D'Re I. Stergios, f.k.a. D'Re I. Murray, and James M. Murray, Intervenor v. Commissioner , 2009 T.C. Memo. 15 ( 2009 )

T.C. Memo. 2009-15UNITED STATES TAX COURT
D’RE I. STERGIOS, f.k.a. D’RE I. MURRAY, Petitioner, AND
JAMES M. MURRAY, Intervenor v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket No. 8389-04. Filed January 22, 2009.
Curtis W. Berner, for petitioner.
James M. Murray, pro se
Davis G. Yee, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HOLMES, Judge: This case arises from a troubled five-year
marriage that produced two children, constant bickering, and
numerous mutual accusations of wrongdoing. The Commissioner
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issued each spouse a notice of deficiency for the last two full
years of their marriage, and the former wife petitioned us. She
doesn’t contest the amount of the deficiency, but pleads as an
affirmative defense that she qualifies as an innocent spouse.
The Commissioner agrees with her, but her ex has intervened. In
this case where neither of the main parties is credible, we piece
together the fragments of truth as best we can to decide whether
she is entitled to relief under section 6015.1
FINDINGS OF FACT
This case arises from that couple’s 2000 and 2001 tax
returns, both of which greatly understated the tax due. The
couple are James Murray and his former wife, D’Re Inge Stergios.2
Murray, an imposing man, had been a gifted swimmer in his
youth. Stergios had been an athlete herself, a fine figure
skater who might have competed in the Calgary Olympics. But
injuries ended her career and she went on to college, graduating
from the University of California at Davis with a degree in
rhetoric and communications. Murray had graduated from the
University of Arizona with a degree in economics and was working
as a stockbroker at Merrill Lynch when he met his future former
1
All section references are to the Internal Revenue Code
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
2
D’Re has taken her new husband’s surname.
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wife. They began dating in 1995, soon married, and quickly had a
child. Stergios stopped working outside the home; their second
child followed eighteen months later. She earned no income of
her own during the years at issue.
The marriage was troubled from the beginning, and the
trouble began over money. Murray did very well, but he moved
from investment firm to investment firm, and with each move he
received an upfront bonus that he was obliged to repay when he
left. He didn’t, though, and by 1999 his $600,000 in unsecured
debt forced him to declare bankruptcy.
These facts at least everyone agrees on. But the former
spouses’ stories diverge on almost every other detail. Stergios
blames Murray’s job-hopping on unethical trades that he made with
her family’s accounts. Murray called one of his bosses, Francis
Roche, to rebut her, but Roche instead testified that he asked
Murray to leave because of improper handling of customer and
personal accounts. Roche we find to be credible, and his
testimony is supported by persuasive documentary evidence that
the New York Stock Exchange punished Murray for making trades on
customers’ accounts in violation of the Exchange’s rules.
Stergios also claims that Murray routinely forged
signatures. As proof she provided the Appeals officer with
contracts from three investment accounts opened in her name. The
signatures on the contracts are not her normal signature, and she
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claims that Murray opened these accounts without her consent.
Stergios also accused Murray of hiding money and a Porsche from
the bankruptcy trustee by fraudulently putting them in his
uncle’s name. Later, when Murray wanted a new Porsche, she
claimed that he bought it by signing his father’s name.
Murray’s employment gave him considerable financial
expertise, but he disputed any inference that Stergios didn’t
understand the family’s financial affairs. He claims that these
were all authorized transactions. He argues with special force
that Stergios knew about the investment accounts in her name,
offering as proof a $25,000 check deposited by Stergios into one
of those accounts. Stergios tells a lengthy story about how the
check came to be deposited, but the specifics are not relevant.
Murray also disputes Stergios’s self-characterization as unwise
in financial matters. He testified at some length that
Stergios’s major at UC Davis--though it didn’t require her to
take any business or accounting classes--did require her to take
a math class.3 After graduation, Stergios worked only as a
secretary at her mother’s construction company; or, perhaps, as a
3
Even this item of minor background detail produced
contradictory testimony. Stergios testified that she was not
required to take a math class while at UC Davis. We decline to
take judicial notice, despite Murray’s request, that a person
graduating in 1990 from UC Davis with a degree in rhetoric/com-
munications was required to take at least one math class.
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vice president who gained a great deal of business acumen while
working there.
These he-said, she-saids extended, however, to the more
serious subject of spousal abuse. The first incident was in
1997 and seems to have begun with an argument while Stergios
drove Murray home from work. The details differ depending on who
is telling the story, but the incident ended when the police
arrived after a neighbor called because she heard Stergios
screaming on the couple’s front porch. The police arrested
Murray because Stergios accused him of pushing her. They
released Murray a few hours later.
The second incident occurred in 1998 and began as an
argument about Stergios’s conversation with an electrical
contractor who was installing a hot tub at their home. Stergios
claims that she fled to a friend’s house after Murray punched her
twice. Murray called the police to report that she had stabbed
him. The police were waiting when Stergios returned home, but
she claimed that Murray had stabbed himself. She ended up
spending the night in jail, though she was never charged.
The final incident occurred in December 2001. Murray had
moved out of the couple’s home, and allegedly taken some of
Stergios’s property with him. Stergios went to his apartment to
retrieve it, only to have Murray allegedly throw a wicker ottoman
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at her head and then start choking her. The police were called,
but she chose not to press charges.
The marriage ended in December 2002, but the arguments,
allegations, and litigation continued. One of the numerous
lawsuits was a custody fight over the children. The evidence of
that dispute that the parties made a part of the record in this
case confirm the picture of a marriage in conflict and disarray
for its entire existence--filled with high levels of aggression,
fighting, threats, and violence. One part of that record,
admitted under seal, leads us to find however that Stergios was
not routinely in fear of Murray and often was verbally aggressive
toward him.
The couple also disputes which of them handled the finances,
and disputes with special vigor the question of who prepared
their tax returns. Murray says that Stergios paid the household
expenses, monitored the couple’s stock holdings, and prepared the
returns. Stergios claims that she merely paid household expenses
from an account that Murray himself funded. Stergios even goes
so far as to claim that while they were married she never saw a
bank or investment account statement or knew what stocks they
held. The truth, we find, is somewhere in between.
Most of the understatement at issue flows from unreported
stock sales from Murray’s accounts (and one of the accounts he
allegedly opened in Stergios’s name). In 2000, there were 216
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unreported stock sales totaling $9.6 million. In 2001, there
were 244 totaling over $17 million. Murray testified that she
knew practically every stock they owned, and would harp on the
subject without mercy if he did not sell a stock before it went
down. Stergios wouldn’t admit to this conduct, but simply
testified: “I assumed that since we were married we did own
stock.” We find neither of them credible--the only witness we
believed on this subject was Tim Chan, a former friend of the
couple. He testified that Stergios knew that Murray traded
stocks and that he and Stergios would discuss the Murrays’ net
worth. We find that Stergios knew more then she admitted, but we
cannot find that she knew about any particular stocks and
accounts.
The other items causing the deficiencies are unreported
income from sources other than stock sales, early withdrawals
from Murray’s retirement account, and disallowed business expense
deductions. There was also an unsubstantiated charitable
contribution to their children’s school in 2000, deductions from
a make-believe horse-training business that Stergios supposedly
ran in 2000, an inflated deduction for mortgage interest in 2001,
and a failure to include in their income State tax refunds
received in both years.
Stergios claims to have no knowledge of any of these items,
and apart from the stock sales, Murray presented no evidence or
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argument to the contrary. We do know for sure that the couple’s
2000 return was prepared electronically. By whom? There we
again have conflicting evidence. Murray alleges that Stergios
used Turbo-Tax to complete their return, with his role limited to
providing her with a summary of his stock transactions.4
Stergios claims that she never saw the return because it was
Murray who prepared it, and he neither involved her in its
preparation nor sought her signature before he filed it. The
couple’s other return at issue--for 2001--was at least filed on
paper. But though the return bore Stergios’s signature, she
claims that she signed it under duress.
Stergios asks for relief from the liabilities arising from
the understatements on both these returns. She first asked for
relief by giving the relevant IRS forms to the revenue agent who
was auditing the couple’s 2000 and 2001 returns. Before the IRS
acted on these requests, the Commissioner sent her a notice of
deficiency for the 2000 and 2001 tax years. Stergios then
petitioned us and claimed innocent-spouse relief as an
affirmative defense to the deficiencies. Murray intervened.
Before trial, the IRS reviewed Stergios’s requests and decided
4
The couple disagrees even on Stergios’s computer
competence. Stergios declared herself computer illiterate, while
Murray told of her Turbo-Tax wizardry. Her exact level of
computer aptitude is undoubtedly between these extremes, but is
not essential to the outcome of this case except as further
evidence that each ex’s desire to harm the other undermines the
credibility of both.
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that she qualified for relief under section 6015(b), (c), and (f)
for both years. We tried the case in San Francisco, and Stergios
was a California resident when she filed her petition.5
OPINION
Spouses who file joint returns are jointly and severally
liable for the tax owed. See sec. 6013(d)(3). Section 6015
provides three ways out of this joint liability. See sec.
6015(b), (c), (f). These subsections address the same general
problem but differ in important ways. Relief under subsection
(f) is available for a spouse who shows that “taking into account
all the facts and circumstances, it is inequitable to hold [her]
liable for any unpaid tax or any deficiency (or any portion of
either).” Relief under subsections (b) and (c), when raised as
an affirmative defense, doesn’t even require a determination by
the Commissioner denying relief before this Court can grant it.
Butler v. Commissioner, 114 T.C. 276, 288 (2000). A requesting
spouse under these subsections generally has the burden of proof,
sec. 1.6015-3(d)(3), Income Tax Regs., but needs only to persuade
us by a preponderance of the evidence. See McClelland v.
Commissioner, T.C. Memo. 2005-121. Under subsection (b) we will
relieve a spouse from liability if she persuades us that she was
5
Appellate venue would thus be the Ninth Circuit. See sec.
7482. Appellate jurisdiction over an appeal by Murray, however,
might be a problem. See Baranowicz v. Commissioner, 432 F.3d
972, 976 (9th Cir. 2005), dismissing appeal from T.C. Memo. 2003-
274.
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justifiably ignorant of the understatement and that she meets the
subsection’s other requirements. For relief under subsection (c)
a requesting spouse must persuade us that she meets the
subsection’s requirements, and we will deny relief if she doesn’t
or if the Commissioner persuades us that any one of the three
exceptions for which he bears the burden of proof applies. See
sec. 6015(c)(3)(A)(ii), (C), (d)(3)(C).
In routine subsection (c) cases, where the requesting spouse
challenges the Commissioner’s denial of relief, this allocation
of the burden of proof sensibly places it on parties who are
adverse to each other. But a problem arises in subsection (c)
cases when the Commissioner favors relief, and the nonrequesting
spouse intervenes to oppose it. See sec. 6015(e)(4); Rule 325;
see also King v. Commissioner, 115 T.C. 118 (2000); Corson v.
Commissioner, 114 T.C. 354, 363 (nonrequesting spouse’s right to
intervene the same in both stand-alone and affirmative-defense
cases). In these cases the Commissioner isn’t adverse to the
petitioning spouse any longer, so--if the intervenor has
intervened to oppose relief relying on any of the three
exceptions listed above--there’s a good chance that we would
place the burden of proof on him to convince us that the
requesting spouse is not entitled to relief. We don’t need to
decide that today, because both parties introduced evidence and
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we can just decide the issues on who persuaded us by a
preponderance of the evidence.
Stergios pleaded all three subsections of 6015, but we will
focus on subsection (c). Section 6015(c) allows a requesting
spouse to allocate the items giving rise to the deficiency to the
nonrequesting spouse if:
(1) the spouses made a joint return;
(2) at the time the election was made the
spouses were legally separated, divorced,
or had not been members of the same
household at any time during the previous
12 months;
(3) the election for relief was made after a
deficiency was asserted but no later
than two years after the Commissioner
began collection activities; and
(4) the deficiency remains unpaid.
When a requesting spouse meets these four requirements, the
items giving rise to the deficiency are allocated as if the
spouses had filed separate returns. Sec. 6015(d)(3)(A).
The Commissioner (or, in this case, Murray) can also
persuade us to deny relief with evidence that the requesting
spouse had “actual knowledge, at the time the individual signed
the return, of any item giving rise to a deficiency * * * which
is not allocable to such individual.” Sec. 6015(c)(3)(C); see
also sec. 6015(c)(3)(A)(ii), (d)(3)(C) (explaining the other two
exceptions that, if met, cause the requesting spouse to be denied
relief).
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No one disputes that Stergios meets requirements (1), (3),
and (4). Murray does argue that she fails requirements (2) and
that she had actual knowledge of what caused the deficiency for
each year. His objection on requirement (2) is easily disposed
of. Murray argues that relief under 6015(c) is not available
because they had not been separated for twelve months when
Stergios filed her Form 8857 Request for Innocent Spouse Relief.
We are, however, not reviewing the Commissioner’s determinations
after Stergios filed the Form 8857. We are deciding whether
Stergios has an innocent-spouse defense to her notice of
deficiency. On May 21, 2004, when Stergios filed her petition
with us, the couple was already divorced. See Vetrano v.
Commissioner, 116 T.C. 272, 283 (2001). Murray’s argument is
thus beside the point, and we reject it.
And so we arrive at the first key issue in this case--Did
Stergios know of any item giving rise to a deficiency when she
signed the return?6 Under section 6015(c)(3)(C), we look for "an
actual and clear awareness (as opposed to reason to know) of the
existence of an item which gives rise to the deficiency (or
portion thereof)." Cheshire v. Commissioner, 115 T.C. 183, 195
6
This part of the section 6015(c) analysis is complicated
by Stergios’s claims that she did not sign the 2000 tax return.
But she does not claim this as a defense, so we will assume that
the return was filed with her consent and will determine what she
knew at the time the return was electronically filed. See sec.
6013(a); sec. 1.6013-1(a)(2), Income Tax Regs.; Moran v.
Commissioner, T.C. Memo. 2005-66.
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(2000), affd. 282 F.3d 326 (5th Cir. 2002). Section 1.6015-3(c),
Income Tax Regs., specifically describes what a requesting spouse
must have knowledge of, given a specific class of item.
! If the item is omitted income. The spouse
requesting relief must have knowledge of the
income, which includes knowledge of the
receipt of the income. Sec. 1.6015-
3(c)(2)(i)(A), Income Tax Regs.; Kling v.
Commissioner, T.C. Memo. 2001-78. We do not
infer actual knowledge from a mere reason to
know of the omitted income. Sec. 1.6015-
3(c)(2)(iii), Income Tax Regs.
! If the item is an erroneous deduction. The
requesting spouse cannot allocate the item if
she knew of the facts that made the item not
allowable as a deduction. Sec. 1.6015-
3(c)(2)(i)(B)(1), Income Tax Regs.
! If the item is a fictitious deduction. The
requesting spouse cannot know that the
expenditure was not incurred. Sec. 1.6015-
3(c)(2)(i)(B)(2), Income Tax Regs.
With this background explained, we will look in turn at each
of the tax years at issue, always remembering that it is Murray
who bears the burden of proving that Stergios is not entitled to
relief because she knew too much.
A. 2000
We start with the 2000 tax return. While the couple
disputes who prepared that return, Stergios and the Commissioner
agree that Murray completed the return and never showed it to
Stergios. Murray denies preparing the return, but he admitted in
a declaration to the family court that he “prepared” the return.
When Stergios’s attorney used the declaration to impeach Murray,
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he replied that “prepare” meant that he reviewed the return after
Stergios prepared it on his computer. The only evidence he
offered was his own testimony. While we don’t believe that
Stergios is as ignorant about tax-return preparation as she would
have us believe, we also don’t believe that she is astute enough
to calculate the couple’s $527,717 short-term capital loss or
create a fictitious business. We find that Murray completed the
return and did so without showing it to Stergios.
Murray also tried to persuade us that Stergios knew about
nearly all his stock transactions. While we are convinced that
Stergios knew generally of the couple’s stock holdings, the
evidence does not suggest she knew enough to meet the “actual
knowledge” requirement of section 6015(c)(3)(C). She would have
had to have knowledge of the stock transactions that actually
realized the omitted income, and Murray did not present any
credible evidence that Stergios knew about any specific
transaction. Stergios also lacks sufficient knowledge because we
find that Murray hid the account statements, particularly the
statements for accounts in her name. Therefore, we find that
while Stergios did know that Murray was buying and selling
stocks, she did not know that the activity produced omitted
income.
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The Commissioner proposed several other adjustments to the
2000 return, and we find each is attributable to Murray without
Stergios’s knowledge:
! More than $10,000 in wage income Murray received
but did not report;
! More than $20,000 in premature IRA distributions
he received from an account under his exclusive
control;
! 1099-Misc income of $32,000 that Murray received
and did not report;
! Numerous miscellaneous employee business expenses
that Murray incurred but for which he had no
substantiation--all relating to his own business
as a stockbroker.
That leaves only the fictional horse-training business that
generated close to $50,000 in losses during 2000. Stergios did
train and ride horses as a hobby that year and into 2001, but we
specifically find that she was unaware that a loss had been
claimed for her hobby for the 2000 tax year.
B. 2001
We also find that Murray did not carry his burden of proof
for the 2001 tax year. We do agree with him that Stergios cannot
claim ignorance of the income omitted from the 2001 return.
Stergios was asked at trial if she believed that the 2001 return
reflected an understatement. She answered, perhaps strategical-
ly, that she never saw the tax return. She claims that after
Murray had moved out, he appeared at the couple’s former resi-
dence bearing the 2001 returns’ (he had the State tax return,
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too) signature pages. Stergios alleges that Murray demanded her
signature and, when she refused, that he became agitated and
physically threatened her until she signed.
But we find this was not the first time that Stergios saw
the 2001 return. During the couple’s custody battle, Murray
prepared a “pro-forma” 2001 return for the family court. We find
Stergios saw this pro forma return because it caused her to
become so concerned Murray was underreporting his income that she
called her lawyer.7 Her attorney responded by sending a letter
to Murray’s attorney communicating her fears and stating that
Stergios would not sign a joint return. The letter was dated
February 27, 2002, just five days before Murray allegedly forced
Stergios to sign the return. We found further evidence of her
knowledge in a reply declaration that Stergios wrote to the
family court. In the declaration she described in detail why the
pro-forma return was incorrect. The description she gave
suggests that the pro-forma return and the one she signed were
the same. Thus, while it may be true that Stergios did not have
knowledge of the understatement reflected on the return she
actually signed, she did have actual knowledge that Murray was
7
Stergios had been monitoring deposits made to the couple’s
accounts, so she thought she knew how much income Murray had in
2001. As Murray points out, her estimates were not accurate
because some of the money being deposited was not income but was
money being moved between the accounts.
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understating the tax owed. So we don’t believe her claim of ignorance.
That is not enough for Murray to win, though. A return
signed under duress is not a joint return, so only the individual
who voluntarily signed the return is liable for the deficiency
shown. Sec. 1.6013-4(d), Income Tax Regs. We find that a tax
return was signed under duress if: (1) A spouse was unable to
resist demands to sign the return; and (2) she would not have
signed the return except for the constraint applied to her will.
Brown v. Commissioner, 51 T.C. 116, 119 (1968). We must
therefore look closely at the circumstances in which Stergios
signed the 2001 return.
Murray claims that he never forced Stergios to sign it. He
claims that the couple was experiencing a period of reconcilia-
tion during the 2001 tax season and it was Stergios who prepared
the return. Murray’s story is highly improbable because he
admitted to preparing the 2001 pro-forma return. For us to
believe Murray’s version of the facts, we must find that Stergios
prepared a return exactly like the pro-forma return after her
attorney sent Murray a letter insisting that she would not sign
that same return. We are not willing to make this leap.
Now we can apply the test for deciding whether Stergios
signed under duress. Stergios meets the first part of that test
because she would not be expected to resist the threats of a man
who is 6 feet 4 inches tall and weighs around 250 pounds,
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especially given that the couple has a history of violence.
Stergios also meets the second part because the letter to Murray
shows she would not have signed the return if it were not for his
threats. We therefore find it more likely than not that Stergios
signed the 2001 return under duress. This makes only Murray
liable for the deficiency.
We therefore hold that Stergios is not liable for the 2000
deficiency under section 6015(c) and she is not liable for the
2001 deficiency because she signed the return under duress.
Decision will be entered for
petitioner.