t c memo united_states tax_court lloyd e dawson jr petitioner v commissioner of internal revenue respondent docket nos filed date charles gordon reed for petitioner steven m diamond and wanda cohen for respondent memorandum findings_of_fact and opinion wells judge respondent determined the following deficiencies in and additions to petitioner’s federal income taxes these cases hereinafter referred to as the instant case have been consolidated for purposes of trial briefing and opinion year sec_6662 additions to tax penalty deficiency sec_6651 sec_6653 sec_6654 sec_6661 dollar_figure -0- dollar_figure -0- dollar_figure -0- big_number dollar_figure -0- dollar_figure -0- dollar_figure after concessions the only issues remaining for decision are whether petitioner is entitled to innocent spouse relief from liability for the understatement_of_tax attributable to funds his former wife katy dawson embezzled during and whether funds embezzled by ms dawson during constitute community_income one half of which is taxable to petitioner findings_of_fact some of the facts have been stipulated for trial pursuant to rule the parties' stipulations are incorporated in this memorandum opinion by reference and are found accordingly general background at the time of the filing of the petitions herein petitioner resided in orange texas from date through date petitioner was employed by the u s navy and from date through date was employed by gulf states utilities as a power plant operator and control operations foreman unless otherwise indicated all rule references are to the tax_court rules_of_practice and procedure and all section references are to the internal_revenue_code in effect for the years in issue petitioner married ms dawson on date and the marriage continued through the years in issue petitioner and ms dawson had two daughters who lived with them during the years in issue bank accounts maintained and certain borrowing by petitioner and ms dawson during the years in issue petitioner and ms dawson maintained a joint checking account with mid county teachers credit_union port neches texas mid county teachers for which both petitioner and ms dawson had signature_authority and on which petitioner wrote checks petitioner and ms dawson maintained a joint account with texaco port arthur works employees’ federal credit_union port arthur texas texaco p a w ms dawson was primary account_holder and petitioner was joint owner of the account which included a joint savings account and a joint checking account both petitioner and ms dawson had signature_authority for the joint checking account and petitioner wrote checks on the account petitioner and ms dawson maintained another joint account with texaco p a w petitioner was primary account_holder and ms dawson was joint owner of the account petitioner ms dawson and pauline although the parties stipulated that the joint account included both a checking and a savings account they did not further explain that account arrangement dupree ms dawson’s mother had signature_authority for the joint account the statements for the foregoing accounts were mailed to the residence of petitioner and ms dawson petitioner opened and looked at some of the statements petitioner also knew where the statements were kept at their residence and he was able to review them whenever he desired beginning date and continuing thereafter through the remainder of petitioner and ms dawson maintained a joint checking account with first national bank of mid county both petitioner and ms dawson had signature_authority for the joint checking account petitioner wrote checks on the account to pay family bills the statements for the account were also sent to petitioner’s residence petitioner reviewed and reconciled the statements on date a home improvement loan from texaco p a w to petitioner and ms dawson in the amount of dollar_figure was outstanding on that date petitioner and ms dawson applied for and received an additional home improvement loan in the amount of dollar_figure from texaco p a w and refinanced the outstanding balance of the earlier home improvement loan the new balance of the home improvement loan they received on that date thus became dollar_figure facts with respect to ms dawson’s employers ms dawson was employed by port arthur home health services pahhs and beaumont home health services bhhs from until date the corporations were wholly owned and or operated by dr ruth constant dr constant during and ms dawson was employed by pahhs and bhhs as an accounting supervisor and was the second person in charge of the corporations after dr constant pahhs and bhhs each operated two different programs a primary care program and a medicare program ms dawson had complete authority over the payroll accounting for the programs including the input of data into the computer systems for the payrolls and the review of the payrolls each of the four programs viz pahhs primary care pahhs medicare bhhs primary care and bhhs medicare had two checking accounts a general account and a payroll account for a total of eight checking accounts while employed by pahhs and bhhs ms dawson had signature_authority for and was authorized to issue checks from all eight checking accounts and had complete responsibility and full authority for the issuance of all payroll checks by pahhs and bhhs during the middle of petitioner worked for dr constant as a computer consultant at such time petitioner was the sole_proprietor of a computer consulting business that included the delivery of computer equipment and the setting up of computerized bookkeeping and payroll systems petitioner installed computer equipment for pahhs and bhhs and set up their computerized bookkeeping and payroll systems he also taught the employees of pahhs and bhhs how to use the systems such computerized bookkeeping and payroll systems that were set up by petitioner included the four payroll checking accounts and the four general checking accounts maintained by pahhs and bhhs that are referred to above petitioner also installed computers in the offices of other corporations operated by dr constant during petitioner also worked as a handyman for bhhs setting up offices and moving boxes and furniture during ms dawson caused checks to be issued to herself from the payroll checking accounts maintained by pahhs and bhhs for her wages from the corporations in the amounts of dollar_figure and dollar_figure respectively also during that year in addition to the checks for her wages she used the computerized payroll system installed by petitioner to cause checks to be issued to herself from the payroll checking accounts in the amount of dollar_figure ms dawson signed each of the checks petitioner operated such business from the middle of through the end of on behalf of pahhs or bhhs ms dawson issued to herself between and payroll checks per month with the amount of each check ranging from dollar_figure to dollar_figure the checks were endorsed by ms dawson and were deposited into joint checking accounts maintained by petitioner and ms dawson during that year during ms dawson caused checks to be issued to herself from the payroll checking accounts maintained by pahhs and bhhs for her wages from the corporations in the amounts of dollar_figure and dollar_figure respectively also during that year in addition to the checks for her wages she used the computerized payroll system installed by petitioner to cause checks to be issued to herself from such payroll checking accounts in the amount of dollar_figure ms dawson signed each of these checks on behalf of pahhs or bhhs the checks were endorsed by ms dawson and were deposited into joint checking accounts maintained by petitioner and ms dawson during that year petitioner deposited certain of the checks ms dawson received from pahhs and bhhs into their joint checking account with first national bank of mid county ms dawson did not hide from petitioner the funds she had embezzled on date believing that ms dawson had embezzled funds dr constant fired her expenditures by petitioner and ms dawson during date a new lincoln continental automobile was purchased for ms dawson’s use the purchase was financed with a loan of dollar_figure during date petitioner wrote two checks to golden triangle remodeling totaling dollar_figure for the cost of a three-car garage added to their home on date petitioner purchased a new ford big bronco automobile the purchase was financed with a loan of dollar_figure to petitioner on which payments were made during during petitioner and ms dawson wrote checks totaling dollar_figure on their joint checking account with mid county teachers also during that year petitioner and ms dawson wrote checks or made transfers totaling dollar_figure from their joint checking account with texaco p a w nearly all of the funds deposited into the joint checking account maintained by petitioner and ms dawson with texaco p a w during were spent in that year between january and date petitioner and ms dawson paid dollar_figure to golden triangle remodeling for the addition of a computer room over their garage the room was furnished in with inter alia a desk a computer cabinet and custom-built bookcases during july and august of don lightfoot home builder inc made improvements to the residence of petitioner and ms dawson that consisted of remodeling its living room and the bedrooms of their two daughters the remodeling included installation of hardwood floors and new draperies in all three rooms removal of part of a wall and the addition of a skylight to one bedroom and of a bay window to the other on date don lightfoot home builder inc was paid dollar_figure for the improvements by a check drawn on the joint checking account with texaco p a w petitioner also signed a check payable to beaumont cobbs carpet inc in the amount of dollar_figure to pay expenses for remodeling one of his daughter’s bedrooms petitioner was aware of the remodeling done at his home during ms dawson purchased beds for their daughters at a cost of dollar_figure a red cherry dining room set at a cost of between dollar_figure and dollar_figure a 25-inch color television and set of oak entertainment cabinets a crystal chandelier a living room set a number of sewing machines two portable televisions with built-in video cassette recorders and a camcorder petitioner was aware of the items ms dawson purchased for their home during also during a new mercury sable automobile was purchased that was financed with a loan to petitioner petitioner also purchased a nissan pickup truck for dollar_figure and paid for it with two checks he wrote on the joint checking account with texaco p a w petitioner and ms dawson also lent dollar_figure to ms dawson’s sister and her husband for the purchase of a truck also during petitioner purchased a 28-foot wood- hulled chris craft boat chris craft for dollar_figure paid for by withdrawals from the joint checking account with texaco p a w the chris craft was licensed and registered to petitioner the interior cabin of the chris craft was decorated by fowler’s furniture design gallery fowler’s in date at a total cost of dollar_figure petitioner and ms dawson met with an employee of fowler’s to discuss the decoration petitioner incurred labor and parts expenses for work performed on the chris craft by eastex marine maintenance on or about the following dates in the following amounts date dollar_figure date dollar_figure date dollar_figure date dollar_figure total dollar_figure additionally petitioner paid over dollar_figure for further work on the chris craft petitioner docked the chris craft at the beaumont yacht club and the membership in the club was in his name only petitioner paid an annual membership fee and monthly docking fees to the beaumont yacht club for the chris craft that totaled approximately dollar_figure per year during petitioner and ms dawson went on a caribbean cruise during such year ms dawson’s parents went on a caribbean cruise that petitioner and ms dawson gave them as a present for their anniversary the cost of the trip was dollar_figure also during that year petitioner ms dawson and their daughter audrey went on a vacation to disneyland in california the dollar_figure cost of the trip was paid with a check drawn on the joint checking account with mid county teachers on christmas eve petitioner and ms dawson gave ms dawson’s sister her husband her sister’s two children and petitioner’s and ms dawson’s daughter audrey a vacation to disneyland the dollar_figure cost of the trip was paid with a check drawn on the joint checking account with mid county teachers during petitioner and ms dawson were members of the pompano club a private dining club on date petitioner and ms dawson purchased a passport motor home motor home for dollar_figure from henry courts rv ms dawson did not hide from petitioner any of the items she purchased with embezzled funds petitioner’s and ms dawson’s income_tax returns petitioner and ms dawson timely filed a joint federal_income_tax return for each of their and taxable years hereinafter respectively referred to as the return and return their return reported wage income of dollar_figure adjusted_gross_income of dollar_figure and that petitioner’s compensation from gulf states utilities was dollar_figure their return reported wage income of dollar_figure adjusted_gross_income of dollar_figure and that petitioner’s compensation from gulf states utilities was dollar_figure forms w-2 for the taxable_year show wages paid to ms dawson by pahhs and bhhs in the amounts of dollar_figure and dollar_figure respectively such forms w-2 include dollar_figure in wages from pahhs and dollar_figure in wages bhhs paid to ms dawson that were omitted from petitioner’s and ms dawson’s return for that year petitioner assisted ms dawson in preparing the return the purported signature of petitioner on the return is not in fact petitioner’s signature petitioner filed a separate federal_income_tax return for the taxable_year on date certain events occurring subsequent to the years in issue petitioner and ms dawson separated on date and were divorced on date on or about date ms dawson pled guilty in the u s district_court eastern district of texas district_court to one count of embezzlement in violation of u s c sec_666 and one count of income_tax evasion for the tax_year in violation of sec_7201 ms dawson was sentenced to months’ incarceration in federal prison at the time of trial ms dawson was on supervised release from federal prison she was ordered by the district_court to pay and at the time of trial she was paying restitution to dr constant and taxes to the internal_revenue_service irs for in accordance with a payment schedule developed with the irs opinion innocent spouse issue the first issue that we must consider is whether petitioner has shown that he is an innocent spouse with respect to the understatement_of_tax attributable to the funds embezzled by ms dawson in spouses who file joint tax returns generally are jointly and severally liable for federal_income_tax due on their combined incomes as well as for interest on and additions to the tax sec_6013 25_f3d_1289 5th cir affg tcmemo_1993_252 the general_rule is mitigated to some extent by sec_6013 known as the innocent_spouse_rule park v commissioner supra congress regards joint_and_several_liability as an important adjunct to the privilege of filing joint tax returns which generally results in a lower tax on the combined incomes of spouses than would be due were they to file separate returns and any relaxation of the rule_of liability depends upon compliance with the conditions of sec_6013 57_tc_373 because of its remedial purpose however the innocent_spouse_rule must not be given an unduly narrow or restrictive reading 509_f2d_162 5th cir the question whether a taxpayer has established that he or she is entitled to relief as an innocent spouse is one of fact park v commissioner supra pincite sec_6013 provides in pertinent part that if a a joint_return has been made under this section for a taxable_year b on such return there is a substantial_understatement of tax attributable to grossly_erroneous_items of one spouse c the other spouse establishes that in signing the return he or she did not know and had no reason to know that there was such substantial_understatement and d taking into account all the facts and circumstances it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable_year attributable to such substantial_understatement then the other spouse 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 substantial_understatement a taxpayer must prove that each requirement of sec_6013 is met and failure to prove any one of the requirements prevents a taxpayer from qualifying for relief as an innocent spouse park v commissioner supra pincite 826_f2d_470 6th cir affg 86_tc_228 94_tc_126 affd 992_f2d_1132 11th cir in the instant case the parties stipulated that petitioner filed a joint_return with ms dawson for notwithstanding that the signature on the return purporting to be petitioner’s is not in fact his respondent also concedes that there was a substantial_understatement of tax attributable to grossly_erroneous_items of ms dawson on the return respondent contends however that petitioner knew or had reason to know of the substantial_understatement and that it is not inequitable to hold petitioner liable for the deficiency attributable to the substantial_understatement the knowledge test as stated above requires a taxpayer to show that at the time of signing a joint_return he or she did not know and had no reason to know of the substantial_understatement of tax on the return the relevant knowledge is of the transaction giving rise to the income omitted from the return rather than of the tax consequences of such transaction the failure of one spouse to sign a return does not prevent such return from being considered a joint_return if the nonsigning spouse intended to file a joint_return see 780_f2d_561 6th cir affg in part and revg and remanding in part tcmemo_1984_310 56_tc_1 park v commissioner supra pincite4 sanders v united_states supra pincite bokum v commissioner supra pincite consequently a spouse who knows or has reason to know of such a transaction does not qualify for relief as an innocent spouse park v commissioner supra sanders v united_states supra a spouse has reason to know of an understatement if a reasonably prudent taxpayer under the circumstances of the alleged innocent spouse at the time of signing the return could be expected to know that the tax_liability stated was erroneous or that further investigation was warranted park v commissioner supra pincite citing sanders v united_states supra pincite and n in deciding the issue factors we consider include the level of education of the spouse seeking relief the spouse’s involvement in the family’s business and financial affairs unusual or lavish expenditures made by the family and the culpable spouse’s refusal to be forthright about the couple’s income park v commissioner f 3d pincite sanders v united_states f 2d pincite in reaching our decision we consider the interplay among the factors and different factors will predominate in different cases 59_f3d_374 2d cir affg tcmemo_1993_390 turning to the facts of the instant case we find that even if at the relevant time petitioner did not actually know that ms dawson was embezzling funds from her employers ie the source of the income he knew or had reason to know of the receipt of the income attributable to the embezzlement as to the first factor level of education petitioner has presented no evidence we note however that during the years in issue petitioner was employed by gulf states utilities as a power plant operator and control operations foreman employment from which he earned over dollar_figure in and that he had been so employed since beginning in mid-1987 and continuing through the years in issue petitioner also operated a computer consulting business that included the delivery and installation of computer equipment and the setting up of computerized bookkeeping and payroll systems certainly he had some experience in business and financial matters as to the second factor involvement in the family’s finances petitioner contends that ms dawson or her mother handled his family’s financial affairs and that he was uninvolved we cannot conclude with certainty from the record whether or not petitioner had actual knowledge that ms dawson had embezzled funds from her employers when the return was signed for instance at trial ms dawson testified that at the time the couple purchased a motor home in petitioner told her to get more money from the agency ie her employers so that they could make a larger downpayment the motor home was purchased on date after the filing of the return in date accordingly such testimony even if we were to believe it would not necessarily establish that petitioner was aware in date that ms dawson was embezzling funds from her employers although ms dawson testified that petitioner had made similar statements at other times she could not recall specific instances in such matters prior to date when he admits he assumed responsibility for writing checks to pay his family’s bills perfect knowledge of one’s family’s financial affairs however is not required to satisfy the reason to know standard 780_f2d_561 6th cir affg in part and revg and remanding in part tcmemo_1984_310 sanders v commissioner supra pincite we conclude that petitioner had sufficient involvement in his family’s affairs to put a reasonable person in his position on notice that the income reported in the return was erroneous or that further inquiry was warranted during ms dawson caused pahhs and bhhs to issue to her between and payroll checks per month with the amounts of the checks ranging from dollar_figure to dollar_figure all of the funds embezzled by ms dawson during were deposited in joint bank accounts over which petitioner had signature_authority and on which he wrote checks the statements for the accounts were mailed to the residence of petitioner and ms dawson and he opened and looked at least some of the statements petitioner knew where the statements were kept at their residence and he could have reviewed them whenever he desired perusal of the bank statements would have alerted petitioner to the actual level of the couple’s income furthermore the number of deposits of payroll checks made by ms dawson in the accounts and the dollar amount of the deposits reflected in the statements would have shown petitioner that the amount of income ms dawson was receiving from her employers was larger than the amount he claimed to have believed that it was during a taxpayer claiming innocent spouse relief cannot simply turn a blind eye to facts within his or her reach that would have put a reasonably prudent taxpayer on notice that further inquiry needed to be made sanders v united_states supra pincite bokum v commissioner t c pincite 57_tc_732 moreover in date petitioner opened a joint checking account at first national bank of mid county into which he deposited certain of ms dawson’s payroll checks checks that petitioner concedes represented some of the funds embezzled from pahhs and bhhs petitioner reviewed and reconciled the statements for the account as stated above petitioner admitted that he assumed responsibility for writing checks to pay his family’s bills at that time prior to the time the return was filed in date petitioner should have become aware no later than march or date of the true level of his family’s income and expenditures moreover petitioner assisted ms dawson in preparing their joint income_tax return in addition to his involvement in his family’s financial affairs we consider it significant that petitioner was involved in the business of ms dawson’s employers pahhs and bhhs during petitioner delivered installed and programmed computerized bookkeeping and payroll systems for pahhs and bhhs in the offices of bhhs petitioner taught the employees of pahhs and bhhs to use the systems during ms dawson used the systems to embezzle funds from her employers petitioner also installed computers in the offices of other corporations operated by dr constant petitioner also worked as a handyman for bhhs setting up offices and moving furniture and boxes the third factor we consider is the presence of unusual or lavish expenditures by petitioner’s family a taxpayer claiming relief as an innocent spouse cannot close his or her eyes to unusual or lavish expenditures that might have alerted him or her to unreported income 72_tc_1164 57_tc_680 the presence of unusual or lavish expenditures may put a taxpayer on notice that it is probable that income is being omitted from a joint_return 72_tc_356 the overall amount of spending by petitioner and ms dawson during should have put petitioner on notice that it was probable that income was omitted from their return petitioner and ms dawson wrote checks on the joint checking account with mid county during that totaled dollar_figure during petitioner and ms dawson wrote checks on the joint checking account with texaco p a w in the amount of dollar_figure the total amount of the checks written on both the accounts thus exceeded dollar_figure such a level of expenditure was made possible by the deposit in the accounts of the dollar_figure that ms dawson embezzled from her employers during although the record indicates that petitioner may have written only a relatively small percentage of the checks drawn on the accounts and petitioner claimed to have been uninvolved in his family’s finances prior to date we do not think it reasonable to conclude that he failed to notice that during he and ms dawson spent an amount that was two or three times the amount that he claimed to have believed to have been their income for each of and viz between dollar_figure to dollar_figure and the amount of adjusted_gross_income reported on each of their and returns the specific expenditures disclosed by the record that were made during also should have alerted petitioner to the probable omission_of_income from the return while the record shows that in a lincoln continental automobile and a ford big bronco automobile were purchased and a three-car garage costing dollar_figure was added to petitioner’s and ms dawson’s home petitioner has conceded that the return omitted the following amounts received by ms dawson dollar_figure of wage income from pahhs and bhhs gross_receipts of dollar_figure and a pension distribution of dollar_figure we find that expenditures made by petitioner’s family in were lavish or unusual significant sums were spent to remodel and furnish petitioner’s home during petitioner and ms dawson paid dollar_figure for the addition of a computer room over their garage they also paid dollar_figure for the remodeling of their living room and the bedrooms of their two daughters petitioner signed a further dollar_figure check to pay expenses in connection with the remodeling petitioner was aware of the remodeling petitioner was also aware in that ms dawson purchased beds for their daughters at a cost of dollar_figure a red cherry dining room set at a cost of between dollar_figure and dollar_figure a 25-inch color television and set of oak entertainment cabinets a crystal chandelier a living room set a number of sewing machines two portable televisions with built-in video cassette recorders and a camcorder expenditures_for automobiles and a boat were also made during a mercury sable automobile was purchased and petitioner purchased a nissan pickup truck for dollar_figure paying for it with two checks he wrote on the joint checking petitioner claims that the remodeling discussed above was financed by a loan although a loan of approximately dollar_figure was funded in the total cost of the remodeling of petitioner’s home in and after the funding of the loan exceeded the amount of the loan moreover it seems reasonable to us that ms dawson’s embezzlement provided a source of funds from which payments on the loan could be made aiding petitioner and ms dawson in carrying the loan account with texaco p a w also petitioner and ms dawson lent her sister and her husband dollar_figure for the purchase of a truck petitioner also purchased a 28-foot chris craft boat for dollar_figure paying for it with withdrawals from the joint checking account with texaco p a w petitioner and ms dawson paid dollar_figure to decorate the boat meeting with the decorator to discuss the decoration petitioner also incurred maintenance_expenses of over dollar_figure with respect to the boat in petitioner paid yacht club membership and dockage fees of dollar_figure with respect to the boat significant travel financed by petitioner and ms dawson also occurred during petitioner and ms dawson went on a caribbean cruise they gave ms dawson’s parents such a cruise costing dollar_figure as an anniversary present petitioner ms dawson and their daughter audrey went on a vacation costing dollar_figure to disneyland in california petitioner and ms dawson gave her sister her husband their two daughters and petitioner’s and ms dawson’s daughter audrey a vacation costing dollar_figure to disneyland the fourth factor we consider is whether ms dawson was forthright about the omitted income petitioner has not established that ms dawson was evasive concerning her true level of income we have found that ms dawson did not attempt to hide the income from her embezzlement or her expenditures from petitioner indeed all of the embezzled funds were deposited in and disbursed from joint checking accounts to which petitioner had access and with respect to which statements were available to him under the circumstances of the instant case a reasonably prudent person would have seriously questioned the gross_income reported in the joint_return petitioner and ms dawson filed for and petitioner therefore had a duty_of inquiry with respect to the correctness of the reported income a duty that he failed to discharge park v commissioner f 3d pincite sanders v united_states f 2d pincite we accordingly find based on the entire record that petitioner knew or had reason to know of the substantial_understatement of tax on the return resulting from the omission of the income embezzled by ms dawson during such year the next matter we consider is whether it would be inequitable to hold petitioner liable for the deficiency attributable to the omission of the funds embezzled by ms dawson from the return sec_6013 in deciding the issue we take into account all of the facts and circumstances id sec_1 b income_tax regs a factor to be considered is whether the person seeking relief significantly benefited directly or indirectly from the omitted income although sec_6013 since its amendment in no continued 20_f3d_173 5th cir affg tcmemo_1992_36 sec_1 b income_tax regs normal support which is to be measured by a couple’s circumstances is not considered a significant benefit sanders v united_states supra pincite terzian v commissioner t c pincite mysse v commissioner t c pincite a significant benefit exists if expenditures have been made which are unusual for the taxpayer’s accustomed lifestyle terzian v commissioner supra other factors include whether the spouse seeking relief has been deserted by the other spouse or is divorced or separated from that spouse sec_1 b income_tax regs and probable future hardships that would be visited upon the purportedly innocent spouse were he or she not relieved from liability sanders v united_states supra pincite n we conclude based on the record in the instant case that petitioner received a significant benefit from the funds that ms dawson embezzled in the embezzled funds allowed more funds to be available for petitioner’s household than were provided by the wage income that was earned by petitioner and ms dawson and continued longer expressly requires that a taxpayer seeking relief as an innocent spouse show that he or she did not significantly benefit from items of income omitted from a joint_return the question of significant benefit is nonetheless a factor properly to be considered in deciding whether it is inequitable to hold a spouse liable for the understatement attributable to the omission 93_tc_672 86_tc_228 affd 826_f2d_470 6th cir reported on their return petitioner has not shown that ms dawson used the funds exclusively for her own benefit and it appears to us that the funds were largely expended for the benefit of petitioner’s family or ms dawson’s relatives the record shows that petitioner enjoyed significant benefits such as expensive remodeling of and furnishings for his home a boat which was purchased and redecorated at significant cost and vacations to the caribbean and disneyland petitioner has not established that such expenditures were characteristic of his accustomed lifestyle and we conclude that the benefits they afforded him were unusual for his lifestyle with respect to the other factors to be considered we note that while petitioner was not deserted by ms dawson they separated and were divorced in such circumstance however does not outweigh the significant benefit that petitioner received from ms dawson’s embezzlement petitioner also has not established that any hardships would be visited upon him were he not to be relieved from liability for the deficiency attributable to the omission of the embezzled funds from the return we find therefore that it would not be inequitable to hold petitioner liable for the understatement attributable to the funds embezzled by ms dawson in based upon the foregoing we hold that petitioner is jointly and severally liable for the deficiencies in and additions to tax attributable to the funds ms dawson embezzled from her employers during that year community_income issue the next issue we shall consider is whether any of the funds embezzled by ms dawson during are taxable to petitionerdollar_figure petitioner is taxable on the funds to the extent of his ownership_interest under texas law 403_us_190 and cases cited therein texas law provides for a community system of property rights of spouses tex const art sec_15 tex fam code ann sec dollar_figure west under that system each spouse has a vested interest in and is the owner of one-half of all such property 72_tc_340 consequently a spouse is liable for the federal_income_tax on the portion of any income that is community_property id a spouse however has no ownership_interest in and is not taxable on income that is the separate_property of the other spouse id our inquiry accordingly focuses on whether the dollar_figure embezzled by ms because petitioner filed a separate tax_return from ms dawson for petitioner concedes that he is not eligible for relief as an innocent spouse under sec_6013 petitioner however does not contend and we do not consider whether he qualifies as an innocent spouse pursuant to sec_66 under which a taxpayer who does not file a joint_return may be relieved of liability for tax on items of community_income attributable to the taxpayer’s spouse see 860_f2d_1235 5th cir affg tcmemo_1987_391 dawson during was community_property or her separate_property the pertinent texas statute defines community_property as the property other than separate_property acquired by either spouse during marriage tex fam code ann sec_5 b west we have previously held that the well-established rule in texas is that the term acquired as it is used in the statute refers to the origin or inception of title johnson v commissioner supra pincite in johnson v commissioner supra pincite we reasoned as follows consequently a spouse who acquires property during marriage must acquire some legal_title to the property before such property will be characterized as community_property hence if a spouse acquires possession of property without title the property remains the separate_property of such spouse under texas law where property is acquired illegally whether title to such property passes to the illegal taker depends on whether the owner intended to pass both possession and title to the illegal taker citations omitted we must accordingly consider whether petitioner has carried his burden of proving that pahhs and bhhs did not intend to pass to ms dawson both possession of and title to the funds she embezzled in ms dawson was authorized to issue the payroll checks in her name that represented the embezzled funds she was responsible for and had signature_authority over all of the payroll checking accounts maintained by pahhs and bhhs and issued all of the payroll checks for those entities ms dawson therefore possessed the authority to act on behalf of those entities to pass both possession of and title to the funds in those payroll accounts to others based upon our consideration of the entire record in the instant case we conclude that petitioner has not carried his burden of proving that in issuing the checks pahhs and bhhs did not intend to pass to ms dawson both possession of and title to the funds embezzled by her during rule a we therefore hold that the dollar_figure embezzled by ms dawson during is community_income one-half of which is taxable to petitioner to reflect concessions and the foregoing decisions will be entered under rule


internal_revenue_service number release date index number ----------------------------- --------------------------------------------------------- --------------- ---------------------- ----------------------- - department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- id no ------------- telephone number -------------------- refer reply to cc tege eoeg et2 plr-123076-04 date date legend taxpayer provision z dear -------------- withholding requirements with respect to payments of lump sum vacation allowances to certain employees of the taxpayer this is in reply to your request for a ruling concerning the federal_income_tax --------------- ------------ according to the information submitted the taxpayer has entered into an agreement with a union that represents certain of its employees this agreement provides for the accrual and payment of vacation pay under this agreement certain employees accrue vacation pay credit according to the number of hours worked and the length of time spent working in the business the vacation pay accrued from january of one year through june of the same year is paid in full as a lump sum payment to the employee by july of that year the vacation pay accrued from july of one year through december of the same year is paid in full as a lump sum payment to the employee by january of the following year the amount of the vacation payment is not reduced by the vacation time actually taken by an employee during that vacation pay accrual_period the employee receives no other wage payments for periods in which he or she takes time off the union agreement also contains a provision describing the method the corporation is to use when withholding federal income taxes on vacation payments provision z of the union agreement states that taxes shall be withheld on the vacation payments on the basis of the number of weeks of vacation or portion of a week of vacation the accrued vacation pay represents under this method the gross amount of plr-123076-04 the vacation payment is divided by the number of weeks or portion of a week of vacation the accrued vacation pay represents and the withholding on that amount is determined based on the withholding_allowances and the appropriate table for a weekly payroll_period once the weekly withholding amount is determined it is multiplied by the number of weeks represented by the gross payment to arrive at the total withholding on the vacation payment in essence the proposed withholding method on the annual vacation lump sum payment treats the vacation payment as a collection of weekly vacation payments or regular wage payments for tax withholding purposes and results in lower overall federal_income_tax withholding than treating the payment as a wage payment for a single payroll_period you have asked for four rulings with respect to the proper method for withholding federal income taxes on vacation payments made by the taxpayer to certain of its employees the requested rulings will be addressed in turn ruling_request whether the method of withholding federal income taxes detailed in provision z of the union agreement is an allowable one ruling_request whether the vacation payments made by the company to its union employees are considered wages for purposes of sec_3402 and of the internal_revenue_code the code and sec_31_3402_h_1_-1 sec_31_3402_h_2_-1 sec_31_3402_h_3_-1 and sec_31_3402_h_4_-1 of the employment_tax regulations the regulations rulings sec_3401 of the code defines wages as all remuneration for services performed by an employee for his employer with certain specific exceptions which are not applicable here the vacation payments are wages as that term is defined under sec_3401 of the code and thus are wages for purposes of sec_3402 of the code and the accompanying regulations however the alternative methods of withholding authorized under sec_3402 of the code are only allowed when used as comprehensive methods for withholding on all of an employee’s wages that is an employer cannot apply the alternative methods authorized under sec_3402 of the code and the accompanying regulations to only a portion of an employee’s wages while applying another method to some other portion of the employee’s wages sec_3402 of the code allows an employer to withhold on wages using any other method that will require the employer to deduct and withhold upon such wages substantially the same amount as would be required to be deducted and withheld by applying subsection a or c of that section the maximum permissible deviations for determining whether the amounts deducted and withheld are substantially the same for purposes of sec_3402 of the code are detailed in sec_31_3402_h_4_-1 of plr-123076-04 the regulations sec_31_3402_h_4_-1 of the regulations cautions that a n employer should thoroughly test any method which he contemplates using to ascertain whether it meets the tolerances prescribed by sec_31_3402_h_4_-1 of the regulations according to our understanding the amounts withheld under the withholding method described in provision z of the union agreement do not meet the maximum permissible deviation standards if compared to the methods for withholding on supplemental_wages provided under sec_31_3402_g_-1 of the regulations or if compared to amounts calculated based on a payment for a single payroll_period the withholding method described under the union agreement is not an allowable one it is not one of the listed methods code sec_3402 through and would fail the maximum possible deviation test under sec_3402 the union agreement in the same provision that details the proposed withholding method states that the intent of that provision is that taxes will be withheld at weekly rates rather than the higher rates for a lump sum payment of vacation pay this is directly contrary to sec_31_3402_h_4_-1 of the regulations which prohibits an employer from using any method one of the principal purposes of which is to consistently produce amounts to be deducted and withheld which are less though substantially the same than the amount required to be deducted and withheld by applying sec_3402 the withholding method proposed by the union agreement is not an allowable one under the code and regulations requested ruling whether the vacation pay payments made to the company’s union employees are supplemental wage payments and therefore subject_to the supplemental wage withholding rules under sec_31_3402_g_-1 of the regulations ruling the vacation pay payments made to the company’s union employees are supplemental wage payments these payments are subject_to the withholding rules prescribed by sec_31_3402_g_-1 of the regulations sec_31_3402_g_-1 of the regulations provides that the amounts of so-called vacation allowances shall be subject_to_withholding as though they were regular wage payments made for the period covered by the vacation if the vacation allowance is paid in addition to the regular wage payment for such period the rules applicable with respect to supplemental wage payments shall apply to such vacation allowances in revrul_66_294 1966_2_cb_459 the service considered whether certain payments were treated as supplemental_wages for federal_income_tax withholding purposes in question employees receive at the end of approximately each months’ period a lump sum payment known as a vacation and sick leave allowance an employee receives this payment whether or not he or she has been absent from work because of vacation or illness however in the event of absenteeism because of vacation or illness the employee receives no regular pay for the period of absence plr-123076-04 the ruling concludes that the lump sum payment is a supplemental wage payment the payments in the instant case are similar to the supplemental wage payment described in question of revrul_66_294 an employee receives the lump sum vacation allowance payment from the taxpayer regardless of whether the employee takes vacation as in the ruling in the event the employee takes vacation the employee receives no regular pay for the period of absence because the vacation allowance here is paid under similar circumstances as the payments in question of revrul_66_294 the vacation allowance payments by the taxpayer are supplemental wage payments for income_tax_withholding purposes therefore we conclude that the vacation allowance payment is a supplemental wage payment requested ruling guidance as to the appropriate withholding methods available to the taxpayer for the vacation pay payments ruling sec_3402 of the code provides that except as otherwise provided in sec_3402 every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the secretary sec_3402 specifically provides for the percentage_method of withholding and the wage_bracket_method of withholding sec_31_3402_g_-1 of the regulations provides that an employee’s remuneration may consist of wages paid for a payroll_period and supplemental_wages such as bonuses commissions and overtime pay paid for the same or a different period or without regard to a particular period when such supplemental_wages are paid whether or not at the same time as the regular wages the amount of the tax required to be withheld under sec_3402 the percentage_method or under sec_3402 the wage_bracket_method shall be determined in accordance with sec_31_3402_g_-1 or b see also revrul_82_200 1982_2_cb_239 if supplemental_wages are paid together with regular wages and the amount of each is not specifically indicated the supplemental_wages are aggregated with the regular wages and withholding is determined as if the total were a single payment for a regular payroll_period if supplemental_wages are separately paid from regular wages or if the amount of the supplemental_wages is specifically indicated in a payment combining regular and supplemental payments two different methods of calculating the amount of income_tax_withholding on the supplemental_wages can be used see sec_31_3402_g_-1 of the regulations under the first method the supplemental_wages are aggregated with the wages paid or to be paid within the same calendar_year for the last preceding payroll plr-123076-04 period or for the current payroll_period the amount of tax is determined as if the aggregate of the supplemental_wages and the regular wages constituted a single wage payment for the regular payroll_period under the second method of withholding on separate payments of supplemental_wages provided in sec_31_3402_g_-1 of the regulations as amended by section of the omnibus_budget_reconciliation_act_of_1993 pub_l_no and sec_101 of the economic_growth_and_tax_relief_reconciliation_act_of_2001 pub_l_no the employer may determine the tax to be withheld from supplemental_wages by using a flat percentage rate of percent without allowance for exemption and without reference to any regular wages this second method can only be used if tax has been withheld from the employee’s regular wages if federal_income_tax has been withheld from the employee’s regular wages the taxpayer can withhold federal_income_tax on the supplemental wage payment by using a flat percent rate without allowance for exemption and without reference to any regular payment of wages if federal_income_tax has not been withheld from the regular wages of the employee the vacation allowance payment is aggregated with the regular wages paid for the current payroll_period or the last preceding payroll_period the amount of withholding_tax is determined as if the aggregate of the supplemental_wages and the regular wages constituted a single wage payment for the regular payroll_period this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely lynne camillo branch chief employment_tax branch exempt_organizations employment_tax gov tax exempt government entities


department of the treasury internal_revenue_service washington d c vo u1 mar 6p eh t2 tax_exempt_and_government_entities_division uic rnnooovoers xxxxkxxkxkkk legend taxpayer a taxpayer b accountant c accountant d ira m iran irao irap iraq irar iras company z sum v sum w dear kk kk kk kkk re re kk wee kee ke re kk rk kek this is in response to the letter submitted by your authorized representative as supplemented by correspondence dated and in which you request relief under sec_301_9100-3 of the procedure and administration regulations the regulations the following facts and representations support your ruling_request taxpayer a maintained iras m n and o individual_retirement_accounts described in the internal_revenue_code code sec_408 with company z during calendar_year taxpayer a converted iras m n and o to roth iras q and r also with company z the amount converted was sum v taxpayer b taxpayer a’s spouse maintained ira p an individual_retirement_account described in code sec_408 with company z during calendar_year taxpayer b converted ira p to a roth_ira ira s also with company z the amount converted was sum w xxxxxxxxxxx page -2- taxpayer a and taxpayer b filed a joint federal_income_tax return with respect to the calendar_year taxpayers a and b's adjusted_gross_income for exceeded the limit found at sec_408a of the internal_revenue_code however on several occasions prior to the ira conversion taxpayer a and taxpayer b consulted with their lead accountant accountant c with respect to these roth conversions accountant c never advised taxpayer a and taxpayer b that they would be ineligible to convert ira m ira n ira o and ira p to roth_ira q roth_ira r and roth_ira s accountant d prepared taxpayer a and b’s federal_income_tax returns for tax years and in when accountant d reviewed taxpayer a and b's return for accountant d informed taxpayer a and taxpayer b that they were ineligible to convert their traditional iras to roth iras prior to the end of the calendar_year taxpayers a and b were unaware that they were ineligible to convert their traditional iras to roth iras as a result prior to the end of the calendar_year they were also unaware of the time limits found in announcements and for recharacterizing an amount that had been converted from a traditional_ira to a roth_ira taxpayers a and b timely filed their calendar_year federal_income_tax return based on the above you through your authorized representative request the following letter_ruling that pursuant to sec_301_9100-3 of the regulations taxpayers a and b are granted a period not to exceed six months from the date of this ruling letter to recharacterize their roth iras ira q ira r and ira s respectfully to traditional iras with respect to your request for relief under sec_301_9100-3 of the regulations sec_408a of the internal_revenue_code and sec_1_408a-5 of the income_tax regulations t regulations provide that except as otherwise provided by the secretary a taxpayer may elect to recharacterize an ira contribution made to one type of ira as having been made to another type of ira by making a trustee-to-trustee transfer of the ira contribution plus earnings to the other type of ira ina recharacterization the ira contribution is treated as having been made to the transferee ira and not the transferor ira under sec_408a and sec_1_408a-5 this recharacterization election generally must occur on or before the date prescribed by law including extensions for filing the taxpayer's federal_income_tax returns for the year of contributions sec_1_408a-5 question and answer-6 of the t regulations describes how a taxpayer makes the election to recharacterize the ira contribution to recharacterize an amount that has been converted from a traditional_ira to a roth_ira the taxpayer must notify the roth_ira trustee of the taxpayer's intent to recharacterize the amount the taxpayer must provide the trustee and the transferee trustee if different xxxxxxxxkkx page - - from the transferor trustee with specified information that is sufficient to effect the recharacterization and the trustee must make the transfer code sec_408a provides in relevant part that an individual with adjusted_gross_income agi in excess of dollar_figure for a taxable_year is not permitted to make a qualified_rollover_contribution to a roth_ira from an individual_retirement_plan other than a roth_ira during that taxable_year sec_1_408a-4 q a-2 of the i t regulations provides in summary that an individual with modified_adjusted_gross_income in excess of dollar_figure for a taxable_year is not permitted to convert an amount to a roth_ira during that taxable_year sec_1_408a-4 q a-2 further provides in summary that an individual and his spouse must file a joint federal tax_return to convert a traditional_ira to a roth_ira and that the modified_adjusted_gross_income subject_to the dollar_figure limit for a taxable_year is the modified agi derived from the joint_return using the couple’s combined income sec_301_9100-1 sec_301_9100-2 and sec_301_9100-3 of the regulations in general provide guidance concerning requests for relief submitted to the service on or after date sec_301_9100-1 of the regulations provides that the commissioner of the internal_revenue_service in his discretion may grant a reasonabie extension of the time fixed by a regulation a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin for the making of an election or application_for relief in respect of tax under among others subtitle a of the code sec_301_9100-2 of the regulations lists certain elections for which automatic extensions of time to file are granted sec_301_9100-3 of the regulations generally provides guidance with respect to the granting of relief with respect to those elections not referenced in sec_301_9100-2 the relief requested in this case is not referenced in sec_301_9100-2 sec_301_9100-3 of the regulations provides that applications for relief that fail within sec_301_9100-3 will be granted when the taxpayer provides sufficient evidence including affidavits described in sec_301_9100-3 to establish that the taxpayer acted reasonably and in good_faith and granting relief would not prejudice the interests of the government sec_301_9100-3 of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good_faith i if its request for sec_301_9100-1 relief is filed before the failure to make a timely election is discovered by the service ii if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control iii if the taxpayer failed to make the election because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election iv the taxpayer reasonably relied upon the written advice of the service or v the taxpayer reasonably relied on a qualified_tax professional including a tax professional employed by the taxpayer and the tax professional failed to make or advise the taxpayer to make the election 3s xxxxxkxkxkxkkk page - sec_301_9100-3 of the regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statue of limitations before the taxpayer's receipt of a ruling granting relief under this section announcement 1999_24_irb_50 date provided that a taxpayer who timely filed his her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional_ira to a roth_ira announcement 1999_44_irb_555 date provided that a taxpayer who timely filed his her federal_income_tax return would have until date to recharacterize an amount that had been converted from a traditional ra to a roth_ira taxpayers a and b timely filed their federal_income_tax return as a result they were eligible for relief under announcement or announcement however they missed the deadlines found in said announcements therefore it is necessary to determine if they are eligible for relief under the provisions of sec_301_9100-3 of the regulations in this case taxpayers a and b were ineligible to convert their ira m iran ira o and ira p to roth_ira q ira r and roth_ira respectively since their adjusted_gross_income exceeded dollar_figure however until they discovered otherwise taxpayers a and b believed that they were eligible to convert their iras m n o and p to roth iras taxpayers a and b filed this request for sec_301 relief shortly after discovering that they were ineligible to convert their iras m n o and p to roth iras and before the service independently discovered their failure to comply with the announcements referenced above calendar_year is not a closed tax_year with respect to your request for relief we believe that based on the information submitted and the representations contained herein the requirements of sec_301_9100-1 and sec_301_9100-3 of the regulations have been met and that you have acted reasonably and in good_faith with respect to making the election to recharacterize your roth iras iras q r and s as traditional iras specifically the service has concluded that you have met the requirements of clauses i and v of sec_301_9100-3 of the regulations therefore you are granted an extension of six months from the date of the issuance of this letter_ruling to so recharacterize this ruling assumes that the above iras qualify under sec_408 of the code at all relevant times no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto xxxxkxkxkxkkkk page - - this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this ruling letter is being sent to your authorized representative if you have any questions concerning this ruling please contact at sincerely yours joyce e floyd manager employee_plans technical group tax exempt and government entitles division enclosures deleted copy of ruling letter notice of intention to disclose


number release date internal_revenue_service index number -------------------- ---------------------------------------------- ------------------------------ - -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------- id no ------------- telephone number --------------------- refer reply to cc psi plr-128821-05 date june ------------------------ ---------------------------------------------------------------- ------------------------------------------------------------------------ legend settlor trust taxpayer ------------------------------------------------------ date date child child child brother x y state state citation1 citation citation citation citation citation citation citation citation dear --------------- ------------------- ---------------- ---------------- ---------------- ------------------- ----------------------------------------------- ------ ------------------ ---------- ------------- -------------------------------------------- -------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- -------------------------------------------- -------------------------------------------- -------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- plr-128821-05 this is in response to your letter dated date and other correspondence concerning the modification of trust the facts and representations submitted are summarized as follows settlor established trust an irrevocable_trust on date with amendment dated date both dates are prior to date property transferred to trust included personal and real_property paragraph fourth of trust provides that upon the death of settlor the trust estate shall be divided into x shares paragraph ninth provides that y portion of settlor’s estate shall be retained in trust for taxpayer during her lifetime the trustee shall pay to taxpayer the net_income of the trust estate in installments convenient to the trustee but in no event less often than quarter annually in addition the trustee shall pay to or for the benefit of taxpayer such sums from principal as the trustee in his sole discretion shall deem reasonable necessary or advisable for her care maintenance and support after taking into consideration funds available for such purposes from other sources paragraph tenth as amended provides that upon the death of taxpayer the trust estate shall be divided to provide an equal fund for child child and child the issue of taxpayer living at the time of the creation of trust trust was irrevocable on date it is represented that no actual or constructive additions have been made to trust after that date brother the current sole trustee intends to resign as trustee of trust and appoint taxpayer as successor trustee trust is silent as to the appointment of a successor trustee trustee represents that he will obtain consents from each trust_beneficiary who has a present and cognizable future_interest in the trust consenting to the resignation of brother as trustee and the appointment of taxpayer as successor trustee trust was executed in state the initial trustees were settlor and brother brother resides in state taxpayer is the sole lifetime beneficiary of trust taxpayer resides in state trust instrument is silent regarding the trust situs qualified beneficiaries citation state law also provides that a vacancy in a trusteeship must be filled if the trust has no remaining trustee by a person appointed by unanimous agreement of the qualified beneficiaries citation state law provides that a trustee may resign with the consent of all adult beneficiaries who are receiving or are entitled to receive income under the trust or to receive a distribution of principal if the trust were terminated at the time consent is sought citation state law also state law provides that a trustee may resign after at least days’ notice to the state law provides that unless a settler or a testator clearly indicates that a state law provides that unless the terms of the trust expressly provide plr-128821-05 provides that a vacancy in the trusteeship may be filled on petition of a beneficiary by a court in its discretion citation otherwise a person other than a settlor who is a beneficiary and trustee of a_trust that confers on the trustee a power to make discretionary distributions to or for the trustee’s personal benefit may exercise the power only in accordance with an ascertainable_standard citation ascertainable_standard is defined as an ascertainable_standard relating to an individual’s health education support or maintenance within the meaning of sec_2041 or sec_2514 of the internal_revenue_code as in effect on date citation these sections of state law apply to all trusts created before on or after date citation broader power is intended by express reference to this subsection a person who is a beneficiary of a_trust that permits the person as trustee or cotrustee to make discretionary distributions of income or principal to or for the benefit of himself or herself may exercise that power in his or her favor only for his or her health education support or maintenance within the meaning of sec_2041 and sec_2514 of the internal_revenue_code citation this section applies to any irrevocable_trust created under a document executed before date unless the parties_in_interest elect affirmatively not to be subject_to the application of this section through a written instrument delivered to the trustee citation date is prior to date general_power_of_appointment as defined under sec_2041 or sec_2514 successor trustee will not cause trust to lose its exempt status under section b a of the tax_reform_act_of_1986 from the application of the generation- skipping transfer_tax under chapter ruling the resignation of brother as trustee and the appointment of taxpayer as taxpayer acting as trustee of trust held for her benefit will not hold a you have requested the following rulings sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power_of_appointment by a disposition that is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent’s gross_estate under sec_2035 to inclusive plr-128821-05 sec_2041 provides that a general_power_of_appointment is a power that is exercisable in favor of the decedent his estate his creditors or the creditors of his estate however a power to consume invade or appropriate property for the benefit of the decedent that is limited to the health education support or maintenance of the decedent shall not be deemed a general_power_of_appointment after date is considered a release of the power sec_2041 provides that the lapse of a power_of_appointment created under sec_20_2041-1 of the estate_tax regulations a power to consume invade or appropriate income or corpus or both for the benefit of the decedent which is limited by an ascertainable_standard relating to the health education support or maintenance of the decedent is by reason or sec_2041 not a general_power_of_appointment a power is limited by such a standard if the extent of the holder's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health education or support or any combination of them sec_2501 imposes a tax on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_2514 provides that for gift_tax purposes the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a sec_2514 provides that the lapse of a power_of_appointment created after power that is exercisable in favor of the individual possessing the power possessor his estate his creditors or the creditors of his estate however a power to consume invade or appropriate property for the benefit of the possessor that is limited by an ascertainable_standard relating to the health education support or maintenance of the possessor is not a general_power_of_appointment date during the life of the individual possessing the power shall be considered a release of the power to the extent that the property that could have been appointed by exercise of the lapsed power during the calendar_year exceeds the greater of dollar_figure or percent of the aggregate value of the assets out of which the exercise of the lapsed power could be satisfied consume invade or appropriate income or corpus or both for the benefit of the possessor of the power that is limited by an ascertainable_standard relating to health sec_25_2514-1 of the gift_tax regulations provides that a power to while federal_law controls what rights or interests shall be taxed after they are whether state or state law controls in this situation has not been determined revproc_94_44 1994_2_cb_683 sets forth the service’s position regarding the plr-128821-05 education support or maintenance of the possessor is by reason of sec_2514 not a general_power_of_appointment created creation of legal rights and interests in property such as the breadth and scope of a power_of_appointment over the corpus of a testamentary_trust is a matter of state law 312_us_399 1941_1_cb_441 309_us_78 1940_1_cb_229 by a court of law however in this case the result would be the same both states provide that where a trustee may make discretionary distributions of income or principal to himself or herself as beneficiary of the trust the trustee may exercise that power in his or her favor only for his or her health education support or maintenance within the meaning of sec_2041 and sec_2514 transfer_tax consequences of the enactment of florida statutes annotated sec_737 a under this statute any fiduciary power conferred upon a trustee to make discretionary distributions of either principal or income to or for the trustee’s own benefit cannot be exercised by the trustee except to provide for that trustee’s health education maintenance or support as described in sec_2041 and sec_2514 the statute was effective with respect to trusts that were irrevocable on or after date pursuant to the revenue_procedure the service will not treat the statute as causing the lapse of a general_power_of_appointment for purposes of sec_2041 and sec_2514 where the scope of a fiduciary power held by a beneficiary was restricted as a result of the statute controls if taxpayer becomes the trustee of trust or any trust created under the terms of trust taxpayer will not possess a general_power_of_appointment with respect to such trust for purposes of sec_2041 and sec_2514 as a result of the trustee invasion power further the appointment of taxpayer as successor trustee of trust will not cause taxpayer to be treated as releasing a general_power_of_appointment within the meaning of sec_2041 and sec_2514 ruling defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip section a of the tax_reform_act_of_1986 act and sec_26_2601-1 of the generation-skipping_transfer_tax regulations provide that the generation-skipping accordingly we conclude that under either state or state law whichever sec_2601 imposes a tax on every generation-skipping_transfer which is plr-128821-05 transfer gst tax is generally applicable to generation-skipping transfers made after date however under section b a of the act and sec_26_2601-1 the tax does not apply to any generation-skipping_transfer under a_trust that was irrevocable on date and no addition actual or constructive was made to the trust after that date this rule does not apply to a transfer of property pursuant to the exercise release or lapse of a general_power_of_appointment that is treated as a taxable transfer under chapter or chapter the transfer is made by the person holding the power at the time the exercise release or lapse of the power becomes effective and is not considered a transfer under a_trust that was irrevocable on date possess a general_power_of_appointment and that her appointment as successor trustee will not cause the release or lapse of a general_power_of_appointment within the meaning of sec_2041 and sec_2514 accordingly the rules under sec_26 b v do not apply judicial construction settlement agreement or trustee action with respect to a_trust that is exempt from the gst tax under sec_26_2601-1 or hereinafter referred to as an exempt trust will not cause the trust to lose its exempt status the rules contained in sec_26_2601-1 are applicable only for purposes of determining whether an exempt trust retains its exempt status for gst tax purposes the rules do not apply in determining for example whether the transaction results in a gift subject_to gift_tax or may cause the trust to be included in the gross_estate of a beneficiary or may result in the realization of capital_gain for purposes of sec_1001 in ruling we concluded that taxpayer as successor trustee to trust will not sec_26_2601-1 provides rules for determining when a modification sec_26_2601-1 provides that a modification of the governing instrument of an exempt trust including a trustee distribution settlement or construction that does not satisfy sec_26_2601-1 b or c by judicial reformation or nonjudicial reformation that is valid under applicable state law will not cause an exempt trust to be subject_to the provisions of chapter if the modification does not shift a beneficial_interest in the trust to any beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification and the modification does not extend the time for vesting of any beneficial_interest in the trust beyond the period provided for in the original trust b i a modification of an exempt trust will result in a shift in beneficial_interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a gst transfer or the creation of a new gst transfer to determine whether a modification of an irrevocable_trust will shift a beneficial_interest in a_trust to a beneficiary who occupies a lower generation the effect of the instrument on the date of sec_26_2601-1 provides that for purposes of sec_26 in the present case the trust was created and became irrevocable prior to plr-128821-05 the modification is measured against the effect of the instrument in existence immediately before the modification if the effect of the modification cannot be immediately determined it is deemed to shift a beneficial_interest in the trust to a beneficiary who occupies a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification a modification that is administrative in nature that only indirectly increases the amount transferred for example by lowering administrative costs or income taxes will not be considered to shift a beneficial_interest in the trust date and it has been represented that no additions actual or constructive have been made to trust after that date accordingly trust is exempt from the gst tax under sec_26_2601-1 we conclude that assuming the beneficiaries of trust consent to the resignation of brother as current trustee and the appointment of taxpayer as successor trustee and such consent renders the resignation and appointment valid under state law then for purposes of chapter the modification of trust is an action that is administrative in nature and accordingly such action does not shift a beneficial_interest in trust to a person or persons who occupy a lower generation as defined in sec_2651 than the person or persons who held the beneficial_interest prior to the modification further the modification will not extend the time for vesting of any beneficial_interest in trust beyond the period provided for prior to the modification accordingly based upon the information submitted and representations made the resignation of brother as trustee and the appointment of taxpayer as successor trustee of trust will not cause trust to lose its status under section b a of the tax_reform_act_of_1986 as exempt from the application of chapter except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination letter is being sent to your authorized representative in accordance with the power_of_attorney on file with this office a copy of this plr-128821-05 sincerely lorraine e gardner senior attorney branch passthroughs special industries


t c memo united_states tax_court benedict john casey petitioner v commissioner of internal revenue respondent docket no 812-02l filed date benedict john casey pro_se daniel n price for respondent memorandum findings_of_fact and opinion thornton judge pursuant to sec_6330 petitioner seeks review of an appeals_office determination sustaining respondent’s proposed levy to collect his unpaid federal income taxes unless otherwise indicated section references are to the internal_revenue_code as amended rule references are to the tax_court rules_of_practice and procedure findings of fact2 the parties have stipulated certain facts which we incorporate herein by this reference when petitioner filed his petition he resided in liberty hill texas petitioner’s tax_return on his federal_income_tax return petitioner reported dollar_figure of gross_income and claimed a dollar_figure refund on this return petitioner listed his address a sec_7262 madeira drive fort worth texas the madeira drive address which was also his parents’ address respondent’s examination of the tax_return by letter dated date and addressed to the madeira drive address respondent notified petitioner that according to third-party information reports petitioner had received dollar_figure of nonemployee compensation that was not reported on his tax_return the letter requested petitioner to provide information about this matter within days petitioner failed to file an opening or reply brief consequently the court did not have available either petitioner’s proposed findings_of_fact or any objections he might have had to respondent’s proposed findings_of_fact although we might deem petitioner to have conceded respondent’s proposed findings_of_fact see rule e 101_tc_412 n we instead base our findings_of_fact on the record before us by letter dated date and showing the madeira drive address petitioner requested additional time to respond to this request on date respondent received from petitioner a purported schedule c profit or loss from business listing his principal business as property inspector showing dollar_figure of previously unreported income from gross_receipts or sales and claiming dollar_figure of previously unclaimed business_expenses including alleged expenses for travel film pager and walking shoes notice_of_deficiency by notice_of_deficiency dated date and mailed to the madeira drive address respondent adjusted petitioner’s income to include dollar_figure of nonemployee compensation and determined a dollar_figure deficiency in petitioner’s federal_income_tax and a dollar_figure accuracy-related_penalty pursuant to sec_6662 in the notice_of_deficiency respondent allowed petitioner no business_expense deduction the notice_of_deficiency contained instructions for filing a petition with the tax_court and indicated that any_tax court petition should be filed within days ie by date on date respondent received from petitioner correspondence stating here are the copies of milege sic film pager auto care for tax_return included in this correspondence along with handwritten mileage logs and photocopied invoices was the first page of the aforementioned notice_of_deficiency in a letter to petitioner dated date and mailed to the madeira drive address the chief of respondent’s examination_division indicated that the information petitioner had submitted on date had been considered but did not support a change to the adjustments previously proposed the letter noted that if petitioner disagreed with these findings he could petition the tax_court pursuant to the instructions contained in the notice_of_deficiency petitioner did not petition the tax_court to challenge the determinations in the notice_of_deficiency collection activity respondent sent petitioner a final notice--notice of intent to levy and notice of your right to a hearing dated date on form request for a collection_due_process_hearing dated date and showing an address of parker lane austin texas the parker lane address petitioner requested an appeals_office hearing on the form the only issue that petitioner raised with respect to the as previously noted the notice_of_deficiency indicated an date deadline for petitioner to petition the tax_court the address listed on the form is simply parker ln without a city or state designation on cross examination petitioner acknowledged that the address listed on the form is in austin texas proposed collection action was respondent’s rejection of his proffered mileage records in date petitioner moved from the parker lane address to leander texas petitioner did not notify respondent or the appeals_office of this address change but requested the united_states postal service to forward his mail by letter dated date and addressed to petitioner at the parker lane address respondent’s austin service_center acknowledged receiving petitioner’s form and stated that someone in the appeals_office would contact petitioner about his request for a hearing petitioner acknowledges receiving this letter by letter dated date and addressed to the parker lane address the october letter appeals officer sue cody cody informed petitioner that his appeals_office hearing was scheduled for date the united_states postal service returned this letter marked return to sender no forward order on file unable to forward cody then sent petitioner another letter dated date the october letter to parker lane austin the parker lane address in this letter cody informed according to cody’s case activity records as contained in respondent’s administrative file the parker lane address was suggested by information contained in respondent’s information data retrieval system transcripts for petitioner petitioner that the appeals_office hearing was scheduled for date this letter was not returned cody’s october and letters stated identically that because petitioner had failed to file a petition in the tax_court challenging the notice_of_deficiency he had no further judicial review of the items in the notice_of_deficiency cody indicated however that she would informally review petitioner’s request at the hearing petitioner did not appear for the scheduled appeals_office hearing cody was unsuccessful in reaching petitioner at the telephone number shown on petitioner’s form on date respondent sent petitioner substantially identical notices of determination to the parker lane address and the parker lane address petitioner admits receiving both transmittals the notices of determination correctly state the tax_year in question as being identical attachments to each notice_of_determination describe the issue as relating to petitioner’s tax_year but in discussing verification of legal and procedural requirements each attachment incorrectly refers twice to petitioner’s tax_year and once to petitioner’s account the only differences between the two notices of determination apart from petitioner’s address is that they appropriately list different certified mail numbers and appear to bear nonidentical original signatures by j t benton team manager each attachment indicates that the only issue raised by petitioner was the disallowance of his claimed mileage expenses and states in pertinent part the only issue raised by the taxpayer is the fact that his mileage was not allowed since taxpayer was issued a statutory_notice_of_deficiency and did not petition_tax_court this issue cannot be considered in connection to the cdp hearing taxpayer is not entitled to judicial review of the items in the statutory notice per sec_6330 however i offered to review his records and consider his request for adjustment as an audit_reconsideration apart from the cdp collection_due_process_hearing taxpayer never responded to my letters or telephone calls taxpayer indicated in his request for a cdp hearing that he didn’t agree with the balance due because the agent didn’t allow him business miles i offered taxpayer an audit_reconsideration apart from the cdp hearing but taxpayer did not call or make the schedule d conference his mileage records do not support an adjustment without further explanation and clarification it appears taxpayer has a history of dropping the ball - making some contact - then not responding this happened during the examination with collection and now in appeals the levy balances the need for the efficient collection_of_taxes with the legitimate concern of benedict john casey that any collection action be no more intrusive than necessary because he has failed to cooperate in proving the liability is incorrect and failed to offer any collection alternative opinion i petitioner’s contentions in his petition petitioner raises numerous technical and procedural complaints about respondent’s determination to proceed with collection action petitioner filed no posttrial brief in his pretrial memorandum petitioner distilled his complaints into these three issues whether the appeals_office failed to offer petitioner the hearing that he requested pursuant to sec_6330 whether this court may redetermine his underlying income_tax_liability and whether the notices of determination are invalid because they contain some incorrect references to petitioner’s tax_year and account ii whether the appeals_office failed to offer petitioner a hearing if a taxpayer fails to pay any federal tax_liability within days of notice_and_demand the secretary is authorized to collect the tax by levy on the taxpayer's property sec_6331 at least days before taking collection action the secretary must provide the taxpayer with a final notice_of_intent_to_levy that describes among other things the availability of administrative appeal sec_6331 we have carefully considered all issues raised in the petition we construe most of them as falling within the ambit of the three issues identified above and we address them in that context the other issues raised in the petition are without merit moot or irrelevant in any event we deem petitioner to have abandoned such other issues upon request the taxpayer is entitled to an administrative hearing before the appeals_office of the irs sec_6330 a face-to-face hearing is not invariably required if a taxpayer is given a reasonable opportunity for a hearing but fails to take advantage of it the appeals_office may make a determination on the basis of the case file see eg leineweber v commissioner tcmemo_2004_17 armstrong v commissioner tcmemo_2002_224 sec_301_6330-1 q a-d6 and d7 proced admin regs respondent sent petitioner a letter dated date and addressed to the parker lane address advising petitioner that he would soon be contacted regarding his hearing a short time later appeals officer cody mailed petitioner a letter dated date and also addressed to the parker lane address scheduling the hearing this letter was returned to sender with a notation that the united_states postal service was unable to forward it the nub of petitioner’s complaint as we understand it is that once the october letter was returned the appeals_office was on notice that parker lane was no longer petitioner’s current address construed broadly petitioner’s argument seems to be that the appeals_office failed to exercise due diligence in discovering his new address petitioner does not dispute however that he received the october letter which was also mailed to the parker lane address if nothing else the october letter should have alerted petitioner that he needed to update his address with respondent moreover after the october letter was returned the appeals officer re-sent the correspondence to the parker lane address as suggested by transcripts in respondent’s administrative file this letter was not returned we believe it most likely that petitioner received it despite his allegation to the contrary just as he admits receiving the notice_of_determination that the appeals_office mailed to the parker lane address a short time later in date but even if petitioner did not receive the october letter we are not persuaded that the appeals_office was at fault especially considering that petitioner moved from the address he listed on his form without informing respondent cody’s attempt to contact petitioner at two different addresses one supplied by petitioner himself and the other suggested by respondent’s records demonstrates reasonable effort in these circumstances rather than a defect in the hearing process it may be that petitioner’s receipt of the date letter lulled him into believing that all mail sent to him at the parker lane address would be successfully forwarded to him we are unpersuaded by petitioner’s suggestion that it was somehow respondent’s fault that the date letter was not forwarded to him moreover the only issue petitioner raised in his form related to his underlying tax_liability as discussed below petitioner was not entitled to raise this issue at the appeals_office hearing iii petitioner’s challenge to his underlying tax_liability a taxpayer may challenge the validity of his underlying tax_liability in an appeals hearing conducted pursuant to sec_6330 only if the taxpayer did not receive any statutory_notice_of_deficiency for such tax_liability or did not otherwise have an opportunity to dispute such tax_liability sec_6330 petitioner claims he did not receive the notice_of_deficiency in time to petition the tax_court we are unpersuaded by petitioner’s claim on the basis of all the evidence we conclude that petitioner received the notice_of_deficiency sometime before date which was the date respondent received petitioner’s correspondence enclosing among other things the first page of the notice_of_deficiency petitioner insists that he enclosed no part of the notice_of_deficiency in the correspondence that respondent received date he speculates that someone at the internal_revenue_service must have shuffled the first page of the notice_of_deficiency into the file containing his correspondence we are unpersuaded by petitioner’s theory which is supported by nothing other than petitioner’s speculation after observing petitioner’s demeanor at trial his lackadaisical attitude in his dealings with respondent and this court and his propensity for blaming others for his troubles we do not regard petitioner as a credible witness particularly in regard to this matter in any event there is no evidence to suggest that the notice_of_deficiency could not be delivered to the madeira address to which it was addressed or that it was ever returned to respondent on the basis of all the evidence we conclude that petitioner actually received the notice_of_deficiency dated date sometime before date--well in time to petition the tax_court accordingly pursuant to sec_6330 petitioner is precluded from challenging his underlying tax_liability in this proceeding iv validity of the notices of determination the notices of determination correctly state in their headings that the instant collection proceeding relates to petitioner’s tax period that ended date identical attachments to each notice_of_determination also state in their initial paragraphs the balance due at issue is for mr casey’s individual tax from for in discussing notwithstanding the preclusion rule_of sec_6330 appeals officer cody offered to consider petitioner’s mileage records informally cody’s offer of informal consideration which evinces good_faith on her part does not entitle petitioner to dispute his underlying tax_liability in this proceeding see 118_tc_572 sec_301_6330-1 q a-e11 proced admin regs verification of legal and procedural requirements however the attachments refer twice to petitioner’s tax_year and once to petitioner’s account petitioner seizes upon these misstatements as establishing the invalidity of the notices of determination and infirmities in the administrative process when read in the context of other information in the notices which makes it clear that the notices relate to petitioner’s tax_year and of other materials in the administrative file the references to petitioner’s tax_year are plainly typographical errors as appeals officer cody declares in her affidavit which is in evidencedollar_figure the evidence shows that cody reviewed among other things respondent’s final notice_of_intent_to_levy the transcripts of petitioner’s account and the case history leading up to the collection action in question her review of the transcripts and other materials satisfies the sec_6330 requirement that the hearing officer obtain verification from the secretary that the requirements of any applicable law or administrative for instance the attachment to each notice_of_determination states idrs shows an assessment of tax penalty and applicable_interest made on the tax period the next sentence however states this assessment was made on this latter date corresponds with the date that petitioner was sent the statutory notice of balance due for his taxes as indicated by the plain-language transcript of petitioner’s account that is in evidence procedure have been met see eg yacksyzn v commissioner tcmemo_2002_99 in the attachment to each notice_of_determination appeals officer cody states i have had no prior involvement with this taxpayer concerning the tax period before this cdp case on the basis of this statement which misstates the tax period in question petitioner alleges that respondent failed to show that the appeals officer was impartial with respect to this collection proceeding as required by sec_6330 as previously indicated we attach little significance to the typographical error regarding the tax period in question for purposes of sec_6330 an impartial officer is one who has had no prior involvement with respect to the unpaid tax specified in subsection a a before the first hearing under this section or sec_6320 see perez v commissioner tcmemo_2002_274 petitioner has presented no evidence that appeals officer cody was previously involved in his case we conclude that the sec_6330 impartiality requirement was satisfied in this case v conclusion petitioner has not made a valid challenge to the appropriateness of the proposed collection action or offered any collection alternatives the appeals officer did not act in an arbitrary or capricious way or in an unlawful or unreasonable manner in sustaining respondent’s proposed collection action and accordingly did not abuse her discretion see 117_tc_183 we sustain respondent’s proposed collection action vi petitioner’s motion for sanctions against respondent during trial petitioner orally moved to impose sanctions on counsel for respondent in support of his motion petitioner asserted vaguely that it was my belief that all of his respondent’s counsel’s communications were vexatious and at that time tactically not in my favor he complained broadly that respondent’s counsel burdened him with an inundation of paperwork although the court invited petitioner to address his motion on brief petitioner failed to file any brief sec_6673 allows the tax_court in its discretion to sanction an attorney admitted to practice before the court if the attorney has unreasonably or vexatiously multiplied the proceedings see 99_tc_533 imposing sanctions under sec_6673 on the taxpayer’s counsel for repeated and egregious conduct during the discovery process that caused significant delay dixon v commissioner tcmemo_2000_116 imposing sanctions on counsel for the irs for intentionally misleading the court petitioner’s motion for sanctions is without basis or merit the record does not suggest that respondent’s counsel has engaged in sanctionable conduct the record does show that petitioner has been uncooperative in complying with respondent’s reasonable requests to prepare this case for trial pursuant to this court’s rules and orders petitioner failed to respond to respondent’s numerous pretrial letters seeking informal disclosure of information after respondent implemented formal discovery procedures petitioner still refused to cooperate and ignored the court’s date order that he comply with respondent’s motion to compel discovery of documents instead of meaningful communication or cooperation in preparing for trial what respondent received from petitioner over a period beginning in date and continuing until shortly before trial was a series of vexatious cartoon-like messagesdollar_figure for instance on date respondent’s counsel received from petitioner a sheet of paper bearing the handwritten message surrender daniel with a smiley-face voice balloon that says you mean i am not the all-powerful oz days before the scheduled date trial respondent’s counsel received from petitioner a similar missive that bore the handwritten message date the day you see the shadow of defeat with a smiley-face voice balloon that says is it groundhog day again if anyone has engaged in sanctionable conduct in this proceeding it is petitionerdollar_figure we strongly caution him against proceeding in bad faith in future litigation before this court decision will be entered for respondent and an appropriate order will be issued denying petitioner’s motion for sanctions in fact by order dated date this court sanctioned petitioner for failing to comply with its date order to comply with respondent’s request for production of documents