Court Opinion

ID: 4337426
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:21:54.231129+00
Date Added: 2024-06-11T14:20:45.072095
License: Public Domain

T.C. Memo. 2009-15

                      UNITED STATES TAX COURT

    D’RE I. STERGIOS, f.k.a. D’RE I. MURRAY, Petitioner, AND
         JAMES M. MURRAY, Intervenor v. COMMISSIONER OF
                   INTERNAL REVENUE, Respondent

     Docket No. 8389-04.                 Filed January 22, 2009.

     Curtis W. Berner, for petitioner.

     James M. Murray, pro se

     Davis G. Yee, for respondent.

             MEMORANDUM FINDINGS OF FACT AND OPINION

     HOLMES, Judge:   This case arises from a troubled five-year

marriage that produced two children, constant bickering, and

numerous mutual accusations of wrongdoing.   The Commissioner
                                - 2 -

issued each spouse a notice of deficiency for the last two full

years of their marriage, and the former wife petitioned us.      She

doesn’t contest the amount of the deficiency, but pleads as an

affirmative defense that she qualifies as an innocent spouse.

The Commissioner agrees with her, but her ex has intervened.     In

this case where neither of the main parties is credible, we piece

together the fragments of truth as best we can to decide whether

she is entitled to relief under section 6015.1

                          FINDINGS OF FACT

     This case arises from that couple’s 2000 and 2001 tax

returns, both of which greatly understated the tax due.    The

couple are James Murray and his former wife, D’Re Inge Stergios.2

     Murray, an imposing man, had been a gifted swimmer in his

youth.    Stergios had been an athlete herself, a fine figure

skater who might have competed in the Calgary Olympics.    But

injuries ended her career and she went on to college, graduating

from the University of California at Davis with a degree in

rhetoric and communications.    Murray had graduated from the

University of Arizona with a degree in economics and was working

as a stockbroker at Merrill Lynch when he met his future former

     1
       All section references are to the Internal Revenue Code
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
     2
         D’Re has taken her new husband’s surname.
                                - 3 -

wife.    They began dating in 1995, soon married, and quickly had a

child.    Stergios stopped working outside the home; their second

child followed eighteen months later.    She earned no income of

her own during the years at issue.

     The marriage was troubled from the beginning, and the

trouble began over money.    Murray did very well, but he moved

from investment firm to investment firm, and with each move he

received an upfront bonus that he was obliged to repay when he

left.    He didn’t, though, and by 1999 his $600,000 in unsecured

debt forced him to declare bankruptcy.

     These facts at least everyone agrees on.    But the former

spouses’ stories diverge on almost every other detail.    Stergios

blames Murray’s job-hopping on unethical trades that he made with

her family’s accounts.    Murray called one of his bosses, Francis

Roche, to rebut her, but Roche instead testified that he asked

Murray to leave because of improper handling of customer and

personal accounts.    Roche we find to be credible, and his

testimony is supported by persuasive documentary evidence that

the New York Stock Exchange punished Murray for making trades on

customers’ accounts in violation of the Exchange’s rules.

     Stergios also claims that Murray routinely forged

signatures.    As proof she provided the Appeals officer with

contracts from three investment accounts opened in her name.      The

signatures on the contracts are not her normal signature, and she
                                - 4 -

claims that Murray opened these accounts without her consent.

Stergios also accused Murray of hiding money and a Porsche from

the bankruptcy trustee by fraudulently putting them in his

uncle’s name.    Later, when Murray wanted a new Porsche, she

claimed that he bought it by signing his father’s name.

     Murray’s employment gave him considerable financial

expertise, but he disputed any inference that Stergios didn’t

understand the family’s financial affairs.    He claims that these

were all authorized transactions.    He argues with special force

that Stergios knew about the investment accounts in her name,

offering as proof a $25,000 check deposited by Stergios into one

of those accounts.    Stergios tells a lengthy story about how the

check came to be deposited, but the specifics are not relevant.

Murray also disputes Stergios’s self-characterization as unwise

in financial matters.    He testified at some length that

Stergios’s major at UC Davis--though it didn’t require her to

take any business or accounting classes--did require her to take

a math class.3   After graduation, Stergios worked only as a

secretary at her mother’s construction company; or, perhaps, as a

     3
       Even this item of minor background detail produced
contradictory testimony. Stergios testified that she was not
required to take a math class while at UC Davis. We decline to
take judicial notice, despite Murray’s request, that a person
graduating in 1990 from UC Davis with a degree in rhetoric/com-
munications was required to take at least one math class.
                                - 5 -

vice president who gained a great deal of business acumen while

working there.

       These he-said, she-saids extended, however, to the more

serious subject of spousal abuse.    The first incident was in

1997 and seems to have begun with an argument while Stergios

drove Murray home from work.    The details differ depending on who

is telling the story, but the incident ended when the police

arrived after a neighbor called because she heard Stergios

screaming on the couple’s front porch.    The police arrested

Murray because Stergios accused him of pushing her.     They

released Murray a few hours later.

       The second incident occurred in 1998 and began as an

argument about Stergios’s conversation with an electrical

contractor who was installing a hot tub at their home.     Stergios

claims that she fled to a friend’s house after Murray punched her

twice.    Murray called the police to report that she had stabbed

him.    The police were waiting when Stergios returned home, but

she claimed that Murray had stabbed himself.    She ended up

spending the night in jail, though she was never charged.

       The final incident occurred in December 2001.   Murray had

moved out of the couple’s home, and allegedly taken some of

Stergios’s property with him.    Stergios went to his apartment to

retrieve it, only to have Murray allegedly throw a wicker ottoman
                               - 6 -

at her head and then start choking her.    The police were called,

but she chose not to press charges.

     The marriage ended in December 2002, but the arguments,

allegations, and litigation continued.    One of the numerous

lawsuits was a custody fight over the children.    The evidence of

that dispute that the parties made a part of the record in this

case confirm the picture of a marriage in conflict and disarray

for its entire existence--filled with high levels of aggression,

fighting, threats, and violence.   One part of that record,

admitted under seal, leads us to find however that Stergios was

not routinely in fear of Murray and often was verbally aggressive

toward him.

     The couple also disputes which of them handled the finances,

and disputes with special vigor the question of who prepared

their tax returns.   Murray says that Stergios paid the household

expenses, monitored the couple’s stock holdings, and prepared the

returns.   Stergios claims that she merely paid household expenses

from an account that Murray himself funded.    Stergios even goes

so far as to claim that while they were married she never saw a

bank or investment account statement or knew what stocks they

held.   The truth, we find, is somewhere in between.

     Most of the understatement at issue flows from unreported

stock sales from Murray’s accounts (and one of the accounts he

allegedly opened in Stergios’s name).    In 2000, there were 216
                                - 7 -

unreported stock sales totaling $9.6 million.     In 2001, there

were 244 totaling over $17 million.     Murray testified that she

knew practically every stock they owned, and would harp on the

subject without mercy if he did not sell a stock before it went

down.    Stergios wouldn’t admit to this conduct, but simply

testified:    “I assumed that since we were married we did own

stock.”    We find neither of them credible--the only witness we

believed on this subject was Tim Chan, a former friend of the

couple.    He testified that Stergios knew that Murray traded

stocks and that he and Stergios would discuss the Murrays’ net

worth.    We find that Stergios knew more then she admitted, but we

cannot find that she knew about any particular stocks and

accounts.

     The other items causing the deficiencies are unreported

income from sources other than stock sales, early withdrawals

from Murray’s retirement account, and disallowed business expense

deductions.    There was also an unsubstantiated charitable

contribution to their children’s school in 2000, deductions from

a make-believe horse-training business that Stergios supposedly

ran in 2000, an inflated deduction for mortgage interest in 2001,

and a failure to include in their income State tax refunds

received in both years.

     Stergios claims to have no knowledge of any of these items,

and apart from the stock sales, Murray presented no evidence or
                               - 8 -

argument to the contrary.   We do know for sure that the couple’s

2000 return was prepared electronically.   By whom?   There we

again have conflicting evidence.   Murray alleges that Stergios

used Turbo-Tax to complete their return, with his role limited to

providing her with a summary of his stock transactions.4

Stergios claims that she never saw the return because it was

Murray who prepared it, and he neither involved her in its

preparation nor sought her signature before he filed it.    The

couple’s other return at issue--for 2001--was at least filed on

paper.   But though the return bore Stergios’s signature, she

claims that she signed it under duress.

     Stergios asks for relief from the liabilities arising from

the understatements on both these returns.    She first asked for

relief by giving the relevant IRS forms to the revenue agent who

was auditing the couple’s 2000 and 2001 returns.   Before the IRS

acted on these requests, the Commissioner sent her a notice of

deficiency for the 2000 and 2001 tax years.   Stergios then

petitioned us and claimed innocent-spouse relief as an

affirmative defense to the deficiencies.   Murray intervened.

Before trial, the IRS reviewed Stergios’s requests and decided

     4
       The couple disagrees even on Stergios’s computer
competence. Stergios declared herself computer illiterate, while
Murray told of her Turbo-Tax wizardry. Her exact level of
computer aptitude is undoubtedly between these extremes, but is
not essential to the outcome of this case except as further
evidence that each ex’s desire to harm the other undermines the
credibility of both.
                               - 9 -

that she qualified for relief under section 6015(b), (c), and (f)

for both years.   We tried the case in San Francisco, and Stergios

was a California resident when she filed her petition.5

                             OPINION

     Spouses who file joint returns are jointly and severally

liable for the tax owed.   See sec. 6013(d)(3).   Section 6015

provides three ways out of this joint liability.    See sec.

6015(b), (c), (f).   These subsections address the same general

problem but differ in important ways.    Relief under subsection

(f) is available for a spouse who shows that “taking into account

all the facts and circumstances, it is inequitable to hold [her]

liable for any unpaid tax or any deficiency (or any portion of

either).”   Relief under subsections (b) and (c), when raised as

an affirmative defense, doesn’t even require a determination by

the Commissioner denying relief before this Court can grant it.

Butler v. Commissioner, 114 T.C. 276, 288 (2000).    A requesting

spouse under these subsections generally has the burden of proof,

sec. 1.6015-3(d)(3), Income Tax Regs., but needs only to persuade

us by a preponderance of the evidence.    See McClelland v.

Commissioner, T.C. Memo. 2005-121.     Under subsection (b) we will

relieve a spouse from liability if she persuades us that she was

     5
       Appellate venue would thus be the Ninth Circuit. See sec.
7482. Appellate jurisdiction over an appeal by Murray, however,
might be a problem. See Baranowicz v. Commissioner, 432 F.3d
972, 976 (9th Cir. 2005), dismissing appeal from T.C. Memo. 2003-
274.
                              - 10 -

justifiably ignorant of the understatement and that she meets the

subsection’s other requirements.   For relief under subsection (c)

a requesting spouse must persuade us that she meets the

subsection’s requirements, and we will deny relief if she doesn’t

or if the Commissioner persuades us that any one of the three

exceptions for which he bears the burden of proof applies.   See

sec. 6015(c)(3)(A)(ii), (C), (d)(3)(C).

     In routine subsection (c) cases, where the requesting spouse

challenges the Commissioner’s denial of relief, this allocation

of the burden of proof sensibly places it on parties who are

adverse to each other.   But a problem arises in subsection (c)

cases when the Commissioner favors relief, and the nonrequesting

spouse intervenes to oppose it.    See sec. 6015(e)(4); Rule 325;

see also King v. Commissioner, 115 T.C. 118 (2000); Corson v.

Commissioner, 114 T.C. 354, 363 (nonrequesting spouse’s right to

intervene the same in both stand-alone and affirmative-defense

cases).   In these cases the Commissioner isn’t adverse to the

petitioning spouse any longer, so--if the intervenor has

intervened to oppose relief relying on any of the three

exceptions listed above--there’s a good chance that we would

place the burden of proof on him to convince us that the

requesting spouse is not entitled to relief.   We don’t need to

decide that today, because both parties introduced evidence and
                               - 11 -

we can just decide the issues on who persuaded us by a

preponderance of the evidence.

     Stergios pleaded all three subsections of 6015, but we will

focus on subsection (c).   Section 6015(c) allows a requesting

spouse to allocate the items giving rise to the deficiency to the

nonrequesting spouse if:

           (1)   the spouses made a joint return;

           (2)   at the time the election was made the
                 spouses were legally separated, divorced,
                 or had not been members of the same
                 household at any time during the previous
                 12 months;

           (3)   the election for relief was made after a
                 deficiency was asserted but no later
                 than two years after the Commissioner
                 began collection activities; and

           (4)   the deficiency remains unpaid.

     When a requesting spouse meets these four requirements, the

items giving rise to the deficiency are allocated as if the

spouses had filed separate returns.     Sec. 6015(d)(3)(A).

     The Commissioner (or, in this case, Murray) can also

persuade us to deny relief with evidence that the requesting

spouse had “actual knowledge, at the time the individual signed

the return, of any item giving rise to a deficiency * * *     which

is not allocable to such individual.”     Sec. 6015(c)(3)(C); see

also sec. 6015(c)(3)(A)(ii), (d)(3)(C) (explaining the other two

exceptions that, if met, cause the requesting spouse to be denied

relief).
                               - 12 -

      No one disputes that Stergios meets requirements (1), (3),

and (4).   Murray does argue that she fails requirements (2) and

that she had actual knowledge of what caused the deficiency for

each year.    His objection on requirement (2) is easily disposed

of.   Murray argues that relief under 6015(c) is not available

because they had not been separated for twelve months when

Stergios filed her Form 8857 Request for Innocent Spouse Relief.

We are, however, not reviewing the Commissioner’s determinations

after Stergios filed the Form 8857.     We are deciding whether

Stergios has an innocent-spouse defense to her notice of

deficiency.   On May 21, 2004, when Stergios filed her petition

with us, the couple was already divorced.     See Vetrano v.

Commissioner, 116 T.C. 272, 283 (2001).     Murray’s argument is

thus beside the point, and we reject it.

      And so we arrive at the first key issue in this case--Did

Stergios know of any item giving rise to a deficiency when she

signed the return?6   Under section 6015(c)(3)(C), we look for "an

actual and clear awareness (as opposed to reason to know) of the

existence of an item which gives rise to the deficiency (or

portion thereof)."    Cheshire v. Commissioner, 115 T.C. 183, 195

      6
       This part of the section 6015(c) analysis is complicated
by Stergios’s claims that she did not sign the 2000 tax return.
But she does not claim this as a defense, so we will assume that
the return was filed with her consent and will determine what she
knew at the time the return was electronically filed. See sec.
6013(a); sec. 1.6013-1(a)(2), Income Tax Regs.; Moran v.
Commissioner, T.C. Memo. 2005-66.
                              - 13 -

(2000), affd. 282 F.3d 326 (5th Cir. 2002).   Section 1.6015-3(c),

Income Tax Regs., specifically describes what a requesting spouse

must have knowledge of, given a specific class of item.

            !   If the item is omitted income. The spouse
                requesting relief must have knowledge of the
                income, which includes knowledge of the
                receipt of the income. Sec. 1.6015-
                3(c)(2)(i)(A), Income Tax Regs.; Kling v.
                Commissioner, T.C. Memo. 2001-78. We do not
                infer actual knowledge from a mere reason to
                know of the omitted income. Sec. 1.6015-
                3(c)(2)(iii), Income Tax Regs.

            !   If the item is an erroneous deduction. The
                requesting spouse cannot allocate the item if
                she knew of the facts that made the item not
                allowable as a deduction. Sec. 1.6015-
                3(c)(2)(i)(B)(1), Income Tax Regs.

            !   If the item is a fictitious deduction. The
                requesting spouse cannot know that the
                expenditure was not incurred. Sec. 1.6015-
                3(c)(2)(i)(B)(2), Income Tax Regs.

     With this background explained, we will look in turn at each

of the tax years at issue, always remembering that it is Murray

who bears the burden of proving that Stergios is not entitled to

relief because she knew too much.

A.   2000

     We start with the 2000 tax return.   While the couple

disputes who prepared that return, Stergios and the Commissioner

agree that Murray completed the return and never showed it to

Stergios.   Murray denies preparing the return, but he admitted in

a declaration to the family court that he “prepared” the return.

When Stergios’s attorney used the declaration to impeach Murray,
                                - 14 -

he replied that “prepare” meant that he reviewed the return after

Stergios prepared it on his computer.      The only evidence he

offered was his own testimony.    While we don’t believe that

Stergios is as ignorant about tax-return preparation as she would

have us believe, we also don’t believe that she is astute enough

to calculate the couple’s $527,717 short-term capital loss or

create a fictitious business.    We find that Murray completed the

return and did so without showing it to Stergios.

     Murray also tried to persuade us that Stergios knew about

nearly all his stock transactions.       While we are convinced that

Stergios knew generally of the couple’s stock holdings, the

evidence does not suggest she knew enough to meet the “actual

knowledge” requirement of section 6015(c)(3)(C).      She would have

had to have knowledge of the stock transactions that actually

realized the omitted income, and Murray did not present any

credible evidence that Stergios knew about any specific

transaction.   Stergios also lacks sufficient knowledge because we

find that Murray hid the account statements, particularly the

statements for accounts in her name.      Therefore, we find that

while Stergios did know that Murray was buying and selling

stocks, she did not know that the activity produced omitted

income.
                               - 15 -

      The Commissioner proposed several other adjustments to the

2000 return, and we find each is attributable to Murray without

Stergios’s knowledge:

     !      More than $10,000 in wage income Murray received
            but did not report;

     !      More than $20,000 in premature IRA distributions
            he received from an account under his exclusive
            control;

     !      1099-Misc income of $32,000 that Murray received
            and did not report;

     !      Numerous miscellaneous employee business expenses
            that Murray incurred but for which he had no
            substantiation--all relating to his own business
            as a stockbroker.

     That leaves only the fictional horse-training business that

generated close to $50,000 in losses during 2000.    Stergios did

train and ride horses as a hobby that year and into 2001, but we

specifically find that she was unaware that a loss had been

claimed for her hobby for the 2000 tax year.

B.   2001

     We also find that Murray did not carry his burden of proof

for the 2001 tax year.    We do agree with him that Stergios cannot

claim ignorance of the income omitted from the 2001 return.

Stergios was asked at trial if she believed that the 2001 return

reflected an understatement.    She answered, perhaps strategical-

ly, that she never saw the tax return.    She claims that after

Murray had moved out, he appeared at the couple’s former resi-

dence bearing the 2001 returns’ (he had the State tax return,
                               - 16 -

too) signature pages.   Stergios alleges that Murray demanded her

signature and, when she refused, that he became agitated and

physically threatened her until she signed.

     But we find this was not the first time that Stergios saw

the 2001 return.   During the couple’s custody battle, Murray

prepared a “pro-forma” 2001 return for the family court.     We find

Stergios saw this pro forma return because it caused her to

become so concerned Murray was underreporting his income that she

called her lawyer.7   Her attorney responded by sending a letter

to Murray’s attorney communicating her fears and stating that

Stergios would not sign a joint return.   The letter was dated

February 27, 2002, just five days before Murray allegedly forced

Stergios to sign the return.   We found further evidence of her

knowledge in a reply declaration that Stergios wrote to the

family court.   In the declaration she described in detail why the

pro-forma return was incorrect.   The description she gave

suggests that the pro-forma return and the one she signed were

the same.   Thus, while it may be true that Stergios did not have

knowledge of the understatement reflected on the return she

actually signed, she did have actual knowledge that Murray was

     7
       Stergios had been monitoring deposits made to the couple’s
accounts, so she thought she knew how much income Murray had in
2001. As Murray points out, her estimates were not accurate
because some of the money being deposited was not income but was
money being moved between the accounts.
                              - 17 -

understating the tax owed.   So we don’t believe her claim of ignorance.

     That is not enough for Murray to win, though.    A return

signed under duress is not a joint return, so only the individual

who voluntarily signed the return is liable for the deficiency

shown.   Sec. 1.6013-4(d), Income Tax Regs.   We find that a tax

return was signed under duress if: (1) A spouse was unable to

resist demands to sign the return; and (2) she would not have

signed the return except for the constraint applied to her will.

Brown v. Commissioner, 51 T.C. 116, 119 (1968).    We must

therefore look closely at the circumstances in which Stergios

signed the 2001 return.

     Murray claims that he never forced Stergios to sign it.     He

claims that the couple was experiencing a period of reconcilia-

tion during the 2001 tax season and it was Stergios who prepared

the return.   Murray’s story is highly improbable because he

admitted to preparing the 2001 pro-forma return.     For us to

believe Murray’s version of the facts, we must find that Stergios

prepared a return exactly like the pro-forma return after her

attorney sent Murray a letter insisting that she would not sign

that same return.   We are not willing to make this leap.

     Now we can apply the test for deciding whether Stergios

signed under duress.   Stergios meets the first part of that test

because she would not be expected to resist the threats of a man

who is 6 feet 4 inches tall and weighs around 250 pounds,
                              - 18 -

especially given that the couple has a history of violence.

Stergios also meets the second part because the letter to Murray

shows she would not have signed the return if it were not for his

threats.   We therefore find it more likely than not that Stergios

signed the 2001 return under duress.   This makes only Murray

liable for the deficiency.

     We therefore hold that Stergios is not liable for the 2000

deficiency under section 6015(c) and she is not liable for the

2001 deficiency because she signed the return under duress.

                                    Decision will be entered for

                               petitioner.