TAX COURT OPINION

Case: David J. & Sharon A. Felt
Docket Number: 3735-06
Judge: Holmes
Opinion Type: memo
Filed: 10/28/2009
Pages: 49

T .C . Memo . 2009-24 5 UNITED STATES TAX COUR T DAVID J . FELT AND SHARON A . FELT, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 3735-06 . Filed October 28, 2009 . George W . Connolly and Habeeb Gnaim ,,'for petitioners . Randy Durfee and Gordon Sanz , for respondent . MEMORANDUM' FINDINGS OF FACT AND OPINIO N HOLMES, Judge : David Felt, a real-estate broker and mortgage banker, bought a Texas savings-and-loan association in 1983 . it was failing, and regulators wanted him to sell . To make matters worse, David and his wife Sharon failed to file their tax return s 81RVED OCT 2 8 2009 - 2 - for 1986-87, 1989, and 1994-98 . The Commissioner says their failure to file concealed massive amounts of income, including : IC I $4 million in capital gains from the sale of the S&L , $2 million in cancellation-of-indebtedness income different business that David also ran, an d a small river of money streaming to the Felts throug h accounts held by David's aged mother and flowing fro m indistinct sources offshore . The Commissioner also asserts various additions to tax 'and resists Sharon Felt's request for innocent-spouse relief . FINDINGS OF FACT I . Beginnings : Reliance'Savings Association I David Felt bought Bowie County Savings & Loan Association in 1983 . He financed the deal with $1 .4 million borrowed from th e Texas Investment Bank and from an entity called, Amerirca n Guaranty Inc . (AGI), which he himself owned . Felt moved Bowie to Housto n and renamed it Reliance Savings Association . Reliance was , a state-chartered, federally insured S&L regulated by the Federal> Home Loan Bank Board (FHLBB) . S&Ls became'popular~in the early twentieth century as a way to promote home ownership . Kendall, The Savings and Loan Business " 1 (1962) . They offered slightly higher interest rates on savings accounts than could somelibanks,, and then used the . savings to fund residential mortgages . For much-of the century, S&Ls enjoyed tax benefits but also shouldered a heavy regulatory weight--for instance, a majority of their assets had to be residential real (cid:127) 3 - estate loans . In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980, Pub . L . 96-221, sec . 401, 94 Stat . 151, which loosened restrictions on consumer lending and broadened the types of investments thrifts could make . Volatile . interest rates, a mismatch of short-term government-insured liabilities and long-term risky investments-- plus some outright thievery--led to a financial crisis in the industry when borrowers defaulted at staggering rates . Hundreds of S&Ls failed, and Texas was especially hard hit, partly due to sagging real estate prices ; Felt himself estimated that nearly 75% of the S&Ls in the .state failed or disappeared in the 1980s . Reliance was one of them . In 1986, the FHLBB came after Felt for regulatory violations,,and,threatened him with removal and ,a cease-and-desist order . Felt took-the hint and, .in August 1986, agreed to sell his entire interest in Reliance . The Bank Board gave him six months, and warned him to come to the Board fo r approval of any deal that he worked out . Felt quickly found a consortium of buyers . They fell into three groups . The first were people who had lent money to AGI and gotten notes back ; Felt traded 60 percent . of his Reliance stock for the return of these notes . The second group paid him $500,000 in cash for 7 percent of the Reliance stock, but borrowed the money from a bank .which required Felt to personally guarantee the loan . And a third group bought the remaining 33 percent with 4 - notes from yet another of-Felt's~business entities, called' Specialty Finance' .Company, which held the shares as'collateral . . The-deal' was=trouble from the start . Felt's offering I' material included-unaudited financial statementsand failed t o include some information that it should have . The deal als o depended on anticipated sales- .to affiliates that'.were less than certain to occur .. Felt didn't fix these problems"and'-the°FHLBB ° never approved the sale .-4 with the' deal anyway . The FHLBB'' s response-was''(cid:127) swift' and harsh . It seized(cid:127)Reliance, .,and .in 1990 i t got a judgment against Felt requiring him to'rescind the :sale : .- This left him to pay a judgment for $4 :2 million plus costs and interest . . The Felts dec }i'ared 'bankruptcy in 1992, - but : even . , bankruptcy, turned sour in 1997 when the Office' .. of, Thrif t Supervision,''the FHLBB' s successor agency won a~.,court order- .declaring the.-$4 .2 million judgment nondischargeable because'i t arose from Felt's willful defalcation and-breach of . fiduciary . duty . . II . Life After.. Bankruptcy ' The Felts both te'stified~ that ' life became grim . David sai d they had had an A+ lifestyle .before mid-1987, which graduall y became' an F,lifestyle . . Sharon credibly testified that she sand he r husband could no longer afford-a housekeeper or a-landscapin g company after 1992 .. We also believed her testimony that .they 6 5 - could no longer afford new furniture and began instead to accept used furniture-handed down from her elderly mother-in-law, Birdie Felt . It wasn't just furniture that Birdie was giving the Felts . By 1994, and until her death in 2000, many of the Felts' ordinary household expenses came to be paid from Birdie Felt' .s checking account . Tens of . thousands, and perhaps hundreds of thousands, of dollars a year for rent, summer camp, college expenses, and credit-card bills came to the Felts from her account . She also deposited money into several of David's business accounts . The source of her plentiful wealth is unclear . But whatever its ultimate origins, it flowed from offshore accounts back to the United States in regular $7,500 wire transfers . These wire= transfers . continued uninterruptedly until .March 2000, several months before Birdie died . We specifically find that at least some of her wealth came from her son ; for 1995 through 2000, the bank records of Tower Resources (yet another of David's many businesses) show .almost $40,000 flowing to Birdie . III . AGI and AGI-Ne v Reliance was only one province of Felt's empire in the 180s . Another was AGI, a Texas corporation that Felt had formed in 1978, and which later was to become entangled in the Reliance sale . As Felt's troubles grew, he began to fail to pay AGI's franchise tax, and its registration lapsed in November 1989 . Before then, though ~AGI was. in the consumer and,resident'ial' .loan business,- which it . funded by borrowing-money from investors . AGI's_, . , importance to this case lies in the notes with a face value of-'- vj $2,510,740 . that some of .is investors exchanged-for Reliance,stoc k in 1986 . But there was also another AGI . In 1998, Felt applied for-an u Employer Identification Number for:. "American Guaranty, , Inc .',.in . Las Vegas, Nevada (we'1l11limitour use-of the abbreviation AGI to4 the Texas corporation,and ;,call(cid:127)-this one AGI-Nev) . Felt listed,,''. . his aged mother as .AGI-Nev's principal officer . . ; He described as, a "holding company" and indicatedthat "American Guaranty., Inc ." .had never applied .for an EIN before ., (AGI-Nev is also defunct, Nevada- .having permanentlyrevoked,its registration . ) AGI-Nev isimportant to the case because . David . and Birdie opened' at least twobank accounts, yin- .its name .. The first was, a ri checking account, . into which they deposited .$50,000 .- . The second was a money-market account,=into which they deposited $250,,000 Felt explained this .;by saying that he had given some,old .AGI (that's the by-then-defufct-Texas AGI, not AGI-Nev) receivables-to , a collections company, and that he formed the new company to handle the money it remitted Felt testified that,, despite=, the , corporate facade', he . andl Birdie used the,AGI-Nev money personally , and may .have split .it equally . There ;are_several checks bearing- Birdie's signature from the AGI-Nevffaccounts .,-One check, , writte n ~,I - 7 - in February 1999, is for $17,048 .39 and was endorsed by David Felt . The others, from 1998, total $55,000 and were endorsed for deposit into Birdie's Wells Fargo account . IV . J&N A third entity important here is J&N (the initials of the Felt children) . J&N was not a corporation ; Felt described J&N as "effectively a d/b/a that just held some rental properties and a couple of notes or something ." It did, however, have a bank account in its own name, and at least $153,000 somehow stumbled into this account in 1997 . The, source of the money is also mysterious--Felt says that J&N took in only $80,000 that year by collecting an old debt, and after expenses it .netted only $73,118 . V . Notices of Deficienc y In 2005, the Commissioner issued notices of deficiency to the Felts . They showed the-following deficiencies in tax : 1 1 There is no explanation in the record for the different deficiencies for the two Felts in 1987 and 1996 . Year 1986 .1 1987 1989 1994 1995 .1996 1997 1998 u! a. - Deficienc y $991,69 0 -David : . 103,85 9 Sharon : 103,08 4 561,88 4 36,73 2 10,63 2 David : . 37,10 2 Sharon : 37,779 . = 144,56 7 185,864 . The Commissioner also ass erted-additions' to . tax under-sections - - 665,1(a) (1) and (2), and'6454 . We tried the case-in .Houston, 2 :.a s The parties settled many, issues, but these remain : .OPINION WhetherTDavidIand Sharon Felt should have . reported' capital gains for 1986 from the sale of Reliance ; whether they should have reported $2 million in cancellation-oif-indebtedness income for 1989 ; (cid:127) whether they should have reported income'from Birdi e Felt for ,1996,',] 1997, and 1998 ; (cid:127) whether . they should have reported $153,118 in incom e from J&N for 1997 ; whether they should recognize $300,000 in income from AGI-Nev for 19 1,98 ; z Unless otherwise Indicated, all section references"are to, the Internal Revenue',Code for the years at . issue ; all Rule N references are to the Tax Court Rules of Practice -and .Procedure .. - 9 - (cid:127) whether Sharon Felt is entitled to relief from community property liability rules under section 66 ; an d (cid:127) whether the Commissioner properly asserted additions to tax and a penalty against her . I . Income from the Sale of Relianc e A . Did David Recognize Gains from the Reliance Sale? To-calculate gain, we subtract a taxpayer's adjusted basi s from the sale price of the item sold . Sec . 1001 ( a) . The parties agree that Felt's basis in - his Reliance stock was $ 1,725,852 . Felt says he sold his shares for assets nominally worth $4 .5 million . But simple arithmetic will not do here, because the parties dispute the actual value of what Felt got for his shares . We therefore value each piece of what he got : the AGI notes , (cid:127) the borrowed cash supported by Felt's guaranty, an d proceeds from the . Specialty Finance loans . 1 . AGI Note s David exchanged about 60 percent of his Reliance shares fo r notes payable by AGI . These notes had a total face value of $2,510,740, but Felt argues that they were worthless . The Commissioner ' contends that the Felts ' benefited because they were the sole owners of AGI, and AGI was now free of a $2 . 5 million debt ., . Felt does 'admit that the cancellation ofwth 'se notes might have created cancellation- of-indebtedness income for him,' but Gross income includes " all income from whatever source (continued . . .) argues that this „would be true only if he were personally liabl e for their repayment . We''agree with Felt that we should look first . at whether the sale created cancellation-of-indebtedness incom e for him from AGI, and only then at, whether the sale created,agai n or loss . , The Commissioner argues that David was personally liable o n the' investors' notes, got ; them as .part of the Reliance stock :sale , and then . canceled them, giving . rise to $2 .5 million of income .a It's not immediately apparent why this should be so--AGI was a , corporation, which usually gives shareholders limited . liability . corporation's-;creditors canno t successfully demand thatl,shareholders pay their company's debt s unless the shareholders have guaranteed them . See Tex . Bus .'Corp Act Ann . art-2 .21 (Vernon 2003) . . . David provided several pieces of evidence that ;he ;had,not personally guaranteed the notes or become otherwise personally liable . First is the letter he .sent to AGI investors -to induc e them to trade for his ;Reliance ..stock . In that letter (o f admittedly dubious credi} ility) he,writes : "Although I,,, Davi d Felt, donot have any personal .liability-.for payment of your .AGI , note, and do not as,sume ,any :..liability,for.payment of your AGI not e * *T * 'I will be preparing-an offering circular for, my stock i n . . . continue d) derived," including Sec ._f61 (a)-(12) . income from the ;:discharge kof indebtedness . - 11 - Reliance Savings Association." The parties introduced a more persuasive AGI note from October 1984, originally made out to a Tracy V . Huckins, . which makes no mention of a personal guaranty by David and seems to allow recourse only against AGI . The Commissioner's only evidence is a Memorandum and Order from the Southern District of Texas in FHLBB v . Felt , No . H-88- 1204 (S .D . Tex . 1997) (order to submit final judgment), which states, "[A]s a result of the exchange, Felt * * * canceled AGI's investment debt, allowing Felt to avoid personal liability for that debt ; and allowed Felt to retain AGI's assets for himself and to forgive his personal debt to AGI ." The problem, for the Commissioner here is that he didn' .t give us enough context--the District Court's order doesn't explain the basis for its finding . And the Commissioner never pleaded or argued that Felt had actually litigated the question in District Court--and we won't just assume that actual litigation or the other elements of collateral estoppel exist . We therefore find by a bare preponderance of the evidence that David has produced sufficient evidence that he was not personally liable on the notes . He has met his burden of showing that no cancellation-of-indebtedness income accrued to him from the exchange of AGI notes .. That's not quite enough for the Felts to win this part of the case . They must also persuade us that the AGI notes were worthless at the time of the sale . The Commissioner helped them here, presenting . evidence from Timothy Wannemuehler, the FHLBB bank examiner who examine AGI's'records in 1986, that AGI was insolvent in 1986, and could-not'pa'y the notes . This corroborate s Felt's own'claim that he'!himself knew the'notes'were worthles s when he accepted themforphis Reliance stock--he sent a .lette r AGI' s investors about , that time to warn them of cashf low problem s at AGI and tell them that',90-percent of AGI's competitors we're out of business or in bankruptcy .' We . therefore find that the notes . were worthless . Five investors paidi'Felt a total of $500,000 cash for some . .-' Reliance-shares ., Some of, these investors-,financedi-their .-purchase.. through Texas,''Investment Bank,' which required Felt-to personall y guarantee the loans .-''The record has three guaranty agreements for a total of $171',000, allrljsigned by Felt, effective December' 1986 :, :!I All have stated maturity dates of: December 3-1, . 1987 . . Felt .doe s not dispute that he received $500,000 cash in 1986,. His onl y argument is, ,that he later had . to make good on some of his guaranties and estimateslrthat he had to pay back $100,000, . He stumbles here on~llthe claim-of-right doctrine, the rule, of A tax law that states, a taxpayer receives earnings under a = claim of right and without restriction as to its disposition, h e has received income * * * even though it may still be claimed .that he is not entitled to . retain the money ." N.A . : Oil Consol ."v . Burnet ,,286 U .S . 417, 424 (1932) If the taxpayervmust,later . repay,, he may take a deduction in the year he repays . ::Id . ; see- - 13 - also sec . 1341 . This means the Felts must report the entire $500,000 as income in 1986, the year they received it . That still leaves the question of whether the Felts are entitled to a deduction in the year Felt made good on the guaranty (assuming that year is one of the years before us)'. Felt bears the burden of proving both the amount he repaid and the date he repaid it .' See Rule 142(a) . He offered only his testimony to prove the amount of the repayment, and no evidence of the date of the repayment . We .cannot say when he paid the guaranties or whether he even paid in years covered by the notices of deficiency, so on this point we find for the Commissioner . The Felts must include the entire $500,000 as payment for the Reliance stock in 1986 and they are not entitled to a deduction for the alleged $100,000 repayment . 3 . Specialty Financing Note s The final group bought roughly 33 percent of the Reliance stock . They financed this, with loans . from Specialty Finance, which turns out-to be a doing-business-as name for David Felt . These-loans were in-the form of promissory notes from the stock buyers to Specialty Finance . We have only one note in the record, and it shows interest payable starting in April 1987, with principal payments beginning in April 1989 and the entire note coming due December 31, 1990 . The interest rate is set at either the highest rate allowed by law or one percent over the prime rate, whichever was less . It was secured by the Reliance shares. - 1 4 Felt argues that 'bec!ause'he was . insolvent, Specialty Finance . was insolvent, thus ;making .,the notes worthless . His logic is : clearly wrong ; just because Citibank,' for instance , becomes ' insolvent doesn't mean itjs . .credit card holders, get off the hook'. ; l from-paying their,-bills . a The ,relevant inquiry is . into the rt debtor's-solvency.; if,the . debtor is solvent, . an insolvent ~jcredito r may sell the-notes, - for immediate' (if discounted) cash value . This . is, called ",cash equivalence . " Individual .taxpayers ; are„ generally, cash basis taxpayers , which means, that they have, to recognize income, in . the year they "actually .or,constructiv4ly", receive it :.Sec . 45.1 ; sec . '1 .4151- .1(a), Income Tax Regs ._ This rule is easy ._to. apply to cash-,,-cash - is'income when the' taxpayer .getsf t in his hands . It'is harder t o apply to debt instruments taxpayer only to a futur e ,consideration for "cash equivalence," and include, :it' in income i n the year receive,d,, rathei than counting it as income only, whe n payments .arejmade ., Felt7has .the burden of proving that the, note s are not, cash equivalents See . Olster v . Commissioner , 79 T .C . ., 456,, . 469 n'.14,, ( 1982 ),,- affd . 751 F .2d 116 .8 (11th Cir. . . 1985) W e look at whether .,the note )is ,a- "promise to pay, of a , solvent obligo r * * *, not subject . to set-offs, . and is of_a kind that i s ~ frequently transferred t o 11 lenders or investors at a discount not substantially greater than the generally prevailing premium fo r lq 15 - the use of money ." See Cowden v . Commissioner , 28,9 F .2d 20, 24 (5th Cir . 1961), revg . 32 T .C . 853 (1959) . Felt could have met his burden by showing, for instance, that . the debtors were insolvent, the notes could not be assigned, or the notes would have traded at a deep discount . See id . But he gave us nothing about these subissues ; and so we find that the notes were cash equivalents . Our default rule is to rely on the face'value of the notes, as it is the only-measure of this value that we have . See A . & A . Tool & .Supply Co . v . Commissioner , 182 F .2d 300, 303 (10th Cir . 1950), revg . a Memorandum opinion of this Court . We therefore find that the Felts . must recognize as income in the year of the sale the entire :.face value--$1,489,260--of the Specialty Finance notes . The total gain or loss-from the sale is the amount Felt received less his basis . He received cash and notes worth $1,989,260, and his basis was $1,725,852 . This leaves a taxable gain of $263,408 . 'B . Did the Sale Produce Capital Gain or Ordinary Income? Felt argues that since he "was a dealer in notes in his ordinary course of business * * * he is entitled-to an ordinary loss for the total amount of the consideration represented by these notes ." We-have already found that Felt recognized gain on the sale, but this argument . forces us to determine whether the gain was a capital gain or ordinary income . Property held by a taxpayer is generally a capital asset . When a capital asset is -' 16 - sold', the gain or loss isp capital too . Sec : . 1222 ..' Felt spent "' . considerable time arguing] whether-the notes he received,in .the sale were capital°assets,~ when he should have been arguing about the Reliance .stock that: he; sold . Stock is a capital asset ,unless- it falls within the section 1221(a)(1) exception for dealers . who keep - stock 'as inventory . J, Felt was . a banker who -admittedly dealt ; ° inn"notes . and mortgages ," : not'stock . We-therefore find that the stock °° was"a capital asset,-the gains from its sale are , capital, too .' See . Kadillak V : Co Imissioner , 127 T .C . 184, 199 (2006) affd :, 534-F .3d 1197 (9th .Cir . 2008) . When Is the Sale Taxable? , Felt also argues that he did not . recognize capital „gains in 1986 because the sale was later rescinded by court order . .'But-,= a with his-argument about, part of the cash he receive, in consideration--cash he later might have to .pay back--this argument founders,on the claim-of'jright doctrine . The .Felts have t o recognize income in the year they received it, and that'year was 1986, because the.-Commissioner says so and the Felts never rebut it . They may have been_ntitled,to a :_deduction~later in the year of the rescission--if they in fact could prove; they paid back the consideration that: they lad received--but that year is not, before „ us . II . Cancellation-of-Indebtedness-Incom e The next, issue is thetiming of T$2 million .in cancellation I . of-indebtedness ; .income r,The Commissioner assertsthat Felt -' . 17 - borrowed over $2 million from AGI, and there is no dispute that he never repaid it . These unrepaid loans became income to Fel t in 1989, when AGI's business registration lapsed . Felt's . counterargument is that he-didn't owe AGI any money and that, if he did, AGI owed him more , so the amounts should offset . He also argues that he didn't recognize the income in 1989 because AGI continued operating . despite its lapsed registration , and that he didn't have to recognize cancellation - of-indebtedness income in 1989 because he was insolvent that year . ' See sec . 108 ( a)(1)(B) . We therefore analyze : (cid:127) Whether Felt owed AGI money , whether his debt was offset by a debt AGI owed him, if he did have cancellation-of-indebtedness income , whether he. realized it in 1989 or some other year, an d (cid:127) whether he was insolvent at the time he realized the income . A . Did-Felt Owe a Debt to AGI ? We face a paucity of-evidence about Felt's debt to AGI . The .only records we have are the FHLBB examiner's handwritten notes and accompanying AGI ledgers, coupled with the Felts' stipulation that AGI records showed these loans and the loans were never repaid . The records (which are, in places, illegible) show th e following . eight loans worth more than $2 million total, fallin g due between 1983 and 1987 : Loan No . 31-020259-8 31-020031 .1 32-020134-3 42-020223-4 32-020147-5 33-020„058-4 38-020086-5 38-020087-3 1 8 7p Amount $ 1 , 946,'672 .. 16,937 . Il~ 14 , 20 0 ia ,~ 16,500 IIN ; 40,870(cid:127) 16,000 39,794 58,000 Maturity Dat e 1-2-8 7 11-1-8 6 11-15-8 6 ?-12-8 6 [month illegible ] °l1-16-8 3 3-10-8 4 7-8-8 3 11-01-8 3 Felt carefully clais"that "the record is devoid of any AG I documentation reflectingl . the $2 million loans . . But he doesn' t actually deny owing AGI money ; his briefs dispute only whether the AGI records showed a debt, and whether they establish its amount . We agree-that the evidendet'is thin,°but .the Felts stipulated that A the AGI records'"indicated"that Mr.= . Felt-was indebted to AGI i n the amount of $2,148,973 :' . This debt has never been repaid ." Under Rule 91(e), stipulations are binding unless "justic e requires" the Court to release a party from its'stipulation . Th e Felts nowhere claim that we should release them from the stipulation ; and since theyti~were represented by counsel , we would be unlikely to grant suc h! a request . We therefore find that Felt- owed AGI $2,148,973 and iiever paid . it . rl~ B . Was Felt's Debt to AGI Offset by the AGI Notes ? We next examine whether the notes Felt acquired in the Reliance sale somehow relduce 'the debt he owed AGI .and never . Lf , 19 - repaid . Felt's problem here is a failure to present proof that he took steps to carry out a setoff . Felt's setoff argument seems to be that if he has to realize cancellation-of-indebtedness income, he need do so only after netting what he owed AGI against what AGI owed him after he received AGI notes as part of the Reliance stock sale . Without a setoff, it is the full amount of Felt's indebtedness to AGI that might create cancellation-of-indebtednes s income . Setoff is a state-created right . Citizens Bank of Md . v . Strum-of, 516 U .S . 16, 18-19 (1995) . ; Dzikowski v . N . Trust Bank of Fla ., N .A . ( In re Prudential of Fla . Leasing, Inc .) , 478 F .3 d 1291, 1297 (11th Cir . 2007) . Texas requires four steps to set of f a debt : (cid:127) An intent to exercise his right to setoff ; (cid:127) an action to accomplish the setoff ; (cid:127) making a record of the setoff ; and (cid:127) applying the funds taken by setoff to the debt owed . Tex . Commerce Bank-Hurst, N .A . v . United States , 703 F . Supp . 592, 594-95 (N .D . Tex . 1988), affd . sub nom . Tex . Commerce Bank-Ft . Worth, N .A . v . United States , 896 F .2d 152 (5th Cir . 1990) ; Shearson Lehman Bros ., Inc . v . .Resolution Trust Corporation , No . 05-93-00527-CV (Tex . App ., Feb . 23, 1994) . Felt did none of these things--at least while AGI was still in existence--and his mere - ;20 - declaration . of an,intent to-,set off, retrospectively is not enough . See . In re Archer , 34 .Bankr .'28, 30 (Bankr . N :D . Tex . 1983) . , We therefore f.ind,that Felt did,not exercise any right to %g . setoff that-he might have had, and that . it is the full amount o f his .,loans_from AGI that(cid:127)generates,cancellation-of-indebtedness, , income . C,. When Was_There-,an .Identifiable Event Leading to . Realization of the Income ? Since we have decided that Felt owed AGI money that was not diminished by setoff,,we ,next turn to deciding the year in which , his debt to AGI was canceled . The Commissioner, relying on Cozzi 4 V . Commissioner ,' 88 T .C .435 (1987) argues that there was a i I ,K "identifiable event" in 1989 because that was the year AGI forfeited its corporate charter and, he says, ceased doin g business . Felt says that AGI continued doing business after 1989 and any cancellation - of-indebtedness income would have arisen at the time of the bankruptcy proceedings in 1992, which is not, a year at issue . We have long recognized the problem of fixing when indebtedness iscancele d l'I indeed,, "it will often be . impossible find one, and only one, ,event that clearly establishes the time .o f abandonment [of a claim],-rthere_ .is likely to be a-range . of . times, any one of which would be reasonable ." Id . at 447 .= Ourresponset: to this uncertainty is tomake,taxpayers show . that the = Commissioner's stated date does not fall within the range of - 21 - reasonable dates. Id . at 448 ; see Rule 142(a) . We look to the "facts and circumstances relating to the likelihood of payment" to determine what : range of dates would be-reasonable . (cid:127) Id . at_ .445 . Cozzi tells us that a "scheduled final payment" .passing with no payment on a loan is an "identifiable event" sufficient to trigger recognition of cancellation-of-indebtedness income . Id . at 447 . Therefore, it would be reasonable to find that the Felts had $2 million of cancellation of indebtedness income as early as January 1987, because all of the loans were due by then . . See table supra p . 18 . Felt wants us to find that'he incurred this income in 1992, the year he declared bankruptcy . This would be five years after the last final payment date had passed with no payments (and nine years after the earliest maturity date had passed) . Felt' s failure to include these AGI debts on his bankruptcy schedules also strongly indicates that he was no longer liable for these amounts . His suggested date falls outside the reasonable range ; he must have realized this income before 1992 . 4 But has Felt proven to us that the Commissioner's 1989 date falls outside-of the reasonable range, too? The Commissioner pinpoints 1989 because he believes that is the year-AGI ceased doing business . Felt did state-during formal discovery that AG I 4 We therefore find it unnecessary to decide the parties' arguments about whether an unlisted debt is discharged in bankruptcy ; this debt was forgiven before Felt's bankruptcy . - 22 - ceased operating sometimes before.1992,"but,argues that AGI didn't ' peter out . until ..sometime Irafter 1989' . And he' credibly testified' that AGI continued to operate after its registration lapsed, .. and : even reported on his19.92,bankruptcy schedules that he had been . involved in running the business within the last-two years . ..- ., Felt also directed us to-section 7 .12 of the'Texas#' Business . Corporation Act, which provides a three-year time limit,for winding up the affairs-of a,dissolved,business, to show that_AGI y could-still, have collected on a past .-due debt after 1989 . .' Tex . Bus . Corp . Act Ann . art . 17 .12(A) (Vernon 2003) . This is useful ; 1 because we apply substantive state corporate law ass of November' 20, . 1989, the date that AGI lost its right to,do business in-Texa s by failing to pay franchise taxes . T,Forfeitu .res for .failure to pay franchise tax are governed by the .Texas -Tax-Code,_section 171 .251, which reads (now and in 1989) : : ."The comptroller shall forfeit th e corporate privileges of"a corporation on which the franchisetaxii Ali, is' 'imposed if"' °and lists~~! several . triggering events, includin g failure to file annual " reports ° and~,failure ' to pay franchise taxes . Tex . Tax, Code Ann . sec' . 17.1-.251 ( Vernon 2008 ) ; 1989 Tex . Sess . Law. Serv ." 584, (West) (effective Sept .. - 1, 1989) The effect of .; forfeiture is that the "corporation shall be - denied the right" to, . sue or defendin.a court'~I'of this.°state .." Tex . Tax Code Ann . .sec . 171 .252(1) ;(Vernon 2008) 'This raises a close question of Texa s law : Should the three-year winding- .down period from the Texas Business Corporation Act modify the forfeiture provision from the n 2 - 23 - Texas Tax Code? If so, AGI did not relinquish the right to collect from Felt when it failed to pay franchise tax, and thus no identifiable event occurred in 1989 . There is an answer . As of August 1989, article 7 .12 of the Texas Business Corporation Act covered only "a corporation dissolved (1) by the issuance of a certificate of dissolution or, other action by the Secretary of State, (2) by a decree of a court * * * or (3) by expiration of its period of duration ." 1989 Tex . Sess . Law Serv . 801 (West) (effective Aug . 28, 1989) . It did not include in . its definition of a dissolved corporation a corporation which lost its corporate privileges for failure to pay franchise tax . See id . ; see also In re ABZ Ins . Servs .,, Inc . , 245 Bankr . 255, 260 (Bankr . N .D . Tex . 20001 (explaining that 1993 amendment brought failure to pay franchise tax within purview of Texas Business Corporation Act article 7 .12 ; before that, three- year period not applicable to franchise tax forfeitures) . Thus, we agree with the Commissioner that in 1989, AGI lost its ability to sue Felt for repayment in 1989, even though AGI could and did continue to transact business . ' However, simply because AGI lost its ability to sue Felt in 1989 does not make 1989 the magic year in which he realized cancellation-of-indebtedness income . November 1989 (the date o f 5 AGI could have gotten this right back by paying its franchise tax . Because we find that the identifiable event is not later than AGI's forfeiture, we need not analyze when AGI finally lost all rights to conduct business or dissolved . AGI's forfeiture) fell more than two and a half years after th e last maturity date for these loans and one year after the FHLB B sued Felt for more than $4 million--at which point any reasonabl e creditor probably would have stepped up collection efforts or considered the debt lost! We are convinced that, although AG I lost its ability to pursue legal .remedies in 1989, this year i s .too late to fall within the reasonable range . We find that the Felts realized cancellation-of-indebtednes s 1 1: income in 1987, the year1in which the last final maturity date came and went without payment . Cozzi , 88 T .C . at 447 . We therefore find that the Felts realized $2 million in cancellation- of-indebtedness income in 1987, another of the years for which w e 11 have jurisdiction . D . Did The Felts Present Sufficient . Evidence of Insolvency ? Our final question is whether, under section 108, th e cancellation of the AGI debts should be excluded from incom e because the Felts were insolvent at the time . If they can find refuge in section 108, must be under section 108(a)(1)(B)--th e Felts' bankruptcy-ended zp under Chapter 7, not 11, they are no t farmers, and .they make no argument that this is qualified real- . <1; property indebtedness . That exclusion is limited to-the amount o f the insolvency, sec . 108'''4(a)(3), and "insolvency" means that th e taxpayer ., has an "excess 'of liabilities over the fair market valu e of assets", sec . 108 "(d) M . The' relevant period . is immediately 25 - before the Felts realized their cancellation-of-indebtedness income, sometime in late 1986 or early 1987 . The Felts makes only vague arguments as to their solvency . We know that in the .late 1980s, they owned a home, although they estimated its value only as of the time of .the bankruptcy .6- 'Sharon testified that they owned two cars, but neither Felt presente d evidence of their equity in those cars . Felt testified that h e carried a life-insurance policy worth $250,000, but presented no evidence of, .whether he could cash it in . Felt testified that he still had the proceeds from his sale of Reliance in-1987, as the rescission suit did not start until 1988 . Although they did not file a 1987 tax return, their 1985 and 1988 tax returns show positive income . And they stipulated to income in 1987 : Income Source Reliance Savings compensation Interest Self-employment income Capital gains from stock Total Amount $37,50 0 4,63 4 53,04 2 9,24 6 104,42 2 The Felts'gave us no evidence of savings, investments, or income from other business ventures in 1987, and fail to convince us the y 6 Felt's bankruptcy schedules in 1992 showed an outstanding balance of $1 .2 million on the house, for which the Felts took mortgage deductions of $80,000-$100,000 in the years in which they did file tax returns . Yet the Felts provided no evidence of their equity in the house for any of the years at issue, much less 1987 . 26- have accounted for, all of their income'and assets for that year .,: For instance, they earned $4,634 in .interest,in 1987 but neve r stated the source of that' interest ., °(We infer there was'an asset with some positive fair market value generating, that interest ; ;) Without-this,evidence, we cannot find , that,, Felt's . liabilities exceeded the fair market-1value of his- assets . ) We therefore find . that' the-Felts- have not met their burden' of proving the .existence . and extent of their insovency, in 1987. J or any year before their 1992 bankruptcy),, and'so''Fwe find they were not insolvent as-toany of the AGI debt . Me therefore hold- that the Felts . must- recognize :the entire-amount as cancellation-of-indebtedness income in,1987 . ' III . Income From Birdie .:IGFelt . Although not the largest" dollar .amount,here, the question whether the Felts shouldl,~recognize income from Birdie Felt is perhaps the most complicated issue . The Felts tell us they were struggling financially after the bankruptcy, and that Birdies helped by paying their family, expenses out of her accumulated, riches . The Commissioner argues .,-that this-is implausible--Birdie, Felt was a woman in her 80s with no discernible history of°gainfu l Felt owed AGI $2,148 ;973'.' : The Commissioner asserted only' $2 million in cancellation-of-indebtedness income in the notice of deficiency, and he never moved to amend his pleadings to' assert any increase in deficiency this might cause .,, There--are so many other adjustments from our findings and the parties' various, concessions and ,compromises that we can't, predict whether this will have the-effect of . limiting the amount in our final decision . We direct thel~parties to be aware of this possible, problem in trying to reach agreement under Rule 155 . , 27 - employment or independent .income8 who may have . been suffering from Alzheimer's . The Commissioner also points out that she somehow found'°hundreds of thousands of dollars to deposit into her bank account during these years, and unlike most retirees, had bank deposits that increased fourfold in six .years, with-wire transfers remaining relatively stable : Year 1994 1995 1996 1997 1998 1999 Wire Transfer . Deposits Total Deposit s $45,000 60,000 122,207 90,000 102,500 10,7,502 $59,565 .7 4 124,706 .0 9 236,854 .7 4 138,100 .9 5 158,173 .9 3 223,130 .00 , Despite her allegedly close and generous relationship with her son and daughter-in-law, both professed-utter ignorance of the source of her riches or the nature of her offshore wire transfers . And her generosity was total--she died with no money in her estate but thousands of dollars of personal credit-card debt . 8 Indeed, IRS records presented at trial show that Birdie owed no taxes for 1994, 1995, 1996, 1997, or 1998 ..She owed $836 for 1988, $1,222 for 1989, and $45.0 for 1990 . Like her'-son, Birdie only occasionally filed tax returns . Unlike her son, she may have earned so little that she didn't have to . There was actually'$114,707 in wire transfers in 1996 . However, one for $32,207 is from First American Title in Houston, not the offshore transferors responsible for the other transfers, and we have excluded it from this calculation . - 28 - This°all-smells not,1quite'right . The Commissioner determine d that the'money flowing from overseas .-through Birdie's accounts'to ' the Felts _:was the Felts'~own~;income In general, the taxpayer , bears :the burden of disp'oving the Commissioner's determination .- Rule l42(a)' . The Felts argue, however, that-the Fifth Circuit, : .to . which appeal from this case would lie, has .held that ,"a court need not give effect to the presumption of correctness in a case , involving unreported . income if the-Commissioner cannot presen t some predicate evidence supporting its determination . y." Commissioner .' 932 F .2d 1128, 1133 '(5th C r . 1991), affg .' i n part and revg .,in part T . .C . Memo . 1990 - 68 ; see also Siebert v . Commissioner , T .C . Memo .11997-6 .. 'So before we can find that th e money'Birdie repeatedly dropped'on her son'was his own income,'we . look"at whether the'Comm issioner's determination on'this-subject, li was arbitrary and erroneous, or whether the'Commissionerhad "som e factual foundation for * 1 * * = [his] assessment . .. Portillo , 93 2 F .2d at 1133 . In Portillo , the taxpayer' did not° receive a , Form 1099 in time, to file his tax return, so he just estimated his income . Id . at 1130-31 . After he filedlhis return, he finally got a Form 109 9 from ' . his' employer showing much more income than he' had reported . Id . at 1131 .' But the Corr whether . Portillo received the extra income, relied on th e employer's Form 1099 and issued a notice of deficiency . He then' - 29- - relied on the presumption of . correctness when Portillo objected . Id . The Fifth Circuit held that the Commissioner did not get the benefit of the presumption until he "engage .[d] :in one final foray for truth in order to provide the court with some indicia that the taxpayer received unreported income ;" one way to accomplish this,, the court said, was by analyzing the taxpayer's bank deposits . Id . at 1133-34 . In another Fifth Circuit case, that court found that the Commissioner could not assess wagering excise taxes without some evidence linking the .taxpayer to gambling,activities . within the period of assessment . Carson v . United States , 56 0 F .2d 693, 696 (5th Cir . 1977) . But the Felts overlook a key difference in their case : both Portillo and Carson , the taxpayer filed a return . The rule is different for taxpayers who don't file ; in Parker v . Commissioner , 117 F .3d 785, 787 (5th Cir- . 1997), the court held that the Commissioner had no duty to conduct an independent investigation of third-party payment reports when the taxpayer s failed to fil-e their own sworn statement (such as a Form 1040) disavowing the income . We find that the Commissioner took-sufficient steps to investigate whether the Felts received money from Birdie . Unlike what he did in Porti.llo , the Commissioner here secured extensive bank records showing checks Birdie wrote to David or for the Felts' expenses, as well as records from Sharon Felt's bank 30 - 'account showing .she cashedd checks 'from Birdie ; there is n o question that David and Sharon actually received' this money . The Felts' provided no-tax return or statement, sworn or otherwise, saying they did not . In~fact ;' they confirmed 'that she gave'the m money-to pay their bills :! Although the'Commissi'oner~cannot point to any single source" of 'Felt' s income" flowing to Birdie ; the Commissioner has' supplied , a few pieces of evidence~il The Commissioner showed that the following''entities, all related to-David Felt,, deposited money into Birdie's bank account from 1995-2000 : Entity Towe r Gibralta r J&N AGI-Ne v Estate of Vansickl e Total Ip Yea r 1995 1996 1997 1998 1999 200 0 1995 -199 6 19'9 8 199 5 Amount , $4, 077 :61 4,000 .0 0 16 ;500 .0 0 2,750 .00 9,500 .00 ' 2,000 .0 0 550 .00 6,893 .0 0 1,000 .00 1,350 .00- 55,000-,0 0 4 ., 000 . 0 0 107,620 .6 1 We are therefore convinced that at least :.some of , Birdie,' s deposits are attributable to David Felt's business activities even without knowing, their exact source . .find .that the notice , We 31 - of deficiency was not-arbitrary and erroneous, and hold the burden of disproving the Commissioner's determination is on the Felts . The Felts have several counterarguments . The first is that the IRS somehow relied on insufficient IRS records of Birdie's tax information . The second is-that the money from Birdie was not their income, but only gifts from a loving mother . Finally, the Felts argue that some of the money flowing into Birdie's accounts and then back out to the Felts was (or will be) taxed as income from J&N, Tower, or other .Felt entities . While the Felts try to fault the IRS for failing to enter into evidence certain types of account transcripts, they point to no specific irregularities or missing information in the IRS records that we do have . It's'the Felts' burden to show that these records are flawed, but they gave us no evidence and apparently made no efforts to acquire any through discovery . We therefore find-that the IRS records of Birdie' .s taxes,that we have are reliable . On the question of whether Birdie's transfers were gifts, we focus on her intent . Commissioner v . Duberstein , 363 U .S . 278, 285 (1960) . And when the Commissioner asserts that'a transfer is taxable' income, the taxpayer has the burden of showing that-it was in fact a gift ; this means that the taxpayer has-to introduce credible evidence of the donor's "detached and disinterested generosity ." Id . Transactions between family members that reduce - 32 - taxes necessarily cause us toquestion'whether the transaction wa s a bona " fide gift or justan effort . to avoid taxes . Carriag e Square , Inc .-v . Commissiner ; . 69 T .C . 119, 133 (1977) . : I. Birdie .3Felt died years before trial, . so we lack he r testimony .°, David Felt testifiedthat .Birdie'gave the Felts,money ;I "because we needed it" and that he never considered :it income ., ;He also testified that'none~of the money flowing ,into .=Birdie' s accounts .. was his money, .but later said that_he .sometimes deposite d money,into her accounts fromrhis_ .businesses because,he,"probabl Was . paying, back loans . 'she: had'~made . Sharon" testified that Felt , asked Birdie .for help paying'bills but had no intention of'paying _ her back . Wedo not-find-the Felts credible when .they,deny that the - y fromBirdie was really their own .' David, and Sharon's tax money rate would have been muchhigherthan .Birdie :'s (asshe.,earned no discernible income in mo 6t of the years at issue ) .,w and-David Felt had reason to fear creditors',. discovering that he still had significant sums of . money, given :the .unpaidand undischarged $4 . 2 million judgment from°the(cid:127)Reliance,,sale . The bank records :in ' evidence show that Felt's, . businesses ,shed money in 1996, at they :" .very time Birdie's wealth :began .to rise . Her-payments to the'Fel t -family. peaked during 19.96 and 1997--and 1997 was the year the ., ,m Office of'Thrift .Supervision won its ; judgment"againstDavid Felt, ." ; The checks ; from,Felt's buisinesses deposited into Birdie's account r -_33 - lead us to find Felt .-not credible when he testified that he did not deposit money into . her accounts . Together with the Felts' failure to provide any other evidence of Birdie's intent, this also .reduces his overall credibility as a witness . We thus find that the money from Birdie was not a gift, but-the Felts' own- income-circuitously routed . That . leaves us to decide whether money deposited into Birdie's account was actually income on which, the Felts already owe taxor perhaps savings on which they already paid tax . This requires a careful parsing of the sources of those deposits . The Felts provided no evidence, credible or not, regarding the sources of Birdie's wealth . They chose not to call as witnesses . two men who wrote monthly checks to Birdie, or David Felt's own family members who might have had better knowledge of,his mother's sources of income .. Although the Felts faulted the IRS for not seeking additional information about the offshore wire transfers, the Felts also chose not to seek this additional,informationlo or provide bank records for any of their other business entities .- We infer that such information would have proven detrimental to their case . 'o Instead, the Felts claim they "did not have the authority" to request this information . They did have the authority, however, to obtain records from Capital Trading Partners (the organization responsible for wiring Birdie's money) and introduce such evidence . - ' 34°- In the end , the . only - relief we' can provide for the Felt s to make . sure . that money fi,lowing , from David to Birdie to 'David'-is,' not taxed . twice . Since - tIhe Felts failed to file tax returns fors most years , we must make )sure only that we are - not double-counting income - already attributed to .the.. Felts in ..this opinion . Since,' for reasons we list below, money from , J&N,is income to the Felts ; . that is somewhat'easy-to' l,trace : We will also subtract - AGI-Nev money flowing " into : Birdie's ' account - from,the Felts ' income .( as we . explain infra -' section V) Ij .,The parties have .- stipulated' amounts of income from -the Tower account= in 1996'- 98, as well c Year 1996 1997 1998 Entity ' Toiwe r Tower Towe r 131! N Amount $4,00 0 16,50 0 2,75 0 1,35 0 Tota l $4,100 0 16,500; .The Commissioner wants us o find the-following amounts of incom e to the Felts from Birdie :? 1996 $78, 2 62 .23 1997 199 8 $67,063 .38 $112,248 .7, 0 We subtract from the amounts in the notice of deficienc y .those moneys coming fromlFelt-owned entities . This leaves us with 1 !1: the following amounts of,!other income from Birdie Felt : 1996 $74,26.2 .23 IV . J&N Income - 35 - 1997 199 8 $50,563 .38 $108,148 .7 0 The Commissioner used abank-deposits analysis to reconstruc t the Felts' income for several years . Although David Felt apparently-kept no bank account in his name, the Commissioner argues that he drew checks for personal expenses from ban k accounts held in the names of his business entities, and therefor e the money flowing into these bank accounts is his income . Although the parties have resolved some of these disputes, th e Felts and the Commissioner remain far apart on how much of th e money flowing into J&N's bank account was income in 1997 . The Commissioner wants to tax all of the $153,118 .04-deposited into this account ; the Felts say that J&N's only cash intake wa s $80,000 from a business deal, and they concede that, after deducting expenses, $73,118 of that was income to them . They argue that the Commissioner's income reconstruction "failed to take into account any expenses or"deductions that * * * [the Felts] may have been entitled to," but then provide no evidence substantiating any business deductions . This argument fails for want of proof . we think it's plausible that other business accounts held money that found its way into the J&N account . But we won't speculate--in the absence of evidence, we'll rely on the burden of proof, which here lay witch the Felts t disprove th e Commissioner's determinatiowhich therefore stands . . V . AGI-Nev Incom e Another point of contention between Felt and the Commissioner . is whether the money deposited into the AGI-Ne v accounts in 199 8 is income . The Commissioner determined,that i t was, because form s from the Southern National Bank of Texas showed two accounts wer e opened with $250,000 and ''$50, .000 deposits, respectively . Th e Felts stipulated that-these documents were true and correct,'so we ' find that Felt and his-mother, deposited $300,000 into those tw o bank ; accounts in 1998 . . The Felts ' only argument is that this was not their income I1, because it was money owed to AGI,'when AGI ceased to do business , and thus .should have been income to AGI . Well, no . First, AGI forfeited . its right to db business in 1989, and Felt never in the , 'intervening nine years sought to .remove this impediment by paying the required tax and, penalties . Second, AGI was'a.Texa s corporation, but Felt chose to deposit the $300,000 in,an accoun t is of a corporation with a similarname but incorporated in Nevada . Corporations don't succeed to one another' s assets because o f similar names . And, somewhat oddly, both Felt and his mother were . signatories . on the AGI-Nev accounts, though only Felt had been a shareholder and director of the old AGI . For all of these reasons, we find the Felts' arguments on this point . wholly 37 - unpersuasive . We do find Felt's testimony that he and his mother used the $300,000 fo'r personal expenses to-be credible . This, though, just leads to another question : How should that money be allocated between Felt and Birdie ? Felt claims that they split'it equally . We don't believe him--it might even be reasonable to conclude that it was all his income and he just chose to give some to his mother . But in the absence of very much evidence on this issue, we will look for the amount Birdie actually got from the AGI-Nev deposits as, by an ever-so-slight preponderance of the evidence, the correct measure of what she took from AGI's old .creditors . We look to the checks submitted as evidence .,-There are several from one of the AGI-Nev accounts . One check, written in February 1999, is for $17,048 .39 and was endorsed by David Felt . The others, from 199 :8, total $55,000-and were endorsed for deposit into Birdie's Wells Fargo account . Because Felt presented no contrary evidence,, other than his testimony that he and his mom intended to split it equally, we find that Birdie got only this $55,000 of the total $300,000 . deposited into the AGI-Nev accounts . We find that the remaining $245,000 is Felt's income in 1998 . VI . Section' .66 InnocentlliSpouse "Relie f 38 - Texas is a community-property state, and under section 66, . , married couples who=donot . file joint tax returns ".generally mus t report half of the totalli'~community,income earned .by the spouses during the taxable ;,year"~!,unless an exception applies . Sec .11 .66 7 1(a), Income Tax Regs . Sharon Felt asks us , to find . that she fall s within the section 66(c)liexception,-and thus that she is liable, , only for the income ,attributable to .her :. Her reqne st falls within .section 66(c)(cid:127), which offers two types .. of relief--"traditional" and "equitable . " , ;' Sharon ;, requeste d "traditional" -relief, which helps a .spouse,.who .: Did not file aq!b-joint return-for the-taxable year , and . omitted from grross°income,an item . of community income .- that should have been included but that would have bee n allocated to the other spouse, and proves that he!~ or she did-not know -or have-,reason t o know of the omitted item, if it would also , given the .facts and circumstances, be inequitable t o ..~, include .that item in the requesting spouse's income . Thee Commissioner does not dispute that Sharon Felt-meet s first two . requirements, b t .. he, argues that ,she knew of th e omitte d items.(cid:127) and. that, given the facts and circumstances, it would not b e inequitable to include .the items ;, in her = income . We choose to start ,' ith'section 66 (c) (4) , and ask whether, .:' given all the facts and circumstances, it would . be inequitable to include all the many items at issue in Sharon's gross income . W e 39 - 'do this because the last requirement helps narrow the years for which we must test Sharon's knowledge of each and every item of omittedincome . The regulation, section 1 .66-4(a)(3), Income Tax Regs ., tell us that one relevant factor--indeed, the only factor that the parties discuss at any length"--is whether-the requesting spouse benefited from the'omitted items of income . The regulations are even more helpful, as they go on to clarify that a "benefit includes normal support, but does not include de minimis amounts ."- Sec . 1 .66-4(a)(3), Income Tax Regs . The Felts argued that Sharon's lifestyle was not lavish during-this time, but that is the test for innocent-spouse relief under section 6015 an d section 66(c) equitable relief, not the test under sectio n 66 (c) (4) ,1 2 11 The regulation, of course, does provide that lack of significant benefit is only one factor to be considered in what is supposed to be an all-the-facts-and-circumstances test . The only other specific factors that it mentions are "desertion, divorce or separation," sec . 1 .66-4(a)(3), Income Tax Regs ., none of which is present here . The regulation also incorporates by reference revenue procedure 2000-15 and its own open-ended list of factors . We don't make specific findings on these factors because the-Felts didn't argue them . . 12 See sec . 1 .6015-2(d), Income Tax Regs . ("One relevant factor * * * is whether the requesting spouse significantly benefitted * * .* A significant benefit is any benefit in exces s of normal support .") . The Commissioner also applies a significant-benefit test to requests made under section 6015(f) and the equitable-relief provision of section 66(c) . Rev . Proc . 2003-61,"2003-2 C .B . 296, 299, sec . 4 .03(2)(a)(v) (applying the section 6015(b) standard) . - IG -40 - The Felts'never argue'that Sharon's'standard'of living fell' . below "normal " support, " or th .t the ; items of . income Felt earned r were diverted to anything but"family' expenses . (i' e . - .r"norma l support") .e Sharon credibly testified : that her lifestyle : didn' t change much until 1992, when their mortgage wa s foreclosed ..and , they no longer could -afford . .domestic ' staff ; this, i s a strong Y indication that:. she is'not entitled . to section 66(c) traditional , relief . for any .of . the omitted .item .s . o f income before ; 1992 .4 .. Afte r 1992, we still find for the most part , that she,enjoyed "norma l support, ." even taking into account the Felts' relatively hig h standard of living,'and we have,no evidence .Felt diverted his- ' income from-the family . money to, pay bills, she would ask , David and lie would write# her a :. check . Although they no' : l.onger owned a home, they did rent very nice houses . Sharon continued to have a car an d bank accoun t with substantial balances'in most years . stipulated som e items'of .income, and'this opinio n The upholds Felts I the Commissioner°is determination f other items, in the if 41 - Source NationsBank Tower NationsBank Tower NationsBank Tower Self-employment Self-employment income adjustmen t Birdie Felt NationsBank Tower J&N Birdie Felt NationsBank Tower J&N Birdie Felt AGI-Nev Year 1994 Total 1995 Total 1996 Total 1997 Total 1998 Total Amount $5,311 .0 0 5,455 .0 0 10,766 .0 0 14,048 .00 19,995 .0 0 34,043 .0 0 9,623 .0 0 13,989 .0 0 6,405 .0 0 21,842 .0 0 74,262 .2 3 126,121 .2 3 3,516 .0 0 42,981 .0 0 143,636 .0 4 50,563 .3 8 240,696 .4 2 1,131 .0 0 35,074 .0 0 27,775 .0 0 108,148 .7 0 245,000 .0 0 417,128 .70 . There is evidence that the Felts had a . lower income in 199 4 and 1995'. There are bank records for those years showing that Felt diverted income between his businesses and his mother, suggesting that Sharon may not have gotten the benefit of some income items . For those years, we are willing to assume that Sharon did not receive "normal support" from the income . That leaves us to decide whether . she meets the last prong of the traditional relief test, section 66(c)(3), whether she knew or had . reason to know of each item of omitted income in 1994 and - 42-- 1995 . q LL This re wires aniitem-by- itemanalysis . If Sharon wa s aware of the source of the .income,but riot aware of the amount, she is .considered to have knowledge of the item . See sec . 1 .66-4(a)(2)(ii), Income's,.Tax Regs' . The regulations also' say t o look at "All of the facts and circumstances" to determine whether, a reasonable-person would know of the income . Sec . : 1 .66-4(a)(2)(i), Income Tax Regs . The relevant facts and circumstances . can include the nature of the :item, amount of the item relative to other income items, . the couple' s financial situation :,- Sharon's educational' or business experience, and whether the item was listed on prior years " returns . Id . Almost half . of _-the - conceded income for each year was . in Sharon's bank account, over which she had sole signatory power . We, find'that she had actual knowledge of that money . The rest of'the money came from the Tower bank account .. She testified that she' had heard the name Tower,, didn't know what Tower did . However,, , Sharon deposited checks from Tower into her own bank account in 19.94 and 1995, leading usfto find that she knew David had a business called Tower that generated family income . Knowledge of the source of income is sufficient to :find knowledge of the items . income themselves . We find that Sharon knew of the items giving rise to the deficiencies, and that she fails the test for traditional relief under section 66 . . - 43 - We can't stop yet, however, because Sharon also asks for equitable relief under the flush language of 66(c) .13 The last sentence of the flush language of section 66(c) reads : Under procedures prescribed by the Secretary, if, taking into account all the facts and circumstances,, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either) attributable to any item for which relief is not available under the preceding sentence, the Secretary may relieve such individual of such liability . .Unlike the traditional test, which asks whether it would b e inequitable to include a specific item in one spouse's past " 13 Although the Commissioner didn't raise the issue, there is a real question about the timeliness of Sharon's section 66(c) request . That section refers us to the regulations . Section 1 .66-4(j)(2)(i), Income Tax Regs ., imposes no deadline for requesting,equitable relief . Sec . 1 .66-4(j)(2)(ii), Income Tax Regs . But they do point us to Revenue Procedure 2000-15, superseded by Revenue Procedure 2003-61 . Sec . 1 .66-4(a)(3), (b), Income Tax Regs . . (Both paragraphs read : "Factors relevant to whether it .would be inequitable to hold a requesting spouse liable, more specifically described under * * * Revenue Procedure 2000-15 * * * are to be considered in making a determination under this paragraph .") The Revenue Procedure states as a "threshold condition" for equitable relief under section 66(c)-- that the requesting spouse "applies for relief no later than two years after the date of the Service's first collection activity," and refers us*to section 1 .6015-5(b)(2)(i), Income Tax Regs ., for the definition of collection activity . Among the actions qualifying as "collection activity" is "the filing of a claim by the United States in a court proceeding in which the requesting spouse is a party or which involves property of the requesting spouse ." Sec . 1 .6015-5(b)(2)(i), Income Tax Regs . The April 1992 order approving Sharon's bankruptcy disclosure statement lists the IRS as a priority tax claimant, and lists $28,846 .25 of priority tax claims . Of this, $27,000 represented a federal .tax lien . While this doesn't prove that the United States actually filed a .claim for any of the years before us, it suggests that Sharon might have missed one of'the threshold requirements of the revenue procedure for equitable relief . See also Lantz_v . Commissioner , 132 T .C . (2009) . -44 - income, the .equitable relief provision looks :to the present--would ; it be inequitable to make that spouse .-pay the liability today?,14-, We have in the past found that .we have jurisdiction to hea r section 66(c) equitableclaims,in deficiency cases, although w e lack jurisdiction over stand-alone claims . Bernal v . Commissioner , 120 T .C . 102,107-08 (2003 ), . In deficiency cases,' we review these as affirmative defenses . First, the procedural issues . Affirmative defenses mus,t .bet~- raised in the,ple.adings .,i Rule,39. . Although Sharon should-hav e raised the innocent- spouse defense in her petition, .or amended .th e petition , after it became clear she would raise' the issue at trial , she may still be . saved if the Commissioner expressly or implie'dly consented to trying the matter . 'See Rule 41(b) . Although counsel for the Commissioner did1inform the Court that he was'displease d receiving such : late 'notice of'the 'i' ssue, he. failed to ,object a t trial and never raised his concerns-'on brief, despite extensive : and thorough coverage of ,lithe section '66 (c) issue . We find .that h e impliedly'consented to'try the matter . ~ brief - argue s ° ' only,that Sharon-is no t entitled "to section 66 (cj equitable relief because she failed to- file a Form 8857, which he claims is "the most fundamental of .al l ,14 Despite, the past-present :distinction, both sections, of the regulations guiding our determination ofawhat is "inequitable" inexplicably direct us to the same :.revenue procedure 45 - the threshold requirements ." Although he cites Revenue Procedure 2003-61, section 4 .01 for this proposition, that requirement is actually in section 5 and allows a taxpayer to make the request by Form 8857 or "other similar statement signed under penalties of perjury ." See also sec . 1 .66-4(j), Income Tax Regs . ,The only document in the record signed by Sharon Felt is the Tax Court petition, which never mentions innocent-spouse relief or anything like it . By failing to provide the Commissioner notice of-the section 66 argument, the Felts effectively prevented the Commissioner from making a pretrial determination as to whether Sharon . was entitled to equitable relief ; therefore, there is no determination--to review . We find that the Felts failed to provide proper notice of this claim, and therefore we will not consider the issue . Although this seems harsh for Sharon Felt, all hope may not be lost ; it is at least possible that she might be able to raise section 66(c) equitable relief as '& defense in any collection hearing under section 6330 . See sec . 6330(c)(4)(A) . 11 There is also a potential problem in deciding the appropriate standard of review. In cases like Beck v . Commissioner , T .C . Memo . 2001-198, we held that we should review for abuse of discretion . But we recently held in the closely related situation of requests for relief under section 6015(f) that we review de novo . See Porter v . Commissioner , 132 T .C ., (2009) . We will figure'out Porter 's effect on section 66(c) in some later case . VII . Additions to Tax ,, The final issues are all-the additionsto tax that th e Commissioner asserts under sections, ; 6651 (a) (1) and . 6654 . for . all the .. tax, .years at issue, and additions under :section 6651(a)(2) rfor . 1996-98 . Section .6651 (a)-(l) imposes .,an addition to tax for failure t o timely . file a_ :tax return l The Commissioners has . met his- burden of' .. production because'1the Felts' I stipulated that they did not file tax returns for .any of_the years atcissue . The Felts argue only that . ., Sharon should not have to-pay=these additions' thereby concedin g them as to David . . Sharon seems .toxmake two arguments . , The first, , relates only to 1987 and~!1989, years for which the Felts go t letter .. from the Commissioner . stating ., they, did not need : t tax return . David Felt testified that he thought . they -got the .. is letters around the time of-the bankruptcy andthat :he didnt kno w why he had received-them,1,because he hadn't asked'for them .- admitted the letters .as evidence over the .objections of th e Commissioner's counsel, although we share-his concerns about their origin . The letters are! ; dated 1993, several years after the . Felts' return s would have been due for 1987 and 1989 . Bu t Sharon filed bankruptcy chedules stating : "The Debtor and he r husband have not filed Federal Individual Income Tax returns for (cid:127) the calenda r years 1986 through 1991 because ' of losses incurred, by the Debtor .' s husband," the same reason Felt cited for not filing 47 - in the first place . We therefore find that Sharon did not rely on the 1993 letters in failing to file . Her second argument is stronger .-She argues that because she was unaware of the income from Felt's businesses, she lacked sufficient information to file income . tax returns . She relies o n two cases from the early 1980s . In Crane v . Commissioner , T .C . Memo . 1982-350, the husband actively hid his income from his wife ; in Fleming v . Commissioner , T .C . Memo . 1984-130, the wife wa s afraid of her husband's violent temper and did not know ta x returns had not been filed . There'is no evidence that Felt actively hid his income from Sharon . She did testify credibly that when Felt would explain his business dealings to her, 'she would get bored and lose interest, but that doesn't amount to concealment . And her bankruptcy filings state that Sharon and her counsel "have examined all transactions . for the period commencing in 1990 until the date of filing of the Petition . ." Those schedules state that she and her husband expected to earn $70,000 per year during the duration of the bankruptcy plan . Again, this indicates that she had at least some access to financial information .- There is also no sign that Sharon was afraid to ask Felt about family or business income ; she testified that'she asked Felt about the Reliance sale,- and she also testified that she would ask him about expenses in credit-card statements until "he got irritated and sent the bills to his office ." Sharon knew 48 - about several of Felt's businesses and even :had signatory powers , over the J&N bank account . She has-not convinced is that she, lacked, access to the information necessary to : file a-separate tax return, and so we, will sustain,all the failure-to-timely-file, additions to tax . .The second addition ; under section-6651(a)(2) i .s,for,failur e to pay, tax .: Again, the Felts contest, this,,, only as it applies to,, . . The Commissioner,-must- .do a .little more to meet,his_burde n , Sharon here .- Hemust,show either that he filed a substitute for return (SFR) under section 6 .020,(b) or that the Felts filed .a return showing tax due . See sec . . 6651 (a),(2) ; . .Wheeler v .-Commissioner,, , 127 T .C . 200,E 208-209 .- (2006) affd . 521 F .3d 1-289 (10th-,'Cir . 2008) . The SFRs must meet certain requirements ; a bare front page of a Form,1040 will not suffice . Id . at 209 . The Commissioner- provided us with SFRs forr .SharonFelt for 1996, .1997, and 1998 ; these documents include not only the front page of a Form 1040 with Sharon's name, Social Security number ., and ...filing .status, but also certifications by,the preparers, work papers showing amounts-f . bf tax due' and penalties ;; and detailed explanations . We therefore, hold-that the Commissioner- has metF his burden of . production, ; and sustain the additions to .tax in the face of .Sharon's claim- ;that , is _ - - - . she had reasonable cause'for her failure for the same reasons w e VI relied on in sustaining the failure -to-timely-file additions 49 - The Commissioner also asserted an addition to tax under section 6654 against both David and Sharon Felt for their failure to pay estimated tax . The Felts ..make no claim of error regarding these assertions, and we therefore deem them conceded . Section 6654 additions are mandatory and mathematical, with no reasonable- cause exception . Crane v . Commissioner , T .C . Memo . 1982-350 . Decision will be entere d under Rule 155 .