1 Petitioner was represented at the trial of this case by

Beatriz E. Meza. Ms. Meza was allowed to withdraw her appearance

on behalf of petitioner on Nov. 13, 1996.

T.C. Memo. 1997-308

UNITED STATES TAX COURT

ALEJANDRINA DE AYCARDI, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11922-95. Filed July 3, 1997.

Alejandrina De Aycardi, pro se.1

Susan G. Lewis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

SWIFT, Judge: Respondent determined deficiencies and

additions to tax for 1987, 1988, and 1989 with respect to

petitioner's Federal income taxes as follows:
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Addition to Tax

Sec.

Year Deficiency 6651(a)(1) 

1987 $17,835 $4,459

1988 21,529 5,382

1989 36,911 9,228

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.

The issue for decision is whether certain income that

petitioner received in 1988 and 1989 qualifies under section

871(h) as nontaxable interest on qualified "portfolio debt

investments". 

FINDINGS OF FACT

Many of the facts have been stipulated and are so found. At

the time the petition was filed and during the years in issue,

petitioner resided in Ocana, Colombia. 

From 1937 to 1941, petitioner attended college in the United

States and during those years petitioner obtained a U.S. Social

Security number. In 1941, petitioner returned to Colombia. 

Since 1941, petitioner has resided in Colombia.

In November of 1988, with assistance from a sister who

resided in the United States, petitioner invested $1,015,489 in a

mutual fund with respect to which petitioner received U.S. source

interest and dividend income. 
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Petitioner did not file a Form W-8, Certificate of Foreign

Status, that is normally required in order to qualify interest

received by a nonresident of the United States for nontaxable

treatment under section 871(h). 

During 1988 and 1989, petitioner received $8,414 and

$106,682, respectively, in dividend income with regard to the

above $1,015,489 mutual fund investment. Because petitioner had

provided her Social Security number to the mutual fund and

because petitioner had not provided a Form W-8 to the mutual

fund, the mutual fund treated petitioner as a U.S. resident and

filed with respondent Forms 1099-INT and DIV reflecting the

interest and dividend income paid to petitioner in 1988 and 1989. 

For 1988 and 1989, petitioner did not file Federal income

tax returns. For 1988 and 1989, respondent prepared

substitute income tax returns on petitioner's behalf using

information set forth in the Forms 1099-INT and DIV that were

filed with respondent by the mutual fund. 

On the substitute income tax returns, respondent treated

petitioner as a U.S. resident and calculated the tax owed by

petitioner based on tax rates applicable to U.S. residents. 

Respondent treated the interest and dividend income that

petitioner received in 1988 and 1989 as taxable, and respondent

used the standard 20-percent backup withholding rate in

calculating petitioner's tax liability for each year. On brief,

respondent concedes that the interest income that petitioner
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received on her mutual fund investment qualifies as exempt from

U.S. tax.

OPINION 

Generally, section 871(a)(1)(A) imposes a 30-percent

withholding tax on certain income received by nonresident aliens

from sources within the United States. Section 871(h), however,

treats portfolio debt interest as nontaxable and not subject to

the 30-percent withholding tax under section 871(a)(1)(A). 

Dividends received, however, are not eligible for this nontaxable

treatment under section 871(h). 

Exemptions, exclusions, and other provisions treating income

as nontaxable occur as a matter of legislative grace and should

remain strictly construed. Helvering v. Northwest Steel Rolling

Mills, Inc., 311 U.S. 46, 49 (1940); Erie Endowment v. United

States, 316 F.2d 151, 153 (3d Cir. 1963). A taxpayer is entitled

to an exclusion only if there is clear provision for the

favorable tax treatment. Templeton v. Commissioner, 719 F.2d

1408, 1411 (7th Cir. 1983), affg. James v. Commissioner, T.C.

Memo. 1982-456. 

Reasonable reliance on an agent may constitute a defense to

penalties but not to the underlying tax liability. United States

v. Boyle, 469 U.S. 241, 252 (1985).

Generally, taxpayers bear the burden of proving by a

preponderance of the evidence that respondent's determinations
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are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). 

Respondent, however, bears the burden of proof with regard

to new issues and increases in the deficiency. Rule 142(a). The

question of what constitutes a new issue depends, among other

things, on whether different evidence must be presented than that

relating to the issues raised in the original notice of

deficiency. Achiro v. Commissioner, 77 T.C. 881 (1981).

Petitioner argues that the mutual fund misclassified her

status as a U.S. resident for Federal income tax purposes and

incorrectly invested her $1,015,489 in a mutual fund on which

both interest and dividends were earned. Petitioner argues that

(due to this alleged misclassification and incorrect mutual fund

into which her funds were invested) she received from the mutual

fund dividend income of $8,414 and $106,682 in 1988 and 1989,

respectively, instead of interest. Petitioner emphasizes that

had the dividends been received as interest, the interest would

have been treated as nontaxable under section 871(h). Petitioner

therefore argues that the dividend income that she did receive

should now be reclassified as interest and treated as nontaxable

for Federal income tax purposes under section 871(h). 

As explained, respondent concedes that the actual interest

that petitioner received on her mutual fund investment qualifies

as nontaxable under section 871(h).
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Respondent now argues that the dividend income petitioner

received on her mutual fund investment does not qualify as

nontaxable interest under section 871(h), and -- because it has

now been determined that petitioner was not a U.S. resident --

respondent argues that the dividend income of $8,414 and $106,682

that petitioner received should be treated as taxable U.S. source

income to petitioner and subject to tax at the 30-percent

withholding rate applicable to taxable U.S. source income of

nonresident aliens. 

Also, because respondent does not want to assert an

increased deficiency and therefore shift the burden of proof

under Rule 142(a), respondent -- on the dividend income --

asserts only the original tax deficiencies that were determined

to be applicable thereto based on the tax rates applicable to

U.S. residents (namely, the 20-percent backup withholding rate). 

Respondent's taxation of petitioner on the dividend income

as a nonresident alien but at the 20-percent U.S. backup

withholding rate (so as to avoid increasing the tax deficiency

attributable to the dividend income) does not constitute a new

issue. The assertion of a new theory which merely clarifies or

develops the original determination without being inconsistent

and without increasing the amount of the deficiency generally

will not be treated as a new issue. Achiro v. Commissioner,

supra at 890. 
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 As a nonresident of the Unites States, petitioner's

dividend income received on the mutual fund investment is taxable

under section 871(a)(1)(A) and normally would be taxed on the

basis of the 30-percent withholding tax applicable to nonresident

aliens. The dividend income that petitioner received does not

qualify under section 871(h) as nontaxable U.S. source interest

income received by a nonresident alien. 

Generally, we treat facts as they happened, not how they

could or might have happened in the ideal situation for a

taxpayer. See Estate of Legg v. Commissioner, 40 B.T.A. 1074,

1076 (1939), revd. and remanded on another issue 114 F.2d 760

(4th Cir 1940). In 1988 and 1989, in regard to the amounts in 

controversy, petitioner received dividend income, not portfolio

debt interest income that would have been nontaxable under

section 871(h). Petitioner failed to file a Form W-8 to notify

the withholding agent of her nonresident alien status, and

petitioner has not presented evidence that proved either that the

deficiency determinations were incorrect or that petitioner

qualifies under section 871(h) for a tax exemption on her

dividend income. 

 Petitioner's argument that she relied on the mutual fund to

properly invest her $1,015,489 to ensure that she was not taxed

on any income earned on her investment is not persuasive. 

Reasonable reliance on an agent may constitute a possible defense
- 8 -

to penalties but not to the underlying tax. United States v.

Boyle, 469 U.S. 241, 252 (1985).

We conclude that the dividend income petitioner received on

her mutual fund investment does not qualify as nontaxable

interest income under section 871(h). For consistency with the

rate of tax as applied in respondent's notice of deficiency, we 

-- at respondent's request -- sustain respondent's imposition of

the 20-percent withholding tax rate on petitioner's dividend

income.

To reflect the foregoing,

Decision will be entered

under Rule 155.