Mitchell v. Commissioner

T.C. Memo. 2000-332

UNITED STATES TAX COURT

HERBERT L. MITCHELL, DECEASED, AND ELLA MARIE MITCHELL,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15953-95. Filed October 26, 2000.

John D. Steffan, for petitioners.

Alan R. Peregoy, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined a deficiency of $268,376

in petitioners’ Federal income taxes for 1991 and, by amendment

to answer, asserted an increase in the deficiency of $988, for a

total of $269,364. We must decide whether petitioner Ella Marie

Mitchell (petitioner) is entitled to relief from liability for
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the deficiency under the provisions of section 6015(b), (c), or

(f).1

The sole assignment of error in the petition in this case

was respondent’s failure to grant petitioner relief under section

6013(e). During the pendency of the case, Congress repealed

section 6013(e) and enacted section 6015 as a substitute. The

parties subsequently filed additional memoranda addressing the

effect of new section 6015 on the instant case. The parties

agree that section 6015, rather than section 6013(e), applies to

the proceedings, and respondent has conceded that petitioner

should be treated as having made any elections she may be

eligible to make under section 6015 as if made in the petition.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. We

incorporate by this reference the stipulation of facts and

attached exhibits. At the time of filing the petition,

petitioner resided in Washington, D.C. Her husband, petitioner

Herbert L. Mitchell (Mr. Mitchell), is deceased. The Mitchells

had been married for 28 years prior to Mr. Mitchell’s death in

March 1992 and had raised four children. Petitioner worked in

1
References to sec. 6015 are to that section as added to
the Internal Revenue Code by the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201,
112 Stat. 685, 734. All other section references are to the
Internal Revenue Code in effect for the year in issue.
 - 3 -

the District of Columbia school system for 20 years, as a teacher

and a counselor. Additionally, for 38 years, she operated a

beauty salon, which employed one other person, who tended the

salon while petitioner was working at the school. Petitioner did

not maintain the beauty salon’s books or payroll personally;

instead, she engaged others to do so.

At the time of his death, Mr. Mitchell was a teacher and the

Director of Federal Programs for the Charles County, Maryland,

Board of Education. Mr. Mitchell managed the family’s finances.

He made the decisions with respect to major purchases and

investments, paid the bills, and engaged an adviser to help him

prepare the tax returns.

At the beginning of 1991, petitioner and Mr. Mitchell had

three children in college and a fourth living at home. They were

paying tuition and other expenses of the children in college.

They were barely able to pay the family’s bills. Their house was

in need of substantial repairs.

Mr. Mitchell had been a member of the Teachers’ Retirement

System of the State of Maryland (Retirement System) until he

transferred to the Teachers’ Pension System (Pension System).

The Retirement System is a qualified defined benefit plan under

section 401(a) requiring mandatory nondeductible employee

contributions, and the trust maintained as a part of the plan is

exempt from taxes under section 501(a). The State of Maryland
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also maintained the Pension System, another qualified defined

benefit plan under section 401(a), and the trust maintained under

that plan is also tax exempt under section 501(a).

Sometime in early 1991 Mr. Mitchell became interested in

transferring from the Retirement System to the Pension System.

He contacted the Maryland State Retirement and Pension Systems

requesting an estimate of the amount of a refund he would receive

upon such a transfer. The letter he received in response to his

request, dated April 25, 1991, informed Mr. Mitchell that the

estimated transfer refund would be $666,191.28. The letter noted

that this refund would be “subject to taxation when received”.

The letter further stated that the Internal Revenue Service had

ruled that the transfer refund was not eligible for a rollover

into another eligible retirement plan either as a partial

distribution or as a lump sum distribution. In addition, the

letter advised Mr. Mitchell that he should review the tax

consequences of receiving the transfer refund with his tax

adviser or with the Internal Revenue Service. Petitioner did not

see this letter.

On May 23, 1991, Mr. Mitchell elected to transfer from the

Retirement System to the Pension System. As a result, he

received a transfer refund distribution in the form of two

checks, dated June 30, 1991, totaling $666,564.51. He initially

deposited these checks into a bank and later invested the
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proceeds in U.S. Treasury securities. He did not roll over the

proceeds into an Individual Retirement Account (IRA). Petitioner

and Mr. Mitchell received two Forms 1099-R from the State of

Maryland indicating that the taxable portion of the transfer

refund distribution was $629,083.14. Petitioner was aware of the

timing and amount of the transfer refund distribution and knew

that Mr. Mitchell had purchased Treasury securities with the

proceeds.

In January 1992, and for approximately 5 months thereafter,

petitioner was suffering from shingles, the severity of which

caused her to be bedridden at various times and absent from work

for extended periods. In March of 1992, Mr. Mitchell died

suddenly as the result of a pulmonary embolism. Sometime shortly

after April 15, 1992, petitioner contacted Mr. Emerson Browne,

the family’s longtime tax adviser, concerning the preparation of

a 1991 Federal income tax return. She provided Mr. Browne with

the records she could find, including the Forms 1099-R issued by

the State of Maryland with respect to the transfer refund

distribution. She did not find, and therefore did not provide to

Mr. Browne, the letter from the Maryland State Retirement and

Pension Systems that had advised Mr. Mitchell that the transfer

refund was potentially subject to taxation whether rolled over or

not.
 - 6 -

Not having seen this letter, Mr. Browne believed that in

order to avoid current tax on the transfer refund distribution,

Mr. Mitchell should have rolled it over within 60 days of the

distribution into an eligible retirement plan, such as an IRA.

He learned from petitioner that this had not been done.

Notwithstanding the failure to execute a timely rollover,

Mr. Browne advised petitioner to effect a rollover by opening

IRA’s with the proceeds from the distribution. He did not advise

her that a rollover would be ineffective because untimely;

rather, he told her to roll over the proceeds and referred her to

a financial adviser for that purpose. At the end of June 1992,

with the assistance of the financial adviser recommended to her

by Mr. Browne, petitioner sold the Treasury securities and opened

four separate IRA’s--two with initial investments of $130,000,

and two more in the initial amount of $97,500, or a total of

$455,000. She also placed $162,500 in a non-IRA account with an

investment service, bringing her total amount invested, including

the IRA’s, to $617,500.

In June or July 1992, Mr. Browne prepared a joint 1991

Federal income tax return on behalf of petitioner and her

deceased husband. The return reflected the receipt of the

transfer refund distribution of $666,564.41. The return as filed

included Forms 1099-R issued by the State of Maryland reflecting

that $629,083.14 of the transfer refund was fully taxable.
 - 7 -

However, the return itself indicated that only $1,083.14 of the

distribution was taxable. An attached schedule showed tax-free

rollover treatment of $628,000 as invested in a qualified plan.

At the time she signed the return, petitioner did not

understand the tax consequences of the transfer refund

distribution or the purpose of the rollover she was advised to

effect. She did not ask why a relatively small amount of the

entire distribution was taxable. She relied upon Mr. Browne, her

tax adviser, in concluding that the amount of the distribution

treated as taxable on the return was correct. When she signed

the return, she was not aware that the treatment of the

distribution thereon was incorrect. She was not aware that her

failure to treat $629,083.14 of the distribution as taxable

income would give rise to a deficiency.

After signing the return, petitioner made expenditures from

the various IRA accounts she had created with the proceeds of the

distribution. Among other things, she made repairs and

improvements to her residence; she paid down the mortgage; she

paid her family’s medical bills; she made gifts to her children

and her mother; and she paid off her children’s college loans and

credit card balances for various family members. Her spending

over the 3 years 1992 through 1994 totaled more than $441,000.

She also established a trust for her children in the amount of

$132,000.
 - 8 -

During the examination and appeals phase of the instant

case, petitioner submitted to respondent a copy of the previously

filed joint 1991 Federal income tax return. However, the copy

included a counterfeit Form 1099-R, prepared by Mr. Browne but

purporting to be from the State of Maryland, indicating that only

$709.96 of the transfer refund distribution was taxable.

OPINION

The question before us is whether petitioner is entitled to

relief from joint and several liability under section 6015,

commonly referred to as innocent spouse relief. The parties do

not dispute that $629,083.14 of the transfer refund must be

included in income. Petitioner seeks relief under section

6015(b), (c), and (f) from the liability for tax attributable to

the failure to include in income the taxable portion of the

transfer refund distribution. We hold that she is not entitled

to such relief.

In our recent Court-reviewed case, Cheshire v. Commissioner,

115 T.C. ___ (2000), we discussed the history of old section 6013

and new section 6015 in detail, and we do not repeat that

discussion here.

Section 6015(b)(1) provides as follows:

(1) In general.--Under procedures prescribed by
the Secretary, if--

(A) a joint return has been made for a taxable
year;
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(B) on such return there is an understatement of
tax attributable to erroneous items of one individual
filing the joint return;

(C) the other individual filing the joint return
establishes that in signing the return he or she did
not know, and had no reason to know, that there was
such understatement;

(D) taking into account all the facts and
circumstances, it is inequitable to hold the other
individual liable for the deficiency in tax for such
taxable year attributable to such understatement; and

(E) the other individual elects (in such form as
the Secretary may prescribe) the benefits of this
subsection not later than the date which is 2 years
after the date the Secretary has begun collection
activities with respect to the individual making the
election,

then the other individual 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.

The requirements of subparagraphs (A) through (E) are stated in

the conjunctive; that is, a taxpayer must satisfy all of them to

be entitled to relief under section 6015(b)(1). There is no

dispute in the instant case that petitioner satisfies (A) and

(E); that is, that she made a joint return with her husband and

that an appropriate election for relief has been made.

Respondent, however, contends that petitioner fails to satisfy

subparagraphs (B), (C), and (D). In accordance with Cheshire v.

Commissioner, supra, we find that she does not satisfy

subparagraph (C).
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Cheshire, like the instance case, involved omitted income.

In that case, the taxpayer’s spouse received, and failed to

report, retirement distribution proceeds. The taxpayer was aware

of the receipt, and amount, of the distribution. We held that a

taxpayer who has actual knowledge of the underlying transaction,

such as the fact of the receipt of income and the amount thereof,

does not satisfy the requirement set out in section

6015(b)(1)(C). See Cheshire v. Commissioner, supra at ___ (slip

op. at 16). In the instant case, petitioner had actual knowledge

of the underlying transaction; she was aware that the

distribution had been received, and she was aware of the amount.

Thus, under the standard established in Cheshire, she does not

satisfy section 6015(b)(1)(C). Because petitioner does not

satisfy section 6015(b)(1)(C), we need not address whether she

satisfies section 6015(b)(1)(B) or (D); she is not entitled to

relief under section 6015(b).2

The statute offers a second opportunity for relief, in

section 6015(c)(1), which provides as follows:

(1) In general.--Except as provided in this
subsection, if an individual who has made a joint
return for any taxable year elects the application of
this subsection, the individual’s liability for any
deficiency which is assessed with respect to the return
shall not exceed the portion of such deficiency

2
Because petitioner knew about the entire transfer refund
distribution, she also is not entitled to an apportionment of
relief under sec. 6015(b)(2).
 - 11 -

properly allocable to the individual under subsection
(d).

Thus, section 6015(c)(1) allows a taxpayer who is eligible and so

elects to limit his or her liability to that portion of a

deficiency that is “properly allocable to” the taxpayer as

provided in section 6015(d). There is no dispute that no portion

of the deficiency would be properly allocable to petitioner under

section 6015(d). The dispute here is whether petitioner may

elect the application of section 6015(c). Section 6015(c)(3)

lists the criteria for electing the application of subsection

(c). Section 6015(c)(3)(A) and (B) lay out eligibility and

timing requirements for the election; respondent has conceded

that petitioner satisfies these requirements.3

The dispute in this case centers on subparagraph (C), which

provides as follows:

(C) Election not valid with respect to certain
deficiencies.--If the Secretary demonstrates that an
individual making an election under this subsection had
actual knowledge, at the time such individual signed the
return, of any item giving rise to a deficiency (or portion
thereof) which is not allocable to such individual under
subsection (d), such election shall not apply to such
deficiency (or portion). This subparagraph shall not apply
where the individual with actual knowledge establishes that
such individual signed the return under duress.

3
Respondent concedes petitioner meets the requirement of
sec. 6015(c)(3)(A)(i)(I) as a result of Mr. Mitchell’s death and
that an election should be deemed to have been made in the
petition.
 - 12 -

Thus, we are faced with the same question under section 6015(c)

that we addressed in Cheshire; namely, whether respondent has

demonstrated4 that petitioner had “actual knowledge * * * of any

item giving rise to a deficiency” within the meaning of section

6015(c)(3)(C). In Cheshire, we held that section 6015(c)(3)(C)

does not require the Commissioner to show that the electing

spouse had knowledge of the tax consequences arising from the

item giving rise to the deficiency or that the item reported on

the return was incorrect. Rather, “actual knowledge” for

purposes of section 6015(c)(3)(C):

is an actual and clear awareness (as opposed to reason
to know) of the existence of an item which gives rise
to the deficiency (or portion thereof). In the case of
omitted income * * *, the electing spouse must have an
actual and clear awareness of the omitted income. * * *
[Cheshire v. Commissioner, supra at ___; fn. ref.
omitted (slip op. at 19).]

In the instant case, petitioner had an actual and clear

awareness of the omitted income–-she knew when the transfer

refund distribution was received and the amount of the

distribution. Thus, despite the fact that petitioner was not

aware of the tax consequences arising from the transfer refund

distribution, or that her tax return was incorrect,5 under our

4
We note that in general under sec. 6015(c) the taxpayer
has the burden of proof, see sec. 6015(c)(2), but for purposes of
this provision, the Commissioner has the burden of proof, see id.
5
Petitioner and Mr. Browne gave conflicting testimony
(continued...)
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standard in Cheshire she does not qualify for relief pursuant to

section 6015(c).

The final opportunity for relief under the statute lies in

section 6015(f), which provides as follows:

(f) Equitable Relief.--Under procedures prescribed
by the Secretary, if–

(1) taking into account all the facts and
circumstances, it is inequitable to hold the
individual liable for any unpaid tax or any
deficiency (or any portion of either); and

(2) relief is not available to such
individual under subsection (b) or (c),

the Secretary may relieve such individual of such
liability.

We have jurisdiction to review, for abuse of discretion, the

Commissioner’s denial of relief under this subsection. See

Butler v. Commissioner, 114 T.C. 276, 292 (2000); see also

Fernandez v. Commissioner, 114 T.C. 324 (2000). In this case,

petitioner significantly benefited from the omitted income. See

Kistner v. Commissioner, T.C. Memo. 1995-66 (cited in Butler v.

Commissioner, supra at 291). Among other things, she made

5
(...continued)
concerning whether Mr. Browne advised petitioner that Mr.
Mitchell’s failure to effect a rollover of the transfer refund
distribution within 60 days of receipt could produce adverse tax
consequences. On the basis of the demeanor evidence, as well as
Mr. Browne’s apparent involvement in the preparation of a
counterfeit Form 1099 to be submitted to respondent’s agents, we
find petitioner’s version of events more credible and conclude
that she had no knowledge that her 1991 return when signed was
incorrect.
 - 14 -

repairs and improvements to her residence; she paid down the

mortgage; she paid her and Mr. Mitchell’s medical bills; and she

paid her children’s loans and college expenses. She also

established a trust for her children in the amount of $132,000.

Her spending over the 3 years 1992 through 1994, including the

trust fund, totaled more than $570,000. In short, she used the

money from the transfer refund to the considerable benefit of

herself and her family. These expenditures, while no doubt

generous and well intentioned, nevertheless indicate the receipt

of income far in excess of that previously available as normal

support. See Terzian v. Commissioner, 72 T.C. 1164, 1172 (1979)

(cited in Butler v. Commissioner, supra at 291). We therefore

conclude that respondent did not abuse his discretion in denying

petitioner relief under section 6015(f).

To reflect the foregoing,

Decision will be entered

for respondent.