TAX COURT OPINION

Case: Jay Harvey Lukkarila, Petitioner and Sandra Bowie, Intervenor
Docket Number: 6350-12S
Judge: Holmes
Opinion Type: bench
Filed: 06/12/2013
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 JAY HARVEY LUKKARILA, Petitioner, and ) ) ) SANDRA BOWIE, Intervenor, v. COMMISSIONER OF INTERNAL REVENUE, ) Docket No. 6350-12S. ) ) ) ) ) Respondent. ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner, intervenor and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Mark V. Holmes at St. Paul, Minnesota, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision for petitioner will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. June 12, 2013 SERVED JUN 1 4 2013 Capital Reporting Company 3 Bench Opinion by Judge Mark V. Holmes May 8, 2013 Jay Harvey Lukkarila Petitioner, and Sandra Bowie, Intervenor v. Commissioner Docket No. 6350-12S THE COURT: IN THE CASE OF JAY HARVEY LUKKARILA, PETITIONER, AND SANDRA BOWIE, INTERVENOR, V. COMMISSIONER, DOCKET NUMBER 6350-12S, THE COURT HAS DECIDED TO RENDER A BENCH OPINION, AND THE FOLLOWING IS THE COURT'S BENCH OPINION. This Bench Opinion is made pursuant to the authority granted by section 7459 of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's Rules of Practice and Procedures. This case involves a request for Innocent Spouse Relief for the tax year 2009. The innocent spouse in question -- the alleged innocent spouse in question -- is Mr. Lukkarila, a Minnesota resident when he filed his petition. The case arises for the last complete year in which the Lukkarilas were married. They had a very difficult 2009. In January of that year, after spending the holidays in Massachusetts, Mr. Lukkarila flew to Minnesota to start his new job at 3M. It was a considerable promotion, but his wife did not join 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 him. In April of 2009, she filed for divorce. In June 2009, the key event occurred, which gave rise to this Innocent Spouse case; namely, the withdrawal and liquidation of an IRA account held by a company named Sun Life, successor v1a two transactions from Wells Fargo, that was in the name of Mr. Lukkarila. Mr. Lukkarila claims that he was ignorant of this transaction. He certainly didn't report it on the couple's joint return that was filed the next 10 year, in April; their 2009 tax return being due on 11 April 15th. Mr. Lukkarila filed the last joint 12 13 14 return for him and his wife. She, apparently, did not give him any of the documentation relating to the closing of his IRA account and the premature 15 withdrawal of the proceeds. The couple were then 16 17 18 19 20 divorced in July of 2010. Mr. Lukkarila claims surprise when he received notice from the IRS that the liquidation of the IRA and associated inclusion of its amounts in his income, in triggering the 10 percent premature 21 withdrawal penalty, had been noticed by the computers 22 23 24 25 at the IRS. He squawked and ultimately filed an Innocent Spouse Petition. Now, generally, married taxpayers may elect to file a joint income tax return with all its 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 advantages. See Code section 6013(a). "After making the election, each spouse generally is fully responsible for the accuracies of their return and jointly and severally liable for the entire tax due for that year." See section 6013(d) (3). Section 6015, however, sets forth three ways for one spouse to be relieved from joint and several liability on a joint return: Expanded Innocent Spouse Relief under Code section 6015(b); an allocation of deficiency under Code section 6015(c); and equitable relief under section 6015(f). There is a distinction amongst the sections between underpayments and understatements of tax. An underpayment of tax is when the taxpayers put the right amount on their return, but they don't pay it to the IRS. An understatement is when the return is defective in that it does not report all the income, or it over- reports the deductions or in some other way understates the tax owed. This is an understatement case because, as I said, Mr. Lukkarila and his wife did not include the liquidation of the Sun Life IRA account on their return for 2009 (sic). So I will start with 6015(b), which is the first of the understatement sections. And here, I 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 have to note that I look at the record that was in front of me; the stipulation and exhibits and the testimony of Mr. Lukkarila. In Porter v. Commissioner, 130 T.C. 115, (2008)., Porter I, and Porter v. Commissioner, 132 T.C. 203, (2009)·., Porter II, this Court held that it 7 will make a de novo determination regarding whether a 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 requesting spouse is entitled to relief under section 6015. They will not be limited to evidence in the administrative record. Mr. Lukkarila still, however, bears the burden to show that he is entitled to relief. Now, what does 6015(b) require? Let's go to the code. Section 6015(b) states, "If a joint return has been made for a taxable year, on such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return, the other individual filing the joint return establishes that, in signing the return, he or she did not know and had no reason to know that there was such understatement. Taking into account all of the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement, and the other individual elects, in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 such form as the secretary may prescribe the benefits of this subsection... and then the other individual shall be relieved of liability for tax, including interest, penalties and other amounts for such taxable year to the extent such liability is attributable to such understatement." In other words, the Code puts out a five- part test. The first, second and fifth parts of this test are, concededly, met by Mr. Lukkarila. The key parts of the test that were at issue was whether he knew or should have known of the omission from income of his Sun Life account, which did result in an understatement of the Lukkarila's taxes in 2009, and whether it would be inequitable, under the facts and circumstances, to relieve him from joint liability. I'll look at each of these two facts in sequence. First, knowledge. A requesting spouse has knowledge or reason to know of an understatement in two circumstances; he actually knew of the understatement or a reasonable person in similar circumstances would have known of the understatement. See 26 C.F.R. section 1.6015-2(c). All of the facts and circumstances are relevant in determining whether a spouse had reason to know of an understatement. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company These include: 1: The nature of the erroneous item and the amount of the erroneous item relative to other items; 8 2: The couple's financial situation; 3: The requesting spouse's educational background and business experience; 4: The extent of the requesting spouse's participation in the activity resulting in the erroneous item; 5: Whether the requesting spouse failed to inquire at or before signing the return about items on the return or omitted from the return that a reasonable person would question; 6: Whether the erroneous items represented a departure from a recurring pattern reflected in prior years' returns. See Id. I also note that under the Regulation section 1.6015-3(c) (2) (iii), knowledge of the source of the erroneous item, and in this case, that would be the existence of the Sun Life account, does not establish actual knowledge of the item; namely, it's liquidation, which should have triggered its inclusion in the Lukkarila taxable income in 2009. The key facts on this knowledge factor, here, are the obvious forgery of the signature on the paperwork 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 authorizing Sun Life to liquidate the account and send the money to the taxpayers. In this case, it was sent to Mr. Lukkarila, but it was sent to the address in Massachusetts that his wife had exclusive possession of. He didn't know that she got the money. It was to her benefit. She apparently used it for living expenses after she lost her job a few months before; she had the motive, in other words, to liquidate the account; she had the 10 means, because she had access to the account; and she 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 had the opportunity, via her forgery, to get her hands on the money. Now, as the Commissioner reasonably points out, the couple was going through a divorce in which the marshaling of assets, or at least their identification and division, is a routine part of the proceedings. Mr. Lukkarila was listed as the owner of the Wells Fargo's IRA accounts, but nowhere was there an indication of any Sun Life account. This raises the reasonable question of, did Mr. Lukkarila know about it and deliberately not include it because the Sun Life account, at least, no longer existed? However, I believe his testimony that he regarded the Sun Life account, which, after all, was the second successor to a previous Wells Fargo 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 account, as having simply been one of those described by the term "Wells Fargo IRA accounts." The second question that the Commissioner reasonably raised is how is Mrs. Lukkarila supporting herself during those months when she was apparently unemployed? Shouldn't Mr. Lukkarila, in other words, have reason to know that she was getting money from somewhere? The answer is yes, but judging by what Mr. Lukkarila said and by his bank statements, he was, in fact, shipping money to her on a regular basis and could not, therefore, have reasonably known, simply by that fact, that she was taking money from an account that they had previously both had access to. I, therefore, conclude that it's more likely than not that Mr. Lukkarila lacked the knowledge or the reason to know that his ex had cashed in the Sun Life IRA. That still leaves the fourth element in this case, which is that Mr. Lukkarila had to show that it would be inequitable to hold him jointly and severally liable for the understatement resulting from the cashing in of the Sun Life IRA. Here, I have to consider all the facts and circumstances to decide whether it would be 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 inequitable to hold him jointly and severally liable for the understatement. One important factor is 3 whether Mr. Lukkarila significantly benefited, either 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 directly or indirectly, from the understatement. A significant benefit in this case is any benefit in excess of normal support, and direct or indirect benefit may include transfer of property or rights of property, even if the transfer occurred several years after the understatement. See Regulation section 1.6015-2(d). So if, for instance, Mr. Lukkarila's spousal support obligations were reduced by the amount of the Sun Life IRA, that might make it equitable to hold him liable for the resulting tax cost. Some other significant factors bearing on inequity include whether the requesting spouse has been deserted by the non-requesting spouse, whether the spouses had been divorced or were separated, and 20 whether the requesting spouse received a benefit on 21 22 23 24 25 the return from the understatement. These are either not present or, in the case of whether they're divorced, they certainly are present, but they all tend to make it more equitable than not to let Mr. Lukkarila off from the consequences of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 understatement. Some other generally relevant factors include whether the spouses are separated or divorced. As I said, they were separated at the time; Whether the requesting spouse could suffer economic hardship if relief is not granted. That's certainly not the case. Mr. Lukkarila is successful businessman; Whether the requesting spouse knew or had reason to know of an item giving rise to the deficiency. I found that Mr. Lukkarila did not; And whether Mrs. Lukkarila had a legal obligation to pay the outstanding tax liability pursuant to the Divorce Decree. She did; And whether Mr. Lukkarila made a good-faith 16 effort to comply with the income tax laws in taxable 17 18 19 20 21 22 23 24 25 years subsequent to the year in which he's requesting relief. He has; 6: Whether the non-requesting spouse abused the requesting spouse. She did not; And whether the requesting spouse was in poor mental or physical health on the day he signed the return or at the time of the request for relief. He was not suffering from any of those impediments. So there's some factors going both ways. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 However, Mr. Lukkarila, to my satisfaction, showed it 2 more likely than not that he did not know what his 3 wife was up to and that he did not receive any 13 benefit and, indeed, he suffered through litigation and having to deal with the IRS. Therefore, I conclude he is entitled to Innocent Spouse Relief under section 6015(b), and decision will be entered in his favor. This concludes the Court's Bench Opinion in Lukkarila v. Commissioner. (Whereupon, at 1:50 p.m., the above- entitled matter was concluded.) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com