U.S. 521 (1946); Litton Bus.
- 15 -

Sys., Inc. v. Commissioner, 61 T.C. 367, 376-377 (1973);

Roschuni v. Commissioner, 29 T.C. 1193, 1202 (1958), affd. 271

F.2d 267 (5th Cir. 1959); Georgiou v. Commissioner, T.C. Memo.

1995-546; Wood Preserving Corp. v. United States, 233 F. Supp.

600, 605 (D. Md. 1964), affd. 347 F.2d 117 (4th Cir. 1965). The

factors are simply objective criteria helpful to the court in

analyzing all of the relevant facts and circumstances. 

Petitioners bear the burden of proving that a bona fide debt was

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

We will examine the four criteria in turn. 

a. Existence of a Debt Instrument

A debt instrument is defined as a "written, unconditional

promise to pay on demand or on a specified date a sum certain at

a fixed rate of interest". United States v. Uneco, Inc., supra

at 1210. The parties have stipulated that there are no

promissory notes reflecting any debt due from the estate to the

trusts. A valid loan may exist even where there is no formal

debt instrument. Joseph Lupowitz Sons, Inc. v. Commissioner,

497 F.2d 862, 867-868 (3d Cir. 1974), affg. T.C. Memo. 1972-238;

Gilbert v. Commissioner, 74 T.C. 60, 66 (1980); American

Processing & Sales Co. v. United States, 78 Ct. Cl. 353, 371 F.2d

842 (1967). Formal documentation is not controlling. Litton

Bus. Sys., Inc. v. Commissioner, supra at 376-377. This is

especially true in the case of related parties. American
- 16 -

Processing & Sales Co. v. United States, supra; Litton Bus. Sys.,

Inc. v. Commissioner, supra at 377.

Although we do not find that the parties created a formal

"debt instrument", we do find that the parties have evidenced an

objective expression of their intent to create a debt. See

Litton Bus. Sys., Inc. v. Commissioner, supra at 377. The

absence of formal notes does not preclude the court from treating

other written documentation as evidence of a bona fide debt. 

Baird v. Commissioner, supra at 395; see Fin Hay Realty Co. v.

United States, 398 F.2d 694, 697 (3d Cir. 1968). In Litton Bus.

Sys., Inc. v. Commissioner, supra, the Court found that a board

of directors' resolution directing that an advance account be

established as a debt obligation was sufficient to indicate

indebtedness between related parties. The memorandum contained

statements reflecting "borrowing from the stockbroker" by "using

trust assets as collateral" and was followed by a transfer of the

borrowed funds from the trusts to the estate. The journal entries

indicate the transfers of mortgages from the estate to the trusts

in "partial debt settlement". We find that these writings show

the presence of a valid debt and may be considered jointly to be

objective evidence of indebtedness. 

b. Security, Interest Payments, or Fixed Repayment Date

The parties have stipulated that there was no repayment

schedule and no fixed maturity date with respect to the debt. 
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Nor is there evidence of any security for the debt or of any

provision for interest on the debt.

However, the lack of these debt characteristics is not

determinative. Lack of formality may not necessarily negate the

presence of a loan when related parties transfer funds. See

Donisi v. Commissioner, T.C. Memo. 1967-62, affd. 405 F.2d 481

(6th Cir. 1968). Even if interest is not paid on a debt, a bona

fide debt may exist. Joseph Lupowitz Sons, Inc. v. Commissioner,

supra at 868; Gilbert v. Commissioner, supra; Shaken v.

Commissioner, 21 T.C. 785, 793 (1954). 

c. Treatment on the Trusts' Books

The trusts did not treat the $82,763 as interest payments on

their books. This lack of treatment on the trusts' books is not

conclusive. When "the same persons occupy both sides of the

bargaining table, form does not necessarily correspond to the

intrinsic economic nature of the transaction, for the parties may

mold it at their will with no countervailing pull." Fin Hay

Realty Co. v. United States, supra at 697. 

d. Repayments on the Loans

The estate made $82,763 of payments of interest on the

loans, by paying a portion of the margin interest charged on the

trusts' loan from E.F. Hutton. The handwritten notations on the

E.F. Hutton statements for April through August 1984 indicate

that the estate owed interest of a specified amount. The

notations correspond directly to the deposits made by the trusts
- 18 -

to the account of E.F. Hutton. The similarity between notations

and deposits verifies that the estate paid to the trusts interest

on loans from the trusts to the estate. The trusts did not earn

interest income on the municipal bonds or mortgages sufficient to

make the $82,764 of payments to E.F. Hutton during 1984. Thus,

the deposits made to E.F. Hutton could not have been made unless

the estate had transferred funds to the trusts. Petitioner has

not offered any contrary explanation to meet his burden. 

Accordingly, we find that the estate transferred $82,764 in

interest to the trusts.

Since we find that there were bona fide debts between the

estate and trusts and that the estate paid $82,764 in interest on

these debts, Trust C had interest income for its fiscal year

ended February 28, 1985, in the amount of $24,829, 30 percent of

$82,764. Notwithstanding the fact that the estate lacks DNI for

the subject taxable year, Trust C must include this amount in its

DNI for its 1985 taxable year since the estate paid interest to

Trust C in the latter's capacity as a creditor rather than

beneficiary of the estate. See Kitch v. Commissioner, 104 T.C. 1

(1995).

2. Interest on Mortgages

Income derived from property is generally included in the

gross income of the owner of the property. Helvering v. Horst,

311 U.S. 112 (1940); Blair v. Commissioner, 300 U.S. 5 (1937). 

The owner of property is the one who will reap the benefits of
- 19 -

ownership and bear the risks of ownership during the period at

issue. Alstores Realty Corp. v. Commissioner, 46 T.C. 363

(1966). Taxation is more concerned with a taxpayer's actual

control over the property than with title over the property. 

Frank Lyon Co. v. United States, 435 U.S. 561, 572 (1978);

Corliss v. Bowers, 281 U.S. 376, 378 (1930); Towlinsky v.

Commissioner, 86 T.C. 1009, 1041 (1986). 

Respondent determined that the trusts earned $90,596 from

mortgages which were serviced by Berkley. Petitioner argues that

the trusts did not earn income from the mortgages because the

mortgages were titled in the name of Berkley. We agree with

respondent.

We hold that the trusts owned the mortgages at issue because

Berkley transferred the mortgages to the trusts as part of a

"partial debts settlement" of the debts owed by the estate to the

trusts. Berkley serviced the mortgages on the condominium

developments. All mortgage payments from the La Playa and Blue

Grass developments were made to Berkley. Each month, Berkley

would collect all mortgage payments from the mortgagors. Then,

Berkley would prepare a schedule showing the mortgage number, the

total payment, and the principal and interest for each mortgage.

The trusts clearly owned the La Playa and Blue Grass

mortgages during the fiscal year ended February 28, 1985. On its

books, Berkley indicated that the trusts owned the La Playa and

Blue Grass developments. A Berkley work paper reflects a journal
- 20 -

entry under the heading "Trust A B & C (February Close)"

indicating $89,119 interest on La Playa and $1,477 interest on

Blue Grass, for a total of $90,596 during the fiscal year ended

February 28, 1985. Additionally, there is a journal entry in the

trusts' books which indicate the trusts acquired ownership of the

mortgages as part of the estate's "partial debt settlement". 

Since we conclude that the trusts were the true owners of the

mortgages, Trust C had mortgage interest for the taxable year

ended February 28, 1985, of $27,179, 30 percent of $90,596. This

amount is includable in Trust C's DNI for its taxable year ended

February 28, 1985.

B. Addition to Tax Under Section 6651(a)

Respondent determined an addition to tax under section

6651(a) for petitioner's 1985 taxable year. In order to avoid

this addition to tax, petitioner must prove that his failure to

file was: (1) Due to reasonable cause and (2) not due to willful

neglect. Sec. 6651(a); Rule 142(a); In re Stanford, 979 F.2d

1511, 1512 (11th Cir. 1992); Buelow v. Commissioner, 970 F.2d

412, 415 (7th Cir. 1992), affg. T.C. Memo. 1990-219; In re

American Biomaterials Corp., 954 F.2d 919, 922 (3d Cir. 1992);

Stovall v. Commissioner, 762 F.2d 891, 895 (11th Cir. 1985),

affg. T.C. Memo. 1983-450; United States v. Boyle, 469 U.S. 241,

245 (1985); Fleming v. United States, 648 F.2d 1122, 1124 (7th

Cir. 1981). A failure to file a timely Federal income tax return

is due to reasonable cause if the taxpayer exercised ordinary
- 21 -

business care and prudence, and, nevertheless, was unable to file

the return within the prescribed time. In re Stanford, supra at

1514; Fleming v. United States, supra at 1124; sec. 301.6651-

1(c)(1), Proced. & Admin. Regs. Willful neglect means a

conscious, intentional failure to file or reckless indifference. 

United States v. Boyle, supra at 245.

Petitioner argues that his failure to file was due to

reasonable cause because he was a minor during the year in issue

and was not responsible for his financial affairs. We do not

find petitioner's argument persuasive. His "youth and ignorance

at the time returns should have been filed" does not constitute

reasonable cause in the circumstances. Bassett v. Commissioner,

67 F.3d 29, 30 (2d Cir. 1995), affg. 100 T.C. 650 (1993). 

Petitioner introduced no evidence that his failure to file was

due to reasonable cause and not due to willful neglect. 

Petitioner received Schedule K-1 from Trust C informing him that

his portion of Trust C's interest during 1984 was $47,113. We

sustain respondent's determination under section 6651(a) for

petitioner's 1985 taxable year.

C. Addition to Tax Under Section 6654

Respondent further determined an addition to tax under

section 6654 for the year in issue, asserting that petitioner

failed to pay estimated tax. This addition to tax is mandatory

unless petitioner proves that he comes within one of the

exceptions provided in section 6654. In re Stanford, supra at
- 22 -

1514; Recklitis v. Commissioner, 91 T.C. 874, 913 (1988). 

Petitioner has failed to show that any of the statutory

exceptions apply. Accordingly, we sustain respondent's

determination under section 6654 for petitioner's 1985 taxable

year.

We have considered all arguments made by petitioner for a 

contrary holding and, to the extent not discussed above, find

them to be without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.