2001 Tax Ct. Memo LEXIS 88">*88 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, JUDGE: Respondent determined a deficiency in petitioners' Federal income tax of $ 16,525 and an accuracy-related penalty under
After concessions, 2 the only issue for decision 3 is whether David R. Braden is entitled to relief from liability under
2001 Tax Ct. Memo LEXIS 88">*89 FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference. At the time the petition was filed, petitioner resided in Las Vegas, Nevada.
Petitioners were married in October 1981. During 1995, they resided with their minor child, two other children, 5 and a grandchild in Las Vegas, Nevada. Petitioners filed a joint Federal income tax return for 1995.
Petitioner attended college for 3 years, majoring in animal science. While in college, petitioner did not take any courses in the fields of finance or business. Petitioner became a police officer and, in approximately 1984, took a position with the Las Vegas Police Department, where he was employed throughout 1995.
Ms. Braden graduated from high school and attended one semester of college. During 1995, she maintained petitioners' household and took care of the children. During the course of petitioners' 2001 Tax Ct. Memo LEXIS 88">*90 marriage, Ms. Braden was responsible for paying petitioners' bills from funds supplied by petitioner and managing their financial affairs. Petitioner deposited his payroll checks directly into a joint checking account maintained by petitioners at Network Federal Credit Union; Ms. Braden used this account to pay petitioners' bills.
Petitioner did not review petitioners' bills or bank statements and only rarely discussed finances with Ms. Braden or paid a bill himself.
In approximately August 1995, petitioners moved into a newly constructed house. Ms. Braden's father, who had been diagnosed with terminal cancer several months earlier, moved into petitioners' new home with them and remained with them until his death in September 1995.
Ms. Braden and her brother were the heirs of their deceased father; Ms. Braden was appointed executrix of her father's estate. As executrix, Ms. Braden met with the estate's probate counsel regarding estate matters. Petitioner sometimes attended these meetings but did not assist Ms. Braden in performing her duties as executrix.
At some point during 1995, Ms. Braden received distributions from several individual retirement accounts (IRA's) owned by her2001 Tax Ct. Memo LEXIS 88">*91 father at the time of his death. Although petitioner was aware that Ms. Braden had received the distributions, he did not know that the distributions came from IRA's or that the distributions were taxable for Federal income tax purposes. He believed that the distributions simply represented nontaxable distributions from the estate of Ms. Braden's father. His belief was based on conversations he had with Ms. Braden, the estate's probate counsel, and a retired Internal Revenue Service (IRS) special agent. At a meeting held shortly after Ms. Braden's father died, the estate's probate counsel told petitioners there would be no tax on the distributions because inheritances under $ 650,000 were exempt from tax. The retired IRS special agent, whom petitioner had met at a class on financial crimes investigations, also told petitioner, in response to petitioner's question regarding the taxability of an inheritance, that inheritances under $ 650,000 were exempt from tax.
Ms. Braden also received interest earned on certain accounts owned by her father at his death, but the interest income was not reported on petitioners' 1995 return. Petitioner did not know that part of the distributions received2001 Tax Ct. Memo LEXIS 88">*92 by Ms. Braden consisted of interest income. 6 Petitioner believed that all of the funds distributed to Ms. Braden as a result of her father's death were simply an inheritance from Ms. Braden's father. 7
Ms. Braden used approximately $ 10,000 of the distributions she received as a result of her father's death to pay her father's hospital bills and gave half of the remaining money to her brother. Ms. Braden spent2001 Tax Ct. Memo LEXIS 88">*93 the balance of the distributions to construct a block wall at petitioners' home and to purchase furniture, furnishings, a big-screen television, a computer, a hot tub, and landscaping for petitioners' home, a cruise for herself and her sister-in-law, and stereos for the four children who were living with petitioners at the time. Ms. Braden also used some of the money to help purchase two cars -- a Toyota Avalon for which she paid approximately $ 15,000 and a Toyota Tercel for which she paid approximately $ 11,000. Petitioner contributed to the purchase of the cars by trading in a 1995 Chevrolet pickup truck that he had purchased new; the trade-in value was credited against the purchase price of one or both of the cars.
In May 1996, petitioners separated. Petitioner moved out of the family home; Ms. Braden remained in the home. Petitioner continued to deposit his payroll checks into the joint account. Ms. Braden was supposed to pay the mortgage and utilities for the family home but did not do so for a period of approximately 4 months. The delinquency, which petitioner did not discover until the family home was about to be sold, was remedied with funds from petitioner and from the sale2001 Tax Ct. Memo LEXIS 88">*94 of the family home.
In July 1997, petitioners divorced. In connection with the divorce, petitioners sold their home. Petitioner retained no part of the sale proceeds. Ms. Braden retained the furniture and furnishings she purchased with the distributed funds, as well as other property acquired during petitioners' marriage, with the exception of a big- screen television and VCR, a vacuum cleaner, a couch and matching chair, and a computer and desk that petitioner received as part of petitioners' divorce settlement.
Before petitioners separated, petitioner prepared petitioners' 1995 joint Federal income tax return. He did not report the distributions attributable to Ms. Braden's father as income on that return because he believed the funds to be nontaxable. Petitioner did not know the distributions consisted of IRA withdrawals and interest income, nor did he know the proper characterization of the distributions for Federal income tax purposes until he was contacted by respondent's agent.
In the notice of deficiency, respondent determined that Ms. Braden received distributions from the IRA's of her deceased father, the taxable portion of which totaled $ 61,681. After allowing a $ 5,0002001 Tax Ct. Memo LEXIS 88">*95 death benefit exclusion, respondent determined that petitioners failed to report $ 56,681 of the IRA distributions as income on their 1995 joint return. Respondent also determined that petitioners failed to report interest income of $ 754 on their 1995 joint return.
OPINION
In 1971, Congress enacted
In 1984,
Many taxpayers tried unsuccessfully to obtain relief under
Petitioner seeks relief under
2001 Tax Ct. Memo LEXIS 88">*98 (1) In general. -- Under procedures prescribed by the
Secretary, if --
(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;
(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 individual2001 Tax Ct. Memo LEXIS 88">*99 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.
A taxpayer must satisfy each requirement under subparagraphs (A) through (E) to be entitled to relief under
There is no dispute that petitioner satisfies subparagraphs (A), (B), and (E). Petitioner made a joint return with Ms. Braden, there is an understatement of tax attributable to erroneous items of Ms. Braden, and respondent does not dispute that petitioner made a qualifying election as required by
B. THE NO KNOWLEDGE OF THE UNDERSTATEMENT REQUIREMENT OF SECTION
6015(b)(1)(C)
Petitioner's case is appealable to the Court of Appeals for the Ninth Circuit. In omitted income cases under former
The gist of petitioner's argument is that he did not know or have reason to know that the distributions his wife received consisted of IRA withdrawals and interest income. Petitioner argues, in effect, that (1) he did not have actual knowledge of the understatement and (2) he did not have sufficient knowledge of2001 Tax Ct. Memo LEXIS 88">*101 the underlying transaction to give him reason to know of the understatement.
We are satisfied from our review of the record in this case that petitioner did not have actual knowledge of the understatement, or of the transactions that produced the omitted income giving rise to the understatement, when he prepared and filed petitioners' joint return for 1995. In fact, respondent has not argued that petitioner knew of the understatement. Respondent argues only that, because petitioner knew that Ms. Braden had received the distributions as a result of her father's death, petitioner had knowledge of the transaction giving rise to the understatement and, therefore, he knew or had reason to know of the understatement within the meaning of
A taxpayer has reason to know of an understatement if a reasonably prudent taxpayer in his position at the time he signed the return could be expected to know that the return contained the understatement. See
Applying the factors used to determine whether a taxpayer had reason to know of the understatement confirms that petitioner did not have constructive knowledge of the underlying transaction or of the understatement resulting from the transaction. There is nothing in the record to support a conclusion that petitioner, a high school graduate with 3 years of college education, had any involvement with, or knowledge of, the financial affairs of Ms. Braden's father prior to the father's death. After the father's death, petitioner knew only that Ms. Braden was entitled to receive, and did receive, an inheritance. Petitioner's involvement with petitioners' joint financial affairs generally was limited to depositing his paycheck in a joint account with Ms. Braden. Ms. Braden paid most of petitioners' bills and managed their financial affairs. Ms. Braden, the executrix of her father's estate, also handled the financial matters flowing from her father's death. Although Ms. Braden certainly was in a position to know that the distributions came from her father's IRA's, the record does not contain any evidence that she or anyone else told petitioner that the distributions consisted of IRA withdrawals2001 Tax Ct. Memo LEXIS 88">*104 and interest income or gave him any reason to conclude the distributions were taxable. 9 There were no lavish or unusual expenditures following the receipt of the distributions that were inconsistent with petitioner's belief that Ms. Braden had received a nontaxable inheritance from her father's estate. Moreover, although petitioner inquired about the tax consequences of the distributions on at least two occasions, the information he received confirmed his belief that the distributions were part of Ms. Braden's nontaxable inheritance.
2001 Tax Ct. Memo LEXIS 88">*105 What constitutes sufficient knowledge of the transaction in this case can best be illustrated by comparing our decisions in
In Cheshire, the taxpayer had been informed by her husband that he was contemplating retirement and was eligible to receive a substantial sum of money from his retirement plan. The taxpayer knew that her husband subsequently received the distribution from his retirement plan. In fact, the taxpayer's husband showed the taxpayer the deposit slip reflecting the deposit of the retirement plan distribution and discussed with her the purposes for which the distribution would be used. See
In
As in
We hold that petitioner has satisfied the no knowledge of the understatement requirement of
We now turn to the final contested requirement,
We must evaluate all of the facts and circumstances in deciding whether it is inequitable to hold a taxpayer liable for the deficiency under the relief provisions of
Under former
In this case, our evaluation of the evidence regarding petitioner's lifestyle, expenditures, and other financial matters leads us to the conclusion that petitioner did not substantially benefit from the understatement. The family home was purchased with funds supplied by petitioner. Petitioner made a downpayment of approximately $ 13,000 toward the purchase price of the house (approximately $ 175,000) and supplied the funds to pay the mortgage during petitioners' marriage. When the family home was sold, petitioner retained none of the proceeds.
Ms. Braden did not contribute any part of the downpayment, nor did2001 Tax Ct. Memo LEXIS 88">*111 she supply the money to pay the monthly mortgage payments. After petitioners separated, Ms. Braden continued to live in the family home and was supposed to pay the mortgage and other household expenses. She did not do so. Arrearages owed to the mortgage, telephone, and gas and electric companies were paid out of proceeds from the sale of petitioners' home, and, to the extent that the sale proceeds were insufficient, petitioner paid the balance.
With part of the distributions, Ms. Braden purchased some furniture and furnishings for the family home and paid for some home improvements. In the divorce settlement, Ms. Braden kept all of petitioners' household furniture and furnishings, with the exception of a computer and desk, television, VCR, vacuum cleaner, and couch and matching chair. Both Ms. Braden and petitioner contributed to the purchase of two cars in 1995; Ms. Braden contributed cash, and petitioner contributed by trading in a 1995 pickup truck that he had purchased with his own funds.
Taking into account all the facts and circumstances, we are satisfied that petitioner did not benefit substantially from the understatement. Neither petitioner's use of the family home and its2001 Tax Ct. Memo LEXIS 88">*112 furniture and furnishings, nor his receipt of a few items of furniture and equipment as part of his divorce settlement amounted to a substantial benefit, particularly when his overall financial contribution to petitioners' household is taken into account. See
We conclude that it is inequitable to hold petitioner liable for that part of the deficiency attributable to the distributions received by Ms. Braden in 1995 and that, therefore, the requirement of
CONCLUSION
After carefully reviewing the record in this case, we hold that petitioner has satisfied each of the requirements of
To reflect the foregoing and the stipulation of settled issues,
Decision will be entered under Rule 155.
1. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. Petitioner Sharon F. Braden and respondent filed a stipulation of settled issues in which Ms. Braden conceded she is liable for a deficiency in income tax for taxable year 1995 in the amount of $ 16,525, and respondent conceded that Ms. Braden is not liable for the accuracy-related penalty under
3. The only other issues raised in the notice of deficiency are computational.↩
4. Following petitioners' divorce, Ms. Braden changed her name to Sharon Mueller. Since Ms. Braden has not moved to change the caption in this case to reflect her new surname, however, we refer to her in this opinion as Ms. Braden.↩
5. The relationship of these children to petitioners does not appear in the record.↩
6. We infer from the record as a whole that the accounts generating the omitted interest belonged to Ms. Braden's father before his death and that the omitted interest was part of the distributions made to Ms. Braden as a result of his death.↩
7. Although respondent claims that petitioner did not assert that he is entitled to relief from joint and several liability with respect to the omitted interest income, petitioner consistently took the position throughout the case that he believed the distributions Ms. Braden received as a result of her father's death were a part of her nontaxable inheritance.↩
8. Petitioner originally sought relief under former
9. Respondent relies upon our decision in
10. In