                        T.C. Memo. 2011-144



                      UNITED STATES TAX COURT



TIMOTHY LEE RICHARD, Petitioner, AND SUSAN LYNN ELLIS, Intervenor
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 29797-08.               Filed June 27, 2011.



     Adria Vondra, Scott Schumacher, and John Clynch, for

petitioner.

     Susan Lynn Ellis, pro se.

     Patsy Clarke, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Chief Judge:   Pursuant to section 7443A and Rules

180 and 183,1 this case was assigned to and heard by Special

     1
      Unless otherwise indicated, all section references are to
                                                   (continued...)
                                - 2 -

Trial Judge John F. Dean.   His recommended findings of fact and

conclusions of law were filed and served upon the parties on July

15, 2010.   Petitioner and respondent filed no objection to the

Special Trial Judge’s recommended findings of fact and

conclusions of law.

     Intervenor filed an objection thereto and attached a

document for our consideration.    The record was closed at the

conclusion of the trial.    We decline to reopen the record at this

time for purposes of admitting this document into evidence.

     After reviewing the record in this case and the report of

the Special Trial Judge, we adopt the recommended findings of

fact and conclusions of law of Special Trial Judge Dean as the

report of the Court.

     For 2004 respondent determined a deficiency of $23,483 in

Timothy Lee Richard (petitioner) and Susan Lynn Ellis’

(intervenor) Federal income tax and an accuracy-related penalty

of $4,697 under section 6662(a).    The issue for decision is

whether petitioner is entitled to relief from joint and several

liability pursuant to section 6015(c).2


     1
      (...continued)
the Internal Revenue Code as amended and in effect for the year
in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.

     2
      At trial petitioner abandoned his request for relief
pursuant to sec. 6015(b) and (f). Accordingly, the Court limits
                                                   (continued...)
                               - 3 -

                         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 by reference.   When petitioner filed his

petition, he resided in the State of Washington.

     For 2004 petitioner and intervenor filed a joint Federal

income tax return.3   On the joint return they reported total

income of $305,510, $275,821 of which was attributable solely to

intervenor.   On Schedule C, Profit or Loss From Business,

petitioner reported net profit of $13,569 from his investment

broker business.

     Petitioner and intervenor married on September 18, 1985.

During their marriage they maintained separate and joint bank

accounts.   Bank statements for their joint account were addressed

in both of their names and were delivered to their home address.

Both petitioner and intervenor had access to the mail.

     In the years leading up to 2004 petitioner encountered a

series of unfortunate medical events.   He suffered a heart attack

and had open heart surgery and was later diagnosed with prostate

cancer.   He was then forced to discontinue his work as an



     2
      (...continued)
its discussion to sec. 6015(c).
     3
      Respondent notified intervenor of petitioner’s request for
relief, and intervenor filed a notice of intervention on Mar. 5,
2009.
                              - 4 -

investment broker because of his persistent health concerns.     The

series of medical events caused a downward financial spiral for

both petitioner and intervenor.   They began to experience

considerable financial difficulty because of credit card debt and

an overrun of home construction costs.

     Petitioner and intervenor discussed possible solutions to

address their financial situation.    One possible solution they

discussed was borrowing from intervenor’s section 401(k)

retirement account (retirement account).    Following their

discussion, intervenor made an Internet request for a

distribution of $50,000 from her retirement account.    On

March 24, 2004, the distribution was deposited into petitioner

and intervenor’s joint account and the bank statement4 labeled

the deposit “Fidelity Investm Pension; Susan L. Ellis-Richard”.

Intervenor intended to withdraw the portion as a loan; however,

she never received the paperwork or otherwise satisfied the

statutory requirements to process the distribution as a loan.

Deposits into the joint account for the month of March totaled

$68,172.5




     4
      The joint account statement was dated Mar. 4 through Apr.
5, 2004, with an opening balance of $829.39 and a closing balance
of $42,760.12.
     5
      During 2004 intervenor’s earnings were direct deposited
into intervenor and petitioner’s joint bank account.
                                 - 5 -

     Over the course of the next month, petitioner wrote several

checks totaling $16,740.61 drawn on the joint bank account.6

Intervenor and petitioner also paid their mortgage and other

miscellaneous bills from their joint account in March 2004.

     Petitioner and intervenor did not report the distribution on

their 2004 joint Federal income tax return.

     Petitioner and intervenor divorced on July 14, 2006.

     In late 2006 petitioner and intervenor received a notice of

deficiency for their failure to report as income the $50,0007

distribution.    On June 18, 2007, petitioner filed Form 8857,

Request for Innocent Spouse Relief, requesting relief pursuant to

section 6015(b), (c), and (f).    Respondent sent to petitioner a

final Appeals determination denying his request for innocent

spouse relief.

                               OPINION

     Generally, married taxpayers may elect to file a joint

Federal income tax return.   Sec. 6013(a).   After making the

election, each spouse is jointly and severally liable for the




     6
      Three checks totaling $6,740.61 were presented for payment
in the month of March. The final check at issue for $10,000 was
presented for payment in mid-April.
     7
      In the notice of deficiency respondent determined that
petitioner and intervenor received and failed to report a $50,728
distribution from a retirement account. The notice of deficiency
also addressed additional unreported de minimis amounts
attributable to petitioner.
                                - 6 -

entire tax due.    Sec. 6013(d)(3); Cheshire v. Commissioner, 115

T.C. 183, 188 (2000), affd. 282 F.3d 326 (5th Cir. 2002).

     Relief from joint and several liability is available to

certain taxpayers under section 6015.    Under section 6015(c), an

individual who is eligible and so elects may limit his or her

liability to the portion of a deficiency that is properly

allocable to that individual as provided in section 6015(d).

Sec. 6015(c)(1).    Under section 6015(d)(3)(A), generally, any

item that gives rise to a deficiency on a joint return, e.g., the

unreported early distribution from intervenor’s retirement

account, shall be allocated to the individual filing the return

in the same manner as it would have been allocated if the

individual had filed a separate return for the taxable year.

     A taxpayer is eligible to elect the application of section

6015(c) if, at the time the election is filed, the taxpayer is no

longer married to or is legally separated from the individual

with whom the taxpayer filed the joint return to which the

election relates.    Sec. 6015(c)(3)(A)(i)(I).   The election under

section 6015(c) may be made at any time after a deficiency for

such year is asserted and no later than 2 years after the date on

which the Commissioner has begun collection activities with

respect to the taxpayer making the election.     Sec. 6015(c)(3)(B).

     Relief under section 6015(c) is not available to petitioner

if respondent demonstrates that petitioner had actual knowledge
                                - 7 -

of the item giving rise to the deficiency.    See sec.

6015(c)(3)(C); King v. Commissioner, 116 T.C. 198, 203 (2001).

Section 6015(c) does not require that the requesting spouse know

the tax consequences arising from the item giving rise to the

deficiency.    Cheshire v. Commissioner, supra at 194.     In the case

of omitted income, however, the requesting spouse “must have an

actual and clear awareness of the omitted income.”       Id. at 195.

We have observed that the applicable standard under section

6015(c) is the requesting spouse’s “actual subjective knowledge”.

Culver v. Commissioner, 116 T.C. 189, 197 (2001).    The

Commissioner must show, by a preponderance of the evidence, that

the requesting spouse had actual knowledge of the item giving

rise to a deficiency.    See sec. 6015(c)(3)(C); Culver v.

Commissioner, supra at 196.

     The item petitioner contests that gives rise to the

deficiency and is not allocable to petitioner is intervenor’s

retirement distribution.    There is no dispute that petitioner

satisfies section 6015(c)(3)(A) and (B) because he and intervenor

were no longer married when petitioner filed his petition and the

petition was filed timely.    The question remains whether

petitioner had actual knowledge at the time the joint return was

signed of “any item giving rise to a deficiency (or portion

thereof)”.    See sec. 6015(c)(3)(C).
                               - 8 -

     Intervenor testified that petitioner was aware of the

distribution; they had discussed it before she requested the

funds, he was present when she initiated the request for the

distribution, and after the distribution she told him that they

had received the funds.   Intervenor further alleged that in early

2004 petitioner and intervenor fell several months behind on the

mortgage and began receiving phone calls from their mortgage

company requesting payment.   After the distribution intervenor

testified that they were able to make their mortgage payments, an

expense of almost $15,000.8   She further testified that after

making their mortgage payments they no longer received phone

calls from their mortgage company.

     Intervenor admitted that before drawing large checks on the

joint account petitioner would first inquire of her whether

sufficient funds were available in the account and she would say

“yes, we do.   You can do that.”   She alleged, however, that with

other checks, presumably those for inconsequential amounts,

petitioner would not seek prior approval because “he assumed that

there was a couple of hundred dollars in there to cover it.”

Given intervenor’s substantial earnings during 2004 it would not



     8
      The joint bank account statement intervenor provided shows
a payment of only $8,421.66 made in favor of their mortgage
lender on Mar. 26, 2004. See Urban Redev. Corp. v. Commissioner,
294 F.2d 328, 332 (4th Cir. 1961) (the Court may reject a
taxpayer’s uncorroborated, self-serving testimony), affg. 34 T.C.
845 (1960).
                               - 9 -

have been unreasonable for petitioner to assume that the joint

account would contain sufficient funds to cover those

inconsequential expenses.

     Respondent alleges that the foregoing testimony and

petitioner’s own testimony show that petitioner had actual

knowledge of the retirement distribution.    Petitioner and

intervenor shared a joint bank account, petitioner had access to

and opened the mail, and the joint bank account statement clearly

labeled the deposit of the $50,000 retirement distribution.

Respondent also notes that before the $50,000 deposit the balance

of the joint account was $3,692.75 but that within 7 days of the

$50,000 deposit, petitioner wrote checks totaling over $6,500 and

within 1 month of the distribution he drew an additional $10,0009

on the account.   Respondent concludes that petitioner knew the

funds from the retirement account had been deposited into their

joint account because he used those funds.

     Although petitioner may have had “reason to know” of the

distribution as a result of his status as a joint signatory on

the joint account, the Court is not convinced that this fact

alone indicates that petitioner had “actual knowledge” of the


     9
      The record does not contain the joint bank account
statement for the month of April; therefore, petitioner’s
acknowledgment of the $10,000 check he drew on the joint account
in April 2004 does not conclusively show that he had actual
knowledge of the $50,000 distribution. The Court is unable to
conclude that a check in that amount was disproportionate as to
petitioner and intervenor’s income for April 2004.
                               - 10 -

distribution.   Petitioner testified that he did not review the

joint bank account statements and that intervenor primarily

handled the finances and balanced the joint checking account, an

assertion uncontested by intervenor.    Furthermore, petitioner’s

expenditures following the distribution were not so extraordinary

as to signal that he was aware of the availability of additional

funds beyond intervenor’s usual earnings.   During March 2004,

deposits into petitioner and intervenor’s joint account,

excluding the $50,000 distribution, totaled $18,172.   The checks

petitioner drew on the account in March 2004 accounted for only

$6,740.61 of that amount.   Attempting to circumvent this fact,

respondent notes that the balance of the joint account

immediately before the $50,000 deposit was less than $4,000, and

that petitioner was aware of the $50,000 deposit because after

the deposit he made draws on the joint account in excess of

$4,000.    But on March 26, 2004, 2 days after the $50,000 deposit,

an additional amount of $6,602 was deposited into the joint

account.   Therefore, when petitioner’s checks were presented for

payment, the joint account contained sufficient funds to cover

the checks, even without the $50,000 distribution.

     Petitioner credibly testified that he was unaware of

intervenor’s request for and receipt of the $50,000 distribution.

Petitioner admits that he and intervenor discussed the

possibility of obtaining a loan from her retirement account but
                              - 11 -

states that he was unaware that she had actually obtained a

distribution from her retirement account.     He alleges that

although he maintained a joint checking account with intervenor,

she primarily wrote the checks drawn on the joint account and

that he wrote checks drawn on the joint account only when he was

instructed to do so by intervenor.     He also admitted that he

opened the mail sent to their home but would put the bank

statements aside for intervenor to “deal with”.     Petitioner cites

Culver v. Commissioner, 116 T.C. 189 (2001), claiming that his

situation is analogous to that of the taxpayer in that case.

     In Culver, the taxpayer’s ex-wife embezzled money from her

employer for a number of years while they were married and

deposited the funds into their joint account in amounts ranging

from $200 to $800.   The embezzled income was commingled with the

funds in the account, and the funds from that account were used

to pay family expenses and debts.    Although the taxpayer and his

ex-wife maintained a joint account throughout their marriage, his

ex-wife managed all of the finances; she paid the bills, wrote

the checks, and maintained the bank accounts.     Occasionally, he

would write and sign checks drawn on the joint account, although

he did not review their account or manage any of the finances

during the marriage.   The taxpayer and his ex-wife’s joint income

for the first year at issue was $63,567, and the embezzled funds

constituted an additional $44,152.     In the second year at issue
                              - 12 -

their joint income was $76,412 and the embezzled funds

constituted an additional $59,128.     In the years at issue the

embezzled funds constituted an increase of more than 60 percent

of the taxpayer and his ex-wife’s combined annual income.

      In concluding that the taxpayer lacked actual knowledge of

the embezzled funds, the Court found it relevant that the

taxpayer and his ex-wife’s expenses were well within their

resources based on their combined annual wages.     Furthermore,

most of their major purchases were either completely or largely

financed.   Therefore, the taxpayer was unlikely to have actual

knowledge of the embezzled funds, even if he did have reason to

know of them.10

     Respondent alleges that the facts in Culver are

distinguishable from those of this case.     In Culver the

taxpayer’s ex-wife deposited funds in small amounts throughout

the entire year, making the amounts undetectable to the taxpayer.

Here, however, a one-time significant amount, $50,000, was

deposited into petitioner and intervenor’s joint bank account.



     10
      In Culver v. Commissioner, 116 T.C. 189 (2001), the Court
also found it relevant that the taxpayer’s ex-wife corroborated
her husband’s testimony, affirming that she carried out the
embezzlement activity without her husband’s participation or
knowledge.
     Here, on the other hand, we note that with respect to
petitioner and intervenor’s testimony, we are faced with the
situation of “he said, she said”; accordingly, our analysis is
based primarily on what could be reliably drawn from the totality
of the evidence.
                                - 13 -

Respondent asserts that it is unlikely that petitioner lacked

actual knowledge of such a large one-time deposit.

        As respondent suggests, $50,000 is a significant one-time

deposit.     When analyzed with respect to intervenor’s income,

however, the $50,000 distribution represented less than a 20-

percent increase over her annual earnings for 2004.11

     Circumstantial evidence may indicate that petitioner had

reason to know of the distribution; however, actual knowledge

cannot be inferred from reason to know.     See sec. 1.6015-

3(c)(2)(iii), Income Tax Regs.    Although petitioner had access to

the bank statements, occasionally drew checks on the joint bank

account, and admitted that he “for the most part * * * would open

the mail”, he alleged that he did not review the mail and that

intervenor was the one who paid the bills and reconciled their

joint bank account.

     Respondent has failed to persuade us by a preponderance of

the evidence that petitioner had actual knowledge of the $50,000

distribution, and he is therefore entitled to relief from joint

and several liability pursuant to section 6015(c).

     Other arguments made by the parties and not discussed herein

were considered and rejected as irrelevant, without merit, or

moot.


        11
      In Culver the embezzled funds represented more than a 60-
percent increase over the taxpayer and his ex-wife’s combined
wages in the years at issue.
                        - 14 -

To reflect the foregoing,


                                 Decision will be entered

                            for petitioner.
