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Although we find that petitioners’ underpayment attributable
to the Florida tax certificate interest was due to reasonable
cause, the portion of petitioners’ Social Security benefits
required to be included in gross income is not affected by
whether the tax certificate interest is exempt from taxation.
Both taxable and tax-exempt interest are counted for purposes of
the income thresholds that determine the taxability of Social
Security benefits. See sec. 86(b)(2). Thus any misunderstanding
of Mr. Penn’s with respect to the tax-exempt status of interest
petitioners received on tax certificates should have had no
impact on the computation of the amount of petitioners’ Social
Security benefits subject to tax. Nothing else in the record
suggests that there was reasonable cause for petitioners’ failure
to include the appropriate amount of their Social Security
benefits in income. Accordingly, we find that petitioners are
subject to the accuracy-related penalty on the portion of their
underpayment attributable to unreported Social Security benefits.
Finally, in the absence of any evidence of reasonable cause,
we find that petitioners are liable for the accuracy-related
penalty on the portion of their underpayment attributable to
unreported bank interest income of $701.
To reflect the foregoing,
Decision will be entered
under Rule 155.
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Last modified: May 25, 2011