                        T.C. Memo. 2011-43



                      UNITED STATES TAX COURT



                  MICKA M. OLIVER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8527-09.                Filed February 24, 2011.



     Micka M. Oliver, pro se.

     Ric D. Hulshoff, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     PARIS, Judge:   Petitioner did not file a Federal income tax

return for 2000, 2001, 2002, or 2004 (the tax years at issue).1

Thus, respondent created substitutes for returns on petitioner’s



     1
      Petitioner also did not file tax returns for 2005, 2006, or
2008. Petitioner and her husband, Baron Oliver (Mr. Oliver),
filed a joint Federal income tax return for 2007.
                                     - 2 -

behalf for the tax years at issue.           See sec. 6020(b).2

Respondent issued a notice of deficiency in which he determined

Federal income tax deficiencies and additions to tax as follows:3

                                      Additions to Tax
Year       Deficiency   Sec. 6651(a)(1) Sec. 6651(a)(2)       Sec. 6654(a)

2000       $2,996.00       $674.10               $749.00          $161.14
2001          204.20        100.00                 51.05            -0-
2002       25,478.00      5,732.55              6,369.50           851.43
                                                   1
2004        3,329.00        749.03                   TBD            -0-
       1
        Amount to be determined under sec. 6651(a)(2).

Petitioner timely filed a petition with this Court.           At the time

of filing the petition and during all years at issue, petitioner

was married to Baron Oliver (Mr. Oliver),4 and both she and Mr.

Oliver resided in Arizona.5      In an amendment to the answer,




       2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the tax years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
       3
      The notice of deficiency also reflected respondent’s
determinations that: (1) Petitioner’s filing status for the tax
years at issue was married filing separate, (2) petitioner was
entitled to the standard deduction for the tax years at issue,
(3) petitioner was entitled to one personal exemption for the tax
years at issue, and (4) petitioner was entitled to a rate
reduction credit for 2001.
       4
      Petitioner and Mr. Oliver had been married to each other
for over 40 years at the time of trial.
       5
      Arizona is a community property State. See Ariz. Rev.
Stat. Ann. sec. 25-211 (2004). The Olivers did not execute a
premarital agreement even though Mr. Oliver considered all income
to be his.
                                     - 3 -

respondent asserted increased deficiencies6 and additions to tax

for the tax years at issue that were based upon alleged community

property income not included in the notice of deficiency.7       After

the asserted increases, the deficiencies and additions to tax

were as follows:8

                                      Additions to Tax
Year       Deficiency   Sec. 6651(a)(1) Sec. 6651(a)(2)    Sec. 6654(a)

2000       $4,885.00     $1,099.13           $1,221.25       $262.75
2001        7,112.20      1,600.20            1,778.00        284.20
2002       37,940.00      8,536.50            9,485.00      1,267.86
2004       11,884.00      2,673.90            2,971.00        340.58

       Respondent has since conceded many items in the notice of

deficiency and the amendment to the answer.9        After concessions,

the issues for decision are:      (1) To what extent, if any,



       6
      The asserted increase in petitioner’s 2001 deficiency
contained in the amendment includes a minor mathematical error
when compared with Form 5278, Statement--Income Tax Changes.
       7
      The amended answer specifically asserted that, in
accordance with Arizona law, petitioner must include in income
her community property share of: (1) Social Security benefits
she received during the tax years at issue, (2) retirement
account distributions Mr. Oliver received during the tax years at
issue, and (3) Social Security benefits Mr. Oliver received
during the tax years at issue.
       8
      The amendment to the answer also asserted that the Court
should disallow the standard deduction afforded to petitioner in
the notice of deficiency. See supra note 3.
       9
      Specifically, respondent has conceded petitioner’s
liability for additions to tax under secs. 6651(a)(2) and 6654.
See infra note 28. Respondent’s amendment to the answer also
contained minor mathematical errors relating to these penalties.
As respondent has conceded petitioner’s liability for these
penalties, the errors have no bearing on the outcome of this
case.
                              - 4 -

petitioner must include in her income wages, dividends, and

Social Security benefits Mr. Oliver received in 2000; wages,

unemployment compensation, and Social Security benefits he

received in 2001; unemployment compensation and Social Security

benefits he received in 2002; and Social Security benefits he

received in 2004; (2) to what extent, if any, petitioner must

include interest income the Olivers received in 2001 and 2002 and

gain on the sale of stock the Olivers received in 2002; (3) to

what extent, if any, petitioner must include proceeds the Olivers

received in 2002 pursuant to a settlement agreement; (4) to what

extent, if any, petitioner must include in income her Social

Security benefits she received during the tax years at issue; (5)

to what extent, if any, petitioner must include in income

proceeds from the sale of real estate in 2004; (6) whether

petitioner’s filing status for the tax years at issue was married

filing separate; (7) whether petitioner was entitled to the

standard deduction for the tax years at issue; (8) whether

petitioner was entitled to one personal exemption for the tax

years at issue; and (9) whether petitioner is liable for

additions to tax under section 6651(a)(1) for failure to file

Federal income tax returns.

                        FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulation

of facts and the attached exhibits are incorporated in the
                                 - 5 -

Court’s findings by this reference.       Petitioner did not work

during the tax years at issue.    She received Social Security

disability benefits during those years of $9,690, $10,056,

$10,296, and $10,663, respectively.

     During 2000 and part of 2001 Mr. Oliver worked for Qwest

Corp. (Qwest).   During those years he received from Qwest wages

of $52,834 and $14,561, respectively.       In 2000 he also received

dividends of $27.   In 2001 he received unemployment compensation

of $2,870.   In 2002 Mr. Oliver received $5,125 in unemployment

compensation and $23,546 in Social Security benefits.       In 2004 he

received $20,971 in Social Security benefits.

     Throughout 2000 and 2001 and until April 2002 the Olivers

were engaged in a lawsuit they had filed against Qwest in 1997.10

In April 2002 the Olivers reached a settlement with Qwest, which

was memorialized in part by a Settlement Agreement and Release of

All Claims (settlement agreement).       The settlement agreement

provided that:   (1) The Olivers would dismiss or withdraw any

pending lawsuits or administrative proceedings and release all

claims against Qwest, and (2) Qwest would pay the Olivers

$201,000 “for alleged personal injuries, including emotional

distress and compensatory damages; no portion of which represents

payment of back, severance or front pay or lost benefits.”



     10
      Both petitioner and Mr. Oliver were plaintiffs in the
lawsuit.
                                    - 6 -

Pursuant to the settlement agreement, the Olivers received a

$201,000 check from Qwest in 2002, which they deposited into a

savings account.11

        Either petitioner or Mr. Oliver12 received interest income

of $40 in 2001 and $958 in 2002.        Also in 2002 petitioner or Mr.

Oliver received $3,958 from the sale of Qwest stock.13

     During 2004 the Olivers sold real estate in Lawton,

Oklahoma, for $65,000.        Fourteen years earlier, when petitioner’s

mother owned the real estate, she, petitioner, and Mr. Oliver

executed a contract for deed, which provided in relevant part

that:        (1) The Olivers would assume the then-existing mortgage on

the real estate, (2) petitioner’s mother would execute a warranty

deed conveying to the Olivers title to the real estate,14 (3) an

escrow agent would hold the deed until the Olivers fully paid the

mortgage and, (4) if and when the Olivers fully paid the



        11
      The Olivers used the settlement proceeds to purchase
vehicles, build a home in Arizona, and repair real estate in
Oklahoma.
        12
      The Court need not determine which of the Olivers received
the income. The mere fact that one of the Olivers received the
income allows the Court to dispose of all relevant issues
involving this fact.
        13
      Respondent concedes that the cost basis of the Qwest stock
sold was $3,544. Thus, the gain on the sale was $414. Again,
the Court need not determine which of the Olivers received the
proceeds from the stock sale. See supra note 12.
        14
             Petitioner’s mother executed the warranty deed in December
1990.
                                - 7 -

mortgage, the escrow agent would deliver the deed to the Olivers.

The contract also provided:    “It is understood and agreed between

the parties this instrument is a contract for deed, and that

* * * [the Olivers] shall not acquire an interest in the above

described property until terms of this contract are met”.

     Petitioner’s mother’s last will and testament was signed and

witnessed contemporaneously with the contract for deed.    The will

devised the real estate “unto * * * [her] daughter, Micka

Oliver.”    Petitioner’s mother passed away before or during

1994.15    Petitioner, in her capacity as heir, filed a petition to

probate her mother’s will in Oklahoma State court.    Petitioner’s

sister then petitioned the court to avoid probate and to set

aside the deed and the contract for deed.    The Olivers had not

completed the terms of the contract before petitioner’s mother’s

death,16 nor had the escrow agent released any of the title

documents.    Petitioner and her sister eventually settled the

matter and executed an agreement, which they filed with the

Oklahoma court clerk on September 20, 1995 (will contest



     15
      The record does not reflect the exact date petitioner’s
mother passed away. However, the probate number “P-94-18”
appeared on documents in a petition petitioner’s sister filed to
contest the will. Furthermore, petitioner produced a bill from
an attorney with dates in 1994 on which he handled matters
regarding the probate of her mother’s will.
     16
      Petitioner produced checks showing payments the Olivers
made to the mortgage company as late as November 1995 and during
the course of the probate and will contest.
                               - 8 -

agreement).   The will contest agreement, however, reflected

neither the provision in the will regarding the real estate nor

the terms of the 1990 contract for deed.   Rather, it stated that

the parties agreed that the contract and deed properly

transferred and conveyed the real estate to the Olivers.17     The

will contest agreement also provided that the escrow agent would

deliver the deed to petitioner.

     Petitioner filed the will contest agreement, and that same

day the Olivers executed another agreement to assume the then-

remaining amount of the mortgage.   The Olivers paid the mortgage

until sometime in 2001, when they made the final mortgage payment

on the real estate.

     When petitioner sold the real estate in September 2004, the

buyers signed a promissory note, which obligated them to make 360

monthly payments of $335.51 “to the order of Baron Leone Oliver

and Micka Maria Oliver”.18   The principal amount of the

promissory note was $62,500.   The first monthly payment was due

October 1, 2004; all subsequent payments were due the first of



     17
      Nothing in the will contest agreement, the will, or the
contract for deed reflects or approximates the real estate’s
value on the day the will and the contract for deed were
executed. Nor does the record reflect the real estate’s value on
the date petitioner’s mother passed away. Petitioner produced
part of a 1994 appraisal, but it did not show the appraised value
of the real estate.
     18
      Each payment included principal and interest.   The
interest rate was 5 percent.
                                - 9 -

each month, with the last payment due September 1, 2034.    The

buyers signed a payment letter stating the details of the October

2004 payment.   The letter also stated:   “Your loan will be

serviced by Baron Leone Oliver and Micka Maria Olviver [sic].”

In addition, the letter instructed the buyers to mail each

monthly payment to both petitioner and Mr. Oliver.

     To provide security for their obligation, the buyers

executed a mortgage on the real estate, which listed the Olivers

as mortgagee.   The Olivers and the buyers also executed a joint

tenancy warranty deed and a real estate purchase contract.     The

real estate purchase contract provided, among other things, that

the buyers would pay $2,500 earnest money, which would be

deposited with Oklahoma Abstract Co.

     By the end of 2004 the Olivers had received the earnest

money and three installment payments totaling $1,006.53.

Respondent has conceded that the basis of the real estate on the

date of sale was $30,000.

                               OPINION

I. Community Property Assets

     A. Wages, Dividends, and Unemployment Compensation

     Respondent determined that, in accordance with Arizona law,

petitioner must include in income her community property share of

wages and dividends Mr. Oliver received in 2000, wages and

unemployment compensation he received in 2001, and unemployment
                                - 10 -

compensation he received in 2002.    Arizona law presumes that

property acquired by one spouse during marriage is community

property unless acquired:   (1) By gift, devise, or descent; or

(2) after service of a petition for divorce, separation, or

annulment.   Ariz. Rev. Stat. Ann. secs. 25-211, 25-213(A) and (B)

(2004); Rundle v. Winters, 298 P. 929, 931 (Ariz. 1931).      To

rebut the presumption, a taxpayer must produce clear and

convincing evidence that the property at issue is separate

property.    Rundle v. Winters, supra at 931.   This evidence can

include a validly executed premarital agreement designating

certain property to be separate property.    See Ariz. Rev. Stat.

Ann. sec. 25-203(A)(1), (2), and (3) (2004).

     The Olivers were married during the tax years at issue.       Mr.

Oliver admitted that he received wages, dividends, and

unemployment compensation during the years and in the amounts

respondent determined.   Thus, the Court presumes those income

items are community property.    While Mr. Oliver believes all

income received is his alone, the Olivers never executed a

premarital agreement of any kind.    Petitioner produced no

additional evidence to rebut the Arizona community property

presumption but merely asserted that Arizona community property

law should not apply to them.    Therefore, the Court holds that

petitioner must include in income her community property share of

Mr. Oliver’s wages, dividends, and unemployment compensation.
                                   - 11 -

       B. Social Security Benefits

       Respondent’s amended answer affirmatively asserted that Mr.

Oliver’s Social Security benefits received during the tax years

at issue must be included in income as petitioner’s share of

community property.       Respondent must prove this affirmative

allegation.       See Rule 142(a)(1).   Respondent has since abandoned

this allegation, stating in the alternative that Social Security

benefits are a spouse’s separate property and, as such, not

includable in petitioner’s income.19        Therefore, petitioner need

not include in income the Social Security benefits Mr. Oliver

received during the tax years at issue.

II. Interest Income and Gain From the Sale of Stock

       Respondent determined that petitioner should include in

income her community property share of interest income either she

or Mr. Oliver received in 2001 and 2002, as well as her community

property share of gain on stock either she or Mr. Oliver sold in

2002.       The Olivers admitted that they received the interest

income and gain from the stock sale during the years and in the

amounts respondent determined.       Because they were married during

those years, the community property presumption applies.        See

Ariz. Rev. Stat. Ann. sec. 25-211; Rundle v. Winters, supra at

931.    Mr. Oliver believed that all income was his, and

petitioner’s position was that community property law should not


       19
            Petitioner agrees with respondent’s modified position.
                               - 12 -

apply; but petitioner produced no evidence to rebut the

presumption.   Therefore, the Court holds that petitioner must

include in income her community property share of the interest

income and the gain from the stock sale.

III. Proceeds From the Qwest Settlement Agreement

     Respondent determined that petitioner should include in

income her community property share of cash proceeds the Olivers

received in 2002 pursuant to the settlement agreement with Qwest.

In this instance, the community property presumption does not

apply; rather, recovery for personal injuries includes

components, some of which constitute separate property.     Jurek v.

Jurek, 606 P.2d 812, 813-814 (Ariz. 1980).   Specifically, the

part classified as compensation for injuries to one spouse’s

“personal well-being” are that spouse’s separate property.     Id.

at 814.   The parts classified as compensation for lost wages or

medical expenses, however, are community property.    Id.

     The settlement agreement provided a lump-sum recovery for

Mr. Oliver’s personal injuries, including emotional distress.

Such injuries clearly represent injuries to Mr. Oliver’s personal

well-being.    Furthermore, the settlement agreement specifically

excluded lost wages from the recovery.   Lastly, petitioner

produced no evidence that the Olivers incurred any medical

expenses as a result of Mr. Oliver’s injuries.   Thus, the Court

finds that the settlement proceeds are Mr. Oliver’s separate
                               - 13 -

property.   Therefore, the Court holds that petitioner need not

include in her income any proceeds Mr. Oliver received pursuant

to the settlement agreement.

IV. Petitioner’s Social Security Benefits

     Respondent asserted in his amended answer that petitioner

must include in income her community property share of Social

Security benefits she received during the tax years at issue.     As

with his previous affirmative allegation, respondent bears the

burden of proof.   See Rule 142(a)(1).   Respondent abandoned this

initial allegation, arguing that the Social Security benefits

petitioner received are her separate property, the entirety of

which is includable in petitioner’s income.

     Petitioner admitted that she received Social Security

disability benefits during the tax years at issue in the amounts

respondent determined.   Arizona law provides that Social Security

benefits paid to one spouse are that spouse’s separate property.

Luna v. Luna, 608 P.2d 57, 60 (Ariz. Ct. App. 1979).    Thus, the

Social Security benefits petitioner received were her separate

property.   Therefore, the Court holds that petitioner must

include in income the entire amount of Social Security benefits

she received during the tax years at issue.

V. Sale of the Lawton, Oklahoma, Real Property

     Respondent determined that petitioner should include in

income her community property share of the entire gain from the
                              - 14 -

sale of the real estate.   The Court disagrees and holds that (1)

the real estate was petitioner’s separate property, (2)

petitioner sold the real estate on the installment method, (3)

petitioner must include in income the capital gain portion of the

earnest money received in 2004, (4) petitioner must include in

income her community property share of the capital gain received

in 2004 pursuant to the promissory note, and (5) petitioner must

include in income her community property share of the interest

income received in 2004 pursuant to the promissory note.

     The real estate was petitioner’s separate property.    In

Oklahoma, if a contract and deed are executed as part of the same

transaction and delivery of the deed is only part performance of

the contract’s terms, the contract does not merge into the deed.

Banks v. City of Ardmore, 112 P.2d 372, 376 (Okla. 1941).    Here,

the deed and contract for deed were executed the same day.       The

contract unambiguously provided that the Olivers would not obtain

any interest in the real estate until they made full payment

under the contract.   Furthermore, only upon full payment would

the escrow agent deliver the deed to the Olivers.   Thus, the

contract did not merge into the deed.   Because the Olivers had

not made full payment pursuant to the contract before

petitioner’s mother passed away, neither execution of the deed in

1990 nor delivery of the deed in 1995 conveyed any interest in

the real estate to either of the Olivers.   Rather, delivery in
                                 - 15 -

1995 completed the devise of the real estate to petitioner under

her mother’s will.20     The Arizona community property presumption

does not apply to property received by devise.      See Ariz. Rev.

Stat. Ann. secs. 25-211, 25-213(A).       Therefore, when petitioner

received the real estate in 1995, it was her separate property.

     Petitioner’s separate property retains its status unless

changed by agreement or operation of law.      See Sims v. Hanrahan,

475 P.2d 505, 506 (Ariz. Ct. App. 1970).      Between 1995 and 2004

petitioner could have conveyed the real estate to Mr. Oliver as

his separate property or to both herself and Mr. Oliver as

community property.     See Tyson v. Tyson, 149 P.2d 674, 678 (Ariz.

1944); Ariz. Cent. Credit Union v. Holden, 432 P.2d 276, 279

(Ariz. Ct. App. 1967).     The Olivers’ intent, established by a

conveyance and the surrounding facts, would control.      See Ariz.

Cent. Credit Union v. Holden, supra at 279.       Petitioner never

conveyed the real estate to Mr. Oliver or to herself and Mr.

Oliver after she received the real estate in 1995.      Accordingly,

the Court holds that the real estate was petitioner’s separate

property when she sold it in 2004.

     The sale of the real estate in 2004 qualified as an

installment sale.     Thus, interest income and capital gain

received in 2004 must be reported using the installment method.

An installment sale is a disposition of property where at least


     20
          Delivery occurred pursuant to the will contest agreement.
                              - 16 -

one payment will be received after the year of sale.   Sec.

453(b)(1).   The seller must report income received from an

installment sale under the installment method unless she

affirmatively elects not to do so.21   Sec. 453(a), (d)(1).

Petitioner sold the real estate for $65,000, receiving earnest

money of $2,500 and a promissory note in the amount of $62,500,

executed by the buyers, which provided that the buyers would make

monthly payments well after 2004, with the last payment being due

in 2034.   Petitioner did not elect to report the sale under a

method other than the installment method.    Therefore, the Court

holds that petitioner sold the real estate on the installment

method.

     Under the installment method, the seller recognizes capital

gain as installment payments are received.   Sec. 453(c).     Each

installment payment consists of three portions:   (1) Recovery of

basis, (2) capital gain, and (3) interest.   In a given year, the

seller is taxed only on the gain and interest income received




     21
      Respondent argues that petitioner should not be allowed to
report the sale on the installment method simply because, to
date, petitioner has not reported any gain from the sale.
Respondent’s argument has no merit. The statutes, caselaw, and
regulations governing installment sales clearly make installment-
method reporting the default method absent an affirmative
election. See sec. 453(d)(1); Bolton v. Commissioner, 92 T.C.
303, 306 (1989); sec. 15a.453-1(d)(1), Temporary Income Tax
Regs., 46 Fed. Reg. 10717 (Feb. 4, 1981). Notably, respondent
provides no legal authority to support his argument.
                                   - 17 -

during that year.22       To determine the capital gain, the seller

multiplies the total amount of payments received during the year

by the gross profit ratio.        Id.   The gross profit ratio23 equals

the gross profit from the sale divided by the total contract

price.     Id.    The gross profit equals the selling price minus the

seller's adjusted basis in the property.         Sec. 15a.453-

1(b)(2)(v), Temporary Income Tax Regs., 46 Fed. Reg. 10710 (Feb.

4, 1981).        The selling price equals the total consideration the

seller receives for the property, including:         (1) Any money and

the fair market value of any property received; (2) any mortgage

or other debt the buyer pays, assumes, or takes subject to;24 and

(3) any selling expenses the buyer pays.         Sec. 15a.453-

1(b)(2)(ii), Temporary Income Tax Regs., 46 Fed. Reg. 10709 (Feb.

4, 1981).

     The selling price and total contract price equaled $65,000.

Petitioner’s adjusted basis in the real estate, as respondent

conceded, was $30,000.25       Thus, the gross profit on the sale


     22
      The interest income is ordinary income. Sec. 61(a)(4).
The gain recognized is capital gain. Secs. 1001, 1221(a); see
also sec. 1(h) (prescribing the maximum capital gains rate). The
recovery of basis is nontaxable. See sec. 1001(a).
     23
      The gross profit ratio is also referred to as the gross
profit percentage.
     24
      The record contains no evidence that, on the date of sale,
the property was subject to any qualified indebtedness.
     25
          Petitioner claims that the adjusted basis was equal to the
                                                       (continued...)
                              - 18 -

equaled $35,000.   In 2004 petitioner received $2,500 earnest

money and three installment payments of $335.51 pursuant to the

promissory note.   The earnest money consisted of nontaxable

recovery of basis and taxable capital gain.   Each installment

payment consisted of nontaxable recovery of basis and taxable

capital gain and interest income.

      The status of the real estate as petitioner’s separate

property became fixed at the time she acquired it.26   See Horton

v. Horton, 278 P. 370, 371 (Ariz. 1929).   Thus, petitioner, as

the sole owner of the real estate, was entitled to treat all

capital gain from the sale in 2004 as her separate property.     See

id.   However, if spouses treat income (or gain) from separate

property as community property and they intend for the income to

become community property, the character of the income changes

accordingly.   Rundle v. Winters, 298 P. at 931.

      In 2004 petitioner received earnest money and three

installment payments.   The capital gain portion of the earnest



      25
      (...continued)
fair market value on the date she sold it in 2004. Petitioner
produced no evidence to substantiate her claim. Thus, the Court
finds that petitioner’s adjusted basis is $30,000, as respondent
conceded.
      26
      Petitioner testified that the Olivers paid expenses for
repairs, maintenance, and improvements between 1995 and 2004.
However, petitioner produced no evidence to substantiate such
expenses. Furthermore, even if the Olivers did pay such
expenses, doing so would not make the real estate community
property. See Horton v. Horton, 278 P. 370, 371 (Ariz. 1929).
                                - 19 -

money and of each installment payment would ordinarily constitute

income from petitioner’s separate property.     The documents

surrounding the installment sale, however, evince clear intent

for the three installment payments to be community property.      The

promissory note required the buyers to make payments “to the

order of” both petitioner and Mr. Oliver, the mortgage listed the

Olivers as mortgagees, and the payment letter stated that the

Olivers would service the loan.     Thus, the Court finds that the

Olivers intended the installment payments to become community

property.     Therefore, the Court holds that petitioner must

include in income her community property share of the capital

gain received in 2004 pursuant to the promissory note.     However,

the record contains no evidence of such intent regarding the

earnest money.     Therefore, the Court holds that petitioner must

include in income the capital gain portion of the earnest money

received in 2004 as her separate property.

     Petitioner must also include in income her community

property share of interest received in 2004 pursuant to the

promissory note.     The Olivers received the interest income solely

because they executed an installment sale agreement and charged

interest.27    Because the Olivers received the interest income

while they were married, the community property presumption


     27
      In other words, the nature of the property sold--
appreciated real estate--did not affect the Olivers’ receipt of
interest income.
                              - 20 -

applies.   See Ariz. Rev. Stat. Ann. sec. 25-211; Rundle v.

Winters, supra at 931.   Petitioner offered no evidence to rebut

the presumption.   Therefore, the Court holds that petitioner must

include in income her community property share of the interest

income the Olivers received in 2004.

VI. Filing Status, Standard Deduction, and Personal Exemption

     Respondent determined that petitioner’s filing status for

the tax years at issue was married filing separate.    The Olivers

were married throughout the tax years at issue.    To claim married

filing joint return filing status, however, the Olivers needed to

file valid joint tax returns either before or after respondent

issued the notice of deficiency.    See Millsap v. Commissioner, 91

T.C. 926, 936-937 (1988).   The Olivers did not file valid, signed

joint tax returns for the tax years at issue.    Therefore, the

Court holds that petitioner’s filing status for the tax years at

issue was married filing separate.

     In addition, respondent determined that petitioner was

entitled to the standard deduction for the tax years at issue.     A

taxpayer is entitled to the standard deduction if she does not

itemize deductions.   Sec. 63(b).   To itemize deductions, a

taxpayer must affirmatively elect to do so on her Federal income

tax return.   Sec. 63(e)(1) and (2).   Petitioner did not file

returns for the tax years at issue, and thus she cannot itemize
                                    - 21 -

deductions.        Therefore, the Court holds that petitioner was

entitled to the standard deduction for the tax years at issue.

     Furthermore, respondent determined that petitioner was

entitled to one personal exemption for the tax years at issue.           A

taxpayer may claim one exemption for herself during a given tax

year.        Sec. 151(a) and (b).   She may also claim an exemption for

her spouse if, among other things, her spouse had no gross income

for that tax year.        Id.   Mr. Oliver, however, had gross income

for each tax year at issue.         Thus, petitioner cannot claim an

exemption for Mr. Oliver for those tax years.         Therefore, the

Court holds that petitioner was entitled to only one personal

exemption for the tax years at issue.

VII. Addition to Tax for Failure To File Tax Returns

        Respondent determined that petitioner is liable for

additions to tax for failing to file tax returns for the tax

years at issue.28       See sec. 6651(a)(1).   Respondent must produce

sufficient evidence to show that imposing this addition is

appropriate.        See sec. 7491(c); Wheeler v. Commissioner, 127 T.C.

200, 206 (2006) (citing Higbee v. Commissioner, 116 T.C. 438, 446

(2001)), affd. 521 F.3d 1289 (10th Cir. 2008).         Petitioner may

avoid these additions by establishing that she had reasonable



        28
      Initially, respondent determined that petitioner is also
liable for additions to tax under secs. 6651(a)(2) and 6654.
Respondent has now conceded that petitioner is not liable for
these additions to tax. See supra note 9.
                              - 22 -

cause for failing to file and that her failure did not result

from willful neglect.   See sec. 6651(a)(1); Wheeler v.

Commissioner, supra at 207; Higbee v. Commissioner, supra at 447.

     Petitioner admitted that she did not file tax returns for

the tax years at issue.   She also produced no evidence to

establish that she had reasonable cause for her failure to file

and that her failure did not result from willful neglect.29

Therefore, the Court holds that petitioner is liable for the

additions to tax.

     The Court has considered all arguments for contrary holdings

and, to the extent not discussed above, finds those arguments to

be without merit.

     To reflect the foregoing and concessions of the parties,


                                         Decision will be entered

                                    under Rule 155.




     29
      Petitioner did testify that she had health problems during
the tax years at issue. However, she has consistently argued
that she was not required to file tax returns. She has not,
before doing so in her answering brief, argued that her health
problems impeded her ability to file returns. Thus, the Court
finds that petitioner’s health problems had no effect on her
ability or failure to file returns for the tax years at issue.
