T .C. Su m m ary Op i n io n 2 02 1 -2 0

UNITED STATES TAX COURT

M AHER BASSILY AND NERM INE BASSILY, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 3 4 0 4-1 9S. Fi l edJ u l y 1 9, 2 0 21
.

M ah er Bas s i l y

an dNerm i n e Bas s il y , p ro s es e. Dan i el Z. Net tl es , fo r res p o n d en t .

SUM M ARY OPINION PANUTHOS, Sp eci al Tri al J u d g e: Th i s cas e was h eardp urs u an t t o th e p ro v is i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. 1 Pu rs u an t t o s ect i o n 7 4 6 3(b ), th e d eci si on t o b e en t eredi s n o t

1 Un l es s o t h erwi s e i nd i cat ed , s ub s equ en ts ect i on referen ces are t o t h e (co n ti n u ed ...) Served 07/19/21- 2
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rev i ewab l e b y

an y o t her co u rt , an d t h i s o p i n i o n s h al l n o tb e t reat ed as p reced en t fo r an y o th er cas e. In a n o t ice o f d efi ci en cy (NOD) d at edNo vem b er 1 3 , 2 0 1 8 , th e In t ern al Rev enu e Serv i ce (IRS o r res p o n d en t ) d et erm i n eda d efi ci en cy i n p et i t io n ers ’ Fed eral i nco m e t ax fo r t he t ax ab l e y ear 2 0 1 6 o f $ 2 0 0 . Al t ho u g h th e d efi ci en cy d et erm i n edi s $ 2 0 0 , res p o n d en tad ju s t eda fo rei gn t ax cred i to f $ 3 ,5 5 0 wh i ch p et i t i o n ers rep o rt edas a p ort io n o f t h ei r Fed eral i n co m e t ax wi t h h el ddu ri ng t ax y ear 2 0 1 6
. Aft er co n ces si o ns , 2 t h e i s s u es fo r d eci si o n are: (1 ) wh et h er p et i t i o n ers recei v edan d fai l edt o rep o rtt ax ab l e ret i rem en t i n co m e o f $ 47 9 ; (2 ) wh et h er p et i t i o n ers recei v edan d fai l edt o rep o rtp aym en t s i n l i euo f d i v i d en d s o f $ 1 1 2 ; an d (3 ) wh et h er p et i t i o n ers are en t i t l edt o a fo rei g n t ax cred i to f $ 3 , 5 50
.

1 (...co n t in u ed ) In t ern al Rev enu e Co d e i n effect atal l rel ev an tt i m es , an dal l Ru le referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re.

2 Pet i t i on ers co n ced e thatth ey recei v ed an d fai l edt o rep o rt t ax ab l e d i v i d en d s o f $ 9
.- 3
- Back gro u n d So m e o f t h e fact s h av e b een s ti p u lat ed , an dwe i n co rp o rat e t h e s t i p u l at i o n
an d acco m

pan y i n g ex h i b i t s b y

th i s referen ce. Pet it i on ers are m arri edan dl i v edi n Cal i fo rn i a wh en th e p et i t i o n was t i m el y fi l ed
. Pet i t i o ner M ah er Bas s il y

jo i n tl y o wn edtwo b ro k erag e acco u n t s , o n e wi t h each o f h i s s on s , Dav i d Bas s il y an dDan i el Bas s i l y . Each o f th e b ro kerag e
acco u n t s g en erat edfo rei g n-s o u rce i n co m e du ri ng t ax y ear 2 0 1 6. Th e Can ad i an Go v ern m en twi t h h el da t o t al o f $ 3 ,5 5 0 i n t ax es fro m th e i n co m e earn edo n th e b ro k erag e acco u n t s i n 2 0 1 6
. Pet i t i o ners t i m el y

fi l eda jo i n tFo rm

1 0 40 , U.S. In d i v i du al In co m e Tax Retu rn , fo r t he 2 0 1 6 t ax y ear, b u tth ey d i dn o trep o rtan y

fo rei g n s ou rce i nco m e o n th ei r i n co m e t ax return . In st ead , al l o f t h e fo rei g n s o u rce i n co m e rel at edt o th e b ro k erag e acco u n t s t h atp et it i o n er M ah er Bas s i l y o wn edjo i n t l y

wi t h h i s s o n s was rep o rt edo n h i s s o n Dan i el Bas s i l y ’ s 2 0 1 6 Fed eral i n co m e t ax retu rn . Des p i t e t h e fact th atp et i t i o n ers d i d n o t rep o rtan y o f t h e fo rei g n s ou rce i n co m e earn edfro m

th e b ro k erag e acco u n t s o n th ei r t ax retu rn , th ey ap p aren t l y at t em p t edt o m ak e an el ect i o n t o cl ai m a cred i tfo r fo rei g n t ax es p ai d rel at edt o th e b ro k erag e acco u n t s b y

at t ach i n g a Fo rm

1 1 1 6 , Fo rei g n Tax Cred i t(In di v i du al , Es t at e, o r Tru s t ), t o thei r Fo rm 1 0 4 0 . Onth e Fo rm

1 1 1 6 p et i ti o n ers rep o rt ed- 4
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$ 3 ,5 5 0 i n t o t al fo rei g n t ax es p ai do r accru eddu ri n g t h e 2 0 1 6 y ear an dzero fo rei g n
s o u rce i n co m e. Pet i t io n ers rep o rt eda fo rei g n t ax cred i t o f zero o n b o th the Fo rm 1 1 1 6 an dth e Fo rm 1 0 4 0 fo r t h e y ear i n i ss u e. Rat h er t h ancl ai m t h e fo rei g n t ax cred i to n the l i n e d es i g n at edfo r t h atcred i t
o n th e t ax retu rn , p et it i o n ers ad d edth e $ 3 ,5 5 0 o f fo rei g n t ax es t o th e t o t al Fed eral i n co m e t ax es wi t h h el das rep o rt ed o n Fo rm 1 0 4 0. Th us , wh i l e p et i t i o n ers ’ Fed eral t ax wi th h o l d i n g am o u n tedt o $ 4 0 ,9 8 5 , th e Fo rm 1 0 4 0 refl ect ed wi t h ho l d i n g o f $ 4 4 ,5 3 5 (t he am ou n to f Fed eral wi t h h o ld i n g p l u s th e $ 3 ,5 50 i n fo rei g n t ax es wi th h el db y

th e Can ad i an Go v ern m en t ). Res p o n d en tco n duct edan ex am i n at i o n o f p et i t i o n ers ’ retu rn fo r 2 0 1 6 . On th e b as i s o f t h e th i rd -p art y -rep o rt edi n co m e i nfo rm at i o n , res p o n d en tad ju s ted p et i t i o n ers ’ rep ort ed i n co m e t o refl ectu n rep o rt edi n co m e t h ey recei vedi n cl u d i n g : (1 ) t ax ab l e ret irem en t i n co m e o f $ 47 9 , (2 ) d iv i d en d s recei v edo f $ 9 , an d (3 ) p aym en t s i n l i eu of d i v i d en d s recei v edo f $ 1 12 . As a res ul t, res p on d en ti s s u ed th e NOD d at edNo v em

b er 1 3 , 2 0 1 8 , fo r t h e 2 0 1 6 t ax y ear. Res p on d en t d et erm i n eda d efi ci en cy

i n p et it i o n ers ’ Fed eral i n co m e t ax o f $ 2 0 0 , d i s al l o wed p et i t i o n ers ’ cl ai m edfo rei g n t ax cred i to f $ 3,5 5 0 , an dredu cedth e am o u n to f Fed eral i nco m e t ax p et i t i o n ers rep ort edwi t h h el d b y th e am o u nto f t h e d i s al l o wed fo rei gn t ax cred it
.- 5
- Di s cu ss i o n I. Bu rd en o f Pro o f In g en eral , th e Co m

m i s s i o n er’ s d et erm i n at i o n s etfo rt h i n a n o t i ce o f d efi ci en cy

i s p res um edco rrect , an d t h e t ax p ay er b ears th e b u rd en o f p ro v i ng th at th e d et erm i n at i o n i s i n erro r. Ru l e 1 4 2 (a); W el ch v . Hel v eri n g, 2 9 0 U.S. 1 1 1 , 1 15 (1 9 3 3). Li k e d edu ct io ns , t ax cred i t s are a m at t er o f l eg i s l at i v e g race, an dth e t ax p ay er b ears th e b u rd en o f p ro v i n g th at h e o r s he i s en t i tl edt o an y cred i t cl ai m ed . See Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m m is s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2); Seg el v . Co m

m i s si o ner, 8 9 T.C. 8 1 6 , 8 4 2 (1 9 87 ). Tax pay ers m us tal s o
m ai n t ai n ad equ at e reco rd s t o s ub s tan t i at e t h e am o un t s o f an y cred i t s . See s ec. 6 0 0 1 ; s ec. 1
. 6 0 0 1 -1 (a), In co m e Tax Reg s . Pu rs uan tt o s ect i o n 7 4 9 1(a), t h e b urd en o f p ro o f as t o fact u al m at t ers s h i ft s t o the Co m

m i s s io ner u n d er cert ai n ci rcu m s t an ces . Pet it i o n ers d i dn o tal leg e o r
o th erwi s e s h o w th at sect i o n 7 4 9 1 (a) ap p l i es . See s ec. 7 49 1 (a)(2 )(A) an d (B). Th erefo re, p et it i o n ers b ear t h e b u rd eno f p ro o f. See Ru l e 1 4 2 (a). II. Un rep o rt edIn co m e Gro s s i n co m e i n cl u d es al l i n co m e fro m wh at ev er s ou rce d eri v ed . Sec. 6 1 (a). In ad d i t i o n t o the co nces s i o n o f $ 9 n o t eds upra n o t e 2 , p et i t i o n ers co n ced e th atth ey recei vedp aym en t s t o t al i n g $ 5 9 1 thatth ey d i dn o trep o rto n th ei r 2 0 1 6- 6
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Fed eral i nco m e t ax return ; h o wev er, t h ey arg u e t h at t he p aym en t s were n o t req u i redt o b e i ncl u d edas i n co m e. Sp eci fi cal l y p et i t i o ners arg ue t hat$ 4 79 i n
u n rep o rt edret i rem en ti n co m e rel at ed t o a ro l l o v er o f ret i rem en ts av i n g s fro m o ne p l an i n t o an o th er an d$ 1 1 2 i n u n rep o rt edp aym en t s i n l i euo f d i v i d en d s rel at edt o a refu ndo f fees p ai d i n t o a M erri l l Ly n ch i n v es t m en t acco un tth atp et i t i o ner M ah er Bas si l y o wn edjo in t l y

wi t h h i s s o n Dan i el
. Wh ere t h e s t i p u l at edan du n di s pu t edfact s i n a cas e es t ab l is h u n d errep o rt i n g
o f i n co m e b y

t ax p ay ers , i ti s th e t ax p ay ers ’ b u rd en t o co m e fo rwardwi t h ev i d en ce th atth ey are en t i t l edt o ad d i ti o nal o ffs et s o r d edu ct i on s . See, e.g ., Un it ed St at es v . M arab el l es , 7 2 4 F.2 d1 3 7 4 , 1 3 7 9 n .3 (9 t h Ci r. 1 9 8 4 ); El w ert v . Un i t edSt at es , 2 3 1 F.2 d9 2 8 , 9 3 3 (9 t h Ci r. 1 9 5 6 ). Th e Co m m i ss i o ner n eedo n l y es t ab l is h th at t ax p ay ers recei v edu nrep o rt edi n co m e an d t h atn o n d i scl o s u re res ul t edi n t ax d efi ci en ci es . Un i t ed St at es v . Cam p b el l , 3 5 1 F.2 d3 3 6 , 3 3 8 -3 3 9 (2 dCi r. 1 9 6 5 ); Barrag an v . Co m

m i s s i o n er, T.C. M em o . 1 9 9 3 -9 2 , aff’ dwi t h o utp ubl i s h edo p i n i o n , 6 9 F.3 d5 4 3 (9 t h Ci r. 1 9 9 5 ). As n o t edab o ve, res p on d en th as es tab l is h ed t h at p et i t i o n ers recei v edu n rep o rt edi n co m e an dth at t h e u n rep o rt ed i nco m e res ul t edi n a t ax d efi ci en cy . Pet i t i o n ers h av e n o tp res en t edan y ev i d en ce t h atthe afo rem en t i o n edu n rep o rt edi n co m e i t em s were n o n tax ab l e. W i t h res p ectt o th e
u n rep o rt edret i rem en ti n co m e, p et i t i o n ers h av e n o tp res en tedev i d en ce th atth e- 7
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i n co m e was s ub

jectt o t ax -free ro l lo v er t reat m en t . See s ecs . 4 02 (c)(4 ), 4 03 (a)(4 ), (b )(8 ), 4 0 8 (d )(3 )(A). W i t h res p ectt o th e u n rep o rt edp aym en t s i n l i eu o f d i v i d en d s, p et i t io ners hav e n o tp res en t edan y ev i d en ce t h atthe i n co m e was a refu ndo f fees
. Acco rd i n g l y , we s u s t ai n res p o n d en t ’ s d et erm i n at i o ns wi t h res p ect t o al l u n rep o rt edi nco m e i t em s . III. Fo rei g n Tax Cred i t Sect io n 9 0 1 (a) g en eral l y

al lo ws a t ax p ay er a cred i tfo r fo rei g n i nco m e t ax es p ai d , s ubjectt o th e l i m i t at i o n i m p o sedb y s ect i o n 9 0 4 , wh i ch i n tu rn l i m i t s th e cred i tt o th e am ou n to f U.S. t ax o n fo rei g n i n co m e. See g en eral l y s ecs . 9 0 1, 9 0 4
. Al th o u g h th ey

d i ds o i n an i n co rrect m an n er, p et i t i o n ers at t em p t edt o cl ai m

a fo rei gn t ax cred ito n t h ei r 2 01 6 i n co m e t ax retu rn an d h av e p u tth e cred i tati s s u e i n thi s cas e. Th erefo re, wh i l e we d o n o th av e ju ri s d i ct i o n t o en t er a d eci si o n as t o th e ad ju s t m en tt o Fed eral i n co m e t ax wi th h o l d i n g , wh i ch i s n o ts ub ject t o d efi ci en cy

p ro cedu res , s ee Breg i n v . Co m m i s si o n er, 7 4 T.C. 1 0 9 7 , 1 1 0 2 (1 9 8 0 ) (d en y i n g an IRS m o t io n fo r l eav e t o am en dan s wer t o d is al lo w o v ers tat ed s ect i o n 3 1 cred i t s , ru l i ng th ata “ cl ai m b as edo n * * * o v ers t at em en to f t h e t ax es wi t h h el d
* * * d o es n o tco n s t i tu t e a d efi ci en cy wi t h i n t h e m ean i n g o f s ect i on 6 2 1 1”), we d o h av e juri sd i ct i o n t o rev i ew p et i t i o n ers ’ en t i t l em en tt o a fo rei g n t ax cred i t , s ee Ax- 8
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v . Co m m i s s i o n er, 1 4 6 T.C. 1 53 , 1 6 0 (2 0 1 6) (“ Tax Co u rtd efi ci en cy l it i gat i o n m ay
ex t en db ey o n di s s u es rai s edi n th e n o t i ce o f d efi ci en cy .”). A fo rei g n t ax cred i ti s al l o wedo n l y t o t h e ex t en t t h atth e t ax p ay er can p ro v e i t w as “p ai d o r accru ed ” wi th res p ectt o i n co m e fro m s ou rces wi t h o u tth e Un i t ed St at es . Sec. 9 0 5 (b )(1 ) an d(2 ). Th e p urp o s e o f s ect i o n 9 0 1 i s t o p ro vi d e rel i ef fro m U.S. t ax at i on wh ere i n co m e al read y h as b een t ax edb y

an o t her co u n try . Perk i n -El m er Co rp . & Subs . v . Co m m i s s i o n er, 1 0 3 T.C. 4 6 4 , 4 7 0 (1 9 9 4 ). Sect i o n 9 0 4 (a) p ro v i d es th atth e am o u nto f t h e fo rei g n t ax cred i t“ s h al l n otex ceed th e
s am e p ro p ort io n o f t h e t ax ag ai n s twh i ch s uch cred i ti s t ak en wh i ch the t ax p ay er’ s t ax ab l e i n co m e fro m

s o urces wi t h o u tth e Un i t edSt at es * * * b ears t o h i s en t i re t ax ab l e i n co m e fo r th e s am e t ax ab le y ear.” Th i s l i m i t at i o n was en act edt o p rev en t fo rei gn t ax cred it s fro m

el i m i n at i n g U.S. t ax o n U.S.-s ou rce i n co m e. Perk i n El m er Co rp . & Sub s . v . Co m m i s s i o n er, 1 0 3 T.C. at4 7 0 -4 7 1
. Pet i t i o ners arg ue t h atth ey are en t i t l edt o a cred ito f $ 3 ,5 5 0 fo r 2 0 16 ari s i n g fro m fo rei g n t ax es p ai d o n fo rei g n -s o u rce i n co m e rel at edt o b ro k erag e acco u n t s th atp et i t i o n er M ah er Bas s i l y jo i n t l y o wn edwi t h h i s s o n s . Res p o n den ti n tro du ced i n t o ev i d en ce a co m

p u t er g en erat ed“ W ag e an dIn co m e Tran s cri p t” s h o wi n g d at a fro m al l th e i nfo rm at io n retu rn s th atth e IRS recei v edfo r 2 0 1 6 wi t h res p ectt o p et i t i o n er M ah er Bas s i l y . Th e W ag e an dIn co m e Tran s cri ptrefl ect s th at- 9
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res p o n d en t recei v edfro m th i rd -p art y p ay o rs Fo rm s 1 0 9 9 -DIV, Di v i d en d s an d Di s tri b u t i o n s , rep o rt i n g th atfo rei g n t ax es t o t al in g $ 3,5 4 9 were p ai db y jo i n t i n v es t m en tacco u n ts fo r 2 0 16 . Th e W ag e an dIn co m e Tran s cri pt s d o n o ti n d i cat e th e am o un to f fo rei g n -s o u rce i nco m e p et i t i o n er M ah er Bas s i l y recei v ed
. Pet i t io n ers n ei t h er rep ort edrecei p to f fo rei g n -s o u rce i n co m e o n t h ei r 2 0 1 6 Fed eral i n co m e t ax retu rn n or i n t ro du cedev i d en ce es t ab l i sh i n g th atth ey recei v eds u ch i n co m e. Al l o f t h e fo rei g n -s o u rce i n co m e rel at edt o th e jo i n ti n v es t m en tacco u n t s
was rep o rt ed o n p et i t i o n ers ’ so n Dan i el ’ s 2 0 1 6 Fed eral i n co m e t ax retu rn . Res po n d en td i dn o tm ak e an y ad ju s t m en t th at wo u l dreq u i re p et i t io n ers t o i n cl u d e al l o r s om e p ort io n o f th e fo rei g n -s o u rce i n co m e o n th ei r retu rn . Attri al p et i t i o n er M ah er Bas s i l y

ex p l ai n edth ath e rep o rt edth e i n co m e o n h i s s o n Dan i el ’ s i n co m e t ax return b ecau s e h i s s o n d i dn o th av e a Fed eral i n co m e t ax l i ab i l i t y fo r t h e 2 0 1 6 t ax y ear. 3 Pet i ti on ers d i dn o trep o rtan y fo rei g n -s o u rce i n co m e o n th ei r 2 0 16 t ax retu rn . Th erefo re, t h e rat i o o f p et i t i o n ers ’ fo rei gn t ax ab le i n co m e t o th ei r t ot al t ax ab l e i n co m e fo r t ax y ear 2 0 16 i s zero . Pu rs uan tt o t h e l i m i t at i o n i n s ect i o n 9 0 4 (a), t h e am o u n t o f fo rei g n t ax cred i tp et i t i o n ers m ay cl ai m fo r t ax y ear 2 0 1 6 i s

3 W e h av e l on g h el dth ati n co m e i s t ax ab l e t o th e p ers o n wh o earn s i tan d t ax p ay ers m ay n o ts h iftth e i n ci d en ce o f t ax at i o n t o a p ers o n o r en t i t y h av i n g l es s o r n o t ax l i ab i li t y . See, e.g ., Frey v . Co m m i s s io n er, T.C. M em o . 2 0 1 9 -6 2 , at* 7
.- 1 0 -

zero . Onth i s b as i s , we h o l d t h atp et i ti o ners are n o ten ti t ledt o a cred itfo r fo rei g n t ax p ai do r accru edfo r t h e y ear i n i s s u e. IV. Co n cl u si o n In reach i n g o u r h o ld in g s h erei n, we h av e co n s id eredal l arg u m en t s m ad e b y th e p art i es , an d to th e ex t en tn otm en t io n ed ab o v e, we fi n d t h em t o b e m o o t , i rrel ev an t , o r wi th o u tm eri t . To refl ectthe fo reg o i n g co n cl u s i o n s , Deci s i o n wi ll b e en t eredfo r
res p o nd en t .