T.C. Mem o. 2 01 6- 17 1

UNITED STAT ES TAX COURT
MARIA G. LESLIE, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 98 94 -1 2L, Fi le d S ep te m be r 14 , 20 16
. 27 01 4- 12
.
Kev anP. McLau gh li n a ndTy so n P . Cro ss , for pe ti ti on er. Ann a A. Lon g, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HOLMES, Ju dg e: Thes e cas es ari se fro m th e u nh ap py endto a m arri ag e. Mar iaLesl ie go t $ 5.5 m il li on fro m he r fo rm er hus ba ndun de r anag reem en t tha t
sa iditwou ldbe tax ab le to he r an d d educ ti bl e to hi m . Sh e se ntpa rt o f it --ab ou t $4 00 ,00 0- -to anin te rn etsca m st er wh o c la im edhe wou ldin ve stitforhe r in an-2
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[* 2] Afri candi am on d s ch em e b utwho m ad e o ff with t he m on ey . She says th e $5 .5 m il li on was ano nt ax ab le pro pe rty set tl em en t an d t he $4 00 ,00 0 was a th eft lo ss . She als o s ay s t he IRS s ho ul d h av e co ns id eredhe r reque stforanalt ern at iv e to for cedco ll ect io n o f he r ta x d eb t. FINDINGS OF FACT A. The Beg in ni ng Mar iaLesl ie earn eda m as te r’s de gr ee i n p ub li c h eal th adm in is tra ti on fro m Berk el ey so m et im e dur in g the `80 s. Sh e lo ok edfora job with t he st at e go ve rn m en t, an d g otanin te rv ie w with t he Agri cu ltur al Labo r Rel at io ns Bo ardin San Fran ci sc o. Th ere s he m etByro n Geo rg io u. Th e in te rv ie w wentwell an d t he two be ga n wo rk in g i n the same offi ce-- Geo rg io u a s a d ire ct oran d Les li e as an en try-lev el in ve st ig at or . An o ffi ce ro m an ce b lo om ed , andth e two m arri ed
. Dur in g t he earl y

y ears of t he ir m arri ag e Geo rg io u b ecame headof op erat io ns on on e o f Je rry Bro wn’s p res id en ti al cam pa ig ns . W

he n t ha t en de d, h e res um edhi s o ccupa ti on as an a tt orne y an d i nv es to r. Lesl ie de sc rib edhi m as a

“br il li an t m an ” who ha d i nv es tm en ts all ov er the worl d. He h el d i nt eres ts ingo ld
m in es , a cas in o s hi p i n Tex as , andreal est at e aro un d the co un try. H e kne w, sh e sa id , “ im po rta ntpe op le with d eep po ck et s.” He was oft enask edto gi ve lec tu res be cau se of h is “ fin an ci al an d i nt el le ctua l ac um en .”-3
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[* 3] Dur in g t hi s t im e Geo rg io u re m ai ne d c lo se ly ass oc ia te d wi th th e Dem oc rat ic Part y an d n urtu redhi s re la ti on sh ip s wi th can di da te s an d o ffi ceh ol de rs ali ke
. Geo rg io u h im se lf e ve n ra n fo r hi s p arty ’s no m in at io n fo r th e Sen at e fro m Neva da
. Afte r th ateffo rt f

ai le d, h e b eg anwork in g a s “ of co un se l” to Mi lb erg W ei ss an d,
m or e sp eci fic al ly to a m annam edBil l Lera ch . His p os it io n t he re was m or e rai nm ak er tha n l it ig at or , andhe ne go ti at eda de al with t he firm th aten ti tl edhi m

to rece iv e a 1 0% re ferr al fee i n a ny clas s- act io n l it ig at io n h e se cu red
. Geo rg io u was ad ep t atcu lt iv at in g re la ti on sh ip s, an d h e an d Les li e cl im be d in to ev er h ig he r po li ti cal an d s oc ia l ci rcl es . One i n p art ic ul ar i s i m po rta nthe re-- a fri en ds hi p wi th th e g en eral co un se l t o t he Reg en ts of the Uni ve rs it y of C al ifo rn ia
. In20 02 th is fri en ds hi p h el pe d h im lan d t he su itof ali fet im e--r ep res en ti ng th e UC Reg en ts as l eadpl ai nt iff

s i n acla ss act io n a ga in stEnro n. It wo ul d e ve ntua ll y

y ie ldhi m

ov er $ 50 mil li on inatt orne y ’s fees
. B. The Endof aMarr ia ge The n- -an d fr om

he r pe rs pe ct iv e al l aton ce-- Lesl ie ’s m arri ag e cam e to an en d. An d s o b eg anwhatwou ldbe co m e a l en gthy bat tl e wit h am yria d o f ps y ch ol og ic al an d m en ta l-h eal th pro bl em s. Sh e b eg ansu ffer in g- -an d c urren tl y su ffer s- -fro m

sev ere m ajorde pr es si on , andfro m sch iz oa ffec ti ve di so rd er, an d-4
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[* 4] de pe nd en t-p ers on al it y di so rd er. Her co nd it io n d ark en edon ce the m ari ta lse pa rat io n n eg ot ia ti on s b eg anin20 03 , andsh e b eg anto pl anhe r own de ath. Sh e ch os e li fe b utwas a dm it te d t o aho sp it al foranin vo lu nt ary ps y ch ia tri c ho lddu rin g wh ic h s he was d ia gn os edwith s ev ere m ajorde pr es si ve di so rd er. As a
res ul t o f he r st ay , Lesl ie was p res cri be d aser ie s o f ps y ch ot ro pi c dru gs , whi ch in cl ud edEffex orXR, Abi li fy , Cym ba lt a, an d P ro zac. Sh e co nt in ue d t o re qu ire ps y ch ol og ic al ev al ua ti on s t hr ou gh ou t the y ears an d fo un d h ers el f le ss th anful ly ab le to m an ag e h er o wn fi na nc ia l af fai rs . It wa sn ’t un ti l a year be fo re tria l tha t s he fin al ly sto pp edtak in g t he se m ed ic at io ns . Bu t b efo re thi s re co ve ry

sh e h adto ten d t o n eg ot ia ti on s o ve r th e d iv is io n o f
m ari ta l as se ts . Georg io u p ro vi de d a ndpa idforLesl ie ’s att orne y s dur in g t he
ne go ti at io ns , andov er the ne xtth ree o r fo ur y ears th e two were ab le to th ras h o ut th e d et ai ls . W it h h er h eal th so pre cari ou s, the se ne go ti at io ns were d iff ic ul t fo r he r to en du re. Sh e cre di bl y

de sc rib edth em

as “ di sjo in te d” an d p oi nt edou t tha t s he
co ul dn ’t endur e th e m aratho n s es si on s t ha t the ne go ti at io ns requi red
. A m ajor
reas onforth ei r le ng th was t he di vi si onof f ees th atGeor gi ouho pe d wo ul d c om e fro m th e Enr on li ti ga ti on . Georg io u c al le d a ny pay ou t “pi e in th e sky ,” an d h e h ad Lesl ie co nv in cedth atth e ch an ces of aset tl em en t wer e b le akan d t ha t ev enwith
su cces s t he refe rral fee m ig htbe as l ow as $9 m il li on .-5
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[* 5] The ne go ti at io ns en de d wi th a m ari ta l s ep arat io n a gr eem en t (M SA). A
se ct io n i n t he MSA t it le d “ Sp ou sa l Supp ort” gave Lesl ie $7 ,00 0 p er m on th in sp ou sa l s up po rt wh ic h wo ul d e ndwith e it he r pa rty’ s d eat h. Und er a s ep arat e se ct io n t it le d “ Div is io n o f Co m m un it y an d C o- own edPro pe rty” Lesl ie was award edni ne of t he ren ta l p ro pe rti es --wh ic h c urren tl y serve as h er m ai n s ou rce o f in co m e--andth ei r rel at edlo an s. Un de r th at sa me se ct io n, Les li e was award ed 10 % of wh at ev er fe e Geo rg io u re cei ve d a s a r es ul t o f th e Enr on li ti ga ti on . The MSA d idno t s ay

whet he r th is pa ym en t wo ul d t erm in at e in th e ev en t o f ei th er pa rty’ s d eat h. Des pi te th e p ro vi si on ’s lo cat io n i n asec ti on res erv edfordi vi si on s of pro pe rty, the MSA d is ti ng ui sh edth e Enr on fee: W it h re sp ectto an y

an d a ll fees di st rib ut edto Mr. Geo rg io u a s a res ul t o f hi s i nv ol ve m en t i n t he Enro n s ecu rit ie s l it ig at io n t hr ou gh th e firm s, M r. Geo rg io u s ha ll rece iv e n in ety pe rcen t (9 0%) as h is so le an d se pa rat e p ro pe rty andMs . Lesl ie sh al l re cei ve ten pe rcen t (1 0%) of a ll ne t fe es di st rib ut edto Mr. Geo rg io u b y th e Lerac h C ou gh li n fi rm or Mi lb erg W ei ss firm

“ th e fi rm s” . [ si c ] Ms . Lesl ie ’s ten pe rcen t (1 0%) in te res t i n t he Enro n fe e is a sp ou sa l s up po rt a wardfro m a co nt in ge nt li ab il it y , th e am ou ntof wh ic h c ou ldno t b e d efi ni te ly set a t the ti m e o f th is ag reem en t, s in ce M r. Geo rg io u c an no t b e certa in of t he am ou ntof fees th athe wil l re cei ve fro m th e Enr onli ti ga ti on . This ten pe rcen t (1 0%) di st rib ut io n t o M s. Les li e is tax ab le to Ms . Lesl ie an d de du ct ib le to Mr. Geo rg io u a s s po us al supp ort. Und er the same sect io n- -an d c on ti ng en t o n Geo rg io u’s re cei vi ng hi s s pl itof t he Enro n fe es --Geo rg io u was to pa y anad di ti on al $3 55 ,00 0 l um p s um to Lesl ie
.-6
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[* 6] Agai n, thi s s um

was d es cri be d a s s po us al supp ort; th e m ai n d iff eren ce b ei ng th atit wo uld

ex pr es sl y

term in at e upo n Les li e’s de ath. Notto o l on g a fte r th e o rd er d is so lv in g Les li e’s m arri ag e in Jan uary 20 08 , th e Enr on cla ss act io n e nd edwith aset tl em en t v ery fav or ab le to th e p la in ti ffs ’ la wy ers . They subm it te d t he ir f ee ap pl ic at io n t o t he Fed eral di st ric t co urt as pa rt of a m ot io n t o app ro ve th e se tt le m en t. Inth ei r ap pl ic at io n t he lawyers re qu es te d th atth e co urt ap pr ov e at to rn ey ’s fees of 9 .52 % of the Reg en ts ’ ul ti m at e rec ov ery of $7 bi ll io n. Th e co urt g ran te d t ha t re qu es t an d a ward ed$6 88 m il li on infees
. Geo rg io u h im se lf r ecei ve d arefe rral fee o f $5 5 m il li on sp readou t fr om 20 08 to 20 10
. Lesl ie st art edto see so m e m on ey fro m th e d eal
. Fir stcam e th e $ 35 5,0 00 , whi chwas p ai d o utto he r in 16 sep arat e p aym en ts fro m Ju ly 200 6 t o Ap ril 20 07
. The n c am e h er s ha re o f th e ref erra l fe e: Date Am ou nt 11 /1 3/ 20 08 $4 ,00 0,0 00 12 /2 2/ 20 09 1,5 60 ,00 0 6/ 28 /2 01 0 8,2 00 Tot al 5,5 68 ,20 0-7
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[* 7] The 2 00 9 p aym en t h adso m e twi st s. Geo rg io u d efi ni te ly seg reg at edth is
m on ey fro m hi s d is tri bu ti on , anddi rect ly dep os it editin to anacco un t atCal ifo rn ia Ban k & Trus t. Tha t ac co un t h adbo th hi s n am e an d Les li e’s on it , bu t s he cred ib ly te st ifi edth atsh e h adno co nt ro l o ve r it
. Sh e was no t g iv enan y ch eck s t o s ig n fro m th e acc ou nt , andhe r im

pr es si on of t he pa ym en t was th atitwasn ’t y etleg al ly he rs . In J anua ry

20 10 sh e tr ie d t o g ai n c on tro l b y fil in g ade cl arat io n i n s up po rt o f th e “ Rel eas e o f Enr on Paym en ts fro m Trus t Acc ou nt ” wit h t he SanDieg o S up eri or Co urt. Geo rg io u o pp os edhe r pe ti ti on , andth e st at e co urt atfir strefu se d t o g ran t it . It’s n otcle ar fro m

th e rec or d wh enor i f Les li e ev er g ai ne d c on tro l o ve r th e acco un t co nt ai ni ng th e 2 00 9 p aym en t. C. The Afric a Diam on d S cam Whi le th is was h ap pe ni ng an d s ho rtl y be fo re the di vo rce b ecame fin al , Lesl ie ha d m etEug en e Mc Cu ll ou gh at alo cal swap m eet . McCu ll ou gh so ldgo lf cl ub s an d a cces so rie s, wh ic h d id n’t i nt eres t Les li e. Sti ll , as t im e wen t b y , sh e an d McC ul lo ug h b eg ana fri en ds hi p- -m os tl y co m m is erat in g abo utwhatth ey were un ab le to sel l tha t d ay . She be ga n t o t ru sthi m . One d ay McC ul lo ug h b eg an ta lk in g abo utanol d fr ie ndof h is fro m hi s d ay s i n t he Navy. He ex pl ai ne d t ha t the fri en d h ada tr oubl edpa st , bu t h adsi nc e g ot te n i nt o t he di am on d b us in es s an d
se em edto be do in g v ery well forhi m se lf. Deci di ng sh e wou ldli ke a sm al l p ai r of-8
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[* 8] earr in gs , Lesl ie ha d M cCu ll ou gh reac h o utto th e m an . Tha t m an ’s nam e was Lawy er St an le y . Lesl ie est im at es th atitwas abo uttwo week s l at er wh enMcC ul lo ug h g ot ba ckto he r an d e xp la in edth atStanl ey on ly didwho le sa le . Lesl ie at f irs t d id n’t th in k t wice ab ou t i t, b utth enMcC ul lo ug h c am e b acka few week s l at er. He sa id St an le y ha d a n o ffersh e m ig htbe in te res te d i n. There was alar ge sh ip m en t o f 1 di am on ds inAfric a th atSta nl ey ne ed edm on ey

to ex po rt. Fo r th e ri gh t i ni ti al in ve st m en t, Mc Cu ll ou gh sai d, St an le y wou ldgi ve Lesl ie $1 mil li on on ce the di am on ds were i n h an d andth enres ol d. Lesl ie to okth is ba itan d b itdo wn h ard . She di dn ’t eve n s ig n aco nt ract be cau se sh e trus te d M cCu ll ou gh , anditwas o nl y supp os edto tak e 1 0- 30 da y s fo r he r to see a return o n h er “ in ve st m en t” . She wire d afir stpa ym en t o f $3 20 ,00 0 t o anen ti ty nam edAfric a WorldTrad e, LLC, at the be gi nn in g o f Decem be r. A few da y s l at er, St an le y

be ga n e m ai li ng McC ul lo ug h e xc la im in g t ha t Les li e “ co ul d
m ak e m il li on s” an d t ha t i f sh e wou ldke ep pro vi di ng cap it al “ sh e [co ul d] ownhe r own ba nk .” Giv in g i nt o t he sen se of u rg en cy pro jecte d b y Sta nl ey ’s em ai ls , Lesl ie wire d h im

anad di ti on al $6 0,0 00 . Stan le y ’s exc us es forde lay be ga n. Fi rs t, i t was Lesl ie sp ok e wit h S ta nl ey on ly onc e h ers el f. She expl ai ne d dur in g t ria l 1 th atsh e le t M cCu ll ou gh ha nd le all co nt actbe cau se he was t he on e wit h t he rel at io ns hi p wi th Sta nl ey an d tha t s he tru st edhi m

ab so lu te ly.-9
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[* 9] so m e b an k’s s ta nd in g i n t he way of S tanl ey ’s paym en t t o Les li e, th enitwas de la y s b ecau se of t he Ch ris tm as ho li da y s, an d fi na ll y Sta nl ey wrot e Mc Cu ll ou gh
an ot he r em ai l ex pl ai ni ng th at“ th e in landrev enue tax es is th e la stob st acl e . . . the y rai se d i t 1 .00 25 %,” an d t ha t h e n eed edad di ti on al fun ds
. So , Lesl ie wire d a no th er $2 5,0 00 to Sta nl ey . Thi s was , of c ou rs e, al l a s cam of t he same kin d a nyon e wit h a n e m ai l ad dr es s h as en co un te redsi nc e th e o pe ni ng of t he in te rn et . Anditpl ay edou t ju st as on e wou ldex pe ct : Mo re d el ay s fo ll owe d b y m or e ex cu se s fo ll owe d b y m or e de la y s. Les li e fi na ll y

be cam e le ery of

he r ne wfo un d b us in es s p artne r 74 da y s af te r he r in it ia l “ in ve st m en t.” Sh e em ai le d M cCu ll ou gh an d S ta nl ey to co m pl ai n abo ut St an le y ’s “ ov er the to p” de la y s b utrece iv edon e la stex cu se : St an le y ne ed edto ge t a p ro ba te do cu m en t fo r so m e rea so n o r an ot he r be fo re h e co ul d m ak e th e d eal go th ro ug h. The sca le s ca sc ad edfro m he r ey es , andLesl ie th reat en edto cal l the po li ce. No p ro gr es s. Mo re s ta ll in g. St an le y di d up h is ga m e fro m

de cei t t o ou tri gh t fo rg ery by creat in g a ndsen di ng to he r do cu m en ts fro m so m ethi ng cal le d th e “ Fo rei gn Cred itCo m m is si on ” (FC C), b utth e num be r sh ownonth e d oc um en ts
was fal se . Sta nl ey

th enbl am edLesl ie forcau si ng m or e d el ay by con ta ct in g t hi s

“ FCC.” By

m id -2 00 9 Les li e rea li zedsh e h adbe endupe d.-1 0-

[* 10 ] It wa s t oo lat e. Sta nl ey wasn ’t ans weri ng em ai ls or t el ep ho ne cal ls
. McC ul lo ug h s po ke with s ev eral au th or it ie s o n Les li e’s be ha lf. He co nt act edth e FBI a ndth e d is tri ctatt orne y an d e ve n re ach edou t t o C on gr es s, al l t o n o a va il
. Lesl ie pe rs on al ly call edth e lo cal po li ce i n F lo rid a n ear a n a ddres s St an le y ha d gi ve n, an d a sk edth em

to do a welf

are v is itto Sta nl ey ’s ho m e, bu t h e’d al read y sk ip pe d t own . Sh e sp ok e wit h t wo l awy ers bu t the y “ laug h[ ed ] he r ou t o f th e ro om ” an d a dv is edth atsh e sh ou ld n’t s pe ndan y m or e g oo d m on ey

ch as in g b ad
. All th atwas l eftwas aco ll ect io n o f em ai ls be twee n S tanl ey an d h er d et ai li ng th e co ur se of t he tra ns act io ns fro m th e p as t year. Sh e n ev er fi le d s ui t o r m ad e an y ot he r cl ai m

ag ai ns t St an le y

be cau se sh e si m

pl y co ul dn ’t eve n fi ndhi m . Seei ng no ot he r way to be ne fitfro m

th is de ba cl e, sh e d educ te d t he $4 05 ,00 0 o n h er 2 00 9 t ax return. D. The Tax Fi li ng s Befo re h er d iv or ce, Les li e h adne ve r be fo re b een res po ns ib le form an ag in g he r da y -to -d ay

fin an ci al affa irs
. Her p ro bl em s dur in g a ndaft er h er d iv or ce d id
no th in g t o s ha rp enhe r sk il ls
. Sh e cre di bl y tes ti fie d t ha t dur in g t he y ears aft er the di vo rce “ th e rea l wo rldjus t k in d o f li ke pa ss edm e b y co m pl et el y interm s o f m

y-1 1-

[* 11 ] ob li ga ti on s, i n t erm s o f ti m e--t im e fram es an d t im e li ne s an d dut ie s.” Sh e fai le d t o t im el y

fil e h er 2 00 6- 08 tax returns . 2 Sh e d idfin al ly reali ze tha t s he ne ed edto ge t h er af fai rs inord er an d h ire d a pr ep arer --the same prep arer who di d Geo rg io u’s re tu rn s- -to fil e h er 2 00 6, 2 00 7,
an d 2 00 8 t ax returns . All thr ee re tu rn s re po rte d p aym en ts rece iv edfro m Geor gi ou as tax ab le ali m on y . In s pr in g 2 01 0 t he Co m m is si on er as se ss edfai lu re-t o- ti m el y pa y an d fa il ur e-t o- pa y -es ti m at ed -ta x p en al ti es du e to he r la te fil in g o f th e 2 00 7
an d 2 00 8 t ax returns an d m ai le d s ep arat e n ot ic es of d em an d fo r eac h year. In Octo be r 20 10 th e Co m

m is si on er fi le d ano ti ce o f li enfol lo wedby a fin al no ti ce o f hi s i nt en t t o l ev y . In t ha t s am e m on th Lesl ie ti m el y fil edhe r 20 09 tax return rep orti ng th e $ 40 5,0 00 th eftlo ss an d e xc lu di ng th e 2 00 9 En ro n p aym en t fr om Geo rg io u a s t ax ab le in co m e. Lesl ie ti m el y

reque st edanApp eal s Off ic e h eari ng un de r se ct io n 6 33 0 t o ch al le ng e th e am ou ntof h er t ax bi ll an d p ro po se analt ern at iv e to for ced 3

Lesl ie rece iv edanex te ns io n o n h er 2 00 9 t ax return andso itwas t im el y 2 fil ed
. Whe n t he IRS as se ss es a li ab il it y ba se d o n atax pa y er’s u naud it edreturn, 3 th e ta xp ay er h as n’t h adanop po rtu ni ty to “ di sp ut e” h er t ax li ab il it y an d s o i s en ti tl edto a CDP h eari ng . See Mo nt go m ery v. Co m m is si on er, 1 22 T.C. 1, 9 (2 00 4) . This is tru e ev enincas es wher e th e ta xp ay er s el f-re po rte d t he am ou ntan d wis he s t o m ak e a ch an ge --as Lesl ie di d fo r he r 20 07 an d 2 00 8 t ax y ears . Id.-1 2-

[* 12 ] co ll ect io n. Sh e ga ve am en de d 2 00 7 a nd20 08 returns to th e se tt le m en t of fic er (SO) who he ldth e h eari ng . The se returns rep orte d am uc h s m al le r al im on y an d t he carry

ba ckof p artof t he th eftlo ss fro m he r 20 09 tax return- -wh ic h g reat ly reduc edhe r ta xabl e in co m e. Sh e al so pro vi de d t he SO th e d oc um en ta ti on (in cl ud in g b il li ng st at em en ts , herren ta l re al -es ta te act iv it y , dee ds , tra ns fer do cu m en ts , andba nk -acc ou ntst at em en ts ) th atth e IRS ne ed s t o e ve n c on si de r al te rn at iv es to for cedco ll ect io n. The SO d idaskforad di ti on al in fo rm at io n reg ard in g Les li e’s he al th care an d l ife -in su ran ce p rem iu m s- -s ix m on th s o f st at em en ts in st eadof t he th ree Les li e h adalr eady pro vi de d. Bu t ev enth ou gh Lesl ie ne ve r pr ov id edth is ad di ti on al bi t o f in fo rm at io n, the SO was abl e to ge ne rat e anall owabl e-ex pe ns e works he etth atsh owe d Les li e co ul d a ffo rda m on th ly paym en t o f ab ou t $ 5,5 00 . She ne ve r rep eat edhe r reque stfor th e m is si ng in su ran ce i nf

orm at io n o r as ke d Les li e fo r an yth in g e ls e. The Co m m is si on er i ss ue d ano ti ce o f de te rm in at io n fo r Les li e’s 20 07 an d 20 08 tax y ears inwhi ch he di dn ’t eve n a na lyze any col le ct io n a lt ern at iv es . Lesl ie ti m el y fil eda pe ti ti on with t hi s co urt. Sh ortl y aft er tha t, the Co m

m is si on er i ss ue d
a n ot ic e o f de fic ie nc y

forLesl ie ’s 20 07 , 20 08 , and20 09 tax y ears . Lesl ie ti m el y fil eda se pa rat e p et it io n t o c ha ll en ge th atde te rm in at io n t oo . W e co ns ol id at edth e-1 3-

[* 13 ] cas es an d t rie d t he m to ge th er i n S anDieg o. Les li e was at the ti m e an d
rem ai ns a Cal ifo rn iares id en t. OPINION The bi g i ss ue is th e ta xabi li ty of Les li e’s sh are o f th e Enr on refe rral -fee win df al l. The Co m

m is si on er as se rts th atit ’s all ali m on y ; t ax ab le to Lesl ie an d de du ct ib le to Geor gi oube cau se th at ’s whatth e m ari ta l-s et tl em en t ag reem en t s ai d itwas, an d b ecau se itm etth e requi rem en ts of s ect io n 7 1. Lesl ie ass ert s t he 4 pa ym en ts are a p ro pe rty set tl em en t an d t hu s s ho ul d n otbe in cl ud edinhe r in co m e. Sh e al so ass ert s t ha t ev enif t he pa ym en ts are al im on y , th e 2 00 9 En ro n p aym en t is n’t i nc om e to he r fo r th aty ear b ecau se sh e h adn’t re cei ve d i t. The pa rti es als o fig htab ou t wh ethe r Les li e’s lo ss inhe r de al in g wi th Sta nl ey was ath eftlo ss . And th ey fig htab ou t wh ethe r sh e o wes pe na lt ie s: The C omm is si on er as se rts sec ti on 66 51 fai lu re-t o- ti m el y -fi le pe na lt ie s fo r Les li e’s 20 07 an d 2 00 8 t ax y ears as we ll
as sec ti on 66 62 accu racy-rela te d p en al ti es forall th ree years a t i ss ue . And , fin al ly, th ey fig htab ou t wh ethe r th e Co m m is si on er’s s et tl em en t o ffi cer abu se d h er di sc ret io n a s p artof aco ll ect io n due pro ces s h eari ng be cau se sh e fai le d t o

All sec ti on refe ren ces are t o t he Int ern al Rev enue Co de ineffe ctforth e 4 y ears at i ss ue , un le ss we say othe rwis e. All Ru le refe ren ces are t o t he Tax C ou rt Ru le s o f Prac ti ce an d P ro cedur e.-1 4-

[* 14 ] co ns id er co ll ect io n a lt ern at iv es de sp it e Les li e’s ha vi ng pro vi de d h er fin an ci al in fo rm at io n. I. The Enro n F ees The pa rti es ’ di sp ut e ab ou t the Enro n fe es st art s wi tha di sp ut e ab ou t wh at te stwe sh ou ldus e, bo th forth e am ou ntth atwas c on ti ng en t an d the $3 55 ,00 0 t ha t was de fin ed
. Lesl ie arg ue s t ha t we s ho ul d turn t o asetof f act or s u nd er Be ardv. 5 Co m m is si on er, 7 7 T.C. 1 27 5 (1 98 1) . Beardrequi res th e Co urt t o e xa m in e th e fact s o f th es e cas es un de r a s etof s ev ensubjec ti ve fact or s- -larg el y th e in te ntof t he pa rti es --t o d et erm in e if

a pa ym en t i s m or e in th e n atur e o f al im on y or i n t he na ture of a pr op erty

set tl em en t. Id . Butin19 84 Co ng res s amend edsec ti on 71 of t he Co de --the pu rp os e o f whi ch was t o “ el im in at e th e subjec ti ve in qu iri es in to in te nt
an d t he na tu re o f pa ym en ts th atha [s ] pl ag ue d t he co urts .” Hoo ve r v. Co m m is si on er, 1 02 F.3d84 2, 8 45 (6t h C ir. 1 99 6) , aff’g T.C. Mem o. 1 99 5- 18 3. The Co m m is si on er wi ns th is on e--we ’ll fo ll ow the Co de an d n otpri orcas el aw-- an d we wi ll an al y ze the tre atm en t o f th e Enr on pa ym en ts un de r se ct io n 7 1( b) :

As we al read y

no te d, $ 30 ,00 0 o f th e co nt in ge nt$3 55 ,00 0 was pa idto 5 Lesl ie no t i n 2 00 7, b utin20 06 --a year no t co ve redby the no ti ce o f de fic ie nc y an d th us be y on d t he Co m

m is si on er’s rea ch
.-1 5-

[* 15 ] Ali m on y

m ean s an y

cas h p aym en t i f: (A) s uc h p aym en t i s re cei ve d b y (oron be ha lf o f) a s po us e un de r a d iv or ce o r se pa rat io n i ns tru m en t, (B) t he di vo rce o r se pa rat io n i ns tru m en t d oe s n otde si gn at e su ch pa ym en t as a pa ym en t wh ic h i s n otin cl ud ib le ingro ss in co m e un de r th is sec ti on an d n otall owabl e as a de du ct io n u nd er s ect io n 2 15 , (C) i n t he cas e o f anin di vi du al leg al ly sep arat edfro m hi s sp ou se un de r a d ecre e o f di vo rce o r of sep arat e m ai nt en an ce, the pa y ee s po us e an d t he pa y orsp ou se are n otm em be rs of t he same ho us eh ol d a t the ti m e su ch pa y m en t i s m ad e, an d (D) th ere i s n o l iabi li ty to m ak e an y su ch pa ym en t fo r an y pe rio d a fte r th e d eat h o f th e p ay ee s po us e an d t he re i s n o l iabi li ty to m ak e an y pa y m en t (i n c as h o r pr op erty ) as a subs ti tu te forsu ch pa ym en ts aft er the de ath o f th e p ay ee s po us e. If a p aym en t s at is fie s al l o f th es e fac to rs th enit ’s ali m on y . Bak er v . Co m m is si on er, T.C. Mem o. 2 00 0- 16 4. Les li e co nc ed es th e fi rs t thr ee b utarg ue s th atth e p aym en ts do no t s at is fy sec ti on 71 (b )(1 )(D)’s requi rem en t tha t Geo rg io u’s ob li ga ti on to m ak e th es e p aym en t en d wi th he r de ath. We beg in with t he lan gu ag e of th e d iv or ce o r se pa rat io n i ns tru m en t. An d i t s ho ws tha t n owh ere i n t he MSA i s th ere aco nd it io n tha t t erm in at es Geor gi ou ’s ob li ga ti on to pa y ov er a p artof the
co nt in ge ntrefe rral fee upo n Les li e’s de ath. That ’s no t the en d o f th e m at te r, 6 As we’ve a lre ady

fou nd , th e MSA p ro vi de d fo r a $ 35 5,0 00 lu m p- su m 6 pa ym en t t o Les li e o nc e Geo rg io u s ta rte d t o re cei ve th e fee s. Th e MSA m ad e th at pa ym en t-- bu t n otth e $ 5.5 m il li on th atbe cam e Les li e’s ad di ti on al sh are o f th e Enro n fe es --ex pr es sl y co nt in ge nton Lesl ie ’s no t dy in g.-1 6-

[* 16 ] th ou gh , bec au se st at e la w cansupp ly the m is si ng termin at io n- on -d eat h- of
pa y ee co nd it io n t ha t s ect io n 7 1 re qu ire s. See Hoo ve r, 10 2 F .3dat 8 47 ; Lap oi ntv. Co m m is si on er, T.C. Mem o. 2 01 2- 10 7. Un de r Cal ifo rn ialaw, “ [e]xce ptas ot he rwis e ag reedby the pa rti es inwrit in g, the ob li ga ti onof apa rty un de r anord er fo r th e supp ort o f th e o th er p arty term in at es up on th e d eat h o f ei th er p arty or t he
rem arri ag e o f th e o th er p arty .” Cal . Fam . Cod e se c. 43 37 (W es t 2 01 3) . “ A writ te n ag reem en t t o wai ve sec ti on 43 37 ‘ m us t b e sp eci fic an d e xp res s.’” Jo ha ns on v. 7 Co m m is si on er, 5 41 F.3d97 3, 9 77 (9t h C ir. 2 00 8) (qu ot in g In re Ma rri ag e o f Tho rn to n, 1 15 Cal . Rptr. 2d38 0, 3 83 (Ct . App . 20 02 )), aff ’g T.C. Mem o. 2 00 6- 10 5. Th e p art ie s h ere h av e n otpro du cedany su ch ag reem en t. The m ere f ai lu re t o in cl ud e la ng ua ge term in at in g s up po rt upo n d eat h i s n oten ou gh to co ns ti tu te a waiv er. Id . By

op erat io n o f Cal ifo rn ialaw, the n, p aym en ts fro m th e Enr on se tt le m en t wo ul d h av e te rm in at edup on Lesl ie ’s dea th
. The requi rem en t tha t an y li ab il it y to m ak e p aym en ts term in at es up on th e de ath o f th e p ay ee s po us e is cen tra l i n d is ti ng ui sh in g b etweenali m on y an d Extrin si c ev id en ce i s ad m is si bl e to de te rm in e whe th er s ect io n 4 33 7 was 7 waiv edon ly if th ere i s s om e “ la ng ua ge inth e wri tt enag reem en t re as on ab ly su sc ep ti bl e to in te rp ret at io n a s a d ecl arat io n o f anin te ntth atsupp ort co nt inue be y on d [d eat h].” Jo ha ns on v. Co m m is si on er, 5 41 F.3d97 3, 9 77 (9th C ir. 2 00 8) (quo ti ng In r e Ma rri ag e o f Ces na li s, 1 31 Cal . Rptr. 2d43 6, 4 39 -4 0 (C t. Ap p. 20 03 )), aff

’g T.C. Mem o. 2 00 6- 10 5. Ev enif we fo un d t ha t the MSA co nt ai ne d su ch lan gu ag e, ne it he r pa rty pro du cedex tri ns ic ev id en ce fo r ex am in at io n h ere.-1 7-

[* 17 ] pro pe rty set tl em en ts . See H.R. Rep t. No . 98 -4 32 (Part2), a t 1 49 6 (1 98 4) , 19 84 U.S.C.C.A.N. 69 7, 1 13 8; Hoo ve r, 10 2 F .3dat 8 45 -4 6. It s p res en ce h ere b y op erat io n o f st at e law m ean s t he co nt in ge ntEnro n p aym en ts were al im on y tax ab le to Lesl ie
. W e fi ndforth e Co m

m is si on er o n t hi s i ss ue . II. Co ns tru ct iv e Rec ei ptof the 20 09 Paym en t Lesl ie ’s fal lb ackpo si ti on is th atev enif the Enro n p aym en ts are g en eral ly ta xabl e, sh e d id n’t re cei ve th e 2 00 9 p aym en t i n 2 00 9. Gi or gi oude po si te d t he pa ym en t i nt o a n a cco un t Les li e h ers el f di d n otop en . Sh e cl ai m s t ha t s he di d n ot ha ve co nt ro l o ve r th is acco un t; sh e d idno t h av e acc es s t o i t; an d d idno t ev en kn ow i t ex is te d. Lesl ie cred ib ly test ifi edth atsh e st il l d id n’t h av e th is m on ey un ti l-- atth e ear li es t-- th e 2 01 0 t ax y ear. Sh e arg ue s tha t the fun ds were n ottax ab le
un ti l the n. Th e Co m

m is si on er ar gu es , ho wev er, tha t ev enif Les li e d id n’t h av e kn owl ed ge or c on tro l o ve r th e tr us t, Geo rg io u s ho ul d b e co ns id eredLesl ie ’s age nt , th us gi vi ng he r co ns tru ct iv e rec ei ptov er the fun ds
. In co m e is ge ne ral ly tax ab le for th e y ear i n wh ic h i t i s re cei ve d. Se c. 45 1;
se c. 1.4 51 -1 (a), In co m e Tax Reg s. Bu t a t ax pa y er ca n “ co ns tru ct iv el y rece iv e” in co m e. The d oc tri ne of c on st ru ct iv e rec ei ptis su m m ari zedby sect io n 1 .45 1- 2( a) of th e reg ul at io ns :-1 8-

[* 18 ] Gen eral rul e. In co m e al th ou gh no t ac tu al ly redu cedto a ta xp ay er’s po ss es si on is co ns tru ct iv el y rece iv edby him

inth e ta xabl e y ear du rin g wh ic h i t i s cr ed it edto hi s ac co un t, s etap artforhi m , or ot he rwis e m ad e av ai labl e so th athe m ay dra w up on itat a ny tim e, or so th athe co ul d h av e drawnup on itdu rin g t he tax ab le y ear i f no ti ce of in te nt io n t o wi th dr aw ha d b een gi ve n. Ho wev er, i nc om e is no t co ns tru ct iv el y

rece iv edif t he tax pa y er’s co nt ro l o f it s re cei ptis subjec t t o s ub st an ti al li m it at io ns or r es tri ct io ns . Und er the co ns tru ct iv e-re cei ptdo ctrin e, a ta xp ay er i s re qu ire d t o re co gn iz e in co m e whe n s he ha s an un qu al ifi ed , ves te d ri gh t t o re cei ve imm ed ia te pa ym en t. Ro ss v. Co m m is si on er, 1 69 F.2d48 3, 4 90 (1s t Ci r. 19 48 ), rev ’g an d re m an di ng on ot he r gr ou nd s 6 T.C.M. (CCH) 1 24 (19 47 ); M art in v. Co m m is si on er, 9 6 T.C. 8 14 , 82 3 (1 99 1) ; Pa lm er v . Comm is si on er, T.C. Mem o. 2 00 0- 22 8, 2 00 0 WL 10 36 36 8, at *9 . Whe th er a t axpa y er h as co ns tru ct iv e rec ei ptof i nc om e is a qu es ti on of f act . Marti n, 9 6 T.C. at82 2. Thi s C ou rt h as he ldth atkn owl ed ge of t he fun ds ’ rece ip t-- so m ethi ng Lesl ie di dn ’t hav e--i s n eces sa ry forco ns tru ct iv e rec ei pt . Furs te nb erg v. Co m m is si on er, 83 T.C. 75 5, 7 92 (19 84 ) (ci ti ng Davi s v . Comm is si on er, T.C. Mem o. 1 97 8- 12 ). Bu t o nc e Les li e d idbe co m e aware th atth e fu nd s wer e inanacco un t s he st il l h ad
no po wer t o g etth em . Her pe ti ti on to a st at e co urt t o wi n re le as e o f th e fu nd s-1 9-

[* 19 ] sh ows he r la ckof c on tro l. Andth e Co m m is si on er’s arg um en t crum bl es co m pl et el y when on e se es th atth e st at e co urt atfir stde ni edth atpe ti ti on . 8 The Co m m is si on er’s arg um en t tha t Geo rg io u a ct edas Les li e’s ag en t i s al so fau lt y . Recei ptby an ag en t i s re cei ptby the pri nc ip al , Gale v . Comm is si on er, T.C. Mem o. 2 00 2- 54 , bu t the Co m m is si on er h as pro vi de d n o e vi de nc e, no r do es th ere ex is t o n t he reco rdan y

ev id en ce s ug ge st in g t ha t Geo rg io u h adan y au th or ity to act as Lesl ie ’s age nt . Georg io u’s i nt eres t was adve rs e to Lesl ie ’s: WhenLesl ie tri ed to ge t the co urt t o re le as e th e 2 00 9 p aym en t t o h er, h e o pp os edit
. W e fi ndforLesl ie on th e is su e o f co ns tru ct iv e rec ei ptan d h ol d t ha t s he di d
no t re cei ve th e 2 00 9 En ro n p aym en t i n t he 20 09 tax y ear. III. The ft Lo ss Sect io n 1 65 (a) a ll ows a de du ct io n a ga in sta ta xp ay er’s o rd in ary in co m e fo r

“ an y lo ss su st ai ne d dur in g the tax ab le y ear a ndno t co m pe ns at edforby ins ur an ce

The re as on was tha t Les li e atth atti m e h adsu edto ov erturn o r m od ify the 8 MSA o n t he gro un d tha t s he lac ke d c ap aci ty to ag ree t o i t b ecau se of h er m ed ic al pr ob le m s. Th e st at e co urt d id n’t wan t t o re le as e th e fu nd s t o h er u nd er the MSA i f sh e la te r were s uc ces sf

ul inov erturni ng th e MSA a lt og ethe r. The M SA was l at er up he ldby the tri al co urt an d a ga in on ap pe al in20 13 . See Inre Ma rri ag e o f Geo rg io u, 1 60 Cal . Rpt r. 3d25 4 (C t. Ap p. 2 01 3) . There is no th in g i n t he reco rd th atcle arl y

sh ows if a ndwhen Lesl ie go t thi s m on ey . Butitcert ai nl y wasn ’t in 20 09
.-2 0-

[* 20 ] or o th erwi se .” Los s d educ ti on s ar e v ery li m it edfor in di vi du al s, b utth ey

do in cl ud e lo ss es th atari se fro m a th eft . Sec. 1 65 (c). W e lo okto th e la w of t he st at e in whi ch th e lo ss oc cu rredto de te rm in e whe th er a l os s was a th eftlo ss . Bell is v. Co m m is si on er, 5 40 F.2d44 8, 4 49 (9t h Ci r. 19 76 ), aff’g 6 1 T.C. 3 54 (19 73 ). Whi le a th eftlo ss do es n’t re qu ire pro of of a
co nv ic ti on , Pai ne v. Co m m is si on er, 6 3 T.C. 7 36 , 74 0 (1 97 5) , aff’d wit ho ut 9 publ is he d o pi ni on , 52 3 F .2d10 53 (5t h C ir. 1 97 5) , th e b ur de n i s o n Les li e to pro ve by a prep on de ran ce o f th e ev id en ce tha t a t he ft o ccu rredun de r Cal ifo rn ialaw, s ee Hala tav. Co m

mis si on er, T.C. Mem o. 2 01 2- 35 1. Wa s T here a Th eft? Sect io n 4 84 of t he Cal ifo rn iaPen al Co de de fin es th eft : (a) Ev ery pe rs on who sh al l fe lo ni ou sl y st eal , tak e, carry , lea d, ordri ve away

th e p ers on al pro pe rty of an ot he r, orwho sh al l frau du le nt ly app ro pr ia te pro pe rty whic h h as be enen tru st edto hi m or h er, o r who sh al l kno win gl y an d d es ig ne dl y , by an y fal se or f rau du le ntrep res en ta ti on or p ret en se , def rau d a ny oth er The C omm is si on er n ot eddurin g t ria l tha t Les li e m ad e n o h eadway with 9 po li ce en fo rcem en t o n thi s m at te r, no r di d s he su e o r fi le anadm in is tra ti ve cla im ag ai ns t St an le y . Lesl ie ass ert s t ha t d es pi te McC ul lo ug h’s s ev eral effo rts on he r be ha lf s he was u nabl e to ev enlo cat e St an le y . Bu t n ei th er a cr im in al cas e n ora ci vi l s ui t i s re qu ire d t o p ro ve a th eftlo ss --we’ve e ve n h el d t ha t t ax pa y er d oe sn ’t ev enne edto kn ow wh o t he th ie f is . Halat a v . Commis si on er, T.C. Mem o. 2 01 2- 35 1; Jen se n v . Comm is si on er, T.C. Mem o. 1 99 3- 39 3 (a ll owi ng th eftlo ss wher e in su ran ce b ro ke r un wit ti ng ly inv es te d t ax pa y er’s m on ey ina Po nz i s ch em e) af

f’d witho utpubl is he d o pi ni on , 72 F.3d13 5 (9 th Cir . 19 95 ).-2 1-

[* 21 ] pe rs on of m on ey

lab oror r eal or p ers on al pro pe rty, * * * is gu il ty of th eft
. Cal ifo rn iacas es de fin e th e cri m e o f th eftby fals e p ret en se s t o c on si stof t hr ee el em en ts :

• th e m ak in g o f fal se pre te ns e o r rep res en ta ti on by the de fen da nt ;

• th e in te ntto de frau d t he own er o f hi s p ro pe rty; an d

• actua l re li an ce b y

th e o wne r up on th e fal se pre te ns e in pa rti ng with h is pro pe rty. Peo pl e v . W il li am s, 1 61 Cal . Rpt r. 3d81 , 89 (20 13 ); P eo pl e v . Fuji ta , 11 7 C al
. Rp tr. 7 57 , 76 4 (C t. Ap p. 1 97 4)
. Bu t fi rs t a t ax pa y er m

us t es tabl is h t ha t fa il ur e to ke ep th e p ro m is e was no t
m erel y a res ul t o f a co m

m erci al de fau lt . Barry v. Comm is si on er, T.C. Mem o. 19 91 -3 82 (ci ti ng Peo pl e v . Poyet, 9 9 C al . Rptr. 75 8 (1 97 2) ). W e typi cal ly find th atth e fai lure t o k eep a pr om is e is th e res ul t o f a co m m erci al de fau ltinth os e cas es wher e th e ta xp ay er en te reda co nt ractwith aleg it im at e b us in es s. See Bel li s v. Co m m is si on er, 6 1 T.C. 3 54 (no th eftlo ss fro m st oc k p ur ch as e in leg it im at e bu si ne ss lat er b an krup t); see als o B arry, T .C. Mem o. 1 99 1- 38 2 (n o t he ft l os s fr om ba d b us in es s d eal ). Lawy er St an le y ’s bu si ne ss was n otleg it im at e. Andth atm ak es th is cas e si tu at io n m

uc h m or e li ke Hala ta , T.C. Mem o. 2 01 2- 35 1. In Hala ta , th e ta xp ay er-2 2-

[* 22 ] en te redin to a de al inwhi ch sh e was to rece iv e a $ 2.5 m il li on return o n a n in it ia l i nv es tm en t o f le ss th an$2 00 ,00 0. Id . In ex ecu ti ng th e d eal , th e sc amm er ga ve he r a co ll ect io n o f supp orti ng do cu m en ts --wh ic h we l at er fo un d “ ph on y .” Id
. at*2 3. Th e ta xp ay er co nt act eda st at e p ro se cu to r, bu t t o n o a va il . Id. at*1 5. We fo un d the en ti re tran sa ct io n t o b e fi ct it io us by reaso ni ng th at :

• th e d oc um en ts ap pe aredto be fak e,

• th e p ur

po rte d re turnon in ve st m en t was “ to o g oo d t o b e true ”--a n ob vi ou s i nd ic at orof afrau du le ntsch em e, an d

• th e la ckof aco nt ractwas fa r m or e co ns is te ntwith asca m th anwith anin ve st m en t. Id . at * 23
. Lesl ie rece iv edev enles s d oc um en ta ti on th anth e ta xp ay er i n Hal at a: on ly a
su sp ic io us “ FCC” do cu m en t tha t we al so fin d was ph on y . Very m uc h l ik e th e ta xp ay er i n Hal at a, Lesl ie ex pe ct eda return- -d oubl e h er i nv es tm en t i n o nl y 10 -3 0 da y s- -th atwas t oo go odto po ss ib ly be true . Evenm or e co m pe ll in g h ere i s t ha t Lesl ie ne ve r rec ei ve d awrit te n c on tra ctbe fo re wi rin g h er m on ey to “ Afri ca Worl d Trad e, LLC.” W e fi ndSta nl ey ’s rep res en ta ti on s t o b e fraudul en t an d t he who le de al a sc am . Ano th er el em en t o f th e o ffen se is th ata pr om is e to th e ta xp ay er m us t b e m ad e wit h t he in te ntno t t o p erfo rm . Peo pl e v . Kip erm an , 13 8 C al . Rptr. 27 1-2 3-

[* 23 ] (App . Dep’t Supe r. Ct . 19 77 ). W e can th in k o f no pl au si bl e in te nton St an le y ’s part o th er tha n t o d efraudhe r of he r m on ey

an d n ev er p erfo rm

th e d eal he pro m is ed . Halat a, T.C. Mem o. 2 01 2- 35 1, at*2 3 (f in di ng th atph on y

do cu m en ts were co ns is te nton ly w it h a n i nt en t t o d ep riv e th e ta xp ay er o f he r m on ey ). W e al so fin d tha t Les li e actua ll y rel ie d o n S ta nl ey ’s pro m is e o f a h ig h return. Ca li fo rn iaco urts ha ve he ldth atev enrel ianc e b y a fo ol is h v ic ti m

of an ab su rdfrau d i s n on ethe le ss rel ia nc e. Barry , T.C. Mem o. 1 99 1- 38 2 (c it in g P eo pl e v. Gi ll ia m , 29 7 P .2d46 8 (C al . Ct. Ap p. 1 95 6) ). Ther e is no th in g i n t he fact s t o in di cat e th atLesl ie in it ia ll y be li ev edth atSta nl ey

was n ota le gi ti m at e bu si ne ss m an . Evenif Les li e h adbe ensu sp ic io us of S ta nl ey ’s pro m is es --wh ic h sh e was n’t-- sh e cam e acr os s n o e vi de nc e to su gg es t tha t the tra ns act io n was a sc am . See Peo pl e v . Marg hz ar, 2 39 Cal . Rpt r. 13 0, 1 36 (Ct . App . 19 87 ) (rel ia nc e fo un d e ve n wh ere v ic ti m

su sp ic io us ). Acco rd in gl y

we fin d t ha t Les li e’s $4 05 ,00 0 l os s was th e res ul t o f a the ft. Whe n Wa s th e The ft? A tax pa y er i s g en eral ly perm it te d t o d educ t a t he ft l os s i n t he y ear s he di sc ov ers itun le ss th ere i s a c la im forreco ve ry , inwhi ch cas e we tr eatth e lo ss as su st ai ne d wh enitcanbe de te rm in edwith re as on ab le cert ai nt y th atsh e won ’t ob ta in rei m

bu rs em en t. See sec . 16 5( e); sec s. 1 .16 5- 1( d) (2 )(i ), (3 ), 1.1 65 -8 (a)( 2) ,-2 4-

[* 24 ] Inc om e Tax Reg s.; Jep ps env. Co m m is si on er, 1 28 F.3d14 10 , 14 14 (10 th Ci r. 19 97 ), aff’g T.C. Me m o. 1 99 5- 34 2. Les li e’s th eftoc cu rredin20 08 when sh e wire d $ 40 5,0 00 to Sta nl ey . She di dn ’t real iz e th atsh e’d b een sca m m ed , ho wev er, un ti l 2 00 9, an d s he ha s n o p en di ng cla im forreco ve ry

ag ai ns t St an le y . It was als o in 20 09 th atLesl ie ab an do ne d a ny leg al av enue s i n o bt ai ni ng rei m bu rs em en t fr om St an le y aft er Mc Cu ll ou gh ’s con ta ct s wi th po li ce en fo rcem en t an d h er o wn co nt act s wi th he r at to rn ey s p ro ve d u nf ru it fu l. Mc Cu ll ou gh ’s andLesl ie ’s fai le d at te m pt s t o g etrei m

bu rs em en t i n t ha t year are en ou gh forus to fin d t ha t Les li e h ad
no reas on ab le pro sp ectof r eco ve ry . See Hal at a, T.C. Mem o. 2 01 2- 35 1, at*2 8. Thu s, Les li e’s th eftlo ss was su st ai ne d in th e 2 00 9 t ax y ear. W e fi ndforLesl ie on th is is su e. 1 0 IV. Pen al ti es A. Late Fil in g Sect io n 6 65 1( a)(1 ) im

po se s an ad di ti on to tax forfai lure t o t im el y fil e a return unl es s the tax pa y er can e st ab li sh reas on ab le cau se . The Co m m is si on er h as m ethi s b ur de n o f pr oduc ti on on th is on e b ecau se Lesl ie co nc ed es th atsh e fi le d
The e xc es s o f de du ct io ns ov er g ro ss in co m e is a ne t-o pe rat in g l os s. See 1 0 se c. 17 2( c). To t he ex te ntth atLesl ie ’s lo ss ex ceed s h er i nc om e sh e m ay carry ba ckhe r lo ss fir stto 20 07 --two years b efo re the lo ss . See s ec. 1 72 (b )(1 )(A)(i ). W e le av e th es e cal cu la ti on s fo r Ru le 15 5.-2 5-

[* 25 ] he r 20 07 an d 2 00 8 re turn s l at e. Sh e as se rts as ade fen se , ho wev er, tha t s he ha d re as on ab le cau se be cau se of h er o ng oi ng ps y ch ol og ic al pro bl em s. In cap aci ty on t he pa rt o f a t ax pa y er b ecau se of m en ta l i ll ne ss canbe a reas on ab le cau se forfai li ng to fil e ti m el y returns . W il li am s v . Comm is si on er, 1 6 T.C. 89 3, 9 06 (19 51 ); Wil ki ns on v. Co m m is si on er, T.C. Mem o. 1 99 7- 41 0, 1 99 7 W L 57 08 63 , at * 7. Bu t the tax pa y er m us t s ho w th athe r m en ta l o r em ot io na l di so rd er “ ren de red[he r] inc ap ab le of e xe rci si ng ord in ary bu si ne ss care an d prud en ce dur in g t he pe rio d i n wh ic h t he fai lu re t o fi le co nt in ue d.” W il ki ns on , 19 97 W L 57 08 63 , at * 7. We ackno wled ge th atLesl ie was d ia gn os edwith s ev eral
se rio us m en ta l d is or de rs an d was tak in g m ed ic in e fo r de pr es si on . Butth e st an da rd is a to ug h o ne to m eet , andwe di d n otsee en ou gh ev id en ce o f he r in ab il it y to
m an ag e h er o th er b us in es s af fai rs du rin g t hi s t im e. Sh e was , for ex am pl e, li vi ng in
subs ta nt ia l p arton th e in co m e fro m eig htren ta l p ro pe rti es sh e g otinth e d iv or ce, whi chrequi redhe r act iv e in vo lv em en t i n t he ir m an ag em en t. We ackn owl ed ge sh e ha d p ro bl em s d oi ng th is , bu t b ecau se sh e was st il l ab le to li ve on th is in co m e we fin d t ha t h er ab il it y

to “ carry on no rm al act iv it ie s” was n otso im pa ire d a s t o b e an in ab il it y . See i d. Th is is no t en ou gh to ex cu se a la te fil in g. W e fi ndforth e Co m

m is si on er o n t hi s i ss ue .-2 6-

[* 26 ] B. Accu racy-Rel at edPen al ti es Sect io n 6 66 2 i m

po se s an “ accu racy-rela te d p en al ty” of 2 0% o f th e p orti on of th e u nd erp aym en t o f ta x a tt rib ut ab le to a subs ta nt ia l u nd ers ta te m en t o f in co m e ta x. Lesl ie co nc ed es accu racy-rela te d p en al ti es im po se d b y th e Co m m is si on er t o t he
ex te ntth atwe fo un d d efi ci en ci es forth e 2 00 7 a nd20 08 tax y ears . Andwe fo un d fo r he r on th e m eri ts of h er 2 00 9 t ax y ear. Thi s i s a s pl itde ci si on . V. CDP Onc e th e Co m

m is si on er as se ss es a ta x, b utbe fo re h e canco ll ectan y unpa id po rti on of i t, h e m

us t g iv e a t ax pa y er the op po rtu ni ty for a co ll ect io n due pro ces s (CDP) h eari ng . See s ecs . 63 21 , 63 31 (a). A ta xp ay er ca n ra is e an y rel ev an t i ss ue du rin g t he he ari ng , in cl ud in g a n a lt ern at iv e to for cedco ll ect io n. Se c. 63 30 (c)( 2) (A). One su ch alt ern at iv e is anin st al lm en t ag reem en t. Sec s. 6 15 9( a), 63 30 (c)( 2) (A)(i ii ). Altho ug h Les li e’s arg um en ts du rin g t he CDP h eari ng foc us edon he r un de rlyin g l iabi li ty, sh e d is ti nc tl y ask edfora co ll ect io n a lt ern at iv e (d es pi te th e Co m m is si on er’s as se rti onto th e co nt rary). She n ow re qu es ts a rem an d o n t he gr ou nd s t ha t the SO fai le d t o c on si de r a co ll ect io n a lt ern at iv e, an d we r ev ie w th is pa rt o f th e d et erm in at io n fo r ab us e o f di sc ret io n. Se e Seg o v . Comm is si on er, 1 14-2 7-

[* 27 ] T.C. 60 4, 6 01 0 (2 00 0) ; Go za v . Comm is si on er, 1 14 T.C. 17 6, 1 82 (20 00 ). Co urts ge ne ral ly hol d t ha t a d eci si on m ak er ab us es hi s d is cret io n “ whe n [h e] m ak es anerro r of

law * * * or r es ts [hi s] det erm in at io n o n acle arl y erro ne ou s fi nd in g o f fact* * * [o r] ‘ ap pl ie s t he co rrec t l aw to fact s wh ic h a re n otcle arl y erro ne ou s b ut ru le s i n a n i rrat io na l m an ne r.’” Unit edSta te s v . She rb urne , 24 9 F .3d11 21 , 11 25
- 26 (9t h C ir. 2 00 1) (ci ta ti on s o m it te d) (qu ot in g F rie dk in v. St ernbe rg , 85 F.3d14 00 , 14 05 (9t h C ir. 1 99 6) ). The C ou rts have reco gn iz edth atth e App eal s Off ic e n eed s fin an ci al in fo rm at io n t o e va lu at e a co ll ect io n a lt ern at iv e an d t ha t i t i s n otanab us e of di sc ret io n fo r anSO to de cl in e to co ns id er al te rn at iv es wher e a t ax pa y er fa il s t o subm itreque st edfin an ci al in fo rm at io n. Se e Lan ce v . Comm is si on er, T.C. Mem o. 20 09 -1 29 (ci ti ng Sch wers en sky v. Co m m is si on er, T.C. Mem o. 2 00 6- 17 8)
. The Co m m is si on er d oe s ar gu e o n b rie f he re tha t the SO was wi th in he r di sc ret io n t o d en y

co ll ect io n a lt ern at iv es be cau se Lesl ie di dn ’t supp ly info rm at io n ab ou t h er h eal th - an d l ife -in su ran ce p rem iu m s. Thi s was , ho wev er, jus t ab ou t the
on ly fina nc ia l i nf

orm at io n t ha t Les li e d id n’t s up pl y . Evenm or e im po rta nt , th is sp eci fic fai lu re-- a fai lu re t o s up pl y co m pl et e in fo rm at io n abo uthe al th - an d l ife
in su ran ce p rem iu m s- -is no t ci te d i n t he no ti ce o f de te rm in at io n a s a r eas on for refu si ng to co ns id er an alt ern at iv e to en fo rcedco ll ect io n. In rev ie win g n ot ic es of-2 8-

[* 28 ] de te rm in at io n, we fo ll ow t he Ch en ery do ctrin e. See J on es v. 1 1 Co m m is si on er, T.C. Mem o. 2 01 2- 27 4; Sal ah ud di n v . Commis si on er, T.C. Mem o. 20 12 -1 41 , 20 12 W L 17 58 62 8, at*7 . App lying Ch en ery in a CDP ca se m ean s t ha t we can ’t up ho lda no ti ce o f de te rm in at io n o n g ro un ds othe r th anth os e actua ll y rel ie d upo n b y

th e IRS off

ic er wh o m ad e th e d et erm in at io n. Se e Ch en ery I, 31 8 U.S. at 8 7- 88 ; Sp iv a v . Astru e, 62 8 F .3d34 6, 3 53 (7th C ir. 2 01 0) (ag en cy ha s t he
res po ns ib il it y

to art ic ul at e it s re as on in g) ; Sa la hu dd in , 20 12 W L 17 58 62 8, at*7 (“ [O]ur ro le un de r se ct io n 6 33 0( d) is to rev ie w act io ns th atth e IRS to ok , no t the act io ns th atitco ul d h av e ta ke n” ). Tho se gro un ds m us t b e cl earl y

setforth so th at we do no t h av e to gu es s ab ou t wh y anoff ic er d eci de d wh athe di d. Se e Ch en ery II, 33 2 U.S. at19 5. Unl ik e m an y

tax pa y ers , Lesl ie subm it te d aco m pl et e Fo rm

43 3- A, Col le ct io n In fo rm at io n S ta te m en t fo r W ag e Earn ers an d S el f-Em pl oyed In di vi du al s, al on g with acu rren t s etof h er fi na nc ia l re co rd s. Th is en ab le d the SO--ev enwitho utth e ad di ti on al he al th - an d l ife -in su ran ce s ta te m en ts --t o g en erat e anall owabl e-ex pe ns e works he et . Inhe r no te s t he SO ackno wled ge d t ha t Les li e h adpro po se d a The Ch en ery do ctrin e is anadm in is tra ti ve -la w pri nc ip le th atsays a co urt, 1 1 in rev ie win g ade te rm in at io n wh ic h a n “ adm in is tra ti ve ag en cy alo ne is au th or iz ed to m ak e, m

us t ju dg e th e p ro pr ie ty of su ch act io n s ol el y by the gro un ds in vo ke d b y th e ag en cy .” See SEC v. Ch en ery Co rp ., 33 2 U.S. 1 94 , 19 6 (1 94 7) ; SEC v
. Ch en ery Co rp ., 31 8 U.S. 8 0 (1 94 3)
.-2 9-

[* 29 ] co ll ect io n a lt ern at iv e b utin st eadof, fo r in st an ce, d is al lo win g t ha t p artof Lesl ie ’s cla im edexpe ns es an d c om pu ti ng a hi gh er i ns ta ll m en t p aym en t s he si m pl y reject edan y

alt ern at iv e atall . This m ak es th e d et erm in at io n n otrat io na l, i n co ntras t t o t he run -o f-the -rejec ti on -m il l ca se wher e a t ax pa y er s ub m it s n o in fo rm at io n o r le av es ou t as se ts . Cf. Gil lu m v. Co m m is si on er, T.C. Mem o. 2 01 0- 28 0, af f’d, 67 6 F .3d63 3 (8 th Cir . 20 12 ) (ex cl ud in g i nf orm at io n abo utass et s i s fai lu re t o p ro vi de in fo rm at io n n eces sa ry forev al ua ti on ). W e th eref

or e h ol d t ha t the SO’s fai lu re t o c on si de r a co ll ect io n a lt ern at iv e in th is cas e was anab us e o f di sc ret io n. We will rem an d t he cas e to th e App eal s Offi ce t o h ol d asupp le m en ta l h eari ng aft er the pa rti es co m pl et e th ei r Ru le 15 5
co m pu ta ti on . Deci si on indo ck etNo. 2 70 14 -1 2 wi ll be en te redun de r Ru le 15 5, an d a n ap pr op ria te ord er wi ll be is su edindo ck et No. 9 89 4- 12 L.