Crowley v. Commissioner

T.C. Memo. 1995-551

UNITED STATES TAX COURT

JOHN P. CROWLEY AND ELIZABETH R. COCKRELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*

Docket Nos. 28826-84, 7746-87. Filed November 20, 1995.

Stanley M. Klein and Michael J. Weitzner, for

petitioner John P. Crowley in docket No. 28826-84.

Alan J. Garfunkel, Marc S. Orlofsky, and Edward Rubin, for

petitioner Elizabeth R. Cockrell in docket Nos. 28826-84 and

7746-87.

Drita Tonuzi and Henry S. Schneiderman, for respondent.

*
This Supplemental Memorandum Opinion supplements our prior
Memorandum Opinion in the instant case, Crowley v. Commissioner,
T.C. Memo. 1993-503, filed November 1, 1993.
 - 2 -

SUPPLEMENTAL MEMORANDUM OPINION

WELLS, Judge: These cases1 are before us on petitioner

Elizabeth R. Cockrell's2 motion pursuant to Rule 1613 for

reconsideration of Crowley v. Commissioner, T.C. Memo. 1993-503

(prior Opinion). In our prior Opinion, we held, inter alia, that

petitioner was not entitled to relief under section 6013(e) as an

innocent spouse from the understatements of tax for her taxable

years 1980 and 1981 attributable to deductions claimed for losses

incurred by Mr. Crowley in connection with certain commodities

straddle transactions. That holding was based on petitioner's

failure to prove that such understatements of tax were

attributable to "grossly erroneously items" pursuant to section

6013(e)(2)(B).4

1
These cases (for convenience, hereinafter referred to as the
instant case) have been consolidated for trial, briefing, and
opinion.
2
As petitioner John P. Crowley has settled all issues in the
instant case with respect to himself, hereinafter we will refer
to Elizabeth R. Cockrell as "petitioner" and John P. Crowley as
Mr. Crowley.
3
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.
4
Because the requirements for relief as an innocent spouse
under sec. 6013(e) are conjunctive, Bokum v. Commissioner, 94
T.C. 126, 138 (1990), affd. 992 F.2d 1132 (11th Cir. 1993), our
(continued...)
 - 3 -

Background

In her motion, as supplemented, petitioner requests, inter

alia, that we reconsider our prior Opinion and either decide that

she qualifies for relief as an innocent spouse based on the

evidence already in the record or reopen the record to allow

introduction of additional evidence in support of her claim that

she qualifies for relief as an innocent spouse. Petitioner's

requests are based on the following contentions: (1) That newly

available evidence establishes that the deductions in issue are

"grossly erroneous items" within the meaning of section

6013(e)(2); (2) that respondent's counsel at the trial of the

instant case violated Rule 201 and rule 3.3(a)(3) of the Model

Rules of Professional Conduct (Model Rules) in not disclosing

certain information petitioner alleges is relevant to that

question; and (3) that petitioner is entitled to relief as an

innocent spouse pursuant to the transitional rule of section 6004

of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA),

4
(...continued)
holding that such deductions were not attributable to "grossly
erroneous items" rendered it unnecessary for us to decide whether
petitioner satisfied the other requirements of that subsection
that were contested by petitioner and respondent (viz: (1) In
signing the returns in issue petitioner did not know and had no
reason to know of the existence of the understatements in issue
and (2) it would be inequitable to hold petitioner liable for the
deficiencies resulting from those understatements).
 - 4 -

Pub. L. 100-647, 102 Stat. 3685-3686 (transitional rule).5

5
The transitional rule provides as follows:

Sec. 6004. TREATMENT OF CERTAIN INNOCENT SPOUSES

Subsection (c) of section 424 of the Tax Reform
Act of 1984 (relating to innocent spouse relieved of
liability in certain cases) is amended by adding at the
end thereof the following new paragraph:

"(3) Transitional Rule.--If--

"(A) a joint return under section 6013 of the
Internal Revenue Code of 1954 was filed before January
1, 1985,

"(B) on such return there is an understatement (as
defined in section 6661(b)(2)(A) of such Code) which is
attributable to disallowed deductions attributable to
activities of one spouse,

"(C) the amount of such disallowed deductions
exceeds the taxable income shown on such return,

"(D) without regard to any determination before
October 21, 1988, 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 an understatement,
and

"(E) the marriage between such spouses terminated
and immediately after such termination the net worth of
the other spouse was less than $10,000,

notwithstanding any law or rule of law (including res
judicata), 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 understatement, and,
to the extent the liability so attributable has been
collected from such other spouse, it shall be refunded
or credited to such other spouse. No credit or refund
shall be made under the preceding sentence unless claim
therefor has been submitted to the Secretary of the
Treasury or his delegate before the date 1 year after
(continued...)
 - 5 -

Although we incorporate into this Opinion by reference the

findings of fact in our prior Opinion, we restate below certain

of those findings that are relevant to the issues presented by

petitioner's motion for reconsideration, and we further set forth

certain supplementary findings of fact that were not set forth in

our prior Opinion but are, however, based on the record of the

trial of the instant case and relevant to our analysis below.

On November 14, 1979, petitioner and Mr. Crowley were

married. At that time, petitioner was a Canadian citizen and Mr.

Crowley was a U.S. citizen. They were married in a New York

civil ceremony. On November 17, 1979, petitioner and Mr. Crowley

were married a second time in a Canadian church. Prior to her

marriage to Mr. Crowley, petitioner attended the University of

Guelph, in Canada, where she received a bachelor of arts degree.

From August 1977 until August 1979, petitioner worked in Canada

as a life insurance agent first for Prudential Assurance and then

Montreal Life Insurance.

Shortly after the marriage ceremony in Canada, petitioner

and Mr. Crowley returned to New York. During 1980, petitioner

worked for a photographer in New York City for 1 week in exchange

for learning about photography. For 2 weeks, she solicited, by

5
(...continued)
the date of the enactment of this paragraph, and no
interest on such credit or refund shall be allowed for
any period before such date of enactment". [Emphasis
added.]
 - 6 -

telephone, on behalf of a messenger service located in New York

City, for which she was compensated approximately $200.

During December 1980, petitioner was hired as a stockbroker

trainee in New York. In order to prepare for the "series seven"

stockbroker examination required for her employment, petitioner

studied about stocks and bonds at home. Prior to passing the

exam, petitioner answered the telephones for her employer.

During the early part of 1981, petitioner passed the exam and

obtained her stockbroker license. Subsequently, petitioner

"cold-called" potential clients to sell them stocks and bonds.

Neither petitioner's studies nor her work specifically included

commodities tax straddles.

During the years in issue, Mr. Crowley was a partner in TSM

Associates, Sinclair Securities Company, and APEX Associates,

which were partnerships that had engaged in commodities straddle

transactions involving Treasury bill options. Mr. Crowley, as an

employee in James Sinclair Trading Corporation, arranged

commodities straddle transactions for investors seeking "tax-

sheltered investments".

Petitioner was aware of Mr. Crowley's position as a

"commodities trader". Petitioner accompanied Mr. Crowley at

several commodities seminars during which she "milled about" at

the back of the room, "drifted" in and out of the seminar rooms,

and socialized with other wives attending the seminars.

Petitioner attempted to attract clients for her husband at the
 - 7 -

hospitality suites provided by Mr. Crowley's employer after those

seminars. Petitioner, however, did not discuss commodities

straddle transactions during the seminars or in the hospitality

suites.

When petitioner and Mr. Crowley were first married, they

rented a one-bedroom apartment in Manhattan. During their

marriage, petitioner and Mr. Crowley regularly entertained Mr.

Crowley's clients at their apartment, and they frequently dined

out at expensive restaurants in Manhattan. During 1980, Mr.

Crowley and petitioner took vacations to Canada, Vermont, and

Florida. Mr. Crowley's American Express bill for that year was

approximately $90,000, and a substantial portion of that amount

was charged by petitioner. During 1981, they moved to a two-

bedroom apartment which they rented for approximately $1,400 or

$1,500 per month and garaged Mr. Crowley's BMW automobile for

approximately $250 to $300 per month. Subsequently, they rented

a ranch house on Long Island.

During 1982, petitioner and Mr. Crowley decided to separate.

After their separation, petitioner moved into a small loft

apartment and paid the security deposit with $2,000 which Mr.

Crowley had given her. On August 18, 1983, petitioner and Mr.

Crowley were divorced.

On June 15, 1980, petitioner and Mr. Crowley signed a joint

tax return for taxable year 1979, which was filed on June 24,

1980, and reported a negative adjusted gross income in the amount
 - 8 -

of $71,312. During 1979, Mr. Crowley earned $81,925 in

commissions from the James Sinclair Trading Corporation. On June

15, 1981, petitioner and Mr. Crowley signed a joint tax return

for taxable year 1980, which was filed before the end of the

month, and reported an adjusted gross income of $8,055 and tax

due of $240. During 1980, Mr. Crowley earned $122,683 in

commissions from Sinclair Securities Company. On January 26,

1983, petitioner and Mr. Crowley signed a joint tax return for

taxable year 1981, which was filed on January 31, 1983,6 and

reported an adjusted gross income of $90,658 and tax due of

$13,980. During 1981, Mr. Crowley earned $148,141 in commissions

from Sinclair Securities Company. Petitioner signed the joint

returns for 1979, 1980, and 1981 without reviewing them.

The losses disallowed in the notices of deficiency were

claimed by petitioner and Mr. Crowley on their 1979, 1980, and

1981 joint tax returns as Mr. Crowley's share of losses incurred

by TSM Associates, Sinclair Securities Company, and APEX

Associates. During the years 1979, 1980, and 1981, Mr. Crowley

earned more than $380,000 in commissions.

Petitioner and Mr. Crowley entered into a settlement

agreement with respondent that provides that petitioner and Mr.

6
Petitioner concedes that she is liable for the addition to
tax for failure to file timely with respect to that return,
unless she is relieved from such liability as an innocent spouse.
 - 9 -

Crowley may deduct 20 percent of the losses attributable to the

commodities straddle transactions for the years in issue, subject

to petitioner's right to contest her liability for the taxes

arising out of the settlement pursuant to section 6013(e). The

settlement agreement contains standard settlement terms offered

by respondent to all taxpayers involved in the Arbitrage

Management tax shelter litigation project.

Discussion

The decision to grant a motion for reconsideration rests

within the discretion of the Court and such a motion will not be

granted unless unusual circumstances or substantial error is

shown. Vaughn v. Commissioner, 87 T.C. 164, 166-167 (1986).

Moreover, it is our policy to try all of the issues raised in a

case in one proceeding in order to avoid piecemeal and protracted

litigation. Alexander v. Commissioner, 95 T.C. 467, 469 (1990).

Petitioner contends in her motion for reconsideration that

we incorrectly held in our prior Opinion that the understatements

in issue were not attributable to "grossly erroneous items".

However, before deciding whether petitioner would be entitled to

relief from liability as an innocent spouse if we were to accept

that contention, we shall consider whether petitioner fails to

satisfy any of the other requirements for innocent spouse relief
 - 10 -

under section 6013(e) that were contested,7 tried, and briefed by

the parties but were not addressed in our prior Opinion. The

present record in the instant case is sufficient for us to decide

the other undecided requirements for innocent spouse relief under

section 6013(e).8 For the reasons set forth below, we conclude

7
Respondent concedes that petitioner meets certain of the
requirements for relief as an innocent spouse provided by sec.
6013(e).
8
Petitioner requests that we reopen the record to permit her
to introduce, inter alia, her transcript from the University of
Guelph to show that she took no courses in any tax, business, or
financial subject, majored in English, and was "an extremely
indifferent student". Petitioner contends that, after the trial
of the instant case, the Court of Appeals for the Second Circuit
announced a requirement for innocent spouse relief that a
taxpayer's education be taken into account in deciding whether
the taxpayer knew or had reason to know of the existence of a
substantial understatement under sec. 6013(e)(1)(C). Friedman v.
Commissioner, 53 F.3d 523, 531-532 (2d Cir. 1995), affg. in part,
revg. in part, and remanding T.C. Memo. 1993-549; Hayman v.
Commissioner, 992 F.2d 1256 (2d Cir. 1993), affg. T.C. Memo.
1992-228. Petitioner argues that the "new" requirement renders
relevant petitioner's university transcript and the other
evidence she seeks to admit and that such relevance could not
have been anticipated at the time of such trial. Petitioner
admits, however, that the requirement for innocent spouse relief
adopted by the Second Circuit had been articulated by other
courts prior to the trial of the instant case. See, e.g., Price
v. Commissioner, 887 F.2d 959, 965 (9th Cir. 1989), revg. an Oral
Opinion of this Court.
We do not agree with petitioner that she could not have been
aware of the relevance of the evidence she now seeks to introduce
simply because the Court of Appeals for the Second Circuit, at
the time the instant case was tried, had yet to issue its
opinions requiring that a taxpayer's education level be taken
into consideration. Moreover, petitioner contends that, even
without such evidence, the record developed at the trial of the
instant case is sufficient to support a finding that she did not
know and had no reason to know of the existence of the
(continued...)
 - 11 -

that petitioner has failed to satisfy all of the requirements for

relief as an innocent spouse provided by section 6013(e) and has

failed to satisfy all of the transitional rule requirements as

well. Accordingly, we need not reconsider the holding of our

prior Opinion that the deductions claimed on the returns for the

taxable years in issue are "grossly erroneous items" within the

meaning of section 6013(e)(2)(B).9

Our first consideration is whether, for taxable years 1980

and 1981, petitioner has established the requirements of section

6013(e)(1)(C) that, in signing each of the returns for those

years, "she did not know, and had no reason to know," that a

substantial understatement of tax exists as to each such return.

Respondent contends that petitioner has failed to establish,

inter alia, that she did not know and had no reason to know of

the substantial understatements in issue when she signed the

returns for the taxable years in issue, and that petitioner

8
(...continued)
substantial understatements in issue. We accordingly will not
reopen the record to admit additional evidence with respect to
the requirements of sec. 6013(e)(1)(C).
9
As to petitioner's allegation that respondent's counsel
violated Rule 201 and rule 3.3(a)(3) of the Model Rules, the
misconduct asserted by petitioner relates only to evidence
potentially pertinent to the "grossly erroneous items" issue.
Because we hold that petitioner is otherwise not entitled to
relief under sec. 6013(e), and, because of such holding, do not
reconsider our prior holding with respect to the "grossly
erroneous items" issue, we need not, and we do not, address that
allegation in disposing of the instant motion.
 - 12 -

therefore is not entitled to relief as an innocent spouse. We

agree.

The Court of Appeals for the Second Circuit, the court to

which an appeal in the instant case would lie, interprets

subsection 6013(e)(1)(C) as requiring a taxpayer to establish

that "'she [or he] did not know and did not have reason to know

that the deduction would give rise to a substantial

understatement.'" Hayman v. Commissioner, 992 F.2d 1256, 1261

(2d Cir. 1993), (quoting Price v. Commissioner, 887 F.2d 959, 963

(9th Cir. 1989), revg. an Oral Opinion of this Court), affg. T.C.

Memo. 1992-228.

Turning to the facts of the instant case, respondent

contends that petitioner knew that the deductions in issue would

give rise to substantial understatements when she signed the

returns for the taxable years in issue. Respondent relies

primarily on the testimony of Robert Kraft to support such

contention. During the trial of the instant case, Mr. Kraft

testified that he had received a law degree from Georgetown

University Law Center. At a subsequent hearing, Mr. Kraft

admitted that he has never received a law degree. In light of

Mr. Kraft's admission, we regard his testimony as inherently

untrustworthy and, therefore, do not accept his testimony.

Respondent also argues that, because petitioner was a stockbroker

who had passed the "series seven" stockbroker examination prior

to the time she signed the returns in issue, she must have been
 - 13 -

exposed to the mechanics of commodities straddle transactions.

Respondent, therefore, contends that petitioner knew that the

deductions claimed on the returns for the taxable years in issue

would give rise to substantial understatements. Nothing in the

record, however, establishes that petitioner's studies or her

work as a stockbroker exposed her to the intricacies of

commodities straddle transactions.10 Accordingly, we find that

petitioner, when she signed the returns for the taxable years in

issue, did not have actual knowledge that the deductions would

give rise to the substantial understatements.

Even if a taxpayer does not have actual knowledge that

deductions claimed on a return would give rise to a substantial

understatement, a taxpayer who has reason to know of such an

understatement is not entitled to innocent spouse relief. Sec.

6013(e)(1)(C). At the trial of the instant case, petitioner

admitted that she signed the returns for the taxable years in

issue without reviewing them. Nevertheless, she is charged with

constructive knowledge of their contents. Hayman v.

Commissioner, supra at 1262. Petitioner was educated and should

10
At trial, respondent offered the testimony of several
witnesses in an attempt to establish that the brokerage firm at
which petitioner was employed during 1980 and 1981 routinely
taught its stockbroker trainees about commodities straddle
transactions. The testimony of respondent's witnesses, however,
does not establish that petitioner received detailed instruction
concerning commodities straddle transactions as a part of her
training.
 - 14 -

have realized her responsibility for reviewing the returns she

signed. Consequently, petitioner's failure to review returns

that she signed under penalties of perjury cannot be excused.

Terzian v. Commissioner, 72 T.C. 1164, 1170-1171 (1979).

The Court of Appeals for the Second Circuit has held that

the magnitude of the deductions claimed on a return may give rise

to a duty to inquire as to the propriety of the deductions.

Friedman v. Commissioner, 53 F.3d 523, 531 (2d Cir. 1995),

(citing Hayman v. Commissioner, supra), affg. in part and revg.

in part and remanding T.C. Memo. 1993-549. The duty of inquiry

generally arises with respect to "tax returns setting forth large

deductions, such as tax shelter losses offsetting income from

other sources and substantially reducing or eliminating the

couple's tax liability". Hayman v. Commissioner, supra at 1262.

In the instant case, we believe that even a cursory review

of the returns for the taxable years in issue would have alerted

petitioner to the high probability that such returns contained

substantial understatements. The 1980 return reported a gain of

$408,097 on Schedule D that was offset by a loss of $407,884

reported on Schedule E, which included a loss of $508,045 from

TSM Associates. That return reported adjusted gross income of

only $8,055 for the taxable year 1980, and tax due of $240.11

11

During 1980, Mr. Crowley earned $122,683 in commissions from
Sinclair Securities Company.
 - 15 -

The 1981 return, which was filed untimely on January 31, 1983,

reported a gain of $697,896 on Schedule D that was offset by a

loss of $679,327 reported on Schedule E, which included a loss of

$413,765 from TSM Associates and a loss of $399,489 from APEX

Associates. That return reported adjusted gross income of

$90,658, and tax due of $13,980.12 Both the income and

deductions with respect to Mr. Crowley's commodities straddle

transactions reported on the 1980 and 1981 returns were larger

than the other income and deductions reported by Mr. Crowley and

petitioner. Under such circumstances, petitioner had a duty to

look into the propriety of the deductions taken on the returns in

issue, a duty she has failed to satisfy in the instant case.13

Id. Petitioner cannot obtain the benefits of section 6013(e) by

simply turning a blind eye to facts that would reasonably put her

on notice that further inquiry would need to be made. Bokum v.

Commissioner, 94 T.C. 126, 148 (1990), affd. 992 F.2d 1132 (11th

Cir. 1993). As we have previously noted, section 6013(e) is

12
During 1981, Mr. Crowley earned $148,141 in commissions from
Sinclair Securities Company.
13
Petitioner, however, contends that the tax returns for the
taxable years in issue "indicated a roll of income from prior
years to future years, leading an objective observer to conclude
that any disallowance would wipe out all income and deductions
relating to the transactions resulting in little or no net tax
effect." Such a consideration is not a substitute for the
inquiry required by the information disclosed on the returns in
issue.
 - 16 -

designed to protect the innocent, not the intentionally ignorant.

Shannon v. Commissioner, T.C. Memo. 1991-207.

In deciding whether petitioner "had reason to know" of the

substantial understatements when she signed the returns, we also

take into account the factors that the Court of Appeals for the

Second Circuit has held are to be considered in making such a

decision: (1) The spouse's level of education; (2) the spouse's

involvement in the family's business and financial affairs; (3)

the presence of expenditures that appear lavish or unusual when

compared with the family's past levels of income, standard of

living, and spending patterns; and (4) the culpable spouse's

evasiveness and deceit concerning their finances. Friedman v.

Commissioner, supra at 531-532 (citing Hayman v. Commissioner,

supra at 1261). The foregoing factors are considered "because,

ordinarily, they predict what a prudent person would realize

regardless of the other spouse's evasiveness or deceit." Bliss

v. Commissioner, 59 F.3d 374, 379 (2d Cir. 1995), affg. T.C.

Memo. 1993-390.

Applying such factors to the facts of the instant case, we

conclude that petitioner had reason to know of the substantial

understatements when she signed the returns for the taxable years

in issue. Petitioner was a college-educated stockbroker who had

passed the "series seven" examination. She was a former life

insurance agent. Petitioner's involvement in the couple's

business and financial affairs was also significant. Petitioner
 - 17 -

knew that Mr. Crowley was a "commodities trader". She traveled

with him to several commodities seminars, where she attempted to

attract clients for her husband at the hospitality suites

provided by his employer after those seminars. They routinely

entertained Mr. Crowley's clients at their apartment. Petitioner

and Mr. Crowley lived lavishly during 1980 and 1981, the years

for which petitioner seeks relief as an innocent spouse. They

frequently dined at expensive restaurants during those years.

During 1980, they vacationed in Canada, Vermont, and Florida.

Mr. Crowley's American Express bill for that year was

approximately $90,000, and a substantial portion of that amount

was charged by petitioner. During 1981, petitioner and Mr.

Crowley rented a two-bedroom apartment in Manhattan for

approximately $1,400 or $1,500 per month and garaged Mr.

Crowley's BMW automobile for approximately $250 to $300 per

month. Finally, there is no evidence in the record that shows

that Mr. Crowley was evasive or deceitful about their finances or

that he attempted to conceal the fact that he had engaged in

commodities straddle transactions.14 Based on the record in the

14
The Court of Appeals for the Second Circuit recently stated:

According to the dissent, the petitioner should be
deemed innocent because she is guileless and may not
have understood why * * * [her ex-husband] should have
reported his full income. This misapprehends the
nature of innocence in the context of this statute.
Innocent people pay taxes; the obligation to pay taxes
(continued...)
 - 18 -

instant case, we conclude that, at the time she signed the

returns for the taxable years in issue, petitioner had reason to

know of the substantial understatements in issue.

Petitioner contends that the Court of Appeals' decision in

Friedman v. Commissioner, supra, "limits" Hayman v. Commissioner,

supra, with respect to the "reason to know" requirement of

subsection 6013(e)(1)(C). Petitioner interprets the Court of

Appeals' decision in Friedman v. Commissioner, supra, to mean

that the mere fact that a large deduction was claimed from an

investment partnership does not cause the alleged innocent spouse

to have reason to know of the substantial understatement, where

the spouse relied upon representations from her husband that such

deduction was proper and where the taxpayer was not very

sophisticated in financial matters. According to petitioner,

when she signed the tax returns for the taxable years in issue,

she was young and very unsophisticated in financial matters,

having just arrived from Canada.

14
(...continued)
rests on liability, not guilt. An innocent spouse
within the meaning of [sec. 6013(e)] is innocent vis-a-
vis a guilty spouse whose income is concealed from the
innocent and spent outside the family. [Bliss v.
Commissioner, 59 F.3d 374, 380 n.3 (2d Cir. 1995),
affg. T.C. Memo. 1993-390.]

As in Bliss v. Commissioner, supra, there is no evidence in the
record that suggests that Mr. Crowley was evasive or deceitful
with respect to their finances or that he attempted to conceal
the fact that he had engaged in commodities straddle
transactions.
 - 19 -

We disagree with petitioner's interpretation of Friedman v.

Commissioner, supra, as well as her characterization of herself

as unsophisticated with respect to financial matters. In

Friedman v. Commissioner, supra, the Court of Appeals applied the

knowledge standard that it adopted in Hayman v. Commissioner,

supra. In Friedman v. Commissioner, supra, however, the taxpayer

was a "housewife and unemployed former secretary with a high

school education possessing only a rudimentary grasp of the

simplest tax principles." Friedman v. Commissioner, 53 F.3d at

530.15 The Court of Appeals held that the taxpayer in Friedman

v. Commissioner, supra at 531, satisfied her duty of inquiry when

she asked her former husband about the deductions that gave rise

to the understatements, and he told her that "they resulted from

a tax shelter and for her not to worry." In so holding, the

Court of Appeals relied on the fact that the taxpayer knew that

the returns in question had been prepared by an accountant, who

was also a trusted personal friend of the family, and that the

tax shelter had been recommended to her former husband by a tax

expert, whose reputation she was familiar with through her past

15
The facts of the instant case are more analogous to those
of Hayman v. Commissioner, 992 F.2d 1256, 1258 (2d Cir. 1993),
affg. T.C. Memo. 1992-228, which involved a "highly-paid,
college-educated vice-president and merchandising director
employed by the well-known women's clothing chain, Ann Taylor".
Friedman v. Commissioner, 53 F.3d 523, 530 (2d Cir. 1995),
(citing Hayman v. Commissioner, supra at 1258), affg. in part and
revg. in part T.C. Memo. 1993-549.
 - 20 -

employment in her husband's business.

Petitioner, unlike the taxpayer in Friedman v. Commissioner,

supra, was a college-educated stockbroker when she signed the

returns in issue, who admits that she failed to review those

returns prior to signing them. Petitioner's failure to review

the returns before signing them was apparently deliberate because

nothing in the record indicates that she could not have reviewed

them had she wished to do so. Petitioner claims that she signed

the returns because she trusted Mr. Crowley. That trust alone,

however, does not eliminate a spouse's duty to inquire when a

perusal of the return would indicate that further inquiry is

necessary. Hayman v. Commissioner, supra at 1262; Stevens v.

Commissioner, 872 F.2d 1499, 1507 (11th Cir. 1989), affg. T.C.

Memo. 1988-63. Consequently, we hold that petitioner has failed

to prove that she did not know and had no reason to know that the

deductions claimed on the returns for the taxable years in issue

would give rise to substantial understatements.16

Turning to petitioner's contention that she is eligible for

relief as an innocent spouse under the transitional rule,17 we

16
Our holding renders it unnecessary to consider whether
petitioner has satisfied the remaining contested requirement of
sec. 6013(e).
17
In Park v. Commissioner, 25 F.3d 1289, 1300 (5th Cir. 1994),
affg. T.C. Memo. 1993-252, the Court of Appeals for the Fifth
Circuit addressed the scope of the transitional rule as follows:
(continued...)
 - 21 -

note that petitioner could have raised the issue of her

eligibility for relief under that provision in the prior

proceedings in the instant case. We note that TAMRA, which

included the transitional rule, was enacted November 10, 1988,

102 Stat. 3812, well before the instant case was tried. As noted

above, it is the policy of this Court to try all of the issues

raised in a case in one proceeding in order to avoid piecemeal

and protracted litigation. Alexander v. Commissioner, 95 T.C. at

469. In the interest of judicial efficiency, we generally will

not grant a motion for reconsideration to resolve issues that

could have been raised during prior proceedings. CWT Farms, Inc.

v. Commissioner, 79 T.C. 1054, 1057 (1982); Robin Haft Trust v.

Commissioner, 62 T.C. 145, 147 (1974), affd. on this issue, 510

F.2d 43, 45 n.1 (1st Cir. 1975).

17
(...continued)
a reading of the transitional rule in conjunction with
section 6013(e) reveals that Congress did intend for
the transitional rule to provide broader innocent
spouse relief under limited circumstances to a certain
class of spouses--i.e., those who filed joint returns
with substantial understatements prior to January 1,
1985, and whose marriages had since terminated. See
Thompson, 63 T.C.M. (CCH) at 2884. For such spouses,
Congress eliminated the requirement under section
6013(e)(1)(D), which required a spouse to show that it
would be inequitable to hold her liable for the
understatement. In its place, Congress instituted a
"net worth" test, relieving the spouse from liability
if she met the "no reason to know" requirement and had
a net worth of less than $10,000 immediately after the
termination of the marriage. Thus, under the
transitional rule, unlike under section 6013(e),
Congress afforded innocent spouse relief to a spouse
who had benefitted from an erroneous deduction as long
as after the termination of the marriage her net worth
was less than $10,000.
 - 22 -

We note that the transitional rule does provide, in

pertinent part, the following:

"(D) without regard to any determination before
October 21, 1988, 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 an understatement,

* * * * * * *

notwithstanding any law or rule of law (including res
judicata), 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 understatement,
* * *. [TAMRA sec. 6004, 102 Stat. 3685; emphasis added.]

The Court of Appeals for the Fifth Circuit has found that

the purpose of the foregoing language is to enable a taxpayer,

who meets the requirements of the transitional rule, to be

relieved of liability for an understatement as an innocent spouse

notwithstanding a decision as to the taxpayer's liability prior

to the enactment of the transitional rule. Park v. Commissioner,

25 F.3d 1289, 1300 (5th Cir. 1994), affg. T.C. Memo. 1993-252.

Similarly, another court has concluded that the foregoing

provisions were intended to make the relief afforded by the

transitional rule "available to a person who did not have its

benefit when her case was determined". In re Freytag, 173 Bankr.

330, 334 (N.D. Tex. 1994). We, however, do not need to decide

whether the foregoing language of the transitional rule requires

us to resolve the question whether petitioner qualifies for

relief as an innocent spouse under the transitional rule where it

was first raised in a motion for reconsideration and could have
 - 23 -

been raised in prior proceedings. Even were we to consider

petitioner's claim for relief under the provisions of the

transitional rule, we would nevertheless conclude that she does

not satisfy its requirements.

As with the requirements for relief under section 6013(e), a

taxpayer must establish that all of the conditions imposed by the

transitional rule are satisfied in order to be eligible for

relief under that rule. Park v. Commissioner, supra at 1300. We

have held above that petitioner did not satisfy the knowledge

requirement of section 6013(e)(1)(C), in that she did not

establish that, in signing the returns in issue, she "did not

know, and had no reason to know" of the understatements in issue.

Recently, in Park v. Commissioner, supra at 1300, the Court of

Appeals for the Fifth Circuit concluded that

The "did not know, and had no reason to know"
language of the transitional rule virtually mirrors
that of section 6013(e), suggesting that Congress
intended the "no reason to know" requirement of both
provisions to have the same meaning.

Consequently, in order to obtain relief under the transitional

rule, petitioner must, under subparagraph (D) of that rule, make

the same showing that she is required to make under section

6013(e)(1)(C). Petitioner has failed show that she satisfies the

test of subsection 6013(e)(1)(C) and therefore would also fail to

establish that she satisfies the test of subparagraph (D) of the

transitional rule. Accordingly, petitioner could not find relief

as an innocent spouse under the provisions of the transitional

rule.
 - 24 -

To reflect the foregoing,18

Appropriate orders will

18
Although we sympathize with petitioner's plight, we are
guided by the statement we made in Sonnenborn v. Commissioner, 57
T.C. 373, 380-381 (1971):

The filing of a joint return is a highly valuable
privilege to husband and wife since the resulting tax
liability is generally substantially less than the
combined taxes that would be due from both spouses if
they had filed separate returns. This circumstance
gives particular emphasis to the statutory rule that
liability with respect to tax is joint and several,
regardless of the source of the income or of the fact
that one spouse may be far less informed about the
contents of the return than the other, for both spouses
ordinarily benefit from the reduction in tax that
ensues by reason of the joint return. However, some
highly inequitable results were called to the attention
of Congress, particularly where a wife had been
divorced or separated or abandoned after the tax year,
where she was saddled with a disproportionately high
tax liability as a consequence of having filed a joint
return, where such liability grew out of income
attributable only to the husband, unknown to the wife,
and where she had not enjoyed any benefit therefrom.
It was in an effort to eliminate the unfairness of the
joint and several liability provisions in such
circumstances that section 6013(e) was enacted. To be
sure, section 6013(e) is not limited to precisely such
narrow situations. But it must be kept in mind that
Congress still regards joint and several liability as
an important adjunct to the privilege of filing joint
returns, and that if there is to be any relaxation of
that rule the taxpayer must comply with the carefully
detailed conditions set forth in section 6013(e). [Fn.
ref. omitted]

In the instant case, we are, of course, bound to apply the law
that Congress enacted. If the result we reach seems harsh, the
remedy must lie with Congress, which is the body that has the
power to relax the requirements for obtaining relief as an
innocent spouse.
- 25 -

be issued.