Court Opinion

ID: 9391620
Source: CourtListenerOpinion
Date Created: 2023-05-02 19:03:28.499732+00
Date Added: 2024-06-11T17:18:41.785825
License: Public Domain

United States Tax Court

                        T.C. Summary Opinion 2023-18

                     ANTHONY VENNARD HITCHMAN,
                              Petitioner

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 26739-21S.                                            Filed May 2, 2023.

                                     —————

Anthony Vennard Hitchman, pro se.

Adriana E. Vargas, Gregory Michael Hahn, Patsy A. Clarke, and Ara
Derhartonian, for respondent.

                              SUMMARY OPINION

       LEYDEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in effect
when the Petition was filed. 1 Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this Opinion shall
not be treated as precedent for any other case.

      The Internal Revenue Service (IRS) 2 examined petitioner’s 2018
federal individual income tax return. The IRS issued a notice of

        1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
        2 The Court uses the term “IRS” to refer to administrative actions taken outside

of these proceedings. The Court uses the term “respondent” to refer to the
Commissioner of Internal Revenue, who is the head of the IRS and is respondent in
this case, and to refer to actions taken in connection with this case.

                                 Served 05/02/23
                                     2

deficiency dated April 26, 2021, and determined a deficiency of $1,962
for 2018. Petitioner timely filed a Petition for redetermination pursuant
to section 6213(a).

       The issues for decision are whether for 2018 petitioner’s gross
income includes (1) dividend and interest income received, but
unreported, from his shares in Och-Ziff Capital Management Group,
LLC (Och-Ziff), and (2) bond interest income, which is income in respect
of a decedent from the redemption of a savings bond he inherited from
his father. The Court concludes that petitioner’s gross income includes
both the unreported dividend and interest income and the income in
respect of a decedent.

                              Background

       Some of the facts have been stipulated and are so found.
Petitioner resided in Washington State when he timely filed the
Petition.

       The First Stipulation of Facts is incorporated herein by this
reference, except for Exhibits 4–J and 8–J. At trial petitioner objected
to Exhibit 4–J on grounds of relevancy. The Court sustained petitioner’s
objection, and it was not admitted. Respondent objected to Exhibits 7–J,
8–J, and 10–J on grounds of hearsay because of handwritten notations
on those documents. The Court sustained respondent’s objection to
Exhibit 8–J, and it was not admitted. The Court overruled respondent’s
objections to Exhibits 7–J and 10–J. Petitioner also introduced at trial
Exhibits 11–P and 12–P. Respondent objected to those Exhibits on
grounds of relevancy. The Court sustained respondent’s objection, and
Exhibits 11–P and 12–P were not admitted.

I.    Petitioner’s 2018 Tax Return

       Petitioner filed his 2018 federal individual income tax return on
April 15, 2019. For that tax year Och-Ziff issued him a Schedule K–1
(Form 1065), Partner’s Share of Income, Deductions, Credits, etc., that
reported interest income of $18. That Schedule K–1 also reported
dividends of $223. For 2018 petitioner reported on his tax return
interest income and dividend income from Och-Ziff of $7 and $2,
respectively. For 2018 the Bureau of the Fiscal Service Treasury Direct
Ops and Dev Branch issued to petitioner Form 1099–INT, Interest
Income, that reported interest income of $13,992 from a U.S. series I
savings bond (savings bond). Petitioner reported $260 in savings bond
interest on his 2018 return.
                                          3

II.    Petitioner’s Father’s Passing and Petitioner’s Inheritance

       On April 12, 2018, petitioner’s father, Leonard V. Hitchman,
passed away. Petitioner inherited a savings bond from his father.
Petitioner had the savings bond reissued in his name and redeemed it.
A 2018 federal individual income tax return was filed on behalf of
petitioner’s father on April 15, 2019. That return did not report interest
income from the savings bond. The record does not show and the parties
do not assert that petitioner’s father reported any interest income with
respect to the savings bond during the time petitioner’s father owned
the bond. Petitioner does not dispute receiving the savings bond or the
accrued interest income. Petitioner reported interest income from the
savings bond equal to the amount of interest income accumulated from
the date the bond was reissued in his name until it was redeemed.

III.   Notice of Deficiency

       On April 26, 2021, the IRS issued petitioner a statutory notice of
deficiency for tax year 2018 and proposed a deficiency of $1,962 based
on unreported savings bond interest of $13,992, 3 unreported interest
income of $11, and unreported dividend income of $221 reported on a
Schedule K–1. 4

                                    Discussion

I.     Burden of Proof

       Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of
proving those determinations erroneous. Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Gross income generally includes
all income from whatever source derived, including dividends and
interest income. I.R.C. § 61(a); Commissioner v. Glenshaw Glass Co.,

       3  Based on the record, the Court understands the amount of unreported savings
bond interest determined by the IRS to be the amount of accrued and unreported
interest from the date petitioner’s father purchased the savings bond until the date
before petitioner had the bond reissued. Petitioner reported $260 of savings bond
interest on his 2018 tax return, which on the record was the amount of the accrued
interest from the date the bond was reissued until petitioner redeemed it.
       4 Petitioner reported on his 2018 tax return dividend income of $2 and interest

income of $7 from Och-Ziff. Therefore, the notice of deficiency proposed a deficiency
only with respect to the difference between the Schedule K-1 reported interest and
dividend income and the amounts petitioner reported on his tax return.
                                    4

348 U.S. 426, 429–30 (1955); Wilcox v. Commissioner, 848 F.2d 1007,
1008 (9th Cir. 1988), aff’g T.C. Memo. 1987-225; Treas. Reg. §§ 1.61-1(a),
1.61-7(a), 1.61-9(a). The U.S. Supreme Court has held consistently that
Congress defined gross income to exert “the full measure of its taxing
power.” Commissioner v. Glenshaw Glass Co., 348 U.S. at 429 (quoting
Helvering v. Clifford, 309 U.S. 331, 334 (1940)).

       In the U.S. Court of Appeals for the Ninth Circuit the
presumption of correctness attaches in a case involving unreported
income if the Commissioner first establishes some evidentiary
foundation linking the taxpayer with the alleged income-producing
activity. See Weimerskirch v. Commissioner, 596 F.2d 358, 361–62 (9th
Cir. 1979), rev’g 67 T.C. 672 (1977); Rodriguez v. Commissioner, T.C.
Memo. 2009-92. If the Commissioner connects the taxpayer with
unreported income determined in a statutory notice of deficiency, the
taxpayer has the burden of proving that the Commissioner’s
determination is erroneous. See George v. Commissioner, T.C. Memo.
2002-163.

       Respondent has established a sufficient evidentiary foundation as
to the unreported income determined in the notice of deficiency. A
Schedule K–1 and a Form 1099–INT were issued to petitioner reporting
Schedule K–1 interest and dividend income and savings bond interest
income in petitioner’s name. Thus, respondent’s determination of
unreported income is entitled to the presumption of correctness.
Petitioner does not dispute receiving the savings bond interest income
or the interest and dividend income from Och-Ziff.

II.   Interest and Dividend Income

       As to the interest and dividend income he received from Och-Ziff
and reported on the Schedule K–1, petitioner argues that it should have
been split between him and his brother, the other beneficiary of his
father’s estate. All income, unless expressly excluded, is taxable. I.R.C.
§ 61. Petitioner concedes that he received taxable interest and dividend
income from Och-Ziff. He asserts, however, that he should be taxed only
on part of it because part of it belonged to his brother. Unfortunately,
petitioner has not provided any documentary evidence to show that any
partnership shares in Och-Ziff were owned by both him and his brother.
That assertion is contrary to how the Schedule K–1 reported the interest
and dividend income, all in only petitioner’s name. Accordingly, the
Court finds that petitioner has not met his burden of proof, and the
                                     5

unreported interest income of $11 and the unreported dividend income
of $221 are taxable to petitioner for 2018.

III.   Savings Bond Interest Income

       Petitioner asserts that the savings bond had been reissued and
the basis in it was the value as of the date of reissuance. He asserts that
he is liable for only the interest income that accrued from the time the
savings bond was reissued until it was redeemed. Petitioner argues,
without support, that a savings bond is property and gets a stepped-up
basis when it is inherited.

       Interest on U.S. savings bonds is fully taxable. Treas. Reg. § 1.61-
7(b)(3). A taxpayer who owns a U.S. savings bond can elect to report the
income on his federal income tax return. Id. Under section 454(a) a
bond owner for whom the entire interest is includible in income at the
maturity of the bond may elect to treat the annual interest as income.
An election is made simply by including the interest as income on a tax
return, and that election is binding for all subsequent years. I.R.C.
§ 454(a). If no such election is made, the interest accumulates, and when
the bond matures, the accumulated interest is taxable in the year the
bond matures or is redeemed. I.R.C. § 454(c) (flush language).

      Accumulated interest on savings bonds may constitute income in
respect of a decedent under section 691. See Apkin v. Commissioner, 86
T.C. 692, 695 (1986). Regarding the tax treatment for recipients of
income in respect of decedents, section 691(a) provides under the
heading “Inclusion in Gross Income”:

             (1) General rule.—The amount of all items of gross
       income in respect of a decedent which are not properly
       includible in respect of the taxable period in which falls the
       date of his death or a prior period . . . shall be included in
       the gross income, for the taxable year when received, of:
                     ....
                     (B) the person who, by reason of the death of
             the decedent, acquires the right to receive the
             amount . . . .

       Petitioner inherited the savings bond when his father died in
2018. Based on the record, the Court concludes that petitioner’s father
did not report any interest income on the savings bond while he owned
it. His father did not make an election under section 454(a) to have the
annual interest on the bonds made taxable. The interest on the bonds
                                   6

therefore accumulated, and when petitioner redeemed the bonds, the
accumulated interest was includible in his income as income in respect
of a decedent. Accordingly, the Court finds that petitioner had
unreported interest income from his inherited savings bond for 2018 of
$13,992.

      To reflect the foregoing,

      Decision will be entered for respondent.