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Tax Court & Board of Tax Appeals Memorandum Decisions (Prior Years) 1995 TC Memo 1995-448 - TC Memo 1995-409
Jose A. Alvarez, et ux., TC Memo 1995-414, Code Sec(s). 6013; 6501; 6651; 6653; 6661; 6662, 8/24/1995
Tax Court & Board of Tax Appeals Memorandum Decisions
Jose A. Alvarez, et ux. v. Commissioner, TC Memo 1995-414 , Code Sec(s) 6501.
JOSE A. ALVAREZ AND WANDA ALVAREZ. Case Information:

Code Sec(s): | 6501 | Docket: | Dkt. No. 2849-91. | Date Issued: | 8/24/1995. | Judge: | Opinion by Laro, J. | Tax Year(s): | Years 1982, 1983, 1984, 1985, 1986, 1987, 1989. | Disposition: | Decision for Commissioner. | | Related Proceedings at Jose A. Alvarez v. Commissioner, [S| T.C. Memo. 1995-414 [1995 RIATC Memo U95,414], Tax Ct. Dkt. No. 22719-93 | Cites: | TC Memo 1995-414, RIATC Memo P 95414, 70 CCH TCM 518. |
HEADNOTE
1. Tax Court — arbitrary deficiency notice. Deficiency notice wasn't arbitrary, so burden of proof didn't shift to IRS: IRS'sYiet worth calcuJatfonssrnatched taxpayefs^net^Korth Iedger>d€f1ciertoes in taxpayer husband's income computed under^ank-deposifSsQTettiecrwere prima facieVaTld; and taxpayers kept inadequate records and stip&taled the accuracy of IRS's tracing of ledger entries to specific bank account balances. Husband's testimony that source of unreported income was a gift was unsupported. https://checkpoint-riag-com.proxy .lib.wayne.edu/app/view/toolltem?usid=c 1 1 a22674cf&fe. . . 9/28/20 1 1

Petitioners resided in Bayville, New Jersey, when they petitioned the Court in docket No. 2849-91 . Mr. Alvarez resided in Coral Gables, Florida, when he petitioned the Court in docket No. 22719-93. For each of their 1982 through 1984 taxable years, petitioners timely filed a Form 1040, U.S. Individual Income Tax Return, using the status of "Married filing joint return". For each of his 1985 through 1987 and 1989 taxable years, Mr. Alvarez untimely filed a Form 1040 using the status of "Married filing separate return".
Drug-Dealing Activities Involving Mr. Alvarez
Mr. Alvarez was the subject of a criminal investigation conducted by a multiagency task force (Task Force). The Task Force's investigation culminated on October 3, 1985, with the arrest of Mr. Alvarez, Adolph V. Carbone, and approximately 66 other suspects. Mr. Alvarez was charged with conspiracy to distribute cocaine, Mr. Alvarez was later acquitted of these charges.
Mr. Carbone was Mr. Alvarez' client. During the 2-month period ending on August 31 , 1985, Mr. Carbone purchased 3 or 4 kilograms of high-quality cocaine from Mr. Alvarez at a cost ranging from $40,000 to $43,000 per kilo. Mr. Alvarez "fronted" (consigned) the kilos to Mr. Carbone, and Mr. Alvarez received cash payments for each front shortly afterwards. On one occasion, Mr. Carbone paid $43,000 to Mr. Alvarez at his residence in Bayville, New Jersey. Mrs. Alvarez was present at the residence when the cash payment was made.
Mr. Alvarez was arrested at his residence. A search of his residence at that time uncovered loaded weapons with at [pg. 95-2498] least nine rounds of ammunition, approximately 1 ounce of marijuana, an envelope containing $4,000 in cash, another envelope containing two safe deposit box keys, and a notebook ledger. The ledger contained numerous handwritten entries indicating that the aggregate value of assets held by petitioners in accounts, investments, and cash was $1,052,166.
On October 4, 1985, law enforcement authorities used the keys found at Mr. Alvarez' residence to search the two safe deposit boxes. In the boxes, the authorities found: (1) $551,000 in cash and (2) bank passbooks and certificates of deposit totaling $92,772. On the same day, Mrs. Alvarez removed the contents from three safe deposit boxes of petitioners, one in Newark, New Jersey, and the other two in Jersey City, New Jersey. In order to gain entry to the third box, Mrs. Alvarez made misrepresentations to bank officials, who drilled the box open at her request. When Government officials later searched the three boxes, the boxes were empty.
On April 13, 1989, a Federal grand jury indicted Mr. Alvarez on three counts of fraud under section 7206(1), for willfully making false statements in connection with petitioners' 1982 through 1984 joint income tax returns. On November 22, 1989, Mr. Alvarez pleaded guilty to one count of making a false statement on the 1982 joint return in violation of section 7207.
Petitioners failed to maintajrLadequate books andresQcds during the years in issue. Respondent reconstructed Mr. Alvarez' 1985 through 1987 and 1989 taxa^te4B€Qme-tbrough.theJ3ank deposits method. https://checkpoint-riag-com.proxy .lib.wayne.edu/app/view/toolltem?usid=c 1 1 a22674cf&fe. . . 9/28/201 1

taxable year. 12 Respondent determined ttiat Mr. Alvarez' underpayment of income-taxes in each year was due to negligence or intentional disregard of rules or regulations. For 1986 and/1987, section 6653(a)(1)(A) imposes an addition to tax equal to 5 percent of tnte underpayment if any pan of the underpayment is attributable to negligence, and section 6653(a)(1)(B) imposes an addition to tax equal to 50 percent of the interest payable on the portion of the underpayment attributable to negligence. For 1989, section 6662(a) imposes a penalty equal to 20 percent of the underpaymermattribdtable to negligence.
Negligence includes a lack of due care or a failure to do wharf a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, fff| 85 T>C. 934, 947 (1985). For purposes of section 6662(a), "negligence" includes a failure to ma)re a reasonable attempt to comply with the Internal Revenue Code, and "disregard" includes carelessyreckless, or intentional disregard. Sec. 6662(c); |W| sec. 1.6662-3(b)(1), Income Tax Regs.
Mr. Alvarez bears the burden of proving th^se determinations wrong. Rule 142(a); Lumen v. Commissioner, [S] 79 T.C. 846, 860 (1982). Mr. Alvare/presented no evidence on this issue. We sustain respondent's determinations under sections 6653j^)(1) and (2) and 6662(a) for all relevant years. 6. SeitzEmployment Tax
Respondent determinetha^deficiency in self-empjeyrfient tax with respect to each year in issue. A self-employment tax is imposed ornPtcsajeip-excess of $400 derived by an individual from his or her trade or business. Sees. 1401 and 140^bfand (c).
The burden is on oetifioners to prove respondent's determination^wTong^Bule 142(a); Welch v. Helvering, __ 290 U.S. 11JK12 AFTR 1456] (1933). They presented no evidence on this issue~l?vS-sost«in respondent's determinations with respect to it. 7. Innocent Spouse Relief
A husband and wife filing a joint return for a year generally are jointly and severally liable for any tax due with respect to that year. Sec. 6013(d)(3). Section 6013(e), however, provides an exception under which a spouse is relieved of his or her liability when: (1) A joint return was filed for the year in question; (2) there was a substantial understatement of tax attributable to a grossly erroneous item of the other spouse; (3) in signing the return, the "innocent spouse" neither knew, nor had any reason to know, of the substantial tax understatement; and (4) taking into account all facts and circumstances, it is inequitable to hold the claimed "innocent spouse" liable for the deficiency attributable to the tax understatement. Sec. 6013(e)(1). The spouse claiming innocent spouse relief, in this case Mrs. Alvarez, must prove each of these four prongs. Rule 142(a); Bokum v. Commissioner, [i] 94 T.C. 126, 138 (1990), affd. g) 992 F.2d 1132 [72 AFTR 2d 93-5111] (11th Cir. 1993). Because the parties have not contested the first two prongs, we limit our discussion to the last two prongs. In deciding whether it would be inequitable to hold Mrs. Alvarez jointly liable for the deficiencies in petitioners' 1982 through 1984 income taxes, we consider whether she significantly benefited from the underpayments of tax. Estate of Krock v. Commissioner, [ji| 93 T.C. 672, 677 (1989). https://checkpoint-riag-com.proxy.lib.wayne.edu/app/view/toolltem?usid=clla22674cf&fe... 9/28/2011

Mrs. Alvarez argues that it would be inequitable to hold her liable for the deficiencies because she received no significant benefit from the tax understatements. We disagree. Under the facts at hand, Mrs. Alvarez' acquisition of savings and other investment assets is a "significant benefit" to preclude innocent spouse relief. Purifi- [pg. 95-2504] cato v. Commissioner, g) 9 F.3d 290, 294-295 [72 AFTR 2d 93-6559] (3d Cir. 1993), affg. [B] T.C. Memo. 1992-580 [1992 RIA TC Memo 1J92.580]. in the Purificato case, the wives of two brothers sought innocent spouse relief from deficiencies due to their husbands' understatement of income. This Court concluded that neither spouse proved it would be inequitable to hold her liable for her husband's deficiency because each couple had acquired substantial joint savings and other investment assets during the years in issue there. Upon appeal, the Court of Appeals for the Third Circuit agreed. In affirming this Court, the Court of Appeals rejected the wives' argument that the acquisition of joint savings or other investment assets could not, as a matter of law, constitute a significant benefit because the savings and assets did not relate to present consumption. The Court of Appeals held that the wives' position was unsupportable, observing that in the context of an income tax, i.e., a tax on income not consumption, such an argument "simply does not make sense." Id. at 294. The Court of Appeals held that each wife received a significant benefit and, accordingly, denied innocent spouse relief. Id.
Mrs. Alvarez derived a similar benefit during her 1982 through 1984 taxable years. In 1982 and 1983, Mrs. Alvarez benefited from a $35,000 increase in joint investment assets and savings. In 1984, petitioners' joint investments and accounts increased by at least another $48,000. Mrs. Alvarez also received the benefit of the $79,000 cash downpayment on petitioners' purchase of their Bayville residence in 1984. Accordingly, we find that Mrs. Alvarez failed to prove that it would be inequitable to hold her liable for the tax understatements.
Mrs. Alvarez also failed to prove that she neither knew, nor had reason to know, of the substantial understatements. Sec. 6013(e)(1)(C). Mrs. Alvarez testified that she did not know of her husband's business affairs. Mrs. Alvarez testified that she witnessed Mr. Uribe showing Mr. Alvarez a briefcase full of cash, and that Mr. Uribe delivered money to her husband on several occasions. Mrs. Alvarez also testified that she knew about (and used for personal purposes) the money stashed below the trap door. We find that this testimony (the only evidence offered to prove her status as an innocent spouse) strains credulity. We find that Mrs. Alvarez knew of or should have known of the unreported income. We further note that Mrs. Alvarez' credibility before the Court was diminished by her removal of the contents of three of petitioners' safe deposit boxes the day after Mr. Alvarez' arrest. Her conduct in that respect makes us the more skeptical of her story that she knew nothing of the unreported income. We hold that Mrs. Alvarez failed to satisfy the elements of section 6013(e)(1 )(B) and (C), and that she is not entitled to "innocent spouse" relief for any of the relevant years.
To reflect the foregoing,
Decisions will be entered under Rule 155.
APPENDIX Date of https://checkpoint-riag-com.proxy.lib.wayne.edu/app/view/toolltem?usid=clla22674cf&fe... 9/28/2011