T.C. Memo. 1996-9
UNITED STATES TAX COURT
PATRICIA S. MAKALINTAL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 4980-93, 12793-93. Filed January 18, 1996.
Richard J. Sideman and Wendy Abkin, for petitioner.
Debra K. Moe and Lloyd T. Silberzweig, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: In these consolidated cases, respondent
determined deficiencies in and additions to petitioner's 1986,
1987, and 1988 Federal income taxes as follows:
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Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6661
1986 $590,852 $29,543 * $147,713
1987 254,088 12,704 * 63,522
1988 280,624 14,031** -- 70,156
* 50 percent of interest due on portion of
underpayment attributable to negligence.
** For 1988, the applicable addition to tax was
determined under sec. 6653(a)(1).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
After concessions, the issues for decision are whether
Ambrosio G. Makalintal, petitioner’s former husband, and
petitioner underreported their income, and, if so, whether
petitioner qualifies as an innocent spouse under section 6013(e).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
In 1967, Mr. Makalintal and petitioner were married in the
Philippines, and until 1985 (when they moved to the United
States), Mr. Makalintal and petitioner were residents and
citizens of the Philippines. Prior to their divorce in 1990,
Mr. Makalintal and petitioner had three children.
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In the Philippines, Mr. Makalintal was a wealthy
businessman, and he engaged in numerous business ventures.
Sometime in the late 1970's or early 1980's, Mr. Makalintal
organized Integrated Circuits Philippines, Inc. (ICPI), to
manufacture semiconductors in the Philippines. Petitioner did
not work for or hold any position with ICPI.
In 1970, petitioner graduated from the University of the
Philippines with a degree in statistics. In college, petitioner
took courses in math, science, literature, and history.
Petitioner did not take any accounting or business-related
courses.
From 1970 through 1977, petitioner worked for her father-in-
law, a judge in the Philippines, and she worked in a small print
shop owned by Mr. Makalintal. For her father-in-law, petitioner
generally answered the telephone and typed letters. At the print
shop, petitioner handled typesetting, mailed bills, deposited
payments, and paid two employees of the print shop in amounts
determined by Mr. Makalintal. An accountant maintained the books
and records for the print shop.
From 1978 until 1985, when Mr. Makalintal and petitioner
moved to the United States, petitioner did not work outside the
home.
In the Philippines, Mr. Makalintal and petitioner enjoyed a
high standard of living. They owned a large home. They employed
three housemaids, a chauffeur, and two houseboys. Mr. Makalintal
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and petitioner’s three children attended private schools.
Mr. Makalintal and petitioner would occasionally take vacations
to a mountain resort in the Philippines.
While living in the Philippines, petitioner knew the amount
of Mr. Makalintal's salary from ICPI, but petitioner did not know
how much income Mr. Makalintal was earning from his other
businesses and investments. Mr. Makalintal did not discuss any
significant aspects of his businesses and investments with
petitioner.
In December of 1984, Mr. Makalintal purchased for $600,000
investment real property in Tiburon, California (Tiburon
Property). Mr. Makalintal made a cash downpayment of
approximately $300,000 and financed the balance of the purchase
price for the Tiburon Property.
As indicated, in 1985, Mr. Makalintal, petitioner, and their
three children moved to the United States. Mr. Makalintal was
issued by the United States a non-immigrant visa that was valid
through February of 1989. Apparently, Mr. Makalintal now lives
in the Philippines. The record does not indicate whether
Mr. Makalintal ever became a U.S. citizen.
Petitioner is now a citizen of the United States and a
resident of Sunnyvale, California.
In August of 1985, after Mr. Makalintal, petitioner, and
their three children moved to the United States, Mr. Makalintal
purchased for $466,438 a home in Greenbrae, California (the
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Greenbrae home). Mr. Makalintal made a cash downpayment of
$200,000 and financed the balance of the purchase price for the
Greenbrae home. The Greenbrae home had 6 bedrooms and 3-½ baths.
In 1985, Mr. Makalintal organized the following three
California corporations: Integrated Systems and Support (ISS),
Magnacad International (Magnacad), and Magna Financial and
Management Corp. (MFMC) (hereinafter sometimes referred to as the
California corporations).
ISS was organized to market and sell in the United States
semiconductors manufactured in the Philippines by ICPI. Magnacad
was organized to purchase in the United States raw materials
needed by ICPI for the manufacture of semiconductors. The
purpose for MFMC is not made clear in the record.
Mr. Makalintal owned 100 percent of the stock in ISS and
MFMC. Mr. Makalintal owned 30 percent, and Jose Santos,
petitioner's brother, owned 70 percent of the stock in Magnacad.
Petitioner did not own stock in any of the California
corporations.
Mr. Makalintal was president, and petitioner nominally was
secretary of each of the above California corporations.
Petitioner, at the direction of Mr. Makalintal, signed the
articles of incorporation of each of the California corporations.
During the years in issue, Mr. Makalintal managed and
operated each of the California corporations out of the Greenbrae
home.
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From 1985 through 1987, the only compensated employees of
ISS, Magnacad, and MFMC were Mr. Makalintal and Mr. Santos.
Petitioner was not, at any time, an employee of, nor was she paid
any compensation by, any of the above California corporations.
From 1985 through 1988, however, petitioner performed in the
Greenbrae home a limited amount of clerical work for ISS,
Magnacad, and MFMC. At Mr. Makalintal’s direction and under his
supervision, petitioner, at the Greenbrae home, would
occasionally enter data with respect to the California
corporations into a computer program that generated profit and
loss statements. Petitioner did not have any training or
experience with accounting, and petitioner did not understand
much of the data entered into the computer. Petitioner made no
analysis, and petitioner did not attempt to make an analysis, of
the profit and loss statements relating to the California
corporations.
Petitioner did not know whether the data Mr. Makalintal gave
her to enter into the computer was accurate and complete.
Mr. Makalintal did not discuss with petitioner any significant
aspects of the California corporations, and he did not permit
others to talk to petitioner about the California corporations or
businesses.
In March of 1986, Mr. Makalintal entered into a written
agreement to sell his 2 million shares of stock in ICPI to
Alfredo de Los Angeles for $3 million. No downpayment was due,
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and Mr. de Los Angeles agreed to pay Mr. Makalintal quarterly
installments of $150,000 in cash, with the first installment due
in October of 1987, until the $3 million purchase price for the 2
million shares of stock was fully paid.
The agreement for the sale of ICPI stock to Mr. de Los Angeles
was negotiated and entered into by Mr. Makalintal and
Mr. de Los Angeles in the Philippines. Mr. Makalintal did not
discuss this sales agreement with petitioner. Petitioner did not
participate in the negotiations, and petitioner was not aware of the
terms of the sale.
In December of 1987, Mr. Makalintal hired Lorna Ombawa as an
assistant to work for his California corporations, and in October
of 1988, Mr. Makalintal hired Grace Cruz to be his assistant.
After being hired, Ms. Ombawa, instead of petitioner, entered
data into the computer for purposes of maintaining profit and
loss statements relating to the California corporations.
Ms. Cruz supervised Ms. Ombawa, made purchases for ISS, and
paid bills for each of the California corporations.
At Mr. Makalintal’s insistence, Ms. Cruz and Ms. Ombawa also
lived in the Greenbrae home with Mr. Makalintal and petitioner.
During the years in issue, Mr. Makalintal maintained
numerous bank accounts for his personal use and for use of each
of the California corporations.
In 1986, 1987, and 1988, large transfers of funds occurred
from the various bank accounts maintained by Mr. Makalintal and
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from other sources into account 01150, a personal bank account
maintained by Mr. Makalintal in his and petitioner’s names.
Generally, the funds transferred into account 01150 were then
withdrawn and transferred into account 01206, another personal
account maintained by Mr. Makalintal in his and petitioner’s
names or into various bank accounts of the California
corporations owned and operated by Mr. Makalintal.
In 1986, 1987, and 1988, petitioner made occasional
withdrawals from account 01206 but only at the specific direction
of Mr. Makalintal. Petitioner also wrote checks on account 01206
but only to payees and in amounts that were approved by
Mr. Makalintal. In 1987, on account 01206, petitioner wrote 314
checks totaling $146,282, and in 1988, petitioner wrote 665
checks totaling $367,323.
At the specific direction of Mr. Makalintal, petitioner
occasionally transferred funds among the various personal bank
accounts that Mr. Makalintal maintained and the separate bank
accounts of the various California corporations. Mr. Makalintal
did not disclose to petitioner the source of the funds that she
was directed to deposit into the various bank accounts nor the
reason for the withdrawals and deposits that she was directed to
make among the various accounts.
Other than data entry, the transfer of funds among the bank
accounts, and the writing of checks, as described above, all done
at the specific direction of Mr. Makalintal, petitioner was not
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involved in the decisions and day-to-day operations relating to
the California corporations.
In California, during 1986, 1987, and 1988, Mr. Makalintal
and petitioner employed a cook and a chauffeur, and two of their
children attended private schools. During 1986, Mr. Makalintal
purchased a Ferrari and three Mercedes Benz automobiles.
Mr. Makalintal did not allow petitioner to drive any of the
automobiles.
In November of 1986, Mr. Makalintal apparently sold or
deeded the Greenbrae home to Mr. Santos. Mr. Makalintal and
petitioner, however, continued to live in the Greenbrae home.
Although the record is not clear, it appears that sometime before
1990, the Greenbrae home was deeded back to Mr. Makalintal and
petitioner.
During 1986, 1987, and 1988, Mr. Makalintal and petitioner’s
standard of living remained at a level similar to that which they
had enjoyed in the Philippines.
Throughout their marriage, petitioner lived in fear of
Mr. Makalintal. He repeatedly physically abused petitioner. On
numerous occasions, Mr. Makalintal threatened to kill petitioner
with a gun or a knife. During 1986, 1987, and 1988,
Mr. Makalintal did not allow petitioner to leave the Greenbrae
home without his permission, and from late 1987 through early
1990, after Ms. Cruz and Ms. Ombawa began working for the
California corporations, Mr. Makalintal required petitioner to
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spend most of each day in the master bedroom of the Greenbrae
home. Mr. Makalintal also physically abused his children.
In the fall of 1989, Mr. Makalintal informed petitioner that
he planned to divorce her. In March of 1990, Mr. Makalintal
forced petitioner to travel with him to New York City to petition
a New York State court for a divorce.
In April of 1990, petitioner discovered Mr. Makalintal and
Ms. Ombawa were having an affair in the Greenbrae home. The next
day, petitioner moved out of the Greenbrae home, taking with her
only some of her personal belongings and a minimal amount of
cash.
During the summer of 1990, petitioner began taking business-
related courses at a community college in San Mateo, California.
In the summer of 1990, petitioner received from Mr. Makalintal
$135,000 for support of herself and their three children.
On August 3, 1990, Mr. Makalintal and petitioner’s divorce
was finalized, and a property settlement agreement was approved
by the New York State court under which petitioner was to receive
sole custody of their three children, ownership of the Greenbrae
home, $2,000 per month from Mr. Makalintal for child support and
alimony, and several of Mr. Makalintal's automobiles.
Except, however, for the above-referenced $135,000 and
$10,553 that petitioner received on the sale of the Greenbrae
home, petitioner has not received any of the above support,
alimony, or property from Mr. Makalintal. Petitioner now
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supports herself and the three children with full-time employment
and has a modest standard of living.
In June of 1991, petitioner graduated from the College of
San Mateo with a degree in business.
For 1986, 1987, and 1988, petitioner and Mr. Makalintal
filed joint Federal income tax returns. These returns were
prepared by Katie Yue, an independent certified public
accountant. The table below summarizes for 1986, 1987, and 1988,
the gross income, itemized deductions, and taxable income that
were reported on these joint Federal income tax returns.
Gross Itemized Taxable
Year Income Deductions Income
1986 $34,006 $89,352 $-0-
1987 33,945 29,268 -0-
1988 73,544 72,236 -0-
On the tax return for 1986, no income was reported with
respect to Mr. Makalintal’s sale in the Philippines of his stock
in ICPI for $3 million.
When Ms. Yue prepared Mr. Makalintal and petitioner’s 1986
joint Federal income tax return, Ms. Yue expressed concern to her
supervisor at the accounting firm that income reported on the
return was not sufficient to support Mr. Makalintal and
petitioner’s lifestyle. Ms. Yue's supervisor then questioned
Mr. Makalintal specifically with respect to the income reported,
and Mr. Makalintal explained that additional nontaxable financial
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resources were available to him from his business interests in
the Philippines. Ms. Yue and her supervisor accepted
Mr. Makalintal’s explanation and finalized the return for
Mr. Makalintal’s and petitioner’s signatures.
When Mr. Makalintal gave petitioner the 1986 joint income
tax return for her signature, petitioner reviewed the return, and
petitioner also specifically asked Mr. Makalintal how
Mr. Makalintal and she were able to afford such a high standard
of living in light of the income reported on the return.
Mr. Makalintal informed petitioner that he had access to funds in
the Philippines that had been earned in years prior to 1986 and
that were not reportable as income for 1986.
Because, among other reasons, Mr. Makalintal frequently
represented that his business interests in the Philippines were
successful and because Mr. Makalintal used an accounting firm to
prepare the income tax return, petitioner accepted
Mr. Makalintal's explanation of the income reported on the 1986
return, and petitioner signed the return.
In connection with her review and signing of the 1987 and
1988 joint Federal income tax returns, petitioner again asked
Mr. Makalintal about the income reported thereon in light of the
money they were spending. Mr. Makalintal again reassured
petitioner that he had available nontaxable financial resources
from the Philippines.
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For 1986, 1987, and 1988, Ms. Yue also prepared the Federal
corporate income tax returns of the California corporations.
During respondent’s audit for 1986, 1987, and 1988, and
during the litigation of these cases, petitioner has been unable
to obtain from Mr. Makalintal, who apparently has moved back to
the Philippines, information and records pertaining to the bank
accounts that Mr. Makalintal controlled and the purported sale of
Mr. Makalintal’s 2 million shares of stock in ICPI. Based
largely on petitioner’s inability to provide adequate
information, respondent determined that Mr. Makalintal should be
treated as having received in 1986 the entire $3 million stated
sales price for the ICPI stock and as having no tax basis in the
stock. Thus, respondent treated the entire $3 million stated
sales price as additional net long-term capital gain for 1986.
For 1987 and 1988, apparently based just on bank deposits
analyses of the two bank accounts numbered 01150 and 01206
(limited information with respect to which petitioner was able to
provide to respondent), respondent determined that Mr. Makalintal
and petitioner realized unreported additional income of $690,922
and $969,584, respectively.
Also for 1988, respondent determined that $31,335 was
improperly claimed as a home mortgage interest expense deduction
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on Mr. Makalintal and petitioner’s 1988 joint Federal income tax
return.1
Based on the trial evidence, respondent has adjusted
downward the unreported income that she now claims, under her
bank deposits analyses, should be charged to Mr. Makalintal and
petitioner for 1987 and 1988 from $690,922 and $969,584,
respectively, to $501,134 and $332,601, respectively.
For 1986, 1987, and 1988, respondent also determined against
Mr. Makalintal and petitioner additions to tax for negligence
under section 6653(a) and for substantial understatements under
section 6661.
As indicated, Mr. Makalintal apparently now resides in the
Philippines, is divorced from petitioner, and apparently is
ignoring his obligations to petitioner and his children under the
divorce decree and property settlement agreement and his
obligations to respondent under the notices of deficiency mailed
to him for the years in dispute.
OPINION
1986 Income from Sale of ICPI Stock and
Respondent’s Bank Deposit Analyses
Section 453 provides generally that income from an
installment sale shall be taken into account under the
1
The parties have stipulated that the $31,335 home mortgage
interest expense deduction claimed on Mr. Makalintal and
petitioner’s 1988 joint Federal income tax return was improper.
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installment method. Sec. 453(a). An installment sale
constitutes a sale under which at least one payment is to be
received after the close of the year in which the sale occurs.
Sec. 453(b)(1). For the years before us, the installment method
of reporting income relating to an installment sale generally
applies, unless the taxpayer elects otherwise. Sec. 453(d)(1).
Petitioner acknowledges that evidence regarding the sale of
Mr. Makalintal’s 2 million shares of ICPI stock is incomplete but
she argues, among other things, that no evidence indicates that
Mr. Makalintal’s purported sale of his ICPI stock for $3 million
was actually consummated or that Mr. Makalintal actually received
any portion of the $3 million stated sales price. Further,
petitioner argues that under the written installment sales
agreement between Mr. Makalintal and Mr. de Los Angeles, any
income to be charged to Mr. Makalintal with regard to the
purported sale of the ICPI stock should qualify for installment-
sale treatment under section 453 and that (because none of the
sales proceeds was scheduled to be received in 1986) none of the
income relating to the sale should be taxable in 1986.
Petitioner also disputes respondent’s bank deposits analyses for
1987 and 1988.
As explained, respondent takes the position that because of
the inadequacy of the evidence relating to the sale,
Mr. Makalintal’s sale of ICPI stock for a stated $3 million
should be treated as fully taxable to Mr. Makalintal in 1986.
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Further, in her post-trial brief and without amending her
answer, respondent raises, in the alternative, a new issue that
if the $3 million stated sales price for the sale of the ICPI
stock is not taxable as long-term capital gain in 1986, then the
scheduled installment payments to be received by Mr. Makalintal
in 1987 and 1988 (namely, $150,000 in 1987 and $600,000 in 19882)
should be charged to Mr. Makalintal for each of those years, in
addition to the additional adjusted income already charged to
Mr. Makalintal and petitioner under respondent’s bank deposits
analyses for those years.
In response to respondent’s new alternative issue,
petitioner argues that respondent has not timely and properly
raised an issue herein as to the recognition, for 1987 and 1988,
of any income received by Mr. Makalintal on the installment sale
of his ICPI stock. Further, petitioner argues that any income
that arguably might have been received by Mr. Makalintal in 1987
and 1988 from the installment sale should be treated as already
charged to Mr. Makalintal and to petitioner as part of
respondent’s bank deposits analyses for those years.
On the limited record before us on this issue and in the
absence of any contrary evidence, we conclude that
Mr. Makalintal’s sale of ICPI stock to Mr. de Los Angeles was
2
According to the sales agreement, in 1987 one quarterly
installment payment of $150,000 was to be received, and in 1988
four quarterly installment payments of $150,000 each were to be
received for a total of $600,000.
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consummated consistently with the terms of the written sales
agreement. Respondent’s bank deposits analyses for 1987 and 1988
indicate large unexplained deposits that may well represent
proceeds received in those years as payments on the sale of
Mr. Makalintal’s ICPI stock.
We also conclude that Mr. Makalintal's sale of ICPI stock
qualifies as an installment sale under section 453 and that under
that method, because no sales proceeds were scheduled to be
received by Mr. Makalintal in 1986, no income relating to the
installment sale is properly includable in Mr. Makalintal and
petitioner’s joint income for 1986.
Further, with regard to 1987 and 1988 and to respondent’s
new alternative issue, respondent has not amended her answer or
otherwise properly and timely raised an issue herein as to the
taxability in 1987 and 1988 of the scheduled installment payments
to be received by Mr. Makalintal in those years. See Rules 40
and 41; Church of Scientology v. Commissioner, 83 T.C. 381, 524
(1984), affd. 823 F.2d 1310 (9th Cir. 1987); Professional Serv.
Corp. v. Commissioner, 79 T.C. 888, 924 (1982). We shall not
consider this issue.
With respect to the additional income respondent has charged
to Mr. Makalintal and petitioner for 1987 and 1988 using the bank
deposits analyses (namely, $501,134 for 1987 and $332,601 for
1988), petitioner bears the burden of proving that the deposits
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are attributable to a nontaxable source. Calhoun v. United
States, 591 F.2d 1243, 1245 (9th Cir. 1978).
Petitioner argues generally that the various deposits that
respondent has treated as unexplained for 1987 and 1988 represent
transfers among the various bank accounts and are not properly
treated as income.
With limited records available, petitioner established at
trial that several of the deposits into accounts 01150 and 01206
represented transfers among those two accounts, and respondent
has adjusted the unreported income determined from her bank
deposits analyses to reflect that evidence. Petitioner has not
established that the remaining deposits reflected in respondent’s
bank deposits analyses are attributable to nontaxable sources,
and petitioner has not satisfied her burden of proving that the
remainder of the unexplained deposits should not be treated as
includable in Mr. Makalintal’s and her joint income for 1987 and
1988.
For 1987 and 1988, the unexplained deposits of $501,134 and
$332,601, as determined and adjusted by respondent, are to be
treated as additional income and are to be charged to
Mr. Makalintal and to petitioner.
Innocent Spouse Issue
In light of our findings and conclusion in favor of
petitioner with regard to 1986 on the substantive tax adjustment,
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petitioner’s claim of innocent spouse status for 1986 is arguably
moot. We address this innocent spouse issue for 1986, however,
as an alternative issue on which petitioner is relying.
Petitioner also argues that she qualifies as an innocent spouse
for 1987 and 1988 with regard to any understatements in tax
relating to Mr. Makalintal’s sale of his ICPI stock and to the
deposits into Mr. Makalintal and petitioner’s bank accounts.
Generally, where a husband and wife file a joint Federal
income tax return, they are jointly and severally liable for any
tax due. Sec. 6013(d)(3); Ness v. Commissioner, 954 F.2d 1495,
1497 (9th Cir. 1992), revg. 94 T.C. 784 (1990); Guth v.
Commissioner, 897 F.2d 441 (9th Cir. 1990), affg. T.C. Memo.
1987-522; Price v. Commissioner, 887 F.2d 959 n.3 (9th Cir.
1989), revg. an Oral Opinion of this Court. An exception to this
general provision is found in section 6013(e), the so-called
innocent spouse provision. A spouse qualifies as an innocent
spouse if the spouse establishes: (1) A joint return was filed;
(2) the return contained a substantial understatement of tax
attributable to grossly erroneous items of the other spouse; (3)
in signing the return, the spouse seeking relief did not know and
had no reason to know of the substantial understatement; and
(4) it would be inequitable to hold the spouse seeking relief
liable for the understatement in question. Sec. 6013(e)(1);
Pietromonaco v. Commissioner, 3 F.3d 1342, 1345 (9th Cir. 1993),
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revg. T.C. Memo. 1991-361; Guth v. Commissioner, supra at 443;
Price v. Commissioner, supra at 961-962.
Respondent concedes herein that Mr. Makalintal and
petitioner filed joint Federal income tax returns for 1986, 1987,
and 1988 and that any substantial understatements of tax
reflected thereon (relating to Mr. Makalintal’s sale of his ICPI
stock and to the deposits into Mr. Makalintal and petitioner’s
bank accounts) are attributable to grossly erroneous items of
Mr. Makalintal. Respondent, however, argues that petitioner knew
or had reason to know of substantial understatements of tax
relating to the above items and that it would not be inequitable
to hold petitioner liable therefor.
Generally, the question of whether a spouse knew or had
reason to know of a substantial understatement is governed by
whether "a reasonably prudent taxpayer under the circumstances of
the 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." Stevens v. Commissioner, 872 F.2d
1499, 1505 (11th Cir. 1989), affg. T.C. Memo. 1988-63; see Griner
v. Commissioner, 951 F.2d 360 (9th Cir. 1991), affg. without
published opinion T.C. Memo. 1990-301; Bokum v. Commissioner, 94
T.C. 126, 148 (1990), affd. 992 F.2d 1132 (11th Cir. 1993). The
standard is based on a reasonably prudent taxpayer in the
particular circumstances of the taxpayer involved in the case.
Pietromonaco v. Commissioner, supra at 1345.
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Factors relevant to the consideration of whether a spouse
had reason to know of a substantial understatement include:
(1) The spouse's level of education; (2) the spouse's involvement
in the business and financial affairs of the marriage and of the
transactions that give rise to the understatement; (3) the
presence of expenditures that appear lavish or unusual when
compared to the taxpayers’ accustomed standard of living and
spending patterns; and (4) the culpable spouse's evasiveness and
deceit concerning family finances. Pietromonaco v. Commissioner,
supra at 1345; Price v. Commissioner, supra at 965; Stevens v.
Commissioner, supra at 1505.
A spouse's specific and detailed knowledge of the underlying
transaction or business giving rise to the income omitted from
the return may, in certain circumstances, be treated as putting
the spouse on notice of the understatement. McCoy v.
Commissioner, 57 T.C. 732 (1972); Mayworm v. Commissioner, T.C.
Memo. 1987-536. Also relevant is the extent to which family
expenses, about which the spouse had knowledge or awareness,
exceeded reported income. Pietromonaco v. Commissioner, supra at
1345; Hammond v. Commissioner, 938 F.2d 185 (8th Cir. 1991),
affg. without published opinion T.C. Memo. 1990-22. Involvement
by a spouse in a family's financial affairs may give rise to a
reason to know of an understatement. Shea v. Commissioner, 780
F.2d 561, 567 (6th Cir. 1986), affg. in part, revg. in part, and
remanding in part T.C. Memo. 1984-310; Sanders v. United States,
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509 F.2d 162, 168 (5th Cir. 1975); Alberts v. Commissioner, T.C.
Memo. 1986-483.
Physical or mental abuse may also be a factor in considering
a claim for innocent spouse relief. Kistner v. Commissioner, 18
F.3d 1521, 1526 (11th Cir. 1994), revg. and remanding T.C. Memo.
1991-463.
With regard to whether petitioner had reason to know of any
understatements of tax for 1986, 1987, and 1988, relating to
Mr. Makalintal’s sale of his ICPI stock and to the deposits into
Mr. Makalintal and petitioner’s bank accounts, petitioner argues
that she was not significantly involved in the affairs and day-
to-day operations of Mr. Makalintal's businesses and
corporations, that she wrote checks only on one account and only
at Mr. Makalintal's specific direction and approval, that she was
repeatedly physically abused by Mr. Makalintal, and that she did
not know or have reason to know of the substantial
understatements of tax.
Respondent argues that because petitioner had a college
degree, was somewhat involved in Mr. Makalintal's corporations,
wrote many checks on at least one of the personal bank accounts,
and enjoyed a high standard of living, petitioner should be
treated as having known or as having reason to know of the
substantial understatements.
We agree with petitioner. During 1986, 1987, and 1988,
petitioner did not have any significant experience in accounting
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or business. Petitioner did not assist Mr. Makalintal in any
meaningful way in any of the income-producing activities of his
businesses or corporations.
Petitioner was not aware of Mr. Makalintal’s sale of his
ICPI stock. Mr. Makalintal did not disclose to petitioner the
source of the funds that were deposited into their bank accounts.
Petitioner reviewed the 1986, 1987, and 1988 Federal income
tax returns, and she specifically inquired of Mr. Makalintal how
the income reported thereon could support their lifestyle. Based
on her discussions with Mr. Makalintal about the 1986, 1987, and
1988 joint Federal income tax returns, petitioner reasonably
believed that funds that Mr. Makalintal had earned in prior years
from his businesses and investments in the Philippines
constituted the funds that were being used to support the
family’s lifestyle. Petitioner credibly testified in this
regard.
Petitioner's acceptance of Mr. Makalintal's explanation was
reasonable in light of the high standard of living they had
experienced in the Philippines and the apparent success of
Mr. Makalintal’s businesses and investments in the Philippines.
Ms. Yue and Ms. Yue’s supervisor accepted the same explanation
from Mr. Makalintal.
During 1986, 1987, and 1988, Mr. Makalintal and petitioner’s
standard of living remained consistent with prior years.
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Further, in light of the frequent physical abuse by
Mr. Makalintal and Mr. Makalintal’s general refusal to discuss
his business and financial affairs with petitioner, we believe
that petitioner's inquiry was reasonable and sufficient to
satisfy her duty of inquiry with regard to the taxable income
reported on Mr. Makalintal's and her 1986, 1987, and 1988 joint
Federal income tax returns. See Price v. Commissioner, supra at
966.
The final element in considering whether petitioner
qualifies for innocent spouse relief is whether, in light of all
of the facts and circumstances, it would be inequitable to hold
petitioner liable for the alleged understatement for 1986
relating to the sale of the ICPI stock and for the substantial
understatements for 1987 and 1988 that we have sustained relating
to the deposits into Mr. Makalintal and petitioner’s bank
accounts. Sec. 6013(e)(1)(D); Flynn v. Commissioner, 93 T.C.
355, 367 (1989); sec. 1.6013-5(b), Income Tax Regs. This issue
turns largely on the question of whether petitioner benefited
directly or indirectly from the understatements of tax. Flynn v.
Commissioner, supra at 367; Bell v. Commissioner, T.C. Memo.
1989-107; sec. 1.6013-5(b), Income Tax Regs. Normal support of a
spouse and children is not regarded as a significant benefit and
is to be considered in light of the circumstances of the parties.
Sanders v. United States, 509 F.2d 162, 168 (5th Cir. 1975);
Flynn v. Commissioner, supra at 367; Bell v. Commissioner, supra.
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Also to be considered is whether the spouse claiming relief has
been deserted, divorced, or separated. Kistner v. Commissioner,
T.C. Memo. 1995-66; sec. 1.6013-5(b), Income Tax Regs.
Further, in deciding whether it would be inequitable to hold
a spouse liable for understatements of tax, it is relevant to
consider the probable future hardships that would be imposed on
the spouse seeking relief, if such relief was denied. Sanders v.
United States, supra at 171 n.16; Dakil v. United States, 496
F.2d 431, 433 (10th Cir. 1974).
Petitioner argues that it would be inequitable for her to be
held liable for any understatements of tax relating to
Mr. Makalintal’s sale of ICPI stock and to the deposits into
Mr. Makalintal and petitioner’s bank accounts because she did not
significantly benefit from any understatements of income and
because she and the children received the same level of financial
support from Mr. Makalintal during 1986, 1987, and 1988 that she
and the children had received in prior years and because she
received little from him in later years.
Respondent argues that it would not be inequitable to hold
petitioner liable for any understatements in tax relating to the
above issues because Mr. Makalintal and petitioner lived a lavish
lifestyle in comparison to the income reported on the returns and
because petitioner was to receive substantial funds and property
from Mr. Makalintal under the property settlement agreement.
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During 1986, 1987, and 1988, petitioner's standard of living
and level of support from Mr. Makalintal did not significantly
increase in comparison to the standard of living and the level of
support in prior years.
In 1990, after Mr. Makalintal and petitioner divorced,
petitioner received from Mr. Makalintal approximately $135,000
for living expenses and for support of the children. Petitioner
was accustomed to a high standard of living, and the $135,000 was
at least consistent with her standard of living and did not
provide petitioner a significant benefit beyond her normal
support. Aside from the $10,553 that petitioner received from
sale of the Greenbrae home, petitioner did not receive any of the
additional property, alimony, or child support to which she was
entitled under the property settlement agreement.
Throughout their marriage and during 1986, 1987, and 1988,
Mr. Makalintal physically abused petitioner, and petitioner lived
in constant fear of him. Mr. Makalintal and petitioner are now
divorced. Mr. Makalintal apparently is now living in the
Philippines and refused to provide petitioner with certain
records relevant to the issues in these cases.
Denying petitioner innocent spouse relief in these cases
would likely cause very substantial hardship to petitioner.
Mr. Makalintal has abandoned petitioner and left her to deal with
substantial income tax understatements that are attributable to
him. Petitioner has had to pursue further education to support
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herself and her children, living well below her former standard
of living, while receiving virtually no support from
Mr. Makalintal.
We conclude that it would be inequitable to hold petitioner
liable for any income tax understatements sustained herein with
respect either to Mr. Makalintal’s sale of his ICPI stock or to
the deposits into Mr. Makalintal and petitioner’s bank accounts
and that petitioner qualifies for innocent spouse relief under
section 6013(e)(1) with respect thereto.
Mortgage Interest Expense Deduction
Petitioner has not specifically argued that she qualifies
for innocent spouse relief with respect to that portion of the
income tax understatement for 1988 relating to the erroneous
$31,335 home mortgage interest expense deduction. We conclude
that for 1988 petitioner is liable for the portion of the 1988
income tax understatement relating thereto.
Additions to Tax
Our conclusion herein that petitioner qualifies for innocent
spouse relief as to the portion of any understatements in tax for
1986, 1987, and 1988 (that are attributable to the sale of
Mr. Makalintal’s ICPI stock and to respondent’s bank deposits
analyses) also relieves petitioner from any liability for the
additions to tax relating thereto. See flush language of section
6013(e)(1).
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Because, however, the erroneous mortgage interest expense
deduction is not attributable to Mr. Makalintal, the innocent
spouse provision of section 6013(e)(1) does not immunize
petitioner from liability for the additions to tax for 1988 that
are attributable to that adjustment. Petitioner has not provided
any evidence as to the basis for this claimed deduction, and
petitioner has not provided any substantial authority or
reasonable cause for claiming this deduction.
We sustain for 1988 the portion of the negligence addition
to tax under section 6653(a)(1)(A) and (B) and the portion of the
substantial understatement addition to tax under section 6661(a)
that are attributable to the understatement in tax for 1988 that
relates to the claimed mortgage interest expense deduction.
Decisions will be entered
under Rule 155.