Bernard J. Penn and Thelma I. Penn - Page 11




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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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