TAX COURT OPINION

Case: Jeannette E. Rideau
Docket Number: 22401-10S
Judge: Carluzzo
Opinion Type: bench
Filed: 11/29/2011
Pages: 9

UNITED STATES TAX COURT 20 217 WASHINGTON, D . C . JEANNETTE E . RIDEAU, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Re spondent . ) ) ) ) ) ) ) ) ) Docket No. 22401-10S O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is . ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of transcript of Trial Judge Lewis R. Carluzzo at Los Angeles, California, on October 20, 2011, containing his oral opinion rendered at the above case before Special the conclusion of trial. the pages of the the trial of findings of fact and In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. November 29, 2011 SERVED NOV 2 9 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Special Trial Judge Lewis R. Carluzzo 3 , October 20, 2011 Rideau v. Commissioner . Docket No. 22401-10S THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents..the Court's oral findings of fact and opinion. This proceeding for the redetermination of a deficiency is conducted as a Small Tax Case pursuant to the provisions of sect'ion 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of '1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise noted, subsequent section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for 2007. Jeannette E. Rideau appeared pro se. Aaron T. Vaughan appeared on behalf of respondent. In a notice of deficiency dated July 12, 2010, respondent determined a $379 deficiency in petitioner's 2007 Federal income tax (the notice). Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The issue for decision.is whether petitioner understated the interest income reported on her timely filed 2007 Federal income tax return. Resolutiön of the issue depends upon the proper year that certain interest earned on an interest bearing certificate of deposit owned by petitioner during the year in issue is includable in her income. Some of the facts have been stipulated and are so found. At the time the petition was filed, petitioner resided in California. . Funds inherited by petitioner long before the year in issue have, over the years, been invested in various certificates of deposit at various financial institutions. Routinely as one certificate of deposit matured, petitioner invested all or a portion of the proceeds of the maturing certificate of deposit into a new one. This pattern repeated itself in February 2006. Using funds from a certificate of deposit that matured that month, petitioner purchased a certificate of deposit offered by LaSalle Ba k (the LaSalle CD) through Edward D. Jones & Co. (EdwardJones) apparently at the recommendation of an investment representative employed there. The purchase of the LaSalle CD is evidenced by a document entitled "Trade Confirmation" is ued by Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 EdwardJones and processed on February 17, 2006. Petitioner does not recall whether any other do uments evidencing the transaction were created by EdwardJones or signed by her at the time. As she observed during her testimony, the transaction took place more than five years ago, and although the transaction is not insignificant her memory of the event is less than complete. The exact nature of the LaSalle CD cannot be determined from what has been submitted. According to the above-referenced Trade Confirmation: (1) The "principal amount" of the LaSalle CD was $79,000; (2) the LaSalle CD is dated February 22, 2006; (3) interest earned on the LaSalle CD is at the rate of 4.75 percent and. is due on February 22, 2007; nd (4) the amount shown as "yield to maturity" is 4.75 percent. Other entries and statements on the Trade Confirmation are not relevant to the issue here under consideration, or if relevant, have not been explained. Simple math shows that 4.75 percent of $79,000 equals $3,752.50, which, by no coincidence, 1s the amount of interest here in dispute. That is the amount also shown in various records maintained by EdwardJones (sometimes rounded down to "$3,752') as Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 1.3 14 15 16 17 18 19 20 21 22 23 24 25 "taxable interest" that accrued in February 2007 on the LaSalle Bank CD. Records consisting of monthly account statements issued by EdwardJones and no doubt available to, if not received by petitioner, also show that no interest on the LaSalle CD accrued prior to February 2007. When the LaSalle CD matured in February 2007, petitioner used some or all of the principal and interest from that CD to purchase yet another certificate of deposit offered by First Community Bank. Neither the interest income reported on petitioner's 2006 Federal income tax return ($544.06), nor the interest income reported on petitioner's 2007 Federal income tax return ($3,357.84) is attributable to the LaSalle CD. In the notice respondent increased petitioner's 2007 income by $3,752, that is, the interest earned on the LaSalle CD. It is clear that for Federal income tax purposes the definition of income includes interest income, see section 61(a) (4), and petitioner does not suggest otherwise. Furthermore the parties agree that interest income earned on a certificate of deposit is taxed in the year that the interest accrues. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 According to petitioner, only a portion of the interest earned on the LaSalle CD, specifically $625.42, should be includable in her 2007 income because only that amount accrued during that year. The balance, $3,127.08, according to petitioner, accrued in 2006 and is includable in her income for that year. Technicalities and petitioner's sinherity aside, her- position in this regard might be more attractive had she actually reported the interest in that manner . But she didn' t . As it turned out , none of the interest income earned on the LaSalle CD has been reported on a Federal income tax return filed by her. She excuses her failure to do so, in part, because of complications suffered as a result of Hurricane Katrina, and we sympathize with her on the disruptions to her life caused by that hurricane. If there were an accuracy related penalty imposed on the underpayment of tax caused by her failure to report the interest income, her explanation would be more relevant . But respondent has not imposed an accuracy- related penalty here, and we are not so conceráed with the reasons why she failed to report the LaSalle CD interest income as much as we are concerned with the deficiency that results from the omission. In support of her position that the interest Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 income on the_ LaSalle CD should be apportioned ás described above, petitioner relies upon: (1) Her general understanding, based upon her experiences with other certificates of deposit over the years, of how interest income earned on a certificate of depo it accrues and is subject to Federal income tax, and (2) a document dated May 10, 2010, apparently created at petitioner's request by the EdwardJones investment representative who recommended the purchase of the LaSalle CD (the 2010 EdwardJones document). Petitioner's experiences with other certificates of deposit, however, tell us little about how, or more properly when the interest on the LaSalle CD accrued. A certificate of deposit earns and accrues interest according to its unique terms, and the terms of the LaSalle CD, to the extent pla ed in the record, show that all of the interest accrued in February 2007. The 2010 EdwardJones document relied upon by petitioner that suggests otherwise is hardly persuasive. First, created years after the relevant transaction, the document is wholly inconsiste t with records issued by.EdwardJones during the term pf. the LaSalle CD. Second, the amount of interest allocable to each year as shown on the document is calculated first by dividing the total interest income by twelve, Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and proceeding as though 10 months of interest accrued in 2006 and two months of interest accrued in 2007. In fact, the term of the LaSalle CD spanned 10 and one half months in 2006 and only one and one half months in 2007. At best, we consider the 2010 EdwardJònes document as little more than an after thought made in an attempt to advance the cause of a former cli nt. According to respondent, the LaSalle CD is a "zero-coupon CD", and the evidence shows that such financial instruments were offered by EdwardJones during the relevant time. According to respondent, interest income earned on a zero-coupon CD accrues and is taxed when the zero-coupon CD matures. · See, e.g., Bank One Corp. v. Commissioner, 120 T.C. 174 (2003); sec. 1.451-2(2), Income Tax Regs. Because of the scant evidence before us, we are reluctant to categorize the LaSalle CD as respondent sugges s, but find it unnecessary to do so. The dispute before us is resolved by a simple review of the records of EdwardJones created during the term of the LaSalle CD. Those records show the status of the LaSalle CD during certain months prior to its maturity, and further show that the interest income here :'un dispute accrued entirely in February of 2007. That being so, it follows that the Heritage Report'ing Corporation (202) 628-4888 1 2 3 4 S 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 interest .income petitioner earned on the LaSall CD is properly includable in her 2007. income, and respondent's determination to that end is susta ned. o reflect the foregoing decision wil be entered for respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whe reupon, a 4 : 55 p . m. , the bench o inion in the above-entitled matter was concluded. ) // // // Heritage Reporting Corporation