                          T.C. Summary Opinion 2018-1



                         UNITED STATES TAX COURT



        COLIN C. BISHOP, Petitioner, AND LISA BISHOP, Intervenor v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 22108-16S.                         Filed January 4, 2018.



      Michael S. Sterner, for petitioner.

      Jan R. Pierce and Myla Sepulveda (specially recognized), for intervenor.

      Jeffrey D. Rice, for respondent.



                              SUMMARY OPINION


      COHEN, Judge: This case was heard pursuant to the provisions of section

7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant

to section 7463(b), the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other case. Respondent
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determined a $3,545 deficiency in petitioner’s Federal income tax for 2014. The

issue for decision is whether petitioner should be relieved from liability for all or

part of the deficiency that resulted from failure to report on a joint return a

distribution from intervenor’s separately owned retirement account. The

resolution depends on whether petitioner had actual knowledge of the distribution,

or any portion thereof, for purposes of section 6015(c). Unless otherwise

indicated, all section references are to the Internal Revenue Code in effect for

2014.

                                     Background

        Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Respondent and petitioner have

agreed that petitioner is not liable for the deficiency after application of section

6015(c). Intervenor, however, objects to that conclusion.

        Petitioner and intervenor were married on October 31, 2007. They were

temporarily separated twice during 2014, finally separated in June 2015, and

divorced in 2016. At the time his petition was filed, petitioner resided in

Washington. At the time her notice of intervention was filed, intervenor resided in

Oregon.
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      Intervenor inherited a retirement account from her father in 2009. The

account was maintained at Edward D. Jones & Co. (Edward Jones) in intervenor’s

name. Taxable distributions were received before 2014, ranging from $4,000 to

$48,000, and were reported on joint Federal income tax returns filed by petitioner

and intervenor.

      During 2014 and until the time of the permanent separation in 2015,

petitioner and intervenor maintained a joint checking account into which their

payroll checks were deposited. They made transfers to and from other accounts,

and family expenses were paid out of the joint account. Petitioner and intervenor

both had access to the funds in the joint account by the use of debit cards.

      During 2014 intervenor received a $15,068 distribution from the Edward

Jones retirement account. Edward Jones withheld $2,712 from the distribution

and reported both of those amounts to the Internal Revenue Service (IRS). On

August 1, 2014, $6,000 was deposited into the joint checking account that

petitioner and intervenor maintained. The balance of the distribution was used for

the benefit of intervenor’s daughter.

      As they had in prior years, petitioner and intervenor together provided

information to the preparer of a joint tax return for 2014. They did not report the

Edward Jones distribution on that return.
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      Before the petition was filed, petitioner filed a Form 8857, Request for

Innocent Spouse Relief, with the IRS. Intervenor provided information during the

review process. The IRS determined that petitioner was not entitled to relief under

section 6015(b) because he had constructive knowledge of the distribution but was

entitled to relief under section 6015(c) because of the absence of proof of actual

knowledge.

      Neither petitioner nor intervenor disputes the amount of the deficiency.

Petitioner contends that he is entitled to relief from the full amount of the

deficiency and in the alternative that at most he should be liable for the deficiency

relating to the $6,000 deposited into the joint bank account. Intervenor requests

that petitioner be held liable for tax on $7,080, which intervenor infers was the

portion of the distribution plus withheld tax reflected in the $6,000 deposit.

                                      Discussion

      Section 6013(d)(3) provides the general rule that if spouses make a joint

return the liability for the tax shall be joint and several. Subject to other

conditions, section 6015(c) allows a divorced or separated spouse to elect to limit

his or her liability for a deficiency assessed with respect to a joint return to the

portion of such deficiency allocable to him or her under subsection (d). Pursuant

to section 6015(d)(3)(A), “any item giving rise to a deficiency on a joint return
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shall be allocated to individuals filing the return in the same manner as it would

have been allocated if the individuals had filed separate returns for the taxable

year.” Further, “[e]rroneous items of income are allocated to the spouse who was

the source of the income.” Sec. 1.6015-3(d)(2)(iii), Income Tax Regs.; see also

Agudelo v. Commissioner, T.C. Memo. 2015-124, at *16. Denial of relief

requires evidence that the requesting spouse 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.” Sec. 6015(c)(3)(C);

see also sec. 1.6015-3(c)(2), Income Tax Regs. Section 6015(c) differs from the

relief provisions of subsections (b) and (f), under which relief may be denied if the

party requesting relief had constructive knowledge of the item giving rise to the

deficiency. See Culver v. Commissioner, 116 T.C. 189, 197 (2001); Richard v.

Commissioner, T.C. Memo. 2011-144.

      A question exists as to where the burden of proof lies in cases when, as

here, the IRS favors granting relief and the nonrequesting spouse intervenes to

oppose it. The Court has resolved such cases by determining whether actual

knowledge has been established by a preponderance of the evidence as presented

by all parties. See Pounds v. Commissioner, T.C. Memo. 2011-202; Knight v.
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Commissioner, T.C. Memo. 2010-242; McDaniel v. Commissioner, T.C. Memo.

2009-137; Stergios v. Commissioner, T.C. Memo. 2009-15.

      To determine whether the requesting spouse had actual knowledge, the IRS

considers “all of the facts and circumstances.” Sec. 1.6015-3(c)(2)(iv), Income

Tax Regs. Similarly, the Court looks to the surrounding facts and circumstances

for “an actual and clear awareness (as opposed to reason to know)” of the items

giving rise to the deficiency. See Cheshire v. Commissioner, 115 T.C. 183, 195

(2000), aff’d, 282 F.3d 326 (5th Cir. 2002); Pounds v. Commissioner, T.C. Memo.

2011-202.

      In this case, petitioner denies actual knowledge of the distribution although

he admits that he knew about the retirement account and about withdrawals made

in other years for various family expenditures. He argues that intervenor

deliberately deceived him, but he relies on her silence and does not identify any

specific misrepresentations by her. He acknowledges that he was at fault for not

checking the records on the joint bank account maintained by him and intervenor.

      Intervenor disputes petitioner’s credibility. She argues that he had actual

knowledge of the 2014 distribution because it was deposited in their joint bank

account about seven months before the return was prepared and petitioner

continued to write checks from the account and use debit cards accessing funds in
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the account. Intervenor does not claim that she specifically told petitioner about

the distribution when it was received or at the time that the return was prepared or

point to any evidence that petitioner had “an actual and clear awareness (as

opposed to reason to know)” of the items giving rise to the deficiency. Intervenor

testified that they both forgot about the distribution at the time the return was

prepared.

      The history of withdrawals from the retirement account used by the parties

over a period of years and the transactions by petitioner with reference to the joint

bank account support a conclusion that petitioner should have known about the

distribution. The amount was very large in relation to the average balances and

other transactions in the account. There is no evidence, however, that petitioner

saw the bank records before the joint return for 2014 was filed. His denials are not

incredible, implausible or contradicted by direct evidence. See Culver v.

Commissioner, 116 T.C. 189; Richard v. Commissioner, T.C. Memo. 2011-144.

Regardless of the strong indications of constructive knowledge, the evidence falls

short of establishing actual knowledge of any specific amount of the distribution

in 2014.
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      While the parties make other arguments about “equitable” factors, the

absence of proof of actual knowledge is determinative in this case. Therefore,


                                                   Decision will be entered

                                             for petitioner.
