Peter S. Pau and Susanna H. Pau - Page 2

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          respondent asserted further adjustments to petitioners' 1990                
          joint return, including:  (1) An increase of $195,101 in the                
          deficiency in income tax set forth in the original notice; and              
          (2) an addition to tax of $373,731 under the civil fraud penalty            
          of section 6663 or, alternatively, an increased penalty pursuant            
          to section 6662(a) of $99,662.1                                             
               After concessions, two issues remain regarding petitioners'            
          income tax liability for 1990:  (1) Whether petitioners are                 
          liable for the penalty pursuant to section 6663 for failure to              
          report $990,000 of income with the intent of evading the payment            
          of Federal income tax.  We hold they are.  (2) Whether section              
          163(h)(3) limits petitioners' Schedule A deduction for home                 
          mortgage interest to interest paid on acquisition debt of $1                
          million.  We hold it does.                                                  
                                  FINDINGS OF FACT                                    
               The parties have stipulated to some of the facts and the               
          Court has so found.  The stipulation of facts and accompanying              
          exhibits are incorporated herein.  Peter S. Pau (petitioner) and            
          Susanna H. Pau (Susanna) were married and resided in                        
          Hillsborough, California, at the time they filed their petition             
          in this case.                                                               

               1  All section references are to the Internal Revenue Code             
          in effect for the year in issue, and all Rule references are to             
          the Tax Court Rules of Practice and Procedure, unless otherwise             

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