T.C. Memo. 2006-24
UNITED STATES TAX COURT
PHYLLIS E. CAMPBELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6772-04. Filed February 15, 2006.
Robert E. McKenzie and Kathleen M. Lach, for petitioner.
Kathleen C. Schlenzig, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Petitioner challenges respondent’s
determination that she is not entitled to relief from joint and
several liability under section 6015(b) or, in the alternative,
under section 6015(f) for the taxable year 1983.1 Petitioner
1
Unless otherwise indicated, all section references are to
(continued...)
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seeks relief from respondent’s determination of a joint and
several tax liability (including interest) of $2,884,120.91. As
explained herein, we find petitioner is entitled to relief under
section 6015(b).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of fact are incorporated herein by this
reference. Petitioner resided in Lampe, Missouri, at the time her
petition was filed. Petitioner has been married to Ronald
Campbell (Mr. Campbell) since 1968. Petitioner has an
undergraduate degree in sociology and a master’s degree in
special education. In addition, petitioner obtained a licensed
practical nurse (LPN) certification in 1994. During the year at
issue, petitioner was primarily a homemaker. At the present
time, petitioner is employed at Skaggs Community Hospital as an
LPN.
Petitioner’s Relationship With Ronald Campbell
Petitioner did not participate in and had little knowledge
of Mr. Campbell’s business matters. Mr. Campbell was a
commodities broker and trader. During their marriage, petitioner
paid the household expenses from her personal checking account
that Mr. Campbell funded through wire transfers from a
1
(...continued)
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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commodities account in petitioner’s name at Refco, Inc. (Refco),
a trading clearinghouse. Mr. Campbell stated that he transferred
approximately $100,000 to petitioner’s account every few months.
Petitioner’s Assets and Liabilities
On or about February 1, 1983, the Campbells purchased a home
in Naperville, Illinois, for $321,000. On August 16, 1982, Mr.
Campbell had transferred $1 million to petitioner’s personal
account from profits in petitioner’s Refco account by securing a
check from Refco issued to petitioner for that amount.
Petitioner used those funds to purchase the home and several
certificates of deposit. The house was not subject to a mortgage
loan. Petitioner and Mr. Campbell resided in the Naperville home
from February 1 through December 31, 1983. Sometime in 1990, the
Campbells sold one of two lots on which the Naperville home was
located for approximately $165,000. In 1993, they sold the
remaining lot for approximately $393,000. In 1990, the Campbells
purchased a home in petitioner’s name in Lampe, Missouri (the
Lampe home), for approximately $181,000. The Lampe home has
remained an asset exclusively owned by petitioner. They used
some of the proceeds from the sale of the Naperville property to
purchase the Lampe home.
As of the end of the taxable year 2000, petitioner had an
individual retirement account with a fair market value of
$35,833. As of August 14, 2003, there has been no mortgage or
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other encumbrance on the Lampe home. As of March 3, 2005, the
Lampe home had an approximate fair market value of $183,000.
Petitioner had a balance of approximately $25,000 in her
retirement account at Skaggs Community Hospital as of the date of
trial. In addition, petitioner owned a 1993 Ford Explorer at the
time of trial. Petitioner had no other assets of significant
value.
Petitioner’s Account at Refco
The commodities trading account in petitioner’s name with
Refco was opened in 1979 under her Social Security number by Mr.
Campbell. Mr. Campbell directed the trading activity in this
account. During the taxable year 1983, petitioner had a net gain
of $3,505,382 from trades in her Refco account. Petitioner did
not have knowledge of this gain. The account statements showing
the gains and losses in petitioner’s account were addressed to
petitioner and mailed to her home address; however, petitioner
asserts that she did not open them. Petitioner stated that she
handed over the unopened statements to Mr. Campbell. Petitioner
maintained one or more commodity trading accounts with Refco
until at least December 31, 1989.
Petitioner never had any control over the funds in her Refco
account. An examination of her statements from Refco reveals a
fluctuating balance, evidencing a constant inflow and withdrawal
of funds. The only access petitioner had to her account was
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indirectly through the allowance that Mr. Campbell would deposit
in her bank account in order for her to be able to write the
family checks. Even when petitioner bought the Naperville home
in 1982, she did so with money that Mr. Campbell gave to her from
the profits in her account, rather than withdrawing the funds
herself. Petitioner had no knowledge of the trading activities,
nor was she aware of the balance in the account at any given
time.
Mr. Campbell’s Trading Activities
Mr. Campbell directed trading activities for his own account
and the accounts of others, including one or more accounts owned
by petitioner. During the taxable year 1983, Mr. Campbell held a
5-percent partnership interest in Refco Foods, Ltd., a business
that bought, resold, and hedged meat products. Refco Foods,
Ltd., is a distinct entity from Refco, which as previously
discussed is a trading clearinghouse in which Mr. Campbell has no
ownership interest. At the end of the taxable year 1983, Refco
Foods, Ltd., had a loss of approximately $2.6 million in its
futures spread income account.
During the same year, Mr. Campbell operated a business
called Refco Foods Too, a meat commodities trading company, as a
sole proprietorship. Refco Foods Too had net losses of
approximately $600,000 for the taxable year 1983. In addition,
during the taxable year 1983, Mr. Campbell was the president and
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sole shareholder of Campco, Inc., a C corporation. Campco, Inc.,
reported taxable income of $16,005 in its Federal income tax
return for the fiscal year ending August 31, 1983.
London Metal Exchange Transaction
Sometime in late 1983, Mr. Campbell had discussions with Tom
Meyers, the CFO of Refco Foods, Ltd., with respect to what has
been described as a London straddle (London straddle). The
London straddle was conducted through Van Lessen Richardson & Co.
(Van Lessen), a brokerage firm controlled by David Lamb, who was
one of the individuals organizing the London straddle. Mr.
Campbell stated that he funded the London straddle by
transferring approximately $2.6 million from petitioner’s Refco
trading account to the Van Lessen account in 1983. Mr. Campbell
explained in his testimony that he took roughly $2.6 million from
the trading account in his wife’s name at Refco as part of the
scheme to generate offsetting losses and he subsequently used
those funds to satisfy the losses in Refco Foods Too and Refco
Foods, Ltd. Petitioner was not aware that Mr. Campbell withdrew
the $2.6 million. Nor did Mr. Campbell consult her about making
the withdrawal. The funds were never returned to the account in
petitioner’s name and never benefited petitioner.
The purported losses generated by the transactions on the
London straddle were fictitious. During preparation of the
Campbells’ 1983 joint income tax return, Jack Esses, a tax return
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preparer with the firm of Marcus, Esses, & Associates, Ltd.,
informed Mr. Campbell that the $2,591,028 loss from the London
straddle would not be allowed by the Internal Revenue Service
(IRS). Nevertheless, Mr. Campbell instructed that the loss be
included in the 1983 joint Federal income tax return. Mr.
Campbell did not inform petitioner about Mr. Esses’s warning.
Mr. Campbell also never told petitioner about the London
straddle, nor that he made any kind of investment with the money
from her Refco account.
After the London straddle in 1983, Mr. Campbell was not able
to make any money on the commodities market. Mr. Campbell
explained in his testimony that the market substantially changed,
and he was unable to make any money from trading. After 1983,
the Campbells moved to a rural area of Missouri. Mr. Campbell’s
financial situation did not substantially improve until recently.
1983 Tax Return
The Campbells filed a joint income tax return for the 1983
taxable year. Mr. Esses prepared that return. The Campbells
reported adjusted gross income of $48,865 and a negative taxable
income of $57,956. Further, the Campbells reported an
overpayment of $314,229. As a result of the London straddle,
petitioner and Mr. Campbell reported a net loss of $2,591,028
from the Van Lessen account on Schedule D, Capital Gains and
Losses; Form 6781, Gains and Losses from Regulated Futures
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Contracts and Straddle Positions; and Statement 6, Regulated
Futures Contract Marked to Market, which were all attached to the
1983 joint Federal income tax return.
Petitioner signed the 1983 joint income tax return.
Petitioner did not review the 1983 income tax return before
signing it. Further, petitioner did not have any discussions
with, or make any inquiries of, Mr. Campbell or Mr. Esses about
the 1983 tax return before or at the time of signing it.
Audit of 1983 Return
In 1986, the Campbells’ joint Federal 1983 joint tax return
was chosen for audit. The audit of the 1983 joint tax return was
the result of a criminal complaint filed by the U.S. District
Attorney for the Central District of California against the
individuals who organized the London straddle. The complaint
alleged that the six individuals prearranged commodity
transactions using the Van Lessen brokerage firm. The Federal
Bureau of Investigation uncovered evidence of a prearranged
commodity transaction by Mr. Campbell that resulted in a loss of
$2,684,000 and a corresponding gain of $2,645,000 for Refco
Foods, Ltd. The $2.684 million loss generated the net loss of
$2,591,028 from the Van Lessen account claimed on the 1983 income
tax return.
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Appeals Process
The Campbells received a proposed notice of deficiency (30-
day letter) dated March 5, 1990, proposing a deficiency in income
tax for the taxable year 1983 of $2,371,975 and additions to tax
aggregating $1,886,986. The Campbells timely protested this
proposed deficiency, and the case was sent to the Appeals Office.
On September 25, 1998, the Campbells executed Form 870-AD, Waiver
of Restrictions on Assessment and Collection of Deficiency in Tax
and Acceptance of Overassessment, for the 1983 tax year (the 1983
settlement). In the 1983 settlement, the Campbells consented to
the assessment and collection of a $598,826 deficiency (not
including interest). Further, the Campbells conceded that
$435,401 of the deficiency resulted from a tax-motivated
transaction. On December 29, 1998, the Campbells received a
notice of assessment of $2,804,014.43. Under the Form 870-AD,
petitioner was entitled to file a claim for innocent spouse
relief under section 6015. In May 2002, Mr. Campbell submitted
an offer-in-compromise with respect to the 1983 tax liability of
$100,000, which respondent eventually accepted on the grounds of
doubt as to collectibility. The Campbells paid the $100,000 by
stripping their retirement accounts and borrowing money from
petitioner’s mother.
On or around April 14, 1999, petitioner submitted a Form
8857, Request for Innocent Spouse Relief (And Separation of
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Liability and Equitable Relief), requesting relief pursuant to
section 6015(b), (c), or (f) for the taxable year 1983. On
August 9, 2000, respondent sent petitioner an initial letter
(Letter 3277) notifying her that she was not entitled to relief
under section 6015(b) for the taxable year 1983. On September
22, 2000, petitioner sent a protest letter to respondent in
response to respondent’s notification letter outlining the
reasons that petitioner believed respondent’s determination was
incorrect.
Petitioner submitted a Form 433-A, Collection Information
Statement for Wage-Earners and Self-Employed Individuals, to
respondent on September 12, 2003. In petitioner’s Form 433-A,
she reported assets totaling $197,155 (including the Lampe home
valued at $183,000). Petitioner had no outstanding liabilities
and also reported gross monthly earnings of $2,061 and living
expenses of $1,674. Mr. Campbell also reported his assets and
liabilities in the Form 433-A.
Final Notice of Determination
On January 23, 2004, the Appeals Office sent to petitioner a
Notice of Determination Concerning Your Request for Relief From
Joint and Several Liability Under Section 6015 (notice of
determination) denying petitioner’s request for relief from joint
and several liability. The notice of determination denied relief
only under section 6015(f) and did not mention section 6015(b).
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However, the report by the Appeals officer accompanying the
notice of determination denied petitioner relief under section
6015(b) because (1) petitioner had actual or constructive
knowledge of all or part of the understatement, and (2) the
Appeals officer determined that it was not inequitable to hold
petitioner liable for the deficiency. The notice of
determination stated that petitioner was not entitled to relief
from joint and several liability for the taxable year 1983 under
section 6015(f). In making this determination, the Appeals
officer evaluated petitioner’s request under Rev. Proc. 2003-61,
2003-2 C.B. 296.2
On April 22, 2004, petitioner timely filed a petition with
this Court under section 6015(e) seeking review of respondent's
determination.
2
Rev. Proc. 2003-61, 2003-2 C.B. 296, is effective only for
requests for relief filed on or after Nov. 1, 2003, or requests
for relief pending on Nov. 1, 2003, for which no preliminary
determination letter had been issued as of Nov. 1, 2003. The
request for relief in this case was filed on Apr. 14, 1999, and a
preliminary determination letter denying petitioner relief was
issued on Aug. 9, 2000. Therefore, Rev. Proc. 2000-15, 2000-1
C.B. 447, should have been used to consider this case. There is
no basis to conclude, however, that the Appeals officer would
have reached a different conclusion under Rev. Proc. 2000-15,
supra.
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OPINION
Generally, married taxpayers may elect to file a joint
Federal income tax return. Sec. 6013(a). Section 6013(d)(3)
provides that taxpayers filing a joint return are jointly and
severally liable for all taxes due. However, under certain
circumstances, section 6015 provides relief to taxpayers seeking
to be relieved from joint and several liability. Section 6015
offers three types of relief: (1) Full or partial relief under
section 6015(b); (2) proportionate relief under section 6015(c);
and (3) equitable relief under section 6015(f). Petitioner seeks
relief from joint and several liability under section 6015(b), or
in the alternative, section 6015(f). We have jurisdiction to
determine whether equitable relief is available to petitioner for
the deficiency in tax shown on her joint return. See Ewing v.
Commissioner, 118 T.C. 494, 502 (2002).
The taxpayer who files a petition under section 6015(e)
generally bears the burden of proof with certain exceptions not
applicable in this case. Rule 142(a); Alt v. Commissioner, 119
T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004);
Jonson v. Commissioner, 118 T.C. 106, 113 (2002), affd. 353 F.3d
1181 (10th Cir. 2003); Baumann v. Commissioner, T.C. Memo.
2005-31. However, the burden of proof issue does not influence
the outcome of this case because our decision is based on the
preponderance of the evidence. See Blodgett v. Commissioner, 394
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F.3d 1030, 1035 (8th Cir. 2005), affg. T.C. Memo. 2003-212.
Petitioner’s Claim for Innocent Spouse Relief: Section 6015(b)
Although the final notice of determination did not
specifically mention section 6015(b), we believe that it was
respondent’s intent, as reflected in the report of the Appeals
officer accompanying the notice, to deny relief under section
6015(b) as well as section 6015(f). See Aranda v. Commissioner,
432 F.3d 1140, 1144 (10th Cir. 2005) (“We are not concerned with
legalities, but with intent.”), affg. T.C. Memo. 2003-306. We
believe that the omission in the final notice of determination
was a result of careless drafting. Therefore, we review
respondent’s determination under section 6015(b) and (f).3 To
qualify for relief from joint and several liability under section
6015(b), a taxpayer must establish:
(A) a joint return has been made for a taxable
year;
(B) on such return there is an understatement of
tax attributable to erroneous items of 1 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;
3
Petitioner does not argue that she suffered any prejudice
as a result of this omission. The petition seeks this Court’s
review under sec. 6015(b) and (f), and respondent does not
contest such review. However, since we have decided petitioner
is entitled to relief under sec. 6015(b), it is unnecessary for
us to analyze whether petitioner is entitled to relief under sec.
6015(f).
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(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 * * * 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 * * *.
Because these requirements are stated in the conjunctive, a
requesting spouse must satisfy each requirement to qualify for
relief from joint and several liability under section 6015(b).
Alt v. Commissioner, supra at 313. Respondent concedes that
petitioner meets the three requirements of subparagraphs (A),
(B), and (E). Thus, we shall address only the application of
section 6015(b)(1)(C) and (D).
1. Section 6015(b)(1)(C): Know or Reason To Know
A spouse seeking relief under section 6015(b) must not have
known or had reason to know at the time of signing a joint return
that there was an understatement of tax on the return. Sec.
6015(b)(1). The general rule in an omission of income case is
that the relief-seeking spouse knew or had reason to know of an
understatement of tax if she knew of the transaction that gave
rise to the understatement. Erdahl v. Commissioner, 930 F.2d
585, 589 (8th Cir. 1991), revg. T.C. Memo. 1990-101; Jonson v.
Commissioner, supra at 115. However, in deduction cases, the
Court of Appeals for the Eighth Circuit has adopted a different
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standard, following Price v. Commissioner, 887 F.2d 959 (9th Cir.
1989). Erdahl v. Commissioner, supra at 589.
Under this standard, the Court inquires whether a spouse has
reason to know if “‘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.’” Id. at
590 (quoting Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th
Cir. 1989), affg. T.C. Memo. 1988-63). The more the
relief-seeking spouse knows about a transaction, “‘the more
likely it is that she will know or have reason to know that the
deduction arising from that transaction may not be valid.’” Id.
at 590 n.6 (quoting Price v. Commissioner, supra at 963 n.9).
The duty to inquire may arise when the relief-seeking spouse has
notice that a particular deduction could result in a substantial
understatement. Id. The failure to inquire “‘may result in
constructive knowledge of the understatement’”. Id. at 590
(quoting Price v. Commissioner, supra at 965). The factors
considered in deciding whether the relief-seeking spouse had a
reason to know or a duty to inquire include: “‘the spouse's
level of education, [her] involvement in family financial
affairs, the evasiveness or deceit of the culpable spouse, and
any unusual or lavish expenditures inconsistent with the family's
ordinary standard of living.’” Id. at 591 (quoting Guth v.
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Commissioner, 897 F.2d 441, 444 (9th Cir. 1990), affg. T.C. Memo.
1987-522).
In applying these factors, we note that petitioner’s
education did not reflect a substantial background in tax or
financial matters. Petitioner’s role in the family finances was
largely limited to paying the family expenses. Petitioner
received money to pay those expenses from Mr. Campbell, who
deposited “$100,000 or so” from his trading profits every few
months.
Even though petitioner was the technical owner of the Refco
account that generated large profits in 1983, we find that she
was only a nominee and had no control over the funds in the
account. Petitioner’s only access to the account was from the
allowance she received from Mr. Campbell that he deposited in her
personal bank account. Petitioner stated that she never asked
him to deposit any money. Petitioner was aware that she received
a check issued to her in the amount of $1 million in 1982. Part
of the $1 million was used to purchase the family home in
Naperville, Illinois. However, Mr. Campbell explained in his
testimony that he took the money out of petitioner’s account to
buy the home. Petitioner had no involvement in Mr. Campbell’s
trading activities or in particular the London straddle. Mr.
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Campbell never discussed the details of his trading activities
with petitioner.
Further, the totality of the circumstances indicates that
Mr. Campbell was evasive about the family finances. Although the
financial statements from petitioner’s Refco account were mailed
directly to her home address, Mr. Campbell had complete control
over the cashflow into and out of her account. He treated the
funds in petitioner’s Refco account as available for use in
offsetting losses in his other trading activities. Mr. Campbell
did not consult her when he withdrew $2.6 million from her Refco
account to invest in the London straddle. In addition, Mr.
Campbell failed to inform petitioner that their accountant warned
him that the loss resulting from the London straddle would be
disallowed. We find that Mr. Campbell’s act of depriving
petitioner of the benefit of the money earned in her account and
using it to finance a tax-motivated transaction without informing
her amounts to evasive conduct.
We next address the issue of whether there is evidence of
any substantial unexplained improvement in the family’s standard
of living. Petitioner did not benefit from the underreported
income. The money invested into the London straddle from
petitioner’s account was never returned to her. There is
evidence that the Campbells’ lifestyle began to deteriorate in
1983, and it continued to do so over the next decade. Because of
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Mr. Campbell’s subsequent difficulties in the futures market, the
Campbells were compelled to move from an affluent area of the
Chicago suburbs to a rural area in Missouri, substantially
downgrading their standard of living. Petitioner was forced to
strip her retirement account and borrow money from her mother to
pay for her husband’s $100,000 settlement with the IRS. All of
these factors point to the conclusion that the Campbells’
standard of living deteriorated, rather than improved, after the
London straddle.
Taking all the facts and circumstances into consideration,
we hold that petitioner did not have actual knowledge of the
London straddle. Given this holding, we must decide whether a
reasonably prudent taxpayer in petitioner’s circumstances had
reason to know that the deduction was false or a duty to inquire
about the deduction on the return.
We conclude that petitioner did not have reason to know
about the false deduction. Petitioner has established that she
had no knowledge of the underlying transaction that gave rise to
the deficiency. She was not involved in Mr. Campbell’s business
affairs, she did not know about the London straddle, and she did
not know that Mr. Campbell financed the London straddle with
money taken from her account. We believe that petitioner’s
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status as a nominee with no control over the funds in the account
dissociates her from the London straddle.
As stated previously, petitioner did not derive a
significant benefit from the gains in her account. Most of
petitioner’s $3.5 million gain in 1983 was used by Mr. Campbell
to offset the losses he sustained in Refco Foods Too. The money
invested in the London straddle was never returned to petitioner.
As a result of the London straddle transactions, petitioner lost
access to $2.6 million in her Refco account, and there is no
evidence that petitioner benefited from the $314,000 tax refund
the Campbells received from their 1983 taxes.
Further, the London straddle was a series of sophisticated
transactions that looked legitimate on paper. A reasonable
person with petitioner’s educational background, devoid of any
specific knowledge in options trading, could not be expected to
discover that the trades were fictitious. It took a complex
Federal investigation to figure out that the trades were not
legitimate. As the Court of Appeals for the Second Circuit
commented when it considered the status of a spouse whose husband
invested in a transaction designed as an income tax shelter:
“‘[courts] recognize that in the bewildering world of tax shelter
deductions, few experts, let alone laypersons, easily discern the
difference between a fraudulent scheme and an exceptionally
advantageous legal loophole in the tax code.’” Resser v.
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Commissioner, 74 F.3d 1528, 1537 (7th Cir. 1996) (quoting
Friedman v. Commissioner, 53 F.3d 523, 525 (2d Cir. 1995), affg.
in part and revg. in part T.C. Memo. 1993-549), revg. and
remanding T.C. Memo. 1994-241. Therefore, petitioner had no
reason to suspect that the losses associated with the London
straddle were fictitious.
Respondent argues that petitioner had a duty to inquire.
First, respondent implies that the large deduction on the return
should have caused petitioner to inquire as to the source of the
deduction. Citing Hayman v. Commissioner, 992 F.2d 1256, 1262
(2d Cir. 1993), affg. T.C. Memo. 1992-228, respondent asserts
that “it is well established that a spouse cannot be relieved of
liability by turning a blind eye to dramatically large deductions
fully disclosed on the returns which would put the spouse on
notice that further inquiry would be needed.”
In the Court of Appeals for the Eighth Circuit, the court to
which this case is appealable, the presence of large deductions,
standing alone, is not sufficient to trigger a duty of inquiry;
it is a factor that may be considered in the totality of the
circumstances.4 See Erdahl v. Commissioner, 930 F.2d at 591.
Therefore, we may not impose a duty to inquire based solely on
4
We are bound by the Court of Appeals for the Eighth
Circuit’s view because of the Golsen rule. See Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971).
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the large deductions contained in the return. The return was
prepared by a professional C.P.A., and petitioner had no reason
to question its correctness. See Price v. Commissioner, 887 F.2d
at 963; Shea v. Commissioner, 780 F.2d 561, 566 (6th Cir. 1986),
affg. in part and revg. in part T.C. Memo. 1984-310; Padgett v.
Commissioner, T.C. Memo. 1987-130 (noting the complexity of the
tax information and concluding that neither the spouse nor “any
reasonable person under her circumstances” could have analyzed
the transactions without “a sophistication in tax return
preparation which she did not have * * * and should not be
expected to have”). Further, petitioner has no background in
options trading. Even if she had reviewed the return, a large
trading loss would not have raised a red flag because the nature
of her husband’s option trading business was to lose and gain
millions of dollars at a time.
Respondent argues that petitioner had a duty to inquire
because the Campbells paid no tax for 1983 and received a refund
of $314,229. We disagree. Because of the complexity of the
transactions at issue and the fact that Mr. Campbell took
petitioner’s money without her knowledge, we would not expect her
to realize that Mr. Campbell was taking aggressive tax losses
against the gains in her account. See Resser v. Commissioner,
supra at 1538 (noting that “traders in highly volatile
instruments [could] expect to have large realized gains or losses
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from year to year, and thus experience some years with large
taxes or others with no tax”).
Accordingly, we hold that petitioner did not have reason to
know that the London straddle deduction was illegitimate,
nor did she have a duty to inquire into the presence of the
deduction on the 1983 income tax return.
2. Section 6015(b)(1)(D): Inequity
We take into account all the facts and circumstances in
deciding whether it is inequitable to hold the relief-seeking
spouse liable for a deficiency. Sec. 6015(b)(1)(D). Because
this requirement is similar to the requirement of former section
6013(e)(1)(D), cases interpreting that former section such as
Erdahl v. Commissioner, 930 F.2d 585 (8th Cir. 1991), remain
instructive to our analysis. Butler v. Commissioner, 114 T.C.
276, 283 (2000). The material factors most often cited and
considered are whether there has been a significant benefit to
the spouse claiming relief and whether the failure to report the
correct tax liability on the joint tax return results from
concealment, overreaching, or any other wrongdoing on the part of
the other spouse. Alt v. Commissioner, 119 T.C. at 314; Jonson
v. Commissioner, 118 T.C. at 119. Normal support is not
considered a significant benefit. Jonson v. Commissioner, supra
at 114.
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We have already stated why we believe petitioner did not
benefit from the London straddle. She lost access to $2.6
million in her account, and she never saw that money again. As
we have noted, the Campbells’ lifestyle significantly declined
after 1983, and they were forced to move because of Mr.
Campbell’s misfortunes in the options trading business.
Further, we believe imposing a tax liability of more than
$2.8 million as a result of a disallowed transaction of which
petitioner had no actual or constructive knowledge would be
extremely inequitable. Despite Mr. Campbell’s recent success in
his trading, we believe that petitioner would suffer severe
economic hardship if she faced such a liability. She is in her
sixties with a limited number of working years. She has only a
small retirement account, her home, and a 1993 Ford explorer.
Respondent argues that it is not inequitable to hold
petitioner solely liable for the deficiency because the $3.5
million sheltered by the London straddle was attributable to her.
Respondent further suggests that petitioner misled him during the
Appeals process because she did not explicitly tell him that the
account generating the gain sheltered by the London straddle
deduction belonged to her. We disagree.
We have found that petitioner’s involvement in the Refco
account was in her capacity as a nominee only. Mr. Campbell
stated that his friends at Refco opened the account for her.
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Further, petitioner has credibly established that she was not
involved in the trading associated with the account, nor did she
have control of any of the funds in her account. We therefore do
not find her nominal ownership significant in any aspect of this
case. Perhaps petitioner could have been more forthcoming, but
petitioner did not mislead respondent and correctly emphasized
that it was Mr. Campbell’s trading activities that generated the
claimed loss from the London straddle.
Accordingly, we find that it would be inequitable to hold
petitioner liable for the deficiency in this case.
Conclusion
Petitioner is entitled to relief under section 6015(b) since
the preponderance of the evidence indicates that she satisfied
the requirements therein.
To reflect the foregoing,
Decision will be
entered for petitioner.