John Allen and Glenna A. Lyle  6/7/1999

Joseph F. and Dorothy M. German  3/31/1999

John David Zielonka 2/18/1997

Timothy C. Sadlier 1/27/1997

Edward B. Rood 5/29/1996

James K. Roberts 5/16/1996

Robert Libutti  3/7/1996

John J. Burke and Vivian Burke  12/26/1995

Philip H. and Anna Friedman 12/4/1995

Gregory Alberico  11/16/1995

Stanley B. and Rose M. Whitten  10/25/1995

T.C. Summary Opinion 2005-109
UNITED STATES TAX COURT
JIMMIE L. CLEMONS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 20040-03S. Filed August 1, 2005.  Jimmie L. Clemons, pro se.

Jeanne Gramling and Blake W. Ferguson, for respondent.  GOLDBERG, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority. Unless otherwise indicated, subsequent 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.

Respondent determined a deficiency in petitioner’s Federal income tax of $1,601 for the taxable year 2001.(1) After concessions,(2) the issue for decision is whether petitioner must include in his gross income gambling winnings of $44,833 for taxable year 2001.(3) The amount of petitioner’s Social Security benefits received during taxable year 2001 that must be included in his 2001 gross income is a computational matter and will be resolved by our decision on the unreported gambling income issue.

(1) At trial, respondent conceded that the amount of the deficiency for taxable year 2001 set forth in the notice of deficiency was not correct. Instead, respondent claims that the correct deficiency is $1,046.

(2) At trial, respondent conceded that petitioner was entitled to Schedule A deductions for taxable year 2001 of $44,833 and $500 for gambling losses and charitable contributions, respectively.

(3) If the $44,833 gambling winnings are included in petitioner’s gross income, he must also include Social Security benefits received of $8,690 in his gross income for taxable year 2001 pursuant to sec. 86.

Background

Some of the facts have been stipulated and are so found.  The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in Flat Rock, North Carolina, on the date the petition was filed in this case.

Petitioner timely filed his Federal income tax return for the 2001 taxable year. On Form 1040, U.S. Individual Income Tax Return, for taxable year 2001, petitioner reported capital gain income of $1,663.13. Petitioner did not report any other income.  Petitioner also claimed a personal exemption and the standard deduction. Petitioner did not attach a Schedule A, Itemized Deductions, to his Form 1040.

During taxable year 2001, petitioner was retired.  Petitioner gambled at Harrah’s Cherokee Smokey Mountain Casino (Cherokee Casino), and during taxable year 2001, petitioner received gambling winnings of $44,833 from Cherokee Casino.  Both petitioner and respondent received seven Forms W-2G, Certain Gambling Winnings, for taxable year 2001, all seven of which were from Cherokee Casino in the amounts of $16,000, $2,500, $4,000, $4,000, $4,500, $12,583, and $1,250, for a total of $44,833. Petitioner attached these Forms W-2G to his 2001 Form 1040, but, as previously stated, he did not report the amounts as gross income. From these Forms W-2G, respondent determined that petitioner had unreported gambling income of $44,833 for taxable year 2001.

Accordingly, in the notice of deficiency for taxable year 2001, dated November 3, 2003, respondent determined that petitioner must include gambling winnings in the amount of $44,833 in his gross income. Respondent also determined that - 4 - petitioner was entitled to Schedule A itemized miscellaneous deductions in the amount of $44,523, rather than the standard deduction, and respondent further determined that petitioner must include taxable Social Security benefits of $8,690 in his gross income for taxable year 2001. The taxable Social Security income was computed at 85 percent of the total amount of $10,244, which petitioner received as Social Security benefits during taxable year 2001.

After the issuance of the notice of deficiency, but before trial, respondent conceded that he failed to allow petitioner a personal exemption and understated the allowable itemized miscellaneous deductions in his computation of the deficiency reflected in the notice of deficiency.

As previously noted, at trial, respondent conceded that petitioner was entitled to Schedule A itemized miscellaneous deductions of $45,333, consisting of $44,833 for gambling losses incurred by petitioner during taxable year 2001 and $500 for charitable contributions made by petitioner during taxable year 2001. Respondent also conceded, at trial, that the correct amount of the deficiency for taxable year 2001 was $1,046.

Discussion

As a general rule, the determinations of the Commissioner in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving the Commissioner’s determinations to - 5 - be in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). As one exception to this rule, section 7491(a) places upon the Commissioner the burden of proof with respect to any factual issue relating to liability for tax if the taxpayer maintained adequate records, satisfied the substantiation requirements, cooperated with the Commissioner, and introduced during the Court proceeding credible evidence with respect to the factual issue. We decide the issue in this case without regard to the burden of proof. Accordingly, we need not decide whether the general rule of section 7491(a)(1) is applicable in this case. See Higbee v. Commissioner, 116 T.C. 438 (2001). 

Petitioner contends that his $44,833 gambling winnings need not be included in his gross income because he had gambling losses to offset these winnings. Respondent, however, contends that petitioner must include his gambling winnings in his gross income and is then entitled to a Schedule A miscellaneous itemized deduction for his gambling losses. 

The present problem seems to be that petitioner steadfastly rejects or ignores certain basic principles of the Federal income tax laws. Petitioner wishes to net his winnings and losses and, on his tax return, report in gross income only the amount of any net gambling winnings. Petitioner considers as “actual income” only his capital gain proceeds and any net gambling winnings.  Petitioner is in error.

Section 61(a) defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided. McClanahan v. United States, 292 F.2d 630, 631-632 (5^th Cir. 1961). The Supreme Court has consistently given this definition of gross income a liberal construction “in recognition of the intention of Congress to tax all gains except those specifically exempted.” Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955); see also Roemer v. Commissioner, 716 F.2d 693, 696 (9^th Cir. 1983) (all realized accessions to wealth are presumed taxable income, unless the taxpayer can demonstrate that an acquisition is specifically exempted from taxation), revg. 79 T.C. 398 (1982).

Section 62 defines adjusted gross income and allows expenses of a trade or business and certain employee business expenses to be deducted from gross income. These deductions are sometimes referred to as deductions “above the line,” meaning simply that they are deducted from gross income to arrive at “adjusted gross income.” Gamblers who are engaged in a trade or business of gambling may be able to deduct their gambling losses above the line; indeed, courts have based their decisions in some cases on the proposition that such a professional gambler may net losses against winnings for purposes of determining what is includable in gross income. See Winkler v. United States, 230 F.2d 766 (1^st - 7 - Cir. 1956); Green v. Commissioner, 66 T.C. 538 (1976). This is not the present case.

In the case of a taxpayer not engaged in the trade or business of gambling, gambling losses are allowable as a miscellaneous itemized deduction, but only to the extent of gains from such transactions. See sec. 165(d); McClanahan v. United States, supra; Winkler v. United States, supra; Gajewski v.  Commissioner, 84 T.C. 980 (1985); Lutz v. Commissioner, T.C.  Memo. 2002-89; see also Stein v. Commissioner, T.C. Memo. 1984-403; Umstead v. Commissioner, T.C. Memo. 1982-573. 

The parties agree that, during taxable year 2001, petitioner received gambling winnings of $44,833 at the Cherokee Casino.  The parties further agree that petitioner incurred gambling losses, during taxable year 2001, in excess of $44,833.  Petitioner did not report the aforesaid gambling winnings as gross income on his 2001 Federal income tax return. Instead, petitioner merely offset his gambling income with his sustained gambling losses and did not report either of these amounts on his 2001 Federal income tax return.

Petitioner presented no evidence to show that he was a professional gambler, nor did he contend that he was a professional gambler. On the basis of the evidence in the record, we conclude that petitioner was a recreational gambler and not a professional gambler. Therefore, the gambling losses incurred by petitioner during taxable year 2001 are allowable only as an miscellaneous itemized deduction on Schedule A, to the extent of gains from gambling. See sec. 165(d); sec. 1.165-10, Income Tax Regs. Thus, petitioner must include his gambling winnings in his adjusted gross income and is entitled only then to a Schedule A miscellaneous itemized deduction, to the extent of his gains from gambling, for his gambling losses. See sec.  165(d); sec. 1.165-10, Income Tax Regs. 

Reviewed and adopted as the report of the Small Tax Case Division.
To reflect respondent’s concessions and our resolution of the disputed matters, Decision will be entered under Rule 155.
 

T.C. Summary Opinion 2005-3
UNITED STATES TAX COURT
PANSY V. PANAGES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16154-03S. Filed January 4, 2005.
Pansy V. Panages, pro se.
Paul K. Voelker, for respondent.

COUVILLION, Special Trial Judge: This case was heard pursuant to section 7463 in effect when the petition was filed.(1) The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority.

(1) Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent determined a deficiency of $6,161 in petitioner’s Federal income tax for 2001, and a section 6662(a) penalty of $1,232.

The issues for decision are: (1) Whether petitioner’s gambling activity amounted to a trade or business under section 162, thereby allowing her to deduct gambling losses on Schedule C, Profit or Loss From Business, of her Federal income tax return, and (2) whether petitioner is liable for the section 6662(a) penalty.

Some of the facts were stipulated. Those facts, with the exhibits annexed thereto, are so found and are made part hereof.  Petitioner’s legal residence at the time the petition was filed was Sparks, Nevada.

Before entering the flower business, petitioner completed her freshman year of high school and had some floral industry training. Petitioner then opened a flower shop in Reno, Nevada.  The Flower Bucket Florist (flower shop) was organized as a corporation with petitioner as the sole stockholder. At the time of trial, petitioner’s flower shop was open 12 hours a day, Monday through Saturday, and a few hours on Sunday. The flower shop paid petitioner a $66,310 salary during 2001.

In addition, petitioner operated as sole stockholder another business, F.B. Wholesale, Inc. (F.B. Wholesale), which was a wholesale market that purchased flowers from growers and brokers and then resold the flowers to retail florists. The flower shop is one of F.B. Wholesale’s customers. F.B. Wholesale paid petitioner a $7,200 salary during 2001. Finally, petitioner earned $26,160 in rent from two other businesses and $4,848 in the lease of a portion of her home to an elderly lady. 

During the year in issue, petitioner was nearly 70 years of age and had begun making plans for retirement. As a result, she began training her two daughters to assume control of the flower shop; however, petitioner was still actively involved in the flower shop during 2001. Because petitioner planned to hand over management of the flower shop to her daughters, when she turned 65, she began looking for other ways to supplement her monthly Social Security benefits.

Petitioner believed she had a talent for winning at slot machines and began playing the machines at different locations.  She eventually gambled almost exclusively at one grocery store (Smith’s) that had the type of machines she liked, known as progressive machines. She began cultivating relationships with some of the grocery employees and started “tipping” them so they would alert her to what machines had not “paid out” recently.

Petitioner usually played the machine or machines that had gone the longest without a winner. On her 2001 tax return, she deducted as business expenses $6,000 in tips she paid grocery employees for that information. Petitioner estimated she spent 20 to 25 hours a week playing the slot machines at Smith’s. All of her gambling occurred after the flower shop was closed for the evening. Smith’s was on the route petitioner traveled from the flower shop to her home.

During 2000, petitioner contacted an Internal Revenue Service (IRS) agent for information on how to file her income tax return as a professional gambler. Petitioner never sought information from other professional gamblers as to what was required to become a professional gambler for tax purposes. She was reluctant to publicize her status as a professional gambler because of a perceived stigma attached to that occupation. She discussed her tax status as a professional gambler only on one occasion with an IRS agent. She was advised by the agent to simply file a Schedule C with her income tax return and was advised of her responsibility to pay self-employment taxes on any profit realized. Because petitioner reported a loss on her 2001 return, she did not pay any self-employment taxes.(2)

(2) There is no evidence in the record that, in her quest to qualify as a professional gambler, petitioner inquired or received any information that a basic and fundamental requisite of a trade or business, including that of a professional gambler, is that the activity be engaged in for profit. 

On Schedule C of her 2001 return, petitioner listed “Professional Gambler” as her principal business and reported negative income of $5,050 and $8,129 in expenses for a total loss of $13,179. Petitioner kept records verifying the exact dates and amounts of her winnings, tips, and ATM charges and attached those records to her Schedule C. Respondent agreed at trial that petitioner kept meticulous records. Nevertheless, on her Form 1040, U.S. Individual Income Tax Return, petitioner listed her occupation as “Floral Manager”.

For gambling to reach the level of a trade or business activity it must be “pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and * * not a mere hobby”. Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). The Supreme Court, in Groetzinger, held that a taxpayer who spent between 60 and 80 hours per week at dog races qualified as a professional gambler even though the taxpayer received income during the year from interest, dividends, capital gains, and salary earned before his job was terminated.  Likewise, a taxpayer who spent 35 hours a week at a horse track after losing his job as a salesman and who was seeking a new sales job qualified as a professional gambler for purposes of section 162. Rusnak v. Commissioner, T.C. Memo. 1987-249. 

Unlike the taxpayers in the cited cases, petitioner did not pursue gambling full time. She gambled regularly but only after she finished working at her flower shop. She frequently stopped at Smith’s to play the slot machines on her way home from work.  As she reported on her tax return, her occupation was “floral manager”. The fact that petitioner earned income from investments and rent does not in and of itself bar her from being a professional gambler. Petitioner, however, does not qualify as a professional gambler because her situation does not satisfy the test laid out by the Supreme Court. In Commissioner v. Groetzinger, supra at 33, the Court stated that, if a taxpayer “devotes his full-time activity to gambling, and it is his intended livelihood source, it would seem that basic concepts of fairness * * * demand that his activity be regarded as a trade or business”. Petitioner’s livelihood was not her winnings from slot machines; instead, her primary income came from her flower shop. Her gambling was not a trade or business under section 162. Consequently, petitioner may not deduct her losses on a Schedule C but must itemize them.(3)

(3)If petitioner qualified as a professional gambler forpurposes of sec. 162, she still could claim her losses only to the extent she had gains. Sec. 165(d); Praytor v. Commissioner, T.C. Memo. 2000-282. Because petitioner does not qualify as a professional gambler, it is not necessary to address whether petitioner may deduct ATM charges and tips to grocery store employees as expenses because her slot machine losses alone exceeded her winnings; therefore, she may not deduct the charges or tips. In the notice of deficiency, respondent disallowed all of petitioner’s claimed deductions for gambling losses and other expenses in excess of gambling income. That computation is sustained by the Court.

Respondent determined a section 6662(a) penalty of $1,232 against petitioner. Section 6662(a) provides for a 20-percent addition to tax for any underpayment to which the section applies. Respondent determined that section 6662(b) applies to petitioner because (1) petitioner was negligent or disregarded rules or regulations, or (2) petitioner’s deficiency represented a substantial understatement of income tax. 

Negligence is defined as “any failure to make a reasonable attempt to comply with the provisions of this title”, and disregard includes “careless, reckless, or intentional disregard.” Sec. 6662©. The Court holds that petitioner was not negligent, nor did she disregard rules or regulations when she filed as a professional gambler on her 2001 tax return. She consulted with an IRS agent and inquired as to how to file her tax returns as a professional gambler. She then followed the guidelines of the agent, which were simply to include a Schedule C with her income tax return. The Court finds petitioner’s testimony credible. Petitioner kept adequate records verifying her level of gambling activity and attached the records to her Schedule C. In addition, once petitioner received the notice of deficiency from respondent, she ceased her gambling activity while awaiting a decision by this Court. Petitioner’s actions amount to reasonableness under section 6662('c) and her actions are not considered by the Court to be “careless, reckless, or intentional disregard.”

Section 6662(b) also provides an addition to tax in the amount of 20 percent for any “substantial understatement of income tax.” A substantial understatement is defined as the 4 At trial, respondent agreed that, if the Court held that petitioner was not a professional gambler, she could deduct her gambling expenses as itemized deductions. In addition, respondent conceded that petitioner was also entitled to itemized deductions of $200, $458, and $1,376, respectively, for charitable contributions, taxes, and interest.  greater of 10 percent of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). Petitioner’s understatement does amount to more than $5,000; however, she qualifies for a reduction of the understatement. Sec.  6662(d)(1)(B). Section 6662(d) provides for a reduction of the understatement if the taxpayer supplied the relevant facts affecting the tax treatment on the return and if there was a reasonable basis for the tax treatment. Sec. 6662(d)(2)(B)(ii).  As previously discussed, petitioner attached adequate records to her 2001 income tax return, and she had a reasonable basis for believing she qualified as a professional gambler simply by filing a Schedule C. Therefore, petitioner’s understatement for purposes of determining whether it amounts to a “substantial understatement of income tax” is reduced to zero. Sec.  6662(d)(1)(A). Petitioner is not liable for the section 6662(a) penalty.4

Reviewed and adopted as the report of the Small Tax Case Division. Decision will be entered under Rule 155.

T.C. Memo. 2004-161
UNITED STATES TAX COURT
EDWARD D. HAMILTON AND YOLONDA B. HAMILTON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 8352-03. Filed July 12, 2004.  Edward D. Hamilton and Yolonda B. Hamilton, pro sese.

Angelique M. Neal, for respondent.

MEMORANDUM OPINION

LARO, Judge: This case is before the Court for decision without trial. See Rule 122.(1) Petitioners petitioned the Court to redetermine an $8,793 deficiency in their 2000 Federal income tax. We decide whether petitioners’ lottery winnings are includable in their adjusted gross income for purposes of applying the $25,000 offset of section 469(i). We hold they are.(2)

(1)Rule references are to the Tax Court Rules of Practice and Procedure. Section references are to the applicable versions of the Internal Revenue Code.

(2)We decide this case on its merits and without regard to which party bears the burden of proof

Background

The facts in this background section are obtained from the parties’ stipulation of facts and the exhibits submitted therewith. Petitioners resided in Los Angeles, California, when their petition was filed.

Petitioners filed a joint 2000 Form 1040, U.S. Individual Income Tax Return. They reported on that return the following items of income (loss) which they realized during 2000:

Wages $118,053
Interest 4,731
Refunds 872
Rental real estate (22,300)
California State lottery winnings 136,041
Total income 237,397

The rental real estate is a “passive activity”, sec. 469©(2), in which petitioners actively participated.

Discussion

Respondent determined that the phase-out rules of section 469(i)(3) preclude petitioners from currently deducting any of their rental real estate loss. Under that section, individual taxpayers such as petitioners who actively participate in a rental real estate activity and who may otherwise deduct up to $25,000 of a rental real estate loss, see sec. 469(i)(1) and (2), must reduce that $25,000 figure by 50 percent of the amount by which their adjusted gross income exceeds $100,000, see sec.  469(i)(3). We understand petitioners to be making three arguments in support of their claim that respondent’s determination is wrong. First, petitioners argue that their lottery winnings are not includable in their 2000 gross income because they are neither professional nor part-time gamblers.  Second, petitioners argue that their lottery winnings are not includable in their adjusted gross income for purposes of section 469(i)(3). Third, petitioners argue that, if their first two arguments are wrong, the Court should recognize that they are in a tight financial bind and apply equitable principles to allow them to deduct at least half of their rental real estate loss.

We disagree with petitioners’ first argument that their 2000 gross income does not include their lottery winnings. The wide reach of section 61(a) brings within a taxpayer’s gross income all accessions to wealth, United States v. Burke, 504 U.S. 229, 233 (1992), and an accession to wealth on account of gambling winnings is no exception, see, e.g., Lyszkowski v. Commissioner, T.C. Memo. 1995-235 (and cases cited therein), affd. without published opinion 79 F.3d 1138 (3d Cir. 1996). Contrary to petitioners’ claim, an accession to wealth on account of gambling winnings is includable in an individual taxpayer’s gross income whether he or she is a professional gambler, a part-time gambler, or simply a onetime gambler. Id.

Nor do we agree with petitioners’ second argument that their adjusted gross income under section 469(i)(3) does not include their lottery winnings. For purposes of the income tax provisions of the Internal Revenue Code, the term “adjusted gross income” is defined by section 62 as gross income less certain enumerated deductions, none of which is relevant here. While section 469(i)(3)(F) also enumerates certain other adjustments which affect that term for purposes of section 469(i)(3), all of those enumerated adjustments are inapplicable as well. 

We conclude that petitioners’ lottery winnings are includable in their adjusted gross income for purposes of section 469(i)(3). Although petitioners as a third argument essentially invite this Court to apply some principle of equity to arrive at a contrary result, we decline to do so. This Court is not authorized to ignore such a clear expression of Congress’ intent as applies here. Flight Attendants Against UAL Offset v.  Commissioner, 165 F.3d 572, 578 (7^th Cir. 1999).

All arguments for a contrary holding have been considered, and those arguments not discussed herein have been found to be without merit. Accordingly, Decision will be entered for respondent.

T.C. Memo. 2003-301

UNITED STATES TAX COURT

RUTHE G. OHRMAN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5667-02. Filed October 29, 2003.

Steven B. Hval, for petitioner.

Nhi T. Luu-Sanders, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: This proceeding was commenced under section

6015 for review of respondent’s determination that petitioner is

not entitled to relief from joint and several liability for 1999

with respect to a joint return filed with Steven F. Ohrman

(Mr. Ohrman). The issues for decision are: (1) Whether

petitioner is eligible for relief from joint and several

liability under section 6015(b); (2) whether petitioner is liable

under section 6015)('c)(4) to the extent she received disqualified assets notwithstanding a valid election under section 6015('c) and (3) whether respondent abused his discretion in denying petitioner’s request for relief from joint and several liability under section 6015(f).

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue. All dollar amounts have been rounded to the nearest dollar.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference. At the

time the petition in this case was filed, petitioner resided in

Portland, Oregon.

Background

Petitioner and Mr. Ohrman were married in Seattle, Washington, on March 26, 1988. On September 9, 1994, petitioner and Mr. Ohrman purchased a personal residence on Birdshill Road in Portland, Oregon (Birdshill residence). At the time of trial in March 2003, petitioner was 53 years old and Mr. Ohrman was 56 years old.

Petitioner attended college for at least 2 years and worked

towards a teaching degree, but she did not graduate. From 1985

to 1995, petitioner worked as a lending officer at two large

·        3 -

banks. While working as a lending officer, petitioner dealt with real estate agents and reviewed mortgage loan applications.  Petitioner became a full-time homemaker when her grandniece Alexa moved into her home in 1995.

Mr. Ohrman has worked for Spicers Paper, Inc. (Spicers

Paper), in Gresham, Oregon, as its regional manager for the

Portland, Oregon, and Seattle, Washington, divisions for several

years including 1999. As of the time of trial, Mr. Ohrman’s

salary was $135,000 per year, and his take-home pay was

approximately $6,800 per month.

Mr. Ohrman’s Gambling Addiction

Mr. Ohrman has an admitted gambling addiction. Petitioner first became aware of Mr. Ohrman’s gambling in 1993. In 1998, Mr. Ohrman enrolled in Project STOP (the State of Oregon gambling treatment center) to seek treatment for his gambling addiction.  Petitioner participated in Project STOP’s “significant other” program to support Mr. Ohrman. While participating in Project STOP, Mr. Ohrman revealed to petitioner that he had accrued approximately $200,000 in outstanding gambling debts on various joint credit cards held in Mr. Ohrman’s and petitioner’s names.  Mr. Ohrman graduated from Project STOP on December 19, 1998, and received a Certificate of Achievement.

During the Project STOP program, petitioner was advised to

block Mr. Ohrman’s ability to obtain money. Pursuant to this

·        4 -

advice, petitioner took control of the family finances in 1999.  Petitioner wrote checks to pay the bills, reviewed monthly bank statements, and maintained a file drawer in the Birdshill residence where she kept the family’s financial records. In addition, petitioner removed Mr. Ohrman’s name from their joint checking account at U.S. Bank (U.S. Bank checking account) as well as from their joint money market savings account at U.S.  Bank. Petitioner also obtained quarterly credit reports under her name to check for inquiries and new credit during 1999.  Petitioner, however, did not remove Mr. Ohrman’s name from either the $60,000 home equity line of credit held by petitioner and Mr. Ohrman with Wells Fargo Bank (Wells Fargo home equity line of credit) or the joint checking account petitioner and Mr. Ohrman maintained at Key Bank in Seattle.

After she took control of the family finances, petitioner had Mr. Ohrman’s wages from Spicers Paper deposited directly into her U.S. Bank checking account during 1999. Petitioner was the only authorized signer on the U.S. Bank checking account, and Mr. Ohrman had no access to this account. Mr. Ohrman’s wages provided the only income source from which petitioner paid her family’s ongoing living expenses, including Mr. Ohrman’s pre-1998 gambling debts. Despite petitioner’s efforts, Mr. Ohrman’s gambling addiction persisted through 1999.

·        5 -

Mr. Ohrman’s Early Withdrawals From His Retirement Account During 1999, Mr. Ohrman was the owner of an individual retirement account (IRA) at Dean Witter Reynolds (Dean Witter account). The Dean Witter account was a rollover account set up by petitioner and Mr. Ohrman in 1997. Petitioner was present with Mr. Ohrman when the Dean Witter account was established.

Thereafter, petitioner maintained a file for the Dean Witter

account and placed the monthly account statements into a

notebook. As of February 28, 1999, the Dean Witter account had a

total asset value of $454,406.

Petitioner was the designated beneficiary of the Dean Witter

account, but her written consent was not required to make an early withdrawal. Petitioner was aware of how much money was in the Dean Witter account in 1998 and 1999, and she believed there was approximately $700,000 in the account at one point in 1998.  Because of the size of the Dean Witter account, petitioner solicited promises from Mr. Ohrman before and during 1999 that he would not use any of the funds in the Dean Witter account for gambling.

Despite his promises to petitioner, Mr. Ohrman withdrew

$79,000 in early distributions from the Dean Witter account in

11 separate transactions from March 19 to December 21, 1999, to

fund his gambling addiction. Petitioner neither knew about nor

consented to these early distributions, nor did petitioner sign

·        6 -

any of the IRA distribution request forms. Mr. Ohrman was the only person who endorsed the distribution checks.

Statements for the months of March, April, May, June, July, and August 1999 for the Dean Witter account were received at the Birdshill residence. These monthly statements showed that withdrawals totaling $44,000 were taken from the Dean Witter account in the following amounts: March, $5,000; April, $5,000;

May, $8,000; June, $5,000; July, $13,000; and August, $8,000. In September 1999, Mr. Ohrman changed the address on the Dean Witter account statements from the Birdshill residence to his work address at Spicers Paper. Consequently, the monthly statements for September, October, November, and December 1999 for the Dean Witter account were sent to Mr. Ohrman’s work address.  Mr. Ohrman opened an individual checking account at Wells Fargo Bank (Wells Fargo checking account) prior to December 8, 1998, and he used this checking account throughout 1999 in connection with his gambling. Mr. Ohrman opened the Wells Fargo checking account without petitioner’s knowledge or consent.  Mr. Ohrman also obtained credit cards in his name alone after graduating from Project STOP. These credit cards were used to fund his gambling addiction and were not known to petitioner until June 2001. The early withdrawals taken by Mr. Ohrman from the Dean Witter account during 1999 were used at least in part to pay down the gambling debt attributable to these credit cards.

·        7 -

On April 15, 2000, petitioner and Mr. Ohrman filed a joint 1999 Federal income tax return (joint 1999 return), Form 1040, U.S. Individual Income Tax Return, and attachments. Petitioner prepared the joint 1999 return on her home computer using Turbo Tax, a tax preparation program. Although two Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for 1999 were sent to Mr. Ohrman at the Birdshill residence—one indicating a gross distribution and taxable amount of $71,000 from the Dean Witter account and the other indicating a gross distribution and taxable amount of $8,000 from the Dean Witter account—the $79,000 in distributions withdrawn by Mr. Ohrman from his Dean Witter account was not reported on the joint 1999 return filed by petitioner and Mr. Ohrman.

The $79,000 withdrawn by Mr. Ohrman from the Dean Witter account was taxable income, the omission of which from the joint 1999 return resulted in an understatement of tax attributable to an erroneous item of Mr. Ohrman. At the time petitioner signed the joint 1999 return, she did not have actual knowledge of the early distributions from the Dean Witter account.

On May 29, 2001, respondent issued a letter of proposed

changes to petitioner’s and Mr. Ohrman’s reported tax liability

for 1999. This letter proposed that petitioner and Mr. Ohrman

owed an additional $42,927 (consisting of $32,217 in deficiency,

·        8 -

$6,443 in accuracy-related penalty, and $4,267 in interest) for 1999. The letter of proposed changes was received by petitioner at the Birdshill residence in early June 2001. Within a few days after receiving respondent’s letter of proposed changes, petitioner confronted Mr. Ohrman and learned of the early distributions from the Dean Witter account.

Legal Separation Proceedings and Transfer of Assets

Within 1 week after receipt of respondent’s letter of

proposed changes, petitioner met with Laura Rackner (Rackner), an attorney in Portland who specializes in divorce and family law, for advice. During this meeting, petitioner told Rackner that she received respondent’s letter of proposed changes for 1999.  In addition, petitioner told Rackner that Mr. Ohrman was a compulsive gambler and that she wanted to be protected from his gambling-related debt.

Rackner informed petitioner that there was a possibility

that she could obtain relief from joint and several liability for

the 1999 tax deficiency. After hearing Rackner’s advice,

petitioner told Rackner that she wanted a financial separation

from Mr. Ohrman. Accordingly, petitioner provided assets and

liabilities information to Rackner, including the value of the

Birdshill residence and the value of the funds in Mr. Ohrman’s

Dean Witter account and in his 401(k) retirement account. On

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June 21, 2001, petitioner filed for a legal separation from Mr. Ohrman in Clackamas County (Oregon) Circuit Court.  On June 25, 2001, petitioner and Mr. Ohrman signed a Stipulated Judgment for Unlimited Separation (separation agreement), and Mr. Ohrman conveyed his interest in the Birdshill residence to petitioner. Rackner drafted the separation agreement for petitioner.

On July 3, 2001, Circuit Court Judge Patrick D. Gilroy signed the separation agreement in the matter of Ohrman v.  Ohrman, Case No. DR0106592. Mr. Ohrman was not represented at any point during the proceedings for legal separation. Upon execution of the separation agreement, Mr. Ohrman conveyed to petitioner his interest in the Birdshill residence. Petitioner also received ownership of a 1998 Lexus automobile, the Dean Witter account, and a 401(k) retirement account that had been held in Mr. Ohrman’s name. In addition, Mr. Ohrman was required to pay to petitioner spousal support as follows: (1) $6,000 per month, commencing on July 1, 2001, until the Birdshill residence was sold and the sales transaction was completed; (2) $5,000 per month for 12 months thereafter; (3) $4,000 per month for 66 months thereafter; and then (4) $1,500 per month indefinitely.

Pursuant to the separation agreement, Mr. Ohrman has been

required to maintain medical, dental, and hospital insurance on

petitioner. He has also been required to maintain life insurance

·        10 -

through his employer and through Transamerica with petitioner as beneficiary. Additionally, Mr. Ohrman was required to pay, defend, indemnify, and hold harmless petitioner for 19 specified credit cards held in his name in addition to all other credit cards, loans, debts, notes, encumbrances, credit lines, equity lines, or other financial obligations in his name, with the exception of an Alaska Airlines Visa account.

Finally, Mr. Ohrman agreed to:

pay, defend, indemnify and hold * * * [petitioner]

harmless from any claim made by any taxing agency

arising out of tax returns previously filed by the

parties. * * * [Mr. Ohrman] shall be liable, indemnify

and hold * * * [petitioner] harmless from the tax

liabilities resulting for 1999, 2000 and 2001. * * *

[Mr. Ohrman] shall be responsible for communicating with the taxing agencies and do all that is necessary to protect * * * [petitioner] from the tax obligation.

Excluding the right to spousal support, insurance coverages,

and the 1998 Lexus, petitioner received assets with an

approximate fair market value of $782,000 under the separation

agreement. The fair market value of the Birdshill residence as

of June 2001 was approximately $500,000. The true and actual

stated consideration in the Bargain and Sale Deed transferring

Mr. Ohrman’s interest in the Birdshill residence to petitioner

was $0. The 401(k) retirement account had a value of $36,581 on

March 31, 2001. The Dean Witter account had a value of $246,234

on May 31, 2001. Under the separation agreement, Mr. Ohrman

retained only his personal belongings, which consisted of

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clothing, items stored in the garage of the Birdshill residence, his tools, and a 1997 Honda automobile.

Petitioner’s and Mr. Ohrman’s Relationship After Their “Financial

Separation”

Although petitioner and Mr. Ohrman were legally separated as

of July 2001, they continued to reside together. They remained at the Birdshill residence until June 20, 2002. On June 10, 2002, petitioner sold the Birdshill residence for $520,000.  Petitioner received $63,087 in proceeds from the sale of the Birdshill residence.

After the sale of the Birdshill residence, petitioner and Mr. Ohrman rented a room together at a hotel in Portland from June 21, 2002, through July 15, 2002. On July 15, 2002, petitioner purchased a new personal residence on Carlton Street in Portland (Carlton residence) for $363,000. Petitioner made a downpayment of $79,438 to purchase the Carlton residence. In petitioner’s Uniform Residential Loan Application for the purchase of the Carlton residence, dated July 17, 2002, petitioner listed assets with a total value of $940,000 and reported a net worth of $525,373. Petitioner and Mr. Ohrman have resided together at the Carlton residence from July 20, 2002, to at least March 2003.

In addition to residing together, petitioner and Mr. Ohrman have been raising their grandniece Alexa together as parents.

Petitioner and Mr. Ohrman were awarded full custody of Alexa on

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February 24, 2002. Petitioner and Mr. Ohrman have also continued to socialize together as a couple since their legal separation.  Petitioner has remained in control of the family finances since the legal separation and has used Mr. Ohrman’s monthly support payments to pay her family’s ongoing living expenses, consisting of the monthly mortgage payment on the Carlton residence, the utilities, the monthly payment due on her Alaska Airlines Visa credit card, the house and car insurance premiums, and groceries for Mr. Ohrman, Alexa, and herself. In addition to making the monthly support payments to petitioner, Mr. Ohrman pays at least an additional $1,800 per month for Alexa’s schooling, his gambling debt, health insurance for petitioner and Alexa, and life insurance.

Revenue Agent McConnell’s Examination

On December 10, 2001, respondent sent a statutory notice of deficiency to petitioner and Mr. Ohrman for 1999. In the notice of deficiency, respondent determined that petitioner and Mr. Ohrman are liable for a deficiency in income tax of $31,515 and a section 6662(a) accuracy-related penalty in the amount of $6,303. On March 10, 2002, petitioner timely filed her Petition for Determination of Relief from Joint and Several Liability on a Joint Return under section 6015(b), (c), and (f) in response to the statutory notice of deficiency.

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In August 2002, Revenue Agent Joan McConnell (McConnell) was assigned to examine petitioner’s qualification for relief from joint and several liability under section 6015. McConnell interviewed petitioner on September 11, 2002. During this interview, petitioner told McConnell that monthly statements for the Dean Witter account came to the Birdshill residence during 1999, but she did not open them because they were not addressed to her. Additionally, petitioner explained to McConnell that she obtained the legal separation from Mr. Ohrman in order to protect herself financially. Petitioner also provided to McConnell a written response to respondent’s Innocent Spouse Questionnaire at this interview and signed it under penalties of perjury.  McConnell interviewed Mr. Ohrman on October 31, 2002. When questioned during this interview about the transfer of assets to petitioner, Mr. Ohrman told McConnell that the legal separation and transfer of assets were his ideas and that he did not feel that petitioner should have to pay for his mistakes.

McConnell referred to Rev. Proc. 2000-15, 2000-1 C.B. 447,

to determine whether petitioner should be granted equitable

relief under section 6015(f) for the 1999 tax deficiency. Based

upon her analysis of the facts and circumstances of petitioner’s

case, McConnell determined that petitioner did not qualify for

equitable relief under section 6015(f). McConnell concluded that

petitioner received a transfer of disqualified assets from

·        14 -

Mr. Ohrman. In addition, McConnell concluded that petitioner had reason to know of at least some of the distributions from the Dean Witter account.

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 entire tax due for that taxable year. Sec. 6013(d)(3). A spouse (requesting spouse) may, however, seek relief from joint and several liability by following procedures established in section 6015. Sec. 6015(a). A requesting spouse may request relief from liability under section 6015(b) or, if eligible, may allocate liability according to provisions under section 6015©.  Sec. 6015(a). If relief is not available under section 6015(b)

or ©, an individual may seek equitable relief under section

6015(f).

Section 6015(b) Analysis

Section 6015(b) provides, in pertinent part, as follows:

SEC. 6015(b). Procedures For Relief From

Liability Applicable to All Joint Filers.—

(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

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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 individual 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.

The requirements of section 6015(b)(1) are stated in the

conjunctive. Accordingly, a failure to meet any one of them

prevents a requesting spouse from qualifying for relief offered

therein. Alt v. Commissioner, 119 T.C. 306, 313 (2002).

There is no dispute that petitioner satisfies subparagraphs

(A) and (B) of section 6015(b)(1). Moreover, respondent does not argue that petitioner’s election was untimely under section 6015(b)(1)(E). Respondent contends, however, that petitioner failed to meet the requirements of subparagraphs © and (D) of section 6015(b)(1). Petitioner argues that she has met all of

·        16 -

the requirements for equitable relief set forth in section 6015(b)(1) and is entitled to relief from joint and several liability for the joint 1999 return.

Section 6015(b)(1)(C) requires that the requesting spouse establish that in signing the return she did not know, and had no reason to know, that there was an understatement. The parties have stipulated that petitioner did not have actual knowledge of the understatement at the time she signed the joint 1999 return.  In deciding whether petitioner has carried her burden of proof in establishing that she had no reason to know of the understatement in the joint 1999 return, witness credibility is an important consideration. See Penfield v. Commissioner, T.C. Memo. 2002-254; Ishizaki v. Commissioner, T.C. Memo. 2001-318. In this case, as discussed below, various inconsistencies in the assertions of petitioner and Mr. Ohrman undermine the reliability of their generalized assertions that petitioner had no reason to know of the withdrawals from the Dean Witter account. Therefore, we are not required to accept them. See Geiger v. Commissioner, 440 F.2d 688 (9^th Cir. 1971), affg. T.C. Memo. 1969-159.

Petitioner believed that there was approximately $700,000 in

the Dean Witter account at one point in 1998. In an effort to

protect this amount, she solicited promises from Mr. Ohrman

before and during 1999 that he would not use any of the funds in

the Dean Witter account for gambling. Petitioner was aware of

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how much money was in the Dean Witter account in 1998 and 1999 because she was present with Mr. Ohrman when the account was established and had maintained a file for the account’s monthly statements.

While Mr. Ohrman may have been deceitful in hiding the actual withdrawals from the Dean Witter account from petitioner, the account statements showing these withdrawals were sent to the Birdshill residence for the months of March, April, May, June, July, and August 1999. These statements show that withdrawals totaling $44,000 were taken from the Dean Witter account during these months. Mr. Ohrman changed the address on the Dean Witter account to his work address in September 1999.

It is not clear from the testimony or the evidence before us what happened to the Dean Witter account statements for the months of March, April, May, June, July, and August 1999.  Petitioner does not account for these six monthly account statements in her written response to respondent’s Innocent Spouse Questionnaire. Specifically, in petitioner’s response to question No. 22 of the Innocent Spouse Questionnaire, she provided information only as to Mr. Ohrman’s changing the address on the Dean Witter account statements for the months of September, October, November, and December 1999 and his evasiveness about the account statements for those months.

·        18 -

When McConnell interviewed petitioner on September 11, 2002, she inquired as to the Dean Witter account statements for the 6 months of March through August 1999. Petitioner told McConnell that monthly statements for the Dean Witter account came to the Birdshill residence during 1999, but she did not open them because they were not addressed to her. When questioned at trial, however, petitioner was not so forthcoming with an explanation as to what happened to the Dean Witter account statements for the 6 months of March through August 1999.  Petitioner testified that she could not remember getting any statements during 1999 for the Dean Witter account at the Birdshill residence. Therefore, when examined in their totality, petitioner’s response on the Innocent Spouse Questionnaire, her response to McConnell during their interview of September 11, 2002, regarding the delivery of the Dean Witter account statements to the Birdshill residence during 1999, and her response at trial about these statements are vague, inconsistent, and evasive.

Mr. Ohrman also provided testimony as to what happened to the Dean Witter account statements for the 6 months of March through August 1999. Mr. Ohrman testified that he would leave work and “chase the mailtruck” in order to prevent the Dean Witter account statements from reaching the Birdshill residence.

He also testified that, when petitioner asked about the Dean

·        19 -

Witter account statements, he would show her statements that he had “doctored up” in order to hide his withdrawals from the Dean Witter account. When asked about the whereabouts of these “doctored up” statements on cross-examination, however, Mr. Ohrman acknowledged that neither he nor petitioner had provided them and that “they were thrown away” by him or petitioner.

The Dean Witter account statements were not the only source of information indicating that Mr. Ohrman had taken the early withdrawals during 1999. Two Forms 1099-R for 1999 were also sent to the Birdshill residence—one indicating a gross distribution and taxable amount of $71,000 from the Dean Witter account and the other indicating a gross distribution and taxable amount of $8,000 from the Dean Witter account. On the Innocent Spouse Questionnaire, petitioner stated that the two Forms 1099-R were sent to Mr. Ohrman’s work address. This statement is inconsistent with the address clearly shown on both Forms 1099-R.  Petitioner is a fairly well-educated individual who had gained experience with financial matters as a result of her 10 years of employment as a lending officer with two large banks.

Petitioner took complete control of her family’s finances in 1999

as a result of Mr. Ohrman’s gambling addiction, was aware of the

existence and magnitude of the Dean Witter account, and prepared

the joint 1999 return by herself. A reasonable person in

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petitioner’s position would have been put on notice by Mr. Ohrman’s evasion and deception with respect to the Dean Witter account statements. Petitioner was well aware of the extent of Mr. Ohrman’s past gambling and that he needed access to money in order to continue gambling. Even though petitioner had knowledge of these facts, she did not keep close watch over the Dean Witter account. Although petitioner also suffered difficult personal circumstances during 1999, she was able to retain control of other aspects of the family finances. Therefore, when we consider the entire record of this case, we conclude that petitioner has not established that she had no reason to know of the understatement when she signed the joint 1999 return.

We also conclude that petitioner has not satisfied the

requirements of subparagraph (D) of section 6015(b)(1). Taking

into account all the facts and circumstances of petitioner’s

case, it is not inequitable to hold her liable for the 1999 tax

deficiency because the tax-avoidance purpose of the separation

agreement is apparent from the evidence. First, a proposed tax

liability of nearly $43,000 prompted petitioner to meet with

Rackner for advice in early June 2001. Second, petitioner told

Rackner about the proposed tax deficiency during this meeting,

and Rackner informed her that relief from joint and several

liability might be available. Third, with the knowledge that

relief from joint and several liability might be available to

·        21 -

her, petitioner instructed Rackner to draft the separation agreement whereby she would be financially separated from Mr. Ohrman. Fourth, pursuant to this separation agreement, petitioner received approximately $782,000 in assets that had previously been held in Mr. Ohrman’s name along with spousal support amounting to at least $4,000 per month for a minimum period of 78 months, leaving Mr. Ohrman stripped of nearly all of his assets and monthly income. Finally, petitioner and Mr. Ohrman have continued their marital relationship since their legal separation was finalized in July 2001 and have continued to use Mr. Ohrman’s income to pay the family’s ongoing living expenses.

In Doyle v. Commissioner, T.C. Memo. 2003-96, we denied a taxpayer relief from joint and several liability under section 6015(b)(1)(D) because she and her family had engaged in a