Patricia Cotroneo

United States Tax Court

T.C. Memo. 2024-70

PATRICIA COTRONEO,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 29638-14. Filed June 24, 2024.

—————

Frank Agostino, Hana M. Boruchov, and Eugene Kirman, for petitioner.

Shawna A. Early, Carmen N. Presinal, and Rachel L. Schiffman, for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: Respondent determined a deficiency in Frank L.

Cotroneo and petitioner’s (together, Cotroneos) 2012 federal income tax

of $15,288 and an accuracy-related penalty for a substantial

understatement of income tax under section 6662(a)1 and (b)(2) of

$3,058. 2 The issues for decision are whether petitioner (1) failed to

report $122,500 of taxable individual retirement account (IRA)

distributions, $6,987 of taxable Social Security income, and $144 of

partnership income; (2) is liable for a section 6662(a) and (b)(2) accuracy-

related penalty for a substantial understatement of income tax; and

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure.

2 Petitioner and Mr. Cotroneo jointly filed for 2012, but only petitioner filed a

Petition for redetermination of the deficiency, which included a claim for relief under

section 6015.

Served 06/24/24

2

[*2] (3) is entitled to relief from joint and several liability for the

deficiency and the penalty pursuant to section 6015(b), (c), or (f).

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The Stipulation

of Facts and its Exhibits are incorporated herein by this reference.

Petitioner resided in New Jersey when she timely filed her Petition.

Petitioner has an undergraduate degree in theater arts. She

married Mr. Cotroneo in 1988 and was married to him as of the time of

trial. Until her first child was born in 1990 petitioner worked as an

actress in television commercials and soap operas. From 1990 until

2012 she was a homemaker. Mr. Cotroneo worked as an insurance

broker and was the primary source of income for the household. He

made the decisions concerning large purchases and investments.

In 2010 Mr. Cotroneo was indicted by the U.S. Attorney for the

District of New Jersey for bribery and tax evasion. The charges included

an allegation that Mr. Cotroneo did not report over $1,500,000 in income

for taxable years 2005 through 2007, resulting in tax deficiencies

totaling over $570,000. The indictment alleged that this unreported

income consisted of the following amounts that a sham corporation 3 paid

to third parties on Mr. Cotroneo’s behalf: (1) over $200,000 for his

personal credit card bills, (2) $41,400 in golf club membership fees, and

(3) $571,000 in landscaping and remodeling costs for the Cotroneos’

jointly owned residence in Bernardsville, N.J. (Bernardsville residence).

The indictment also alleged that Mr. Cotroneo would be subject to

(1) forfeiture of property that constituted, or was acquired with, any

proceeds he received through the bribery scheme or (2) if such property

had been transferred, commingled, lost, or substantially diminished in

value, then forfeiture of his other property equal to the value of the first

described forfeitable property.

On July 28, 2010, Mr. Cotroneo accepted a plea agreement in

which he pleaded guilty to one count of bribery and one count of tax

evasion with respect to 2007. As part of his plea agreement,

Mr. Cotroneo agreed to (1) file amended returns for 2005, 2006, and

2007, (2) pay any additional tax owed for those years, and (3) forfeit to

the United States all property, real and personal, that constituted or

3 This sham corporation was controlled by another insurance broker with

whom Mr. Cotroneo perpetrated a bribery scheme. The corporation paid Mr. Cotroneo

for his participation in the bribery scheme.

3

[*3] was derived from proceeds traceable to the commission of the

bribery offense. 4 Petitioner was aware of Mr. Cotroneo’s foregoing

obligations.

On February 10, 2011, the Cotroneos sold the Bernardsville

residence for $3,300,000. 5 After satisfaction of the Cotroneos’ liabilities

under mortgages on the residence, outstanding judgments, and other

expenses, they received net proceeds of $151,000 from the sale. An

attorney, Thomas E. Dooley, represented the Cotroneos in the sale.

On the same day the Cotroneos sold the Bernardsville residence,

a residence in Chester, N.J. (Chester residence), 6 was purchased in

petitioner’s name alone for $950,000 in cash from the following sources:

$110,000 from her mother, $151,000 from the Bernardsville residence’s

sale proceeds, and the balance, $689,000, from Mr. Cotroneo. The deed

for the Chester residence indicates that Thomas E. Dooley represented

petitioner in the purchase. Just eight days earlier, on February 2, 2011,

Mr. Cotroneo had withdrawn $304,000 from an IRA he held at Morgan

Stanley Smith Barney, LLC (Morgan Stanley). The beneficiary of the

withdrawal was the Thomas E. Dooley Trust.

Petitioner, her mother, and Mr. Cotroneo were present at the

closing for the Chester residence purchase. At petitioner’s insistence,

4 When Mr. Cotroneo was later sentenced in January 2014, he was ordered to

(1) forfeit $9,126,200 to the United States, representing the proceeds he derived from

the bribery scheme between 2005 and 2010, and (2) make restitution of $3,275,678 to

the U.S. Treasury for distribution to the Toms River Regional School District (an

employee of which had been bribed by Mr. Cotroneo and others), representing the loss

the school district suffered as a result of the bribery scheme.

5 Although the parties stipulated that the sale of the Bernardsville residence

occurred on February 2, 2011, the stipulation is contradicted by a settlement document

in evidence, which establishes the sale date as February 10, 2011. We are not obliged

to accept a stipulation between the parties when it is clearly contrary to facts disclosed

by the record. Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).

6 We take judicial notice that the closing date for the purchase of the Chester

residence was February 10, 2011. This finding is based on a copy of the deed recorded

in Morris County, New Jersey’s publicly available electronic real estate records, which

respondent brought to the Court’s attention in supplemental briefing. We take judicial

notice of the deed and its contents.

A court may take judicial notice of appropriate adjudicative facts at any stage

in a proceeding whether or not the parties request it. See Fed. R. Evid. 201(c) and (d).

In general, the court may take notice of facts that are capable of accurate and ready

determination by resort to sources whose accuracy cannot reasonably be questioned.

Id. subdiv. (b).

4

[*4] title to the Chester residence was placed solely in her name because

she was aware that Mr. Cotroneo had obligations that might attach to

the residence were his name on the title. As of the time of trial, the

Chester residence’s legal title remained in petitioner’s name alone and

unencumbered by any indebtedness.

As noted, at the time of the purchase of the Chester residence,

Mr. Cotroneo had pleaded guilty to bribery and tax evasion charges and

agreed to the forfeiture to the United States of all property that

constituted, or was acquired with, any proceeds he received through the

bribery scheme and to pay any additional taxes owed as a result of his

tax evasion. His sentencing did not occur until January 2014, at which

time he was ordered to pay over $12 million to the United States,

approximately $9 million of which constituted the proceeds he derived

from the bribery scheme in which he had participated. See supra note 4.

Petitioner began working as a grocery store cashier in September

2012, earning $2,133 in wages that year. The Cotroneos also received

$8,220 of combined Social Security benefits in 2012.

The record contains the following Morgan Stanley certified

business records with respect to the IRA Mr. Cotroneo held there: (1) a

2012 Form 1099–R, Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,

issued by Morgan Stanley to Mr. Cotroneo on February 11, 2013, (2) an

IRA consolidated distribution form for a July 9, 2012, withdrawal of

$10,000 by Mr. Cotroneo, (3) withdrawal activity statements outlining

the withdrawals made by Mr. Cotroneo from the IRA for 2011, 2012, and

2013, and (4) six outgoing wire transfer request forms for withdrawals

made by Mr. Cotroneo from February 27 through July 6, 2012, totaling

$90,000. The Morgan Stanley records further indicate that Mr.

Cotroneo’s IRA was a rollover account.

The 2012 Form 1099–R issued to Mr. Cotroneo lists both a “Gross

distribution” and “Taxable amount” of $122,500, and box 2b, “Taxable

amount not determined,” is checked. On the July 9, 2012, IRA

consolidated distribution form, on which Mr. Cotroneo requests a

“Normal (age 59½ and older)” distribution of $10,000 from his

“Traditional IRA” account, he states that he was born in August 1950.

This form is not signed by a Morgan Stanley manager and states that

such a signature is “Required for 72(t) distributions only.”

5

[*5] The withdrawal activity statement for 2011 lists a $304,000

withdrawal via wire transfer to the Thomas E. Dooley Trust on

February 2, 2011. The withdrawal activity statement for 2012 lists

12 distributions made in 2012 totaling $122,500: (1) six wire transfers

made to Mr. Cotroneo between February 27 and July 6, 2012, totaling

$90,000, (2) five branch checks issued to him between July 9 and

November 20, 2012, totaling $30,500, and (3) one distribution to an

unknown account on December 27, 2012, for $2,000. All six outgoing

wire transfer request forms list each withdrawal as a normal, taxable,

partial distribution of funds. One of these forms, dated March 14, 2012,

is signed by both Mr. Cotroneo and “Charlene L. Miles, First Vice

President, Sr. Complex Service Manager,” a Morgan Stanley manager.

During 2012 petitioner maintained a personal checking account.

Mr. Cotroneo deposited money into the account throughout 2012 to cover

the living expenses of the Cotroneos and their children, including those

for the Chester residence. Petitioner was aware that Mr. Cotroneo was

making these deposits. During 2012, $98,556.68 was deposited into the

account, and petitioner wrote checks totaling $99,450.28 from it.

John Hauspurg, a certified public accountant, prepared the

Cotroneos’ 2012 Form 1040, U.S. Individual Income Tax Return. The

Cotroneos did not provide him with a Form 1099–R or a Schedule K–1,

Partner’s Share of Income, Deductions, Credits, etc., for 2012. The 2012

return reported total income of $34,633, including $8,220 in nontaxable

Social Security benefits. The return reported an IRA distribution of $10

and no partnership income. Petitioner signed the 2012 return without

examining it or asking Mr. Cotroneo or Mr. Hauspurg about its contents.

As noted, Mr. Cotroneo was sentenced with respect to the bribery

and tax evasion charges on January 6, 2014, and he was incarcerated

from February 18, 2014, through March 18, 2017.

On July 21, 2014, respondent’s Automated Underreporter (AUR)

program sent the Cotroneos a Notice CP2000, Proposed Changes to Your

2012 Form 1040. The Notice CP2000 carried an AUR control number.

The Notice proposed changes to the 2012 return on the basis of income

information reported to respondent by third parties that differed from

the amounts shown on the return. The Notice further stated that if the

proposed changes were correct, the Cotroneos had a deficiency and

substantial understatement penalty of $15,288 and $3,058, respectively,

for 2012.

6

[*6] On September 1, 2014, an AUR operations manager sent

petitioner and Mr. Cotroneo a letter regarding their 2012 taxable year.

The letter stated in part: “Thank you for your response of July 7, 2014.”

On September 11, 2014, an Internal Revenue Service (IRS)

innocent spouse operations manager mailed petitioner a preliminary

determination proposing to deny her any relief under section 6015(c)

and (f) for 2012. On September 15, 2014, respondent issued a Notice of

Deficiency for 2012 to the Cotroneos. The Notice bore an AUR control

number. The Notice determined that the 2012 return failed to report

(1) $122,500 of taxable retirement income reported by Morgan Stanley,

(2) $144 of partnership income reported by “Atlas Energy Nineties

Series 18 LTD,” and (3) $6,987 of taxable Social Security benefits

reported by the Social Security Administration. These and other

adjustments resulted in the same deficiency and substantial

understatement penalty listed in the Notice CP2000.

Petitioner, through counsel, timely petitioned for

redetermination and asserted as an affirmative defense her entitlement

to relief under section 6015(b) and/or (f). Subsequently, in a Pretrial

Memorandum filed shortly before trial, petitioner also claimed

entitlement to relief under section 6015(c).

As of the time of trial, petitioner had not initiated any divorce

action.

OPINION

I. Jurisdiction

Our jurisdiction in this case is derived from section 6213(a),

respondent’s having issued a notice of deficiency to petitioner and

petitioner’s having timely petitioned this Court for a redetermination of

the deficiency. We have jurisdiction over petitioner’s section 6015

claims as part of that deficiency jurisdiction. See Butler v.

Commissioner, 114 T.C. 276, 287–88 (2000).

II. Deficiency

We first consider whether petitioner is liable for the deficiency

and the penalty respondent determined.

7

[*7] A. Burden of Proof and Production

In general, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of

demonstrating error in those determinations. See Rule 142(a)(1); Welch

v. Helvering, 290 U.S. 111, 115 (1933). The burden on factual issues

that affect a taxpayer’s liability for tax may shift to the Commissioner if

“a taxpayer introduces credible evidence with respect to . . . such issue.”

§ 7491(a)(1); see Higbee v. Commissioner, 116 T.C. 438, 442 (2001)

(“Credible evidence is the quality of evidence which, after critical

analysis, the court would find sufficient upon which to base a decision

on the issue if no contrary evidence were submitted (without regard to

the judicial presumption of IRS correctness).” (quoting H.R. Rep.

No. 105-599, at 240–41 (1998), reprinted in 1998-3 C.B. 747, 994–95)). 7

Additionally, “if a taxpayer asserts a reasonable dispute with respect to

any item of income reported on an information return filed . . . by a third

party and the taxpayer has fully cooperated with the Secretary . . . , the

Secretary shall have the burden of producing reasonable and probative

information concerning such deficiency in addition to such information

return.” § 6201(d).

B. IRA Distributions

Section 61(a) provides that “gross income means all income from

whatever source derived.” Section 408(d)(1) provides that any amount

paid or distributed out of an IRA is included in the gross income of the

payee or distributee in the manner provided under section 72. The

general rule of section 408(d)(1) does not apply to a rollover contribution,

transfers incident to divorce, or distributions for charitable purposes.

See § 408(d)(3), (6), (8). A rollover contribution is any amount paid or

distributed out of an IRA to the individual for whose benefit the account

or annuity is maintained if the entire amount received is paid into an

eligible retirement plan no later than 60 days after receipt.

§ 408(d)(3)(A)(ii); see Schoof v. Commissioner, 110 T.C. 1, 7 (1998).

Generally, the payee or distributee of an IRA is the participant or

beneficiary who is eligible to receive funds from the IRA. Roberts v.

Commissioner, 141 T.C. 569, 576 (2013); see also Darby v. Commissioner,

97 T.C. 51, 58 (1991). Neither the Code nor applicable regulations define

7 In addition a taxpayer is entitled to this shift in the burden of proof only if he

has complied with certain substantiation requirements, maintained required records,

and cooperated with reasonable requests for witnesses, information, or documents.

§ 7491(a)(2).

8

[*8] the terms “payee” or “distributee” or provide specific guidance

regarding when an amount is considered to have been paid or

distributed to a payee or distributee under section 408(d)(1). Roberts,

141 T.C. at 577.

Petitioner argues that pursuant to section 6201(d), respondent

“bears the burden of proof” with respect to the taxability of the Morgan

Stanley IRA distributions. Petitioner contends she has asserted a

reasonable dispute by virtue of the fact that (1) box 2b, “Taxable amount

not determined,” is checked on the Form 1099–R; (2) the records for only

$80,000 of wire transfers from the IRA designate the transferred

amounts as taxable and only one such wire transfer record (for $10,000)

bears a manager’s signature with a date; and (3) the records for the

remaining $42,500 of transfers contain no indication that they were

taxable and accordingly, since the IRA from which Mr. Cotroneo was

receiving the distribution was a rollover IRA, he must have rolled over

these distributions as well because he had done so in the past. In

petitioner’s view the foregoing constitute errors or irregularities that

cast doubt on the Morgan Stanley records’ designation of the distributed

amounts as taxable.

Petitioner’s first point does not raise any reasonable dispute.

Several of Mr. Cotroneo’s withdrawal request forms in the Morgan

Stanley records indicate that the account from which the distributions

to him were made was a traditional IRA. The 2012 Instructions for

Forms 1099–R and 5498, at 9 (2012), instruct payers as follows with

respect to completing Form 1099–R covering a traditional IRA:

Generally, you [the payer] are not required to compute the

taxable amount of a traditional . . . IRA nor designate

whether any part of a distribution is a return of basis

attributable to nondeductible contributions. Therefore, . . .

report the total amount distributed from a traditional . . .

IRA in box 2a [i.e., “Taxable amount”]. This will be the

same amount reported in box 1 [i.e., “Gross distribution”].

Check the “Taxable amount not determined” box in box 2b.

Contrary to petitioner’s suggestion that the check in box 2b denotes that

distributions to Mr. Cotroneo from his Morgan Stanley IRA were

something other than fully taxable, the Form 1099–R instructions make

clear that box 2b is to be checked when a fully taxable distribution is

made from a traditional IRA. As filled out, the Form 1099–R issued to

Mr. Cotroneo from Morgan Stanley reflects Morgan Stanley’s position

9

[*9] that the account in question was a traditional IRA and that the

entire $122,500 distribution from it was taxable.

As for petitioner’s second point, the Morgan Stanley records

include IRA withdrawal requests signed by Mr. Cotroneo where he gives

his birth year as 1950, indicating that he was older than 59-1/2 when he

sought the withdrawals. (Several of the withdrawal requests also note

that they are “normal” distributions (i.e., the distributee has attained

age 59-1/2).) The only evidence in the record concerning any Morgan

Stanley policy requiring a manager’s signature appears on one of

Mr. Cotroneo’s withdrawal requests. That particular withdrawal

request contains a section for a manager’s signature wherein it is noted

that such a signature is “[r]equired for 72(t) distributions only.” Section

72(t) imposes an additional 10% tax on a distribution from an IRA except

where the distributee is 59-1/2 (and in certain other circumstances not

relevant here). See § 72(t)(2)(A)(i).

Thus, given Mr. Cotroneo’s representation regarding his age, the

available evidence concerning Morgan Stanley’s policies suggests that

no manager’s signature was necessary concerning the $122,500 in

distributions reflected in the Morgan Stanley records. Accordingly,

contrary to petitioner’s suggestion, the absence of a manager’s signature

on the withdrawal documents in the Morgan Stanley records does not

suggest that those documents contain “errors” that would cast doubt on

their designation of the distributions as taxable.

Petitioner’s third point is that, since the records of the remaining

$42,500 in transfers out of Mr. Cotroneo’s IRA do not on their face

designate the transferred amounts as taxable, Mr. Cotroneo must have

rolled over these amounts into an IRA or an eligible retirement plan

account. See § 408(d)(3). Petitioner suggests that since Mr. Cotroneo’s

Morgan Stanley IRA from which the distributions were made was itself

a rollover account, he must have effected rollovers with respect to the

distributions that were not denominated as taxable in the Morgan

Stanley records. However, the fact that Mr. Cotroneo had effected an

IRA rollover in the past is not persuasive evidence that he rolled over

any of the amounts distributed to him in 2012. There is no other

evidence in the record that Mr. Cotroneo effected any rollovers with

respect to the distributed amounts in 2012, and petitioner’s speculation

on this point does not raise a reasonable dispute with respect to the

taxability of the IRA distributions within the meaning of section

6201(d).

10

[*10] Even if the foregoing points of petitioner’s were treated as raising

a reasonable dispute, the consequence under section 6201(d) is not, as

petitioner contends, a shift in the burden of proof to respondent.

Instead, section 6201(d) would impose upon respondent only “the burden

of producing reasonable and probative information concerning [the]

deficiency in addition to [the] information return.” Respondent has done

so. The contemporaneously maintained business records of Morgan

Stanley, the authenticity of which the parties have stipulated and to

which petitioner has not made any hearsay objection, show that the

account from which $122,500 in distributions was made to Mr. Cotroneo

during 2012 was a traditional IRA. This is reasonable and probative

information concerning the deficiency respondent determined on the

basis that Mr. Cotroneo received taxable IRA distributions of $122,500

for 2012 that were not reported. Thus respondent has satisfied his

burden of production under section 6201(d) and the burden of proof

remains on petitioner to demonstrate error in the deficiency

determination with respect to the unreported IRA distributions.

Petitioner also argues that the burden of proof has shifted to

respondent pursuant to section 7491(a) concerning all factual issues

underlying his deficiency determinations, including the determination

premised on the unreported IRA distributions. Petitioner contends that

she has introduced credible evidence as contemplated in section 7491(a)

sufficient to shift the burden on this issue. She relies on the same points

just discussed concerning the checked box 2b on the Form 1099–R issued

to Mr. Cotroneo, and the failure of some of the withdrawal forms in the

Morgan Stanley records to designate the distributed amounts as taxable

or to contain a manager’s signature. For the same reasons outlined in

our discussion of section 6201(d), we conclude that petitioner has not

introduced credible evidence for purposes of section 7491(a)—that is,

evidence “which, after critical analysis, the court would find sufficient

upon which to base a decision on the issue if no contrary evidence were

submitted.” See Higbee, 116 T.C. at 442. At best, petitioner has offered

the speculation that, because the IRA from which Mr. Cotroneo made

the withdrawals in 2012 was itself a rollover account, he must have

rolled over the amounts withdrawn from that account.

Nevertheless, the allocation of the burden of proof would have no

impact on our holding regarding the unreported IRA distributions issue.

The evidence on this issue is not in equipoise. See Blodgett v.

Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2005), aff’g T.C. Memo.

2003-212; Dagres v. Commissioner, 136 T.C. 263, 279 (2011). We instead

hold, on the preponderance of the evidence—including in particular the

11

[*11] comprehensive Morgan Stanley records that document Mr.

Cotroneo’s withdrawal of $122,500 from a traditional IRA during 2012—

that respondent’s determination that petitioner failed to report

$122,500 in taxable IRA distributions is sustained.

C. Partnership Income

Petitioner has not addressed respondent’s determination that the

Cotroneos failed to report $144 of partnership income for 2012.

Petitioner has therefore conceded this issue. See Mendes v.

Commissioner, 121 T.C. 308, 312–13 (2003); Leahy v. Commissioner, 87

T.C. 56, 73–74 (1986).

D. Social Security Income

In the case of Social Security benefits the amount included in

gross income, if any, is determined in accordance with the formula set

forth in section 86. Under that formula, a portion of the benefits is

includible in gross income if the sum of the taxpayer’s modified adjusted

gross income (MAGI), as defined by section 86(b)(2), plus one-half of the

amount of Social Security benefits received, exceeds certain threshold

amounts, the “base amount” and the “adjusted base amount.” See § 86(a)

and (b)(1). In petitioner’s case, these threshold amounts are $32,000

and $44,000, respectively. See § 86(c)(1)(B), (2)(B). Although section 86

refers to a “taxpayer,” a joint return “is treated as the return of a taxable

unit and the net income disclosed by the return is subject to [tax] * * *

as though the return were that of a single individual.” See Boehm v.

Commissioner, T.C. Memo. 1999-227, 1999 WL 498494, at *4

(alterations in original) (quoting Helvering v. Janney, 311 U.S. 189, 192

(1940)).

The parties do not dispute that petitioner and Mr. Cotroneo

received $8,220 of Social Security benefits in 2012. Therefore, section

6201(d) does not apply. However, the parties disagree on what portion

of the amount received is taxable under a section 86 calculation. Given

that we have sustained respondent’s determinations that the Cotroneos

failed to include in gross income $122,500 of IRA distributions and $144

of partnership income, the Cotroneos’ MAGI includes these amounts,

totaling $122,644. After adding that total to the other income items

reported on their return and adjusting for deductions claimed therein or

otherwise allowed by the notice of deficiency, the Cotroneos’ MAGI is

$147,514. The sum of one-half of the Cotroneos’ Social Security benefits,

12

[*12] $4,110, plus their MAGI, $147,514, equals $151,624. This amount

exceeds the “adjusted base amount,” $44,000, by $107,624.

Accordingly, the portion of the Cotroneos’ Social Security benefits

includible in income is determined as provided in section 86(a)(2). That

provision requires petitioner to include in gross income the lesser

of (A) or (B), computed as follows: (A) the sum of (i) 85% of the above

excess, $91,480, plus (ii) the lesser of the amount determined under

section 86(a)(1), $4,110, or one-half of the difference between the

adjusted base amount and the base amount, $6,000; or (B) 85% of the

Social Security benefits received during the taxable year, $6,987. See

§ 86(a)(2). Pursuant to this formula, $6,987 of the Cotroneos’ Social

Security benefits is includible in their gross income for 2012. We

therefore sustain respondent’s determination that petitioner failed to

report $6,987 of taxable Social Security benefits for 2012.

E. Substantial Understatement Penalty

Section 6662(a) and (b)(2) imposes a 20% accuracy-related

penalty on any underpayment of tax attributable to a substantial

understatement of income tax. An understatement is generally defined

as the excess of the amount required to be shown on the return over the

amount shown on the return. § 6662(d)(2)(A). A substantial

understatement of tax exists if the amount of the understatement for

the taxable year exceeds the greater of (1) 10% of the tax required to be

shown on the return or (2) $5,000. § 6662(d)(1)(A).

Petitioner does not dispute that the understatement of tax on the

2012 return exceeds the greater of 10% of the tax required to be shown

on the return or $5,000. See § 6662(d)(1)(A). Instead, petitioner argues

that respondent has not demonstrated that supervisory approval of the

penalty was obtained as required by section 6751(b)(1) and that she had

reasonable cause because she relied on the advice of the 2012 return’s

preparer, Mr. Hauspurg. We first consider petitioner’s section 6751(b)

argument.

The Commissioner bears the burden of production with regard to

accuracy-related penalties and must come forward with sufficient

evidence indicating that it is appropriate to impose them. See § 7491(c);

see also Higbee, 116 T.C. at 446. Once the Commissioner meets his

burden of production, the taxpayer bears the burden of proving that the

Commissioner’s penalty determination is incorrect. See Higbee, 116 T.C.

at 446–47. Section 6751(b)(1) provides that no penalty may be assessed

13

[*13] when the initial determination to assess it is not approved in

writing by the immediate supervisor of the person making the initial

determination. Demonstrating compliance with section 6751(b)(1) “is

properly a part of [the Commissioner’s] burden of production under

section 7491(c).” Graev v. Commissioner, 149 T.C. 485, 493 (2017),

supplementing and overruling in part 147 T.C. 460 (2016).

Under section 6751(b)(2)(B), supervisory approval is not required

for a substantial understatement penalty that is automatically

calculated without human review through the AUR program. See

Walquist v. Commissioner, 152 T.C. 61, 73–74 (2019) (holding that no

supervisory approval was required for a substantial understatement

penalty determined without human intervention through the

Correspondence Examination Automated Support program); Ball v.

Commissioner, T.C. Memo. 2020-152, at *12–13 (reaching same

conclusion where the AUR program automatically calculated a

substantial understatement penalty). The IRS concedes that human

review and supervisory approval of a penalty determination are

required where a taxpayer has responded to a computer-generated

notice proposing a penalty. Internal Revenue Manual (IRM) 20.1.1.2.3.2

(Nov. 25, 2011), 20.1.5.1.6(9) (Jan. 24, 2012); see also Walquist, 152 T.C.

at 70–71 & n.7; Ayria v. Commissioner, T.C. Memo. 2022-123, at *10–11

& n.3 (describing scenario involving supervisory approval where

taxpayer responded to initial communication of an automatically

calculated penalty).

In response to petitioner’s contention that respondent has failed

to meet his burden of production, given the absence of any proof of the

written supervisory approval required by section 6751(b)(1), respondent

maintains that no supervisory approval was required because the

substantial understatement penalty was automatically calculated

through electronic means within the meaning of section 6751(b)(2).

Since demonstrating compliance with section 6751(b)(1) is part of

respondent’s burden of production, it follows that his burden of

production here includes demonstrating, in accordance with the IRS

position announced in the IRM, that petitioner did not communicate

with any AUR personnel with respect to the penalty. Had she done so,

the AUR personnel would have been required, pursuant to the

procedures outlined in the IRM, to make an independent determination

regarding the appropriateness of the penalty and supervisory approval

would likewise have been required. As explained below, in view of

correspondence in the record between petitioner and an AUR operations

manager concerning her 2012 taxable year, we are unable to conclude

14

[*14] on this record that respondent has satisfied his burden of

production to show that supervisory approval was not required for the

penalty at issue.

A Notice CP2000 was sent from the AUR program to petitioner

(and Mr. Cotroneo) concerning their 2012 taxable year on July 21, 2014.

The Notice CP2000 proposed a tax deficiency and a penalty for an

underpayment due to a substantial understatement of income tax.

Respondent asserts that petitioner did not respond to the Notice

CP2000, and there is no evidence in the record that petitioner or Mr.

Cotroneo responded to the Notice CP2000 after it was issued and before

the notice of deficiency was issued. The notice of deficiency originated

from the AUR program 8 and determined a tax deficiency and substantial

understatement penalty in the same amounts as had been proposed in

the Notice CP2000.

On the basis of the foregoing, respondent argues that the

substantial understatement penalty was automatically calculated by

the AUR program because there was no response to the Notice CP2000.

We disagree because, while there is no evidence that the Cotroneos

responded to the Notice CP2000 specifically, the record does

demonstrate that there was correspondence between petitioner and

AUR personnel concerning the 2012 taxable year that preceded the

Notice CP2000. The record contains a September 1, 2014, letter from an

AUR operations manager to the Cotroneos, which states as its subject

their 2012 taxable year. The letter begins: “Thank you for your response

of July 7, 2014.” While the record does not contain the July 7 response

that the Cotroneos made, the reference to it persuades us that

petitioner 9 corresponded in writing with AUR personnel on or about

July 7, 2014, concerning her 2012 taxable year. Moreover, we draw the

further inference that petitioner received correspondence from the AUR

program sometime before July 7, 2014. Otherwise, what could have

prompted her to write to AUR personnel on or about July 7, 2014?

Consequently, we find that petitioner and AUR personnel

communicated with respect to the 2012 taxable year before the Notice

CP2000 was issued.

Respondent has the burden of production, and he has not

produced either petitioner’s July 7, 2014, correspondence with AUR

8 Our finding in this respect is based upon the fact that the notice of deficiency

bears an AUR control number.

9 In July 2014 Mr. Cotroneo was incarcerated.

15

[*15] personnel or the AUR notice or letter that prompted it. In these

circumstances we are unable to rule out that the substantial

understatement penalty was addressed in these communications. 10 The

existence of these communications casts doubt on a finding that the

substantial understatement penalty was automatically calculated

without any independent determination by AUR personnel.

Consequently, respondent has not shown that no independent

determination was made by AUR personnel concerning the penalty and

thus that no supervisory approval was required.

Having failed to produce evidence of written supervisory approval

of the penalty or to show that the penalty was automatically calculated

within the meaning of section 6751(b)(2)(B), respondent has failed to

meet his burden of production under section 7491(c). 11 Accordingly, the

penalty determination is not sustained.

III. Section 6015 Relief

We next consider whether petitioner is entitled to relief from

liability for the deficiency pursuant to section 6015.

A. Overview

Generally, married taxpayers may elect to file a joint federal

income tax return. § 6013(a). If a joint return is made, the tax is

computed on the spouses’ aggregate income, and each spouse is fully

responsible for the accuracy of the return and is jointly and severally

liable for the entire amount of tax shown on the return or found to be

owing. § 6013(d)(3); Butler, 114 T.C. at 282. Nevertheless, under certain

circumstances, a spouse who has made a joint return may seek relief

from joint and several liability under procedures set forth in section

6015. § 6015(a). Section 6015 provides a spouse with three alternative

grounds for relief: (1) full or partial relief under subsection (b),

(2) proportionate relief under subsection (c), and (3) if relief is not

available under subsection (b) or (c), equitable relief under

subsection (f).

10 We note in this regard that petitioner testified that she relied on the

Cotroneos’ accountant, Mr. Hauspurg, who prepared the 2012 return, for its accuracy.

One could reasonably infer that she offered this explanation in any earlier

communication with AUR personnel.

11 In view of our holding regarding the burden of production, we need not

address petitioner’s reasonable cause defense.

16

[*16] In cases involving requests for innocent spouse relief, the spouse

requesting relief generally bears the burden of proof. Rule 142(a); Alt v.

Commissioner, 119 T.C. 306, 311 (2002), aff’d, 101 F. App’x 34 (6th Cir.

2004). An exception is found in section 6015(c), which places upon the

Commissioner the burden of proving that a spouse electing relief under

subsection (c) either had actual knowledge at the time of signing the

return of any item giving rise to the deficiency or was part of a

fraudulent scheme to transfer assets. § 6015(c)(3)(A)(ii), (C) (providing

that where the Commissioner meets this burden, the taxpayer is

ineligible for relief under section 6015(c)). Actual knowledge for this

purpose is established by a preponderance of the evidence. Culver v.

Commissioner, 116 T.C. 189, 196 (2001); Knight v. Commissioner, T.C.

Memo. 2010-242; McDaniel v. Commissioner, T.C. Memo. 2009-137. The

standard and scope of review in determining whether relief is warranted

under subsection (b), (c), or (f) of section 6015 is de novo. Porter v.

Commissioner, 132 T.C. 203, 210 (2009). 12

B. Section 6015(b)

Pursuant to section 6015(b)(1), the following requirements must

be satisfied for relief from joint and several liability under section

6015(b): (A) the spouses filed a joint return for the taxable year; (B) the

understatement of tax is attributable to an erroneous item of the

nonrequesting spouse; (C) the requesting spouse establishes that in

signing the return he or she did not know, and had no reason to know,

of the understatement; (D) after taking into account all of the facts and

circumstances, it is inequitable to hold the requesting spouse liable for

the deficiency attributable to the understatement; and (E) the

requesting spouse timely elects the benefits of subsection (b). These five

requirements are stated in the conjunctive, and thus a failure to meet

even one of them prevents a requesting spouse from qualifying for relief.

Alt, 119 T.C. at 313.

Neither party disputes that the requirements of subparagraphs

(A) and (E) of section 6015(b)(1) have been satisfied. Respondent

disputes whether the requirements of subparagraphs (B), (C), and (D) of

section 6015(b)(1) have been met. We shall first address the reason to

know requirement of section 6015(b)(1)(C).

12 As the Petition was filed before section 6015(e)(7) became effective, it has no

application here. See Sutherland v. Commissioner, 155 T.C. 95, 104 (2020).

17

[*17] A requesting spouse has reason to know of an understatement if

a reasonable person in circumstances similar to those of the taxpayer

could be expected to know of an erroneous or missing item at the time of

signing the return. Treas. Reg. § 1.6015-2(c); see, e.g., Reilly-Casey v.

Commissioner, T.C. Memo. 2013-292. The applicable regulations

provide that the facts and circumstances used to determine whether a

spouse had reason to know of an understatement include, among other

things, whether the requesting spouse failed to inquire, when or before

signing the return, about items on the return or omitted from the return

that a reasonable person would question. Treas. Reg. § 1.6015-2(c); see

Canty v. Commissioner, T.C. Memo. 2016-169. Put another way, the

spouse seeking relief has a “duty of inquiry.” Stevens v. Commissioner,

872 F.2d 1499, 1505 (11th Cir. 1989), aff’g T.C. Memo. 1988-63; Shea v.

Commissioner, 780 F.2d 561, 566 (6th Cir. 1986), aff’g in part, rev’g in

part T.C. Memo. 1984-310; Butler, 114 T.C. at 284. Section 6015 does

not protect a spouse who turns a blind eye to facts readily available to

him or her. Porter, 132 T.C. at 212; see also Greer v. Commissioner, 595

F.3d 338, 351 (6th Cir. 2010), aff’g T.C. Memo 2009-20.

The facts and circumstances in this case strongly indicate that

petitioner had reason to know of the understatement of tax on the 2012

return, as we believe a reasonable person in similar circumstances

would have reason to know of, or a duty of inquiry with respect to,

substantial omissions of income from the return. During 2012 petitioner

wrote approximately $100,000 in checks to cover the family’s living

expenses. Petitioner earned wages of only $2,133 during the year, and

the Cotroneos received Social Security income of $8,220. Petitioner was

aware that Mr. Cotroneo made deposits into her checking account that

enabled her to write the foregoing checks. And yet the 2012 return

reported total income of only $34,633. In such circumstances petitioner

had a duty to inquire as to how Mr. Cotroneo was able to cover

approximately $100,000 of her spending during the year if their total

income as reported in the 2012 return was only $34,633. Such a duty

would extend to exploring whether Mr. Cotroneo had a nontaxable

source of income for the deposits she was aware he made into her

checking account.

Furthermore, petitioner had a heightened duty to inquire in this

instance. The 2012 return was prepared by Mr. Hauspurg using solely

the input of Mr. Cotroneo, who had recently entered a guilty plea for tax

evasion and bribery. Despite this, petitioner signed the 2012 return

without reviewing it. A reasonable person in these circumstances would

not do so.

18

[*18] We find that petitioner had a duty to inquire about the omitted

income before signing the return. Her failure to inquire results in her

having reason to know of the understatement arising from the omission

of the IRA distribution and partnership income. Her failure to satisfy

the “reason to know” requirements of section 6015(b)(1)(C) is fatal to her

claim for relief under section 6015(b). 13

C. Section 6015(c)

Petitioner did not raise relief under section 6015(c) in the

Petition, which was prepared by counsel. Instead, she first raised the

issue in her Pretrial Memorandum submitted just before trial. 14

Section 6015(c) allows a requesting spouse to elect to be liable

only for that portion of a joint return deficiency that is properly allocable

to him or her under the rules of section 6015(d). The election is available

only to a spouse who (1) at the time the election is filed, is no longer

married to the nonrequesting spouse or is legally separated, or (2) has

not been a member of the same household as the nonrequesting spouse

at any time during the 12-month period ending on the date the election

is filed. § 6015(c)(3)(A)(i).

13 As a consequence, we need not consider whether petitioner satisfied the

requirements of section 6015(b)(1)(B) or (D). We also conclude, see infra pp. 19–22,

that assets were transferred between Mr. Cotroneo and petitioner as part of a

fraudulent scheme within the meaning of Treasury Regulation § 1.6015-1(d). This

conclusion is an independent basis precluding relief under section 6015(b) as well. See

Chen v. Commissioner, T.C. Memo. 2006-160, 2006 WL 2270402; Treas. Reg. § 1.6015-

1(d).

14 On brief respondent contends that petitioner raised the issue of relief under

section 6015(c) for the first time on brief and that as a result respondent would be

unfairly prejudiced if we were to consider the issue, given that respondent was unable

to adduce evidence at trial with respect to it. We disagree. First, respondent is

mistaken regarding when petitioner first raised the issue. Petitioner claimed

entitlement to relief under section 6015(c) in her Pretrial Memorandum, and

respondent, in a Supplemental Pretrial Memorandum, responded to the claim by

taking the position that petitioner was not eligible to elect section 6015(c) relief by

virtue of her failure to satisfy section 6015(c)(3)(A)(i). Moreover, respondent’s counsel

questioned petitioner at trial concerning whether she was divorced or legally separated

from Mr. Cotroneo—questions which bore directly on the grounds on which respondent

contended in his Supplemental Pretrial Memorandum that petitioner was ineligible to

elect section 6015(c) relief. Given the foregoing, we are satisfied that respondent had

notice before trial that petitioner was making a section 6015(c) claim and that the issue

of her entitlement to section 6015(c) relief was tried by consent. See Rule 41(b).

19

[*19] However, the statute further provides that certain taxpayers are

ineligible to make the election under section 6015(c) to limit their

liability to the portion of the deficiency allocable to them. Section

6015(c)(3)(A)(ii) provides:

(ii) Certain taxpayers ineligible to elect.—If the

Secretary demonstrates that assets were transferred

between individuals filing a joint return as part of a

fraudulent scheme by such individuals, an election under

this subsection [(c)] by either individual shall be invalid

(and section 6013(d)(3) [imposing joint and several liability

on each filer of a joint return] shall apply to the joint

return).

The regulations define fraudulent scheme for this purpose as follows:

“[A] fraudulent scheme includes a scheme to defraud the [IRS] or

another third party, including, but not limited to, creditors, ex-spouses,

and business partners.” Treas. Reg. § 1.6015-1(d).

For the reasons discussed below, we hold that Mr. Cotroneo and

petitioner transferred assets as part of a fraudulent scheme within the

meaning of section 6015(c)(3)(A)(ii) and Treasury Regulation § 1.6015-

1(d).

1. Fraudulent Scheme

In his Answering Brief respondent argued that the sale of the

Bernardsville residence followed by the purchase of the Chester

residence solely in petitioner’s name using funds provided by Mr.

Cotroneo was a “questionable transfer of a joint marital asset . . . to

thwart potential collection actions by the government and to render . . .

[Mr. Cotroneo] judgment and collection proof,” concluding that the

transfer was a “fraudulent transfer scheme.” In response, we sought

supplemental briefing addressing the issue of whether assets were

transferred between the Cotroneos as part of a fraudulent scheme

within the meaning of section 6015(c)(3)(A)(ii) and Treasury Regulation

§ 1.6015-1(d) (defining a fraudulent scheme for this purpose).

On the record before us, we find that respondent has carried his

burden of establishing that the purchase of the Chester residence was

20

[*20] done as part of a fraudulent scheme to transfer assets from Mr.

Cotroneo to petitioner. 15

Mr. Cotroneo entered a guilty plea to tax evasion and bribery on

October 18, 2010. In his plea agreement, signed July 28, 2010, Mr.

Cotroneo agreed to (1) forfeit all property, real and personal, derived

from his bribery scheme and (2) file amended tax returns for 2005

through 2007 and pay any resulting tax owed to the IRS. While the

record does not disclose the amount of the additional tax owed for 2005

through 2007, the charging indictment alleged a tax deficiency

exceeding $570,000 resulting from unreported income exceeding

$1,500,000. The magnitude of the proceeds from the bribery scheme, of

which Mr. Cotroneo was undoubtedly aware, was reflected in his later

sentence, which required that he forfeit over $9 million. Therefore, we

find that as of July 28, 2010, Mr. Cotroneo was aware of the likelihood

that he would have liabilities in the range of millions of dollars.

Petitioner was likewise aware of these likely liabilities, though not the

precise amount of them.

Less than four months after Mr. Cotroneo’s plea, on February 10,

2011, the Cotroneos sold the jointly owned Bernardsville residence for

$3,300,000 and received $151,000 in net proceeds from the sale. That

same day the Chester residence was purchased for $950,000 in cash and

titled solely in petitioner’s name. Petitioner testified at trial that her

mother provided $110,000 of the purchase price and that she did not

15 Petitioner contends that respondent must demonstrate by clear and

convincing evidence (not merely a preponderance of the evidence) that Mr. Cotroneo

and petitioner transferred assets as part of a fraudulent scheme, citing Rule 142(b).

Rule 142(b) requires respondent to carry his burden of proof “[i]n any case involving

the issue of fraud with intent to evade tax” by clear and convincing evidence. We note

that section 6015(c)(3)(A)(ii) provides merely “[i]f the Secretary demonstrates” without

any reference to his needing to do so “by clear and convincing evidence.” The same

phrase—“[i]f the Secretary demonstrates”—is found elsewhere in section 6015(c)(3);

namely, in section 6015(c)(3)(C). With respect to that phrase, we have held that it

requires proof merely by a preponderance of the evidence. See Culver, 116 T.C.

at 195–96. Moreover, the imposition of the clear and convincing standard in Rule

142(b) covers fraud “with intent to evade tax” whereas the “fraudulent scheme”

contemplated by section 6015(c)(3)(A)(ii) extends to “a scheme to defraud the [IRS] or

another third party, including, but not limited to, creditors, ex-spouses, and business

partners.” Treas. Reg. § 1.6015-1(d). Nevertheless, we need not decide whether the

“preponderance of the evidence” or “clear and convincing evidence” standard governs,

because we conclude that respondent prevails here under either standard, having

shown by clear and convincing evidence that assets were transferred between Mr.

Cotroneo and petitioner as part of a fraudulent scheme within the meaning of section

6015(c)(3)(A)(ii) and Treasury Regulation § 1.6015(d)(1).

21

[*21] know the source of the $840,000 balance. Given the magnitude of

the sum, petitioner’s self-serving professed ignorance of its source—to

the extent she would have us believe it did not come from Mr. Cotroneo—

is not credible, and we do not credit it. See Tokarski v. Commissioner,

87 T.C. 74, 77 (1986).

Instead, the evidence clearly and convincingly supports a finding

that the $840,000 cash balance used to purchase the Chester residence

came from the following sources: $151,000 from the net proceeds the

Cotroneos received from the sale of the Bernardsville residence (which

they jointly owned) and the remaining $689,000 solely from

Mr. Cotroneo. The finding is based on the following: (1) Thomas E.

Dooley represented the Cotroneos in their sale of the Bernardsville

residence and the purchase of the Chester residence, (2) Mr. Cotroneo

withdrew $304,000 from his Morgan Stanley IRA eight days before the

purchase (February 2, 2011) that was remitted to the Thomas E. Dooley

Trust, (3) Mr. Cotroneo was present at the closing on the Chester

residence, and (4) the Chester residence was purchased unencumbered.

Even without these identified funding sources Mr. Cotroneo obtained

proximate to the Chester residence purchase, there is simply no other

conceivable source of the funds for the Chester residence purchase than

Mr. Cotroneo 16 (with the exception of the portion petitioner claims her

mother supplied—a contention we accept for this purpose).

At trial petitioner admitted that she insisted that the Chester

residence be titled solely in her name as a way to prevent Mr. Cotroneo’s

obligations from attaching to the residence. She could not have been

unaware of the source of the bulk of the funds used to purchase the

residence. Petitioner’s admission concerning her goal in titling the

residence in her name clearly and convincingly demonstrates that at the

time of the Chester residence’s purchase the Cotroneos had the requisite

intent to defraud necessary to find that they engaged in a fraudulent

scheme. Simply put, the Cotroneos arranged for Mr. Cotroneo’s share of

the Bernardsville residence sale proceeds and substantial funds from his

IRA as well as other of his sources to be used to purchase real property

titled in petitioner’s name, in an attempt to make these funds

unavailable to satisfy the impending claims of Mr. Cotroneo’s creditors,

including the IRS. This puts the arrangements squarely within the

terms proscribed by Treasury Regulation § 1.6015-1(d) and is fatal to

her claim for relief under section 6015(c). See Durland v. Commissioner,

16 Petitioner was working as a homemaker from 1990 to 2012 and was earning

no income.

22

[*22] T.C. Memo. 2016-133 (finding fraudulent transfer of assets where

house purchased with husband’s assets was titled in wife’s name to put

those assets beyond reach of his creditors).

2. Petitioner’s Equitable Interest Defense

Against the conclusion that she engaged in a fraudulent transfer

within the meaning of Treasury Regulation § 1.6015-1(d), petitioner

argues, citing N.J. Stat. Ann. § 2A:34-23(h) (West 2018), 17 that she had

a substantial equitable interest in the couple’s marital property and that

any transfer to her would have to exceed her “actual and equitable

interest” in the couple’s marital property before it could be a fraud on

Mr. Cotroneo’s creditors. We disagree for several reasons. First and

foremost, whatever equitable interest petitioner might have had in

Mr. Cotroneo’s IRA or the proceeds from the Bernardsville residence

would almost certainly have to be resolved judicially. What petitioner

and Mr. Cotroneo attempted to do was an end run around any lawful

process to decide her equitable ownership as against Mr. Cotroneo’s

creditors.

Second, any equitable distribution of their marital property would

occur only incident to their divorce. Petitioner and Mr. Cotroneo

remained married at the time of trial and during the period of the

briefing schedule. Absent divorce, petitioner simply had no equitable

interest in the couple’s marital property. See Carr v. Carr, 576 A.2d 872,

875 (N.J. 1990) (“By the plain terms of the statute, a spouse’s right to

share in marital property by virtue of equitable distribution arises when

‘a judgment of divorce . . . is entered.’” (quoting N.J. Stat. Ann.

§ 2A:34-23)). In Carr the New Jersey Supreme Court held that a wife

could not maintain an equitable distribution claim against the estate of

her estranged husband who died while the divorce action was pending,

because no judgment of divorce had been entered.

Third, even putting aside petitioner’s marital status, only

property that was “legally and beneficially acquired by” the couple

17 The statutory authority for New Jersey’s equitable distribution process is

found in N.J. Stat. Ann. § 2A:34-23(h), which provides:

[I]n all actions where a judgment of divorce . . . is entered the court

may make such award or awards to the parties . . . to effectuate an

equitable distribution of the property, both real and personal, which

was legally and beneficially acquired by them or either of them during

the marriage . . . .

23

[*23] during marriage is subject to equitable distribution. In New

Jersey equitable division is barred for property obtained with illicit or

illegal funds. Sheridan v. Sheridan, 589 A.2d 1067, 1071 (N.J. Super.

Ct. Ch. Div. 1990). “[A] fair and common sense interpretation of the

statutory purpose in permitting the division of ‘legally and beneficially

acquired’ property bars the equitable division of property obtained with

illicit or illegal funds.” Id. at 1071 (quoting N.J. Stat. Ann. § 2A:34-23).

The record in this case establishes that Mr. Cotroneo’s bribery schemes

netted him millions of dollars of illicit funds. We have found that the

bulk of the purchase price for the Chester residence came from

Mr. Cotroneo. Accordingly, there is a clear basis to conclude that the

Chester residence was acquired with illicit funds. 18

For the foregoing reasons we are not persuaded that petitioner

had an equitable interest in the Chester residence under New Jersey

law. Accordingly, our conclusion that petitioner is not entitled to relief

under section 6015(c) by virtue of Treasury Regulation § 1.6015-1(d)

stands.

D. Section 6015(f)

Under section 6015(f), the Secretary may relieve an individual of

liability for a deficiency if, taking into account all the facts and

circumstances, it is inequitable to hold the individual liable and relief is

not available under section 6015(b) or (c).

Our conclusion that petitioner engaged in a transfer of assets

with Mr. Cotroneo as part of a fraudulent scheme to defraud creditors

precludes any relief under section 6015(f). Treasury Regulation

§ 1.6015-1(d) provides: “If the Secretary establishes that a spouse

transferred assets to the other spouse as part of a fraudulent scheme,

relief is not available under section 6015 . . . .” (Emphasis added.) Thus,

the regulation forecloses any section 6015 relief, whether it is sought

under subsection (b), (c), or (f). See Chen v. Commissioner, 2006 WL

18 We further note in this regard that Mr. Cotroneo’s indictment for tax evasion

alleged that a portion of the income Mr. Cotroneo failed to report for 2005 through

2007 consisted of $571,000 in landscaping and remodeling costs for the Bernardsville

residence that had been paid to him by a sham corporation and were bribery proceeds.

Mr. Cotroneo ultimately pleaded guilty to one count of bribery and one count of tax

evasion for 2007 and agreed to forfeit all real property that was derived from proceeds

traceable to the commission of the bribery offense. The $571,000 in landscaping and

remodeling expenditures undoubtedly increased the Bernardsville residence’s value,

and $151,000 of the proceeds from its sale were used to purchase the Chester residence.

24

[*24] 2270402, at *4 (“We hold that [Treasury Regulation § 1.6015-1(d)]

alone supports the Commissioner’s refusal to grant [the taxpayer]

innocent spouse relief under any subsection of section 6015 . . . .”).

We have considered the parties’ remaining arguments and, to the

extent not discussed, conclude that those arguments are irrelevant,

moot, or without merit.

To reflect the foregoing,

Decision will be entered for respondent as to the deficiency and for

petitioner as to the accuracy-related penalty under section 6662(a).