T.C. Memo. 1997-18
UNITED STATES TAX COURT
GLENYCE R. PETERSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17376-94. Filed January 8, 1997.
Terry L. Moore, for petitioner.
Mark J. Miller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WRIGHT, Judge: Respondent determined deficiencies in
petitioner’s Federal income tax for taxable years 1990 and 1991
in the amounts of $20,958 and $27,090, respectively. Respondent
further determined that petitioner is liable for additions to tax
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under section 6651(a)(1)1, in the amount of $2,625 for taxable
year 1990, and in the amount of $5,280 for taxable year 1991, for
failing to timely file tax returns for those taxable years.
Respondent also determined that petitioner is liable for the
accuracy-related penalty pursuant to section 6662(a), in the
amount of $4,192 for taxable year 1990, and in the amount of
$5,418 for taxable year 1991. The sole issue for decision is
whether petitioner qualifies for "innocent spouse" relief under
section 6013(e) for either taxable year 1990 or 1991. We hold
that she does not.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein. At the time the petition was filed in this
case, petitioner resided in Menomonie, Wisconsin.
Petitioner and her former husband, Carl L. Peterson (Mr.
Peterson), were married in 1973. They were divorced in 1993.
The couple filed a joint Federal income tax return for taxable
year 1990 on October 9, 1991. They filed their joint Federal
income tax return for taxable year 1991 on August 18, 1992.
Petitioner received a bachelor's degree in home economics
from the University of Wisconsin in 1958. She received a
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect during the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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master's degree in home economics from the same institution in
1963. After receiving her degrees, petitioner became a school
teacher, teaching at both the junior high and senior high school
levels. She continued teaching at the high school level until
1968 when she became a professor of home economics at the
University of Wisconsin, located in Stout, Wisconsin. Since
1968, petitioner has been a college professor. Petitioner's
expertise lies in the area of textile design and quality
analysis.
Petitioner's former husband, Mr. Peterson, was an attorney
who practiced law in Menomonie, Wisconsin, during the years at
issue. He was granted a power of attorney over the financial
affairs of Martha Burgess (Burgess) in 1985, following the death
of her husband. Mr. Peterson served in this capacity until
Burgess' death in 1990. After Burgess' death, her brother, Ralph
Grundman (Grundman), was appointed administrator of her estate
(the estate). Grundman retained Mr. Peterson to serve as the
estate's attorney. In February 1991, Grundman died and his
widow, Edna (Edna), replaced him as administratrix of the estate.
Mr. Peterson suffered a stroke in June 1991.
Sometime after February 1991, Edna, in her capacity as
administratrix of the estate, began receiving notices regarding
the estate's delinquent tax status. This concerned Edna, and she
initiated an inquiry into the estate's condition. An accounting
of the estate's assets provided by Mr. Peterson was incomplete,
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and his affiliation with the estate was terminated in February
1992. Soon thereafter, Edna hired Roger Schilling (Schilling), a
certified public accountant, to perform an extensive examination
of the estate. Schilling's examination revealed that Mr.
Peterson had misappropriated $136,901.92 from the estate during
1990, and $186,000 from the estate during 1991.
In March 1994, Mr. Peterson was indicted on three counts of
theft, under Wis. Stat. sec. 943.20(1)(b)(West 1996). Mr.
Peterson pleaded guilty to two counts and was sentenced to 15
years in prison.
In addition to Mr. Peterson's occupation as an attorney and
petitioner's occupation as a college professor, the couple also
owned and operated a beef farm during the years at issue. The
name of this farm was "Mill Road Limousins."
During the years at issue, petitioner and Mr. Peterson
maintained at least 2 joint bank accounts at local financial
institutions. One of these accounts was with Valley Bank (the
Valley account) and the other was with Menomonie Farmer's Credit
Union (the Menomonie account). The couple conducted their
personal and business affairs from both accounts. Between
February 3, 1990 and January 3, 1991, petitioner and Mr. Peterson
wrote checks against the Valley account totaling $111,100.72. Of
this amount, petitioner wrote checks totaling $88,532.95, and Mr.
Peterson wrote checks totaling $22,567.77. The records for the
Valley account indicate that the account had a balance of
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$6,336.96 on February 1, 1990 and $4,934.95 on January 3, 1991.
Between June 13, 1990 and January 2, 1991, petitioner and Mr.
Peterson wrote $31,476.39 worth of checks against the Menomonie
account. Of this amount, petitioner wrote checks totaling
$8,519.84, and Mr. Peterson wrote checks totaling $4,728.07. An
employee named Jeff White, who worked for the Petersons, wrote
checks against the account totaling $11,699.19.2 The records
from the Menomonie account indicate that the account had a
balance of $20.90 on March 6, 1990 and $3,892.79 on December 31,
1990. Petitioner managed the account records for both of these
accounts.
Mr. Peterson prepared the couple's 1990 Federal income tax
return. That return reflects the following amounts of gross
income:
Wages $64,258
Interest 1,091
Other gains 5,280
Gross rents 15,982
Gross farm income 3,570
total $90,181
The couple's 1990 return also reflects the following tax
withholdings and expenditures:
Federal income tax withholdings $ 10,458.00
Social Security tax withholdings 4,962.43
State tax withholdings 4,082.18
Rental expenses 11,465.00
Farm expenses 65,219.00
Depreciable assets purchased 95,319.86
total $191,506.47
2
It is unclear from the record who wrote the remaining
$6,529.29 worth of checks.
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Accordingly, as reflected on the couple's 1990 tax return, a
difference of $101,325.47 exists between the amount of gross
income and total withholdings and expenditures.
None of the funds that Mr. Peterson misappropriated in 1990
was reported on the couple's joint return for that year, and,
because their beef farm operation generated large business losses
that offset the couple's reported income, the couple reported no
Federal income tax liability for taxable year 1990. Prior to
signing the couple's 1990 joint return, petitioner examined its
content and expressed concern with a farm loss but nonetheless
signed the return.
In February 1992, Mr. Peterson's daughter, Lucy, an
attorney practicing in Mr. Peterson's firm, informed petitioner
that Mr. Peterson had embezzled an undetermined sum from the
estate. Prior to this time, petitioner had no actual knowledge
of the embezzlements. When petitioner was examining the couple's
joint return for 1991, she asked Mr. Peterson whether the
embezzled funds were being reported on the return. Mr. Peterson
replied in the affirmative and informed petitioner that $45,000
was being reported on a Schedule C attached to the return in
order to account for the funds that he embezzled during 1991.
Having limited this amount to $45,000, $141,000 of the amount Mr.
Peterson misappropriated in 1991 was not reported on the couple's
1991 joint return.
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Respondent determined that the amounts of unreported
embezzlement income in 1990 and 1991 were $115,500 and $168,500,
respectively. The parties now agree, however, that the actual
amounts of unreported income were $136,901 and $141,000 for 1990
and 1991, respectively.
OPINION
As a general rule, a husband and wife who file joint tax
returns are jointly and severally liable for Federal income tax
due on their combined incomes. Sec. 6013(d)(3); Resser v.
Commissioner, 74 F.3d 1528, 1534 (7th Cir. 1996), revg. T.C.
Memo. 1994-241; Park v. Commissioner, 25 F.3d 1289, 1292 (5th
Cir. 1994), affg. T.C. Memo. 1993-252. Section 6013(e), however,
mitigates this general rule to some extent. Park v.
Commissioner, supra. Nonetheless, Congress regards joint and
several liability as an important counterpart to the privilege of
filing joint tax returns, which generally results in a lower tax
on the combined incomes of spouses than would be due were they to
file separate returns, and any relaxation of the rule of joint
and several liability depends upon compliance with the conditions
of section 6013(e). Sonnenborn v. Commissioner, 57 T.C. 373,
380-381 (1971). However, because of its remedial purpose, the
"innocent spouse" rule, as section 6013(e) is commonly referred,
must not be given an unduly narrow or restrictive reading.
Friedman v. Commissioner, 53 F.3d 523, 528-29 (2nd Cir. 1995),
affg. in part and revg. in part T.C. Memo. 1993-549; Sanders v.
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United States, 509 F.2d 162, 167 (5th Cir. 1975). The question
of whether a taxpayer has established that he or she is entitled
to relief as an "innocent spouse" is one of fact. Park v.
Commissioner, supra at 1291.
Pursuant to section 6013(e)(1), an "innocent spouse" is
relieved of liability if he or she proves that: (1) A joint
return has been made for a taxable year; (2) on such return there
is a substantial understatement of tax attributable to grossly
erroneous items of the other spouse; (3) he or she did not know,
and had no reason to know, of such understatement when he or she
signed the return; and (4) after consideration of all the facts
and circumstances, it would be inequitable to hold him or her
liable for the deficiency in income tax attributable to such
understatement. See Purcell v. Commissioner, 86 T.C. 228, 235
(1986), affd. 826 F.2d 470 (6th Cir. 1987). Petitioner bears the
burden of establishing that each of the four requirements of
section 6013(e) has been satisfied. Purcell v. Commissioner, 826
F.2d at 473; Sonnenborn v. Commissioner, supra at 381-383.
Moreover, the requirements of section 6013(e) are conjunctive; a
failure to meet any one requirement prevents a spouse from
qualifying for relief. Park v. Commissioner, supra at 1292;
Purcell v. Commissioner, supra; Bokum v. Commissioner, 94 T.C.
126, 138 (1990), affd. 992 F.2d 1132 (11th Cir. 1993).
The parties agree that petitioner and Mr. Peterson filed a
joint return for each of the taxable years at issue. The parties
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also agree that there is a substantial understatement of tax
attributable to grossly erroneous items of Mr. Peterson for each
of the taxable years at issue. Respondent contends, however,
that petitioner knew or had reason to know of such substantial
understatements and that it would not be inequitable to hold her
liable for the deficiencies attributable to those
understatements. Petitioner disagrees.
Section 6013(e)(1)(C)
In resolving whether petitioner had reason to know that the
returns she signed for the years at issue contained substantial
understatements within the meaning of section 6013(e)(1)(C), the
Court must inquire whether a reasonably prudent person, under the
circumstances of petitioner, could have been expected to know at
the time of signing each return that each such return contained a
substantial understatement or that further investigation was
warranted. Bliss v. Commissioner, 59 F.3d 374, 378 (2d Cir.
1995), affg. T.C. Memo. 1993-390; Park v. Commissioner, supra at
1293 (citing Sanders v. United States, supra at 166-167 and n.5);
Bokum v. Commissioner, supra at 148. The relevant knowledge is
of the transaction giving rise to the income omitted from the
return, rather than of the tax consequences of such transaction.
Quinn v. Commissioner, 524 F.2d 617, 626 (7th Cir. 1975).
Consequently, a spouse who has reason to know of such a
transaction does not qualify for relief as an "innocent spouse."
Park v. Commissioner, supra; Sanders v. United States, supra.
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Additionally, a spouse may have a duty to inquire further if he
or she knows enough facts so as to be placed on notice of the
possibility of a substantial understatement. Guth v.
Commissioner, 897 F.2d 441, 444-445 (9th Cir. 1990), affg. T.C.
Memo. 1987-522. Factors to be considered in determining whether
a taxpayer had reason to know within the meaning of section
6013(e)(1)(C) include: (1) The level of education of the spouse
seeking relief; (2) the alleged innocent spouse's involvement in
his or her family's financial and business activities; (3) any
substantial unexplained increase in the family's standard of
living; and (4) the culpable spouse's evasiveness and deceit
about the family's finances. Resser v. Commissioner, supra at
1536. In reaching our decision, we consider the interaction
among these factors, and different factors may predominate in
different cases. Bliss v. Commissioner, supra at 378.
With respect to each taxable year at issue, we find that
petitioner has failed to establish that she had no reason to know
that the return contained a substantial understatement.
We first consider petitioner's level of education. It is
clear from the record, as well as from our observations at trial,
that petitioner is a highly educated, intelligent woman. She
holds undergraduate and graduate degrees from a respected
academic institution. Not only has she taught at the high school
level, but she has been a university professor for nearly 20
years. Despite such accomplishments and experience, however,
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petitioner argues that, because her area of expertise is limited
to the study of fabrics and clothing, rather than business and
accounting, we should attribute little if any weight to her
academic degrees and status as a professor. We reject
petitioner's efforts to attenuate her academic accomplishments by
pointing to the nature of her expertise. Based on the record in
the instant case, we are satisfied that a reasonably prudent
taxpayer with petitioner's education would have had the ability
to understand that there was a substantial understatement on each
of the joint returns. While it is not uncommon for courts to
conclude that highly educated intelligent taxpayers are entitled
to innocent spouse relief, cf. Resser v. Commissioner, 74 F.2d
1528 (7th Cir. 1996); Friedman v. Commissioner, 53 F.3d 523 (2d
Cir. 1995) ; Foley v. Commissioner, T.C. Memo. 1995-16; Robertson
v. Commissioner, T.C. Memo. 1992-32, the facts of the instant
case do not support a similar conclusion. We do not believe that
it was necessary for petitioner to have possessed specialized
knowledge and education in order for her to have had reason to
know income was being omitted from her joint returns. This case
does not involve transactions the nature of which would require
special understanding or knowledge to appreciate. Rather, it
involves the omission of embezzlement income. Cf. Resser v.
Commissioner, supra. That Mr. Peterson's law practice may have
been complex in nature, and despite petitioner's professed lack
of knowledge with respect to the operation of that practice, is
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inconsequential. Accordingly, we find that petitioner's level of
education supports respondent's claim that petitioner knew or had
reason to know of the substantial understatements contained in
the joint returns for both taxable years at issue.
The second factor we consider when assessing whether a
taxpayer had reason to know of the existence of a substantial
understatement at the time such taxpayer signed his or her return
focuses on the taxpayer's involvement in his or her family's
business and financial affairs. We separately analyze this
factor with respect to each taxable year at issue.
Taxable Year 1990
Petitioner managed her family's checkbooks during taxable
year 1990. She also was her household's principal bill payer.
During taxable year 1990, petitioner drew checks totaling
approximately $97,052 against the family's bank accounts.
Similarly, petitioner's former husband drew checks totaling
approximately $27,296 against the accounts. Additionally,
another $18,228 was drawn against the accounts. Consequently, at
least $142,576 passed through these accounts during taxable year
1990. This was approximately $52,000 more than the gross income
of $90,181 reported on the Petersons' return for 1990. As
manager of the bank accounts, petitioner was obviously aware of
this activity.
Petitioner attempts to clarify this disparity by explaining
that her former husband borrowed substantial amounts of money and
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cashed in various life insurance policies during 1990. The
proceeds from such loans and insurance policies, petitioner
contends, more than account for the imbalance between the
couple's earnings and expenditures for taxable year 1990. At
trial, however, when questioned whether she could substantiate
such allegations, petitioner explained that, although she
possessed documentary proof of the above-referenced loans, she
had not brought such documentation to court. Moreover, other
than her own testimony, petitioner did not offer any
corroboration for her assertion regarding the life insurance
policies allegedly cashed in by her former husband. Although
petitioner's testimony regarding the loans and life insurance
policies was not contradicted at trial, we are not required to
accept petitioner's self-serving testimony if we determine it to
be improbable or questionable. Lovell & Hart, Inc. v.
Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg. T.C.
Memo. 1970-335; MacGuire v. Commissioner, 450 F.2d 1239, 1244
(5th Cir. 1971), affg. T.C. Memo. 1970-89; Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986); see also Lerch v.
Commissioner, 877 F.2d 624 (7th Cir. 1989); Shapiro v. Rubens,
166 F.2d 659, 666 (7th Cir. 1948). Furthermore, it has long been
settled that a party's failure to introduce evidence within his
or her possession, and which, if true, would be favorable to him
or her, gives rise to the presumption that if produced such
evidence would be unfavorable. Wichita Terminal Elevator Co. v.
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Commissioner, 6 T.C. 1158 (1946), affd. 162 F.2d 513 (10th Cir.
1947); see also Glimco v. Commissioner, 397 F.2d 537, 541 (7th
Cir. 1968, affg. T.C. Memo. 1967-119); Frierdich v. Commissioner,
925 F.2d 180 (7th Cir. 1991).
Petitioner also attempts to restrict the amount of weight we
attribute to her involvement in her family's financial and
business affairs by arguing that Mr. Peterson's embezzlement
activities occurred at his law office and not at the couple's
residence, explaining that the embezzled funds were funneled
through the law practice and that she possessed minimal knowledge
about such practice. This argument is without merit as it
attempts to shift our focus of inquiry from her family's
financial activities to Mr. Peterson's law practice. Granted,
petitioner may not have known much about her former husband's law
practice, but she knew how much money the family was spending and
how much it was reporting as income.
A taxpayer claiming "innocent spouse" relief cannot simply
turn a blind eye to facts within his or her reach that would have
put a reasonably prudent taxpayer on notice that further inquiry
was necessary. Sanders v. United States, 509 F.2d at 169; Bokum
v. Commissioner, 94 T.C. at 148; McCoy v. Commissioner, 57 T.C.
732, 734 (1972). Even a cursory examination of petitioner's 1990
return should have placed her on notice that something was amiss.
The return listed expenditures and tax withholdings totaling
approximately $191,506. Of this amount, roughly $95,319 is
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attributable to assets acquired for the beef farm and $65,219 is
attributable to out-of-pocket Schedule F expenses. Despite
whether petitioner was aware of the tax withholdings, or even the
depreciation deductions claimed on the return, she was fully
aware of the out-of-pocket expenditures. Not only did she write
checks in order to pay many of the farm expenses, petitioner's
former husband did not conceal the assets acquired for the
couple's farm; i.e. the vehicles, farm equipment, livestock, etc.
In fact, the nature of such assets make them noticeable, so
petitioner was undoubtedly aware of there existence. In any
event, a summary review of the return indicates that, even
without regard to living expenses, the expenditures and tax
withholdings totaled at least $101,325 more than the $90,181
reported as gross income for taxable year 1990.
We conclude that petitioner had sufficient involvement in
her family's financial affairs to put a reasonable person in her
position on notice that the income reported in her 1990 return
was erroneous or that further inquiry was warranted.
Taxable Year 1991
Just as she did for taxable year 1990, petitioner managed
her family's checkbooks for taxable year 1991. On their 1991
return, petitioner and her former husband reported $45,000 of the
$186,000 that Mr. Peterson had embezzled during the taxable year.
Petitioner maintains that at the time she signed the return on
August 15, 1992, she believed that all funds embezzled by Mr.
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Peterson during taxable year 1991 were reported on the return and
that that amount totaled $45,000. She claims that she
specifically asked Mr. Peterson whether all embezzled funds were
reported on the return and that Mr. Peterson assured her that the
above-referenced $45,000 figure accounted for all such funds.
Further, petitioner asserts that she inquired at Mr. Peterson's
law office as to whether anyone there knew the actual amount that
Mr. Peterson had embezzled during 1991. Office personnel, she
testified, told her that the estate had received special
treatment and that, as a result of such treatment, and because no
paper trail had been created, the actual amount of Mr. Peterson's
embezzlement could not be determined. Petitioner also claims to
have been told that the estate's file had been forwarded to an
attorney unaffiliated with Mr. Peterson's firm, and that, as a
result, she was unable to pursue the matter further.
Respondent attempts to refute each of these allegations.
Specifically, she argues that, because Mr. Peterson was a known
embezzler and had suffered from a memory-impairing stroke the
prior year, it was unreasonable for petitioner to accept his word
that he had only embezzled $45,000 in 1991 and that all such
embezzled funds were reported on the couple's 1991 return.
Instead, respondent claims, petitioner should have contacted the
attorney who had replaced Mr. Peterson as the estate's attorney
in order to determine the validity of Mr. Peterson's
representation that all embezzled funds were accounted for in the
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return. Because petitioner did not conduct such an inquiry,
respondent contends that she failed to discharge her duty to
inquire. Consequently, respondent maintains that, at the time
she signed her 1991 return, petitioner knew or had reason to know
that such return contained a substantial understatement.
We find respondent's argument in this regard unpersuasive.
We reject her assertion that petitioner was obligated wholly to
discard the trust and confidence she had in Mr. Peterson simply
because he had engaged in prior illegal activity. However,
petitioner bears the burden of proof on this issue, and she has
fallen short in carrying that burden. Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933); see Purcell v. Commissioner, 826
F.2d at 473; Sonnenborn v. Commissioner, 57 T.C. at 381-383
(1971). Petitioner's argument with respect to taxable year 1991
is bootstrapped to her argument with respect to taxable year
1990. She maintains that she lacked reason to know of the
understatement for 1991 because her husband's embezzlement
activities took place at his law office and not at the couple's
residence. For reasons explained earlier in this opinion, we
find this argument unpersuasive. Petitioner has provided little
convincing evidence in this case, and her arguments are cursory
and attenuated. Moreover, although petitioner testified that
she questioned the staff at Mr. Peterson's office about the
embezzlement, she failed to corroborate that testimony. Because
petitioner's testimony in this regard is self-serving and
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questionable, we find it to be unreliable and lacking
credibility.3 Accordingly, we conclude that petitioner has
failed to establish that she lacked involvement in her family's
financial and business affairs to an extent sufficient to
conclude that she had no reason to know that the income reported
in the couple's return for taxable year 1991 was erroneous.
The third factor we consider is the presence of unusual or
lavish expenditures by petitioner's family. The presence of
unusual or lavish expenditures may put a taxpayer on notice that
it is probable that income is being omitted from a joint return.
Estate of Jackson v. Commissioner, 72 T.C. 356, 361 (1979). A
taxpayer claiming relief as an "innocent spouse" cannot close his
or her eyes to unusual or lavish expenditures that might have
alerted him or her to unreported income. Terzian v.
Commissioner, 72 T.C. 1164, 1170 (1979); Mysse v. Commissioner,
57 T.C. 680, 699 (1972).
Petitioner's argument with respect to this factor is
considerably thin. It essentially amounts to a general denial
that either she or her former husband experienced any change in
their individual lifestyles and that the couple did not make any
unusual or lavish expenditures during either taxable year at
3
As previously noted, uncontradicted questionable testimony
need not be accepted by this Court. See Lovell & Hart, Inc. v.
Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg. T.C. Memo
1970-335; MacGuire v. Commissioner, 450 F.2d 1239, 1244 (5th
Cir. 1971) affg. T.C. Memo. 1970-89; Tokarski v. Commissioner, 87
T.C. 74, 77 (1986).
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issue. We concluded that petitioner has failed to satisfy her
burden of proof as to this factor with respect to both taxable
years at issue. In taxable year 1990, the couple acquired more
than $95,000 of depreciable assets for their farming operation.
Among the assets purchased were at least 19 head of livestock, a
Ford truck, two trailers, and two tractors. Whether such
purchases are to be considered lavish and unusual for
petitioner's household is obviously a question of fact, as "one
person's luxury can be another person's necessity, and the
lavishness of an expense must be measured from each family's
relative level of ordinary support." Sanders v. United States,
509 F.2d at 168. But we are unable to make a proper assessment
of the asset acquisitions involved in this case because the
record lacks evidence against which an appropriate comparison can
be made. Perhaps petitioner and her former husband routinely
acquired large quantities of livestock, as well as multiple
vehicles and farm equipment, but nothing in the record suggests
this to be the case. In fact, petitioner does not even argue as
much.
Similarly, with respect to taxable year 1991, other than
petitioner's general denial, as noted above, the record lacks
evidence of whether petitioner and her former husband made
unusual or lavish expenditures, or experienced significant
changes in lifestyle. Persuasive evidence would have been
relatively easy for petitioner to provide, yet she elected not to
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provide it, relying instead on her general denial. Due to the
lack of persuasive evidence in the record, and in light of our
concerns with petitioner's credibility, we are simply reluctant
to conclude that petitioner's self-serving denial satisfies her
burden of proof as to this factor.
The fourth factor we consider when assessing whether a
taxpayer had reason to know of the existence of a substantial
understatement at the time he or she signed the return focuses on
whether the taxpayer's spouse was forthright about the omitted
income. Because petitioner did not receive actual knowledge of
the embezzlement income at issue in this case until February
1992, it is clear that Mr. Peterson was evasive with respect to
his embezzlement activities during both taxable years at issue.
However, while the record contains evidence that Mr. Peterson
might have maintained a "secret" checking account, such evidence
is not sufficient to convince us that the funds Mr. Peterson
embezzled were accumulated in that account. To the contrary, it
is clear from the record that during 1990 a large amount of
otherwise unexplained cash flowed through the couple's two joint
accounts managed by petitioner. Accordingly, though petitioner
did not acquire actual knowledge of her former husband's
embezzlement activity until after she signed the joint return for
taxable year 1990, we find that Mr. Peterson did not attempt to
conceal from petitioner the asset acquisitions or other
expenditures made with embezzled funds during that year.
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With respect to taxable year 1991, we find that petitioner
has established that her former husband attempted to conceal the
"extent" of his embezzlement activities by misleading petitioner
when she inquired whether the $45,000 entry on their return
accounted for all of the couple's 1991 embezzlement income.
Having thoroughly examined the circumstances of the instant
case, we conclude that a reasonably prudent person would have
seriously questioned the gross income reported in the joint
return petitioner and her former husband filed for taxable year
1990. None of the four factors discussed above favors petitioner
with respect to taxable year 1990. We therefore conclude that
petitioner had a duty of inquiry with respect to the correctness
of the reported income and that she failed to discharge that
duty. See Park v. Commissioner, 25 F.3d at 1293; Sanders v.
United States, supra at 167. Accordingly, we find, based on the
entire record, that petitioner had reason to know of the
substantial understatement of tax on her 1990 return resulting
from the omission of the income embezzled by Mr. Peterson during
taxable year 1990.
With respect to taxable year 1991, our examination of the
circumstances of the instant case indicates, and we find
accordingly, that petitioner has failed to establish that she had
no reason to know of the substantial understatement of tax on her
1991 return resulting from the omission of the income embezzled
by Mr. Peterson during taxable year 1991. Of the four factors
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discussed above, only Mr. Peterson's evasiveness benefits
petitioner. The weight we attribute to such factor, however,
does not exceed the amount of weight we attribute to any of the
remaining three factors, each of which favors respondent. In
light of the facts of the instant case, we do not think that Mr.
Peterson's evasiveness was of such an extent that petitioner
could not have had reason to know of the understatement of income
in the return.
Section 6013(e)(1)(D)
The next matter we consider is whether it would be
inequitable to hold petitioner liable for the deficiencies in tax
attributable to her former husband's embezzlement activities.
See sec. 6013(e)(1)(D). In answering this question, we take into
account all of the facts and circumstances. Id.; sec.
1.6013-5(b), Income Tax Regs. A factor to be considered is
whether the spouse seeking relief significantly benefited, either
directly or indirectly, from the omitted income. Buchine v.
Commissioner, 20 F.3d 173, 181 (5th Cir. 1994), affg. T.C. Memo.
1992-36; sec. 1.6013-5(b), Income Tax Regs. Normal support,
which is to be measured by a couple's circumstances, is not
considered a significant benefit. Sanders v. United States,
supra at 168; Terzian v. Commissioner, 72 T.C. at 1172; Mysse v.
Commissioner, 57 T.C. at 699. A significant benefit exists if
expenditures have been made which are unusual for the taxpayer's
accustomed lifestyle. Terzian v. Commissioner, supra. Other
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factors include: (1) Whether the spouse seeking relief has been
deserted by the other spouse or is divorced or separated from
that spouse, sec. 1.6013-5(b), Income Tax Regs.; and (2) probable
future hardships that would be visited upon the purportedly
"innocent spouse" were he or she not relieved from liability.
Sanders v. United States, supra at 171 n.16.
Based upon the record in the instant case, we conclude that
petitioner has failed to establish that she did not receive
significant benefits from the funds that Mr. Peterson embezzled
during taxable years 1990 and 1991. For 1990, the record
indicates that the couple enjoyed more disposable income as a
result of the embezzled funds than would have been otherwise
available from the couple's reported earnings. Petitioner has
failed to establish that Mr. Peterson used the embezzled funds in
a manner that did not benefit her significantly. To the
contrary, and particularly with respect to taxable year 1990, the
record indicates that the funds were used for the significant
benefit of the family and its beef farm operation. Petitioner
has not established that such benefits were consistent with her
then existing lifestyle, nor has she established that they
constituted normal support.
When assessing whether it would be inequitable to hold
petitioner liable for the deficiencies attributable to Mr.
Peterson's embezzlement activity, we also consider whether
petitioner was deserted or divorced subsequent to that activity.
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The couple did receive a divorce subsequent to 1991. We find,
however, that such circumstance does not outweigh the significant
benefits petitioner received from the embezzled funds.
Furthermore, petitioner has not established that any hardship she
would encounter as a result of incurring liability for the
deficiencies attributable to the omission of the embezzled funds
from the 1990 or 1991 returns would make it inequitable to hold
her jointly liable for those deficiencies.
We find, therefore, that it would not be inequitable to hold
petitioner liable for the understatements attributable to the
funds embezzled by Mr. Peterson in taxable years 1990 and 1991.
Because petitioner has failed to satisfy all of the
conjunctive factors set forth in section 6013(e)(1), we hold that
she does not qualify for "innocent spouse" relief and is
therefore jointly and severally liable for the deficiencies in
tax, additions to tax, and penalties for 1990 and 1991.
To reflect the foregoing,
Decision will be
entered under Rule 155.