TAX COURT OPINION

Case: Timothy Lee Richard, Petitioner & Susan Lynn Ellis, Intervenor
Docket Number: 29797-08
Judge: Colvin
Opinion Type: memo
Filed: 06/27/2011
Pages: 14

T.C. Memo. 2011-144 UNITED STATES TAX COURT TIMOTHY LEE RICHPRD, Petitioner, AND SUSAN LYNN ELLIS, Intervenor COMM]SSIONER OF INTERNAL REVENUE; Respòndent - Docket No. 29797-08. Filed June 27, 201T. Adria- Voridr Sdott Schutnachei and John Clynch for petitioner. Sjusan Lynn Ellis, pro Ne Patsÿ Clarke, for respondent. MEMO RANDUM FINDINGS OF FACT AND OPINION COLVIN, Chief Jùdge: Pursuant to section 7443A arid Rules 180 arid 183, I this case was assigned to and heard by Special a 3 ItJnliess otherwise indicated,. all sectiore references are to (continued. . . ) SERVED JUN 2 7 2011 - 2 - Trial Judge John F. Dean. His recommended findings of fact and conclusions of law were filed and served upon the parties on July 15, 2010. Petitioner and respondent filed no objection to the Special Trial Judge's recommended findings of fact and conclusions of law. Intervenor filed an objection thereto and attached a document for our consideration. The record was closed at the conclusion of the trial. We decline to reopen the record at this time for purposes of admitting this document into evidence. After reviewing the record in this case and the report of the Special Trial Judge, we adopt the recommended findings of fact and conclusions of law of Special Trial Judge Dean as the report of the Court. For 2004 respondent determined a deficiency of $23,483.in Timothy Lee Richard (petitioner) cand Susan Lynn Ellis' (intervenor) Federal income tax and an accuracy-related penalty of $4,697 under section 6662(a). The issue for decision is whether petitioner is entitled to relief from joint and several liability pursuant to section 6015(c).2 (...continued) the Internal Revenue Code as amended and in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. 2At trial petitioner abandoned his request for relief theeCourt to sec. 6015(b) and (f).. Accordingly, pursuant limits (continued...) FINDINGS OF FACT Some of.the facts have beenestipulated and are so found. The stipulation of facts and the attached exhibits are incorþorated herein by reference. When petitioner filed his petition, he resided in the State ofiWashington. For 2004-petitioner and intervenor filed a jointeFederal income tax retura.3 On the joint return they reported total income of - $305, 5 LO, $275, 821 of which was "attributable ^solely to intervenor. On.schedule O, Profit or Loss From Business, petitioner repor ed net profit of $13 569 from his investmenta broker business. Petitioner and intervenor married:on September 18, 1985 Dur'ing their marciage they maintained separate and joint bank accounts. Bank statements för their -joint account were addressed in both of their names and were -delivered tò their home address. Both- petitioner~and intervenor had accessato the mail. Insthe years leading up to 2004 petitioner encountered a series of.unfortunate medical events. He sufferedda heart attack and had open hea:tt surgery and was later diagnosed with prostate cancer. He was then forced to discontinue his work as an 2(...còntinted)- its discussion to sec.e6015(c) . 3Respondent notified intervenor of petitioner's request for relief, and inte::venor filed a notice of intervention on Mar. 5, 2009. - 4 - investment broker because of his persistent health concerns. The series of medical events caused a downward financial spiral for both petitioner and intervenor. -They began to experienee considerable financial difficulty because of credit card debt and an overrun of home construction costs . Petitioner and intervenor .discussed possible solutions to address their financial situation. One 'possible solution they discussed was borrowing from -intervenor's section 401(k) retirement account (retirement account) . Following their discussion, intervenor made an Internet request for a distribution of $50,000 from her retirement account. On- 1 March 24, 2004, .the distribution was deposited into petitioner and intervenor's joint account and -the bank statement labeled the deposit "Fidelity Investm Pension; Susan L. Ellis-Richard" . Intervenor intended to withdraw -the portion as a loan; however, she never received the paperwork3or otherwise satisfiedi the statutory requirements to process the distribution as a-loan. Deposits into the joint account for the month of March totaled $68,172.5 *The joint account statement was dated Mar. 4 through Apr. 5, 2004, with an opening balance of $829.39 and a closing balance of $42,760.12. 3During 2004 intervenor's earnings were direct deposited into intervenor and petitioner's joint bank account. - 5 - Over the course'of the next month, petitioner wrote several checks totaling $16 740.61 drawn on the ajoint bank accouni.A Intervenor and petitióner alào gaid iheii mortgage and other miscellaneous bills fr'om their joint accoûnt in March 2004. Petitioner and intervenor:did not treport the distribution on their 2004 joint Federal income tax retuin. Petitionet and intervenor divorced on- July 14, 2006. Inalate 2006 petitioner-and intervenor'recéived a notice of deficiency-for tueir failure sto report as income the $50,000' distribution. 02 June 18, '2007; petitioner-filed Form38857, Request for Innocent Spouse Relief, srequestingirelief pursuant to section '6015(b) (c) and (f) to Respondent sent to petitioner a final Appeals determination denying his request for innocente spouse relief OPINION Generally, married taxpayers may electato file a joint Federal income t x return Sect 6013(a) After making the election,-each s ouse2 is jóintly and severally liable for the Three checks totaling $6,740.61 were presented for payment issue for" $10,000 was The final check at in the month of Harch. preserited, for- payment in mid-April . In the notice of deficiency respondent determined that petitioner and intervenor receiúed and failed to eport a $50,728 distribution fron.a retiremenit account. The notice of deficiency also addressed additional unreported de minimis amounts attributable to petitioner. - 6 - entire tax due. Sec. 6013(d) (3); Cheshire v. Commissioner, 115 T.C. 183, 188, (2000), affd. 282 -F.3d 326 (5th Cir. 2002). Relief from joint and several liability :Us available to certain taxpayers under section 6015. Under section 6015(c) an individual who is eligible ,and so elects may limit his or her liability to the portion of a deficiency that is properly allocable to that individual as provided in section 6015(d). Sec. 6015(c) (1). Under section 6015(d) (3) (A), generally, any item that gives rise to a deficiency on a joint return, -e. the unreported early distribution from intervenor's retirement account,. shall be allocated to the individual filing the return in the same manner as it would have been allocated if -the individual had filed a separate return for the taxable year. A taxpayer is eligible to elect the application of section 6015(c) if, at the time the election is filed, the taxpayer is no longer married to or is legally separated from the individual with, whom the taxpayer filed the joint return to which thed election relates. Sec. 6015 (c) (3) (A) (i) (I) . The electiòntunder section 6015(c) may be made at any time after a deficiency for such year is asserted and no later than 2 years after the edate on which the Commissioner has begun collection activities with respect to the taxpayer making the election. Sec. 6015(c)'(3) (]B). Relief under section 6015(c) is not available to petitioner if respondent demonstrates that petitioner had actual knowledge s - 7 - of the item giving rise to the deficiency.- See sec. 6015(c) (3) (C); King v. Commissioner, 116 T.C. 198, 203 (2001). Section 6015(c) does not 'require that the requesting spouse know the tax consequences arising from the item giving rise tx> the deficiency. * Chethire ar. Commissioner, supra at 194. In the case of omitted income, however, dhe requesting spouse "must- have an actual and clear awareness of the omitted income." -Id., at 195. We have observed that the» appliâable standard under section 6015(c) is-the requesting spouse's "actual subjective knowledge". Culvei v. Commissioner,- 116 T.C., 189, 197 (2001). Thes Commissioner musa show, by a preponderance of the evidence, that the requesting s}ouse had actual knowledge of the item givi^ng rise to a defici ncy See sec. 6015(c) (3) (C); Culver v. Commissioner, ssupra at 196. r. 4 The item petitioner contests that gives rise to the ~ defic‡ency and ii not allocable to.petitionertis intervenor's retirement distr:lbution. There is no dispute that-petitioner satisffies section -6015(c) (3) (A) and (B).because he and intervenor were rio longer married when petitioner filed his petition and the petition was filed stimely. The question remains whether petitioner had actual knowledge at the time the joint return was signed of "any it.em giving rise to a deficiency (or portion thereof ) " . See sec .- 6015 (c) (3) (C) . - 8 - Intervenor testified that petitioner was aware of the distribution; they had discussed sit before she requested the funds, he was present when she initiated the request for the distribution, and after the ,distribution she told himothat they had received the funds. Intervenor further alleged that in searly 2004 petitioner and intervenor fell several months behind on the * mortgage and began receiving phone calls from their mortgage company requesting payment. After the distribution intervenor testified that they were able to.make their mortgage payments, an expense of almost $15,000.0 She further testified that after making their mortgage payments they no longer received phone calls from their mortgage company. Intervenor admitted that before drawing large checks on the joint account petitioner would first inquire of her whether suf ficient funds were available in the account and she would say "yes, we do; You can do that." She alleged, however,, that with other checks, :presumably those for inconsequential amounts, petitioner would not seek sprior approval because "he assumed that there was a couple of hundred dollars in there to cover it." Given intervenor's substantial earnings during 2004 it wouldenot" "The join't bank account statement intervenor provided shows a payment of only $8,421.66 made in favor of their mortgage lender on Mar. 26, 2004. 294 F.2d 328, 332 (4th Cir. 1961) taxpayer' s uncorroborated, self -serving testimony) , af fgr. 34 T C. 845 (1960) . See Urban Redev. Corp. v.: Commiásioner (the Court may reject a - 9 - have been unreasonable for petitioner to assume that thé oint account would contain sufficient fundssto coverathose inconsequential expenses . « Respondent -alleges that the foregoing testimony and petitioner's own testimony,show that ,petitioner had actual knowliedge-of the retirement distribution. -Petitioneraand interivenor shared a joint bank account, petitioner:had Jaccess to and opened the mail, and the joint bank account statement clearly labelled 'the deposit -of the $50, 000 retirement distribution. Respondent also notes that-before the $50,000 deposit the balance of the:joint acc,unt was $3,69:2.75 but-thatewithin 7 days of 'the $50,0/00 deposit, petitioner wrote checks totaling over $63500 sand within.1 month oE the distribution he drew an additional $10,0009 on sthe.account. Respondent concludes that petitioneraknew-the funds|from the-ratirement acãount had been deposited-into their jointiaccount be:ause he used those-funds. 9 Although pe:itioner may-havenhad "reason to know" of the distribution as o result of his status as a joint si'gnatory on the joint accoung the:Court is not convinced that this fact alone indicates That petitioner had "actual knowledge" of the The,record doessnot contain the joint bank account statemerit for the moÊth of April; acknowledgment o in April 2004 doÃs not conclusiÝelfshow tha he had'actual knowledge of conclude "that'a check in that amount was disproportiõñade ao to petitioner and intervenor's income for April 2004. the $10,000 check he drew on the joint account theréfore, petitiorier's the $50,000 distribution. -The Court.is unable to - 10 - distribution. Petitioner t'estified that he did not-review the joint bank account statements and thate intervenor primarily handled the finances and balanced the joint checking account, an assertion uncontested by intervenor., Furthermore, petitioner's expenditures - following the distribution were not so extraordinary as to signal that he was aware of the availability of additional funds beyond intervenor's usual earnings. During March 2004,3 deposits into petitioner and intervenor' s joint account, excluding the $50,000 distribution, totaled $18,172.e The checks petitioner drew on the account in March .2004 accounted, for only $6 , 740 : 61 of that amount . Attempting to circumvents this f act , respondent notes that the balance of the joint account a' immediately before the .$50,000 deposit was less than-$4,000, and that petitioner .was aware of the $50,000 deposit because after the deposit he made draws on the joint account in excess of $4,000. But on March .26, 2004, 2,days after the $50,000 deposit an additional amount of $6, 602 was deposited into the joint account. Therefore, when petitioner's checks were 'presented for payment, the joint account contained sufficient funds to cover the checks, even without the $50,000 distribution. Petitioner credibly testified that he was unaware of intervenor's request for and receipt of the $50,000 diätribution. f>etitioner admits that he and intervenor discussed the possibili,ty of obtaining a loan from her retirement account but - 11 - states that he was unaware that she had actually obtained a distribution-fron her retirement account. He alleges that although he maintained- a joint checking account with intervenor, she primarily wrote the checks drawn on the joint account and that he wrote checks drawn on the joint account only when he was instructedito do so by intervenor. He also admitted that he opened the mail sent to their home but would put the bank statements aside for intervenor to "deal with" . Petitioner cites Culver v.» Commis ioner, 116 T.C.' 189 (2001), claiming that his situation is analogous -to that of the taxpayer in that case. In Culve'r, the taxpayer' s ex-wife embezzled money from her employer for a number of years while they were married and deposited the fuads into their joint account in amounts ranging from $200 to $80 2. - The embezzled income was commingled with the funds in the acc ount and the funds from that 'account were used to pay f amily expenses and debts . Although the taxpayer and his ex-wife maintained an'joint account throughout their marriager his ex-wife managed all of the finances; she paid the bills, wrote the checks, and naintained the bank accounts . Occasionally, he would write and ign checks drawn on the joint account, although he di< not revie their account of manage any of the finances during the marriage. The taxpayer and his ex-wife's joint income for t e first year at issue was $63, 567, and t lie embezzled funds constituted an additiorial $44 152 In the second year at issue - 12 - their joint income was $76, 412 and the embezzled funds , s , constituted -an additional $59, 128 . In the years sat issue the embezzled funds constituted an increase of more than 60 percent of rthe taxpayer and his exrwife's combined annual income.s In concluding that the taxpayer lacked actual knowledge of the embezzled funds, ,the Court found it relevant that the taxpayer and his ex-wife's expenses were well within their , resources based on their combined annual wages . Furthermore, most of 'their major purchases were either completely or largely financed. Therefore, the taxpayer was unlikely to have actual knowledge of: the embezzled funds;s even if he did have reason to know of them.1° Respondent alleges that the facts in Culver are - i distinguishable from those of this case. In Culver the taxpayer's ex-wife deposited funds in small amounts throughout the entire year,: making the amounts undetectable to the taxpayer Here, however, a one-time significant amounta $50, 000, was deposited into petitioner and intervenor' s joint bank account . In Culver v. Commissioner,~ 116 T.C. 189 (2001) , the Court also found it relevant that the taxpayer's ex-wife corroborated her husband's testimony, affirming that she carried out embezzlement activity without her husband' s participation or knowledge. the Here, on the other hand, we note that with respect to petitioner and intervenor's testimony, we are faced with the situation of based primarily on what could be reliably drawn from the totality of "he said, she said"; accordingly, our analysis is the evidence. --13 - Respondent asser:s that it is unlikel thát petidiener laeked actual knowledge of such a large one-time deposit. As respondent suggests, $50,000 is a significant one-time deposit. When analyzed with respect to intervenor's income, however, the $50.000 distribution represented less than a 20- percent increase over her annual earnings for 2004." Circumstantial evidence may indicate that petitioner had reason to know oi the distribution; however, actual knowledge cannot be inferred from reason to know. See sec. 1.6015- 3(c) (2) (iii), Income Tax Regs. Although petitioner had access to the bank statements, occasionally drew checks on the joint bank account, and adm:.tted that he "for the most part * * * would open the máil", he alleged that he did not review the mail and that intervenor was the one who paid the bills and reconciled their joint bank account. Respondent has failed to persuade us by a preponderance of the evidence that petitioner had actual knowledge of the $50,000 distribution, and he is therefore entitled to relief from joint and several liability pursuant to section 6015(c). Other arguments made by the parties and not discussed herein were considered and rejected as irrelevant, without merit, or moot. NIn Culver the embezzled funds represented more than a 60- percent wages iin the years at issue. increase over the taxpayer and his ex-wife's combined To reflect .the foregoing, - 14 - Decision will be entered for petitioner. . -am-me