Mark G. Strom

United States Tax Court

T.C. Memo. 2024-58

MARK G. STROM,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

BERNEE D. STROM,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 16258-08, 16711-08. Filed May 16, 2024.

__________

John M. Colvin, Darrell D. Hallett, Cory L. Johnson, and Jason A. Harn,

for petitioner in Docket No. 16258-08.

John M. Colvin, Darrell D. Hallett, Cory L. Johnson, Cori E. Flanders-

Palmer, and Jason A. Harn, for petitioner in Docket No. 16711-08.

Kaelyn J. Romey, Bryant W. Smith, Timothy A. Froehle, Gregory Michael

Hahn, Alicia H. Eyler, Amy Chang, and Michael Finstad (student), for

respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GALE, Judge: These cases have been consolidated for purposes of

trial, briefing, and opinion. Petitioner Mark G. Strom 1 and his spouse,

1 See Docket No. 16258-08.

Served 05/16/24

2

[*2] petitioner Bernee D. Strom 2 (collectively, Stroms), filed a joint

federal income tax return for the taxable year 2000. Respondent

thereafter determined a deficiency of $39,812,187 in the Stroms’ federal

income tax for that year. 3 The deficiency arises from an unreported

income adjustment of $100,535,826, representing the portion of wages

reported on Forms W–2, Wage and Tax Statement, issued to Mrs. Strom

by InfoSpace.com, Inc. (InfoSpace), for 2000 but not reported as income

on the Stroms’ 2000 return.

Dr. and Mrs. Strom each timely petitioned the Court for

redetermination, alleging respondent’s deficiency determination was

erroneous. Dr. Strom’s Petition in addition alleged that he was entitled

to relief under section 6015 4 with respect to any deficiency sustained.

Dr. and Mrs. Strom each subsequently entered into an agreement with

respondent in which they conceded all allegations of error with respect

to the unreported income adjustment and deficiency; additionally, they

have conceded that the amounts of the unreported income adjustment

and the deficiency determined in the notice of deficiency (i.e.,

$100,535,826 and $39,812,187, respectively) are correct. 5 Consequently,

the only issue remaining for decision is whether Dr. Strom is entitled to

relief under section 6015(b) or (f) from the joint and several liability due

2 See Docket No. 16711-08.

3 Following the commencement of these proceedings, the parties filed Joint

Motions for Continuance, representing therein that the resolution of the issues raised

by a suit brought by the Stroms in the U.S. District Court for the Western District of

Washington, seeking the refund of federal income and Medicare taxes paid in 1999 and

Medicare tax paid in 2000, could prove dispositive in these cases. A stay was granted

pending resolution of the government’s appeal of the District Court’s decision to the

U.S. Court of Appeals for the Ninth Circuit. See Strom v. United States, 641 F.3d 1051,

1055 n.4 (9th Cir. 2011), rev’g and remanding 583 F. Supp. 2d 1264 (W.D. Wash. 2008).

Following the issuance of the Ninth Circuit’s opinion, the parties in each case filed a

Stipulation of Settled Issues wherein the Stroms conceded all issues in these cases

except whether Dr. Strom is entitled to relief under section 6015(b) or (f) for 2000. That

issue was subsequently tried during a four-day special trial session.

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

Code, Title 26 U.S.C., 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. Some dollar

amounts have been rounded to the nearest dollar.

5 Dr. Strom has also conceded that, despite his assertion to the contrary in the

Petition, the notice of deficiency was timely issued to him.

3

[*3] with respect to the Stroms’ taxable year 2000. 6 For the reasons that

follow, we hold that he is not.

FINDINGS OF FACT

Some of the facts have been stipulated and, together with the

Exhibits attached thereto, are incorporated herein by this reference.

When the Petitions were filed in these cases, the Stroms resided in the

State of Washington.

I. Background

Dr. and Mrs. Strom were married in 1967. At all relevant times,

they have remained married to and resided with each other.

A. Dr. Strom’s Education and Professional Experience

Dr. Strom has B.S., M.D., and M.B.A. degrees. He has seven

years of postgraduate training, including a surgical internship,

a general surgery residency, and a fellowship in cardiothoracic surgery.

From 1973 to 1976 he served as a clinical instructor in surgery at the

Albert Einstein College of Medicine and, from 1979 until at least 2003,

as an associate in surgery in the Department of Cardiothoracic Surgery

at the University of California, Los Angeles (UCLA) School of Medicine.

From 1976 to 1992, Dr. Strom served as chief of cardiac and thoracic

surgery at Garfield Medical Center in Los Angeles, California, and from

1976 to 1993, as president of Cardiothoracic Associates of Los Angeles,

Inc., a large clinical practice.

From 1983 to 1985, while maintaining his practice as a cardiac

and thoracic surgeon, Dr. Strom pursued his M.B.A. degree at UCLA

attending classes at nights and on weekends. As part of his M.B.A.

curriculum, Dr. Strom took at least one finance course and one

accounting course. He earned his M.B.A. from UCLA in 1985.

From 1993 to 1995 Dr. Strom continued his practice as a cardiac

and thoracic surgeon with a moderately sized surgical group in

Des Moines, Iowa. In 1995 Dr. Strom retired from his surgical practice

to pursue other professional opportunities.

6 Dr. Strom is ineligible for relief under section 6015(c) because at all relevant

times he has been married to and resided with Mrs. Strom.

4

[*4] Following his retirement as a cardiac and thoracic surgeon,

Dr. Strom pursued a career as a healthcare consultant and executive.

From 1996 to 1997 Dr. Strom served as a consultant in the Healthcare

Industry Group at Perot Systems Corp. in Dallas, Texas, where he

specialized in the clinical and operational management of healthcare

delivery systems, assisting clients in implementing managed care.

From 1997 to 1999 Dr. Strom served as vice president of medical affairs

and chief medical officer for Salus Media, Inc., in Santa Barbara,

California, an internet application for large corporations and managed

care organizations. From 1999 to 2000 Dr. Strom served as president

and chief executive officer of Asterion.com (Asterion) in Redmond,

Washington, a medical claims processing company. During 2000

Dr. Strom worked full time and was in the Asterion office daily. Dr.

Strom resigned as a member of the board of directors of Asterion and as

its president and chief executive officer in September 2000.

After leaving Asterion, Dr. Strom spent time training in medical

acupuncture at UCLA, completing the training in 2003. Since that time

Dr. Strom has practiced medical acupuncture and psychosomatic

medicine in Seattle, Washington. In 2005 his left thumb was

amputated, leaving him unable to perform surgical procedures.

During his career, Dr. Strom has been licensed as a physician in

New York (1970), California (1972), Iowa (1993), Pennsylvania (1993),

Missouri (1995), and the State of Washington (1999). He has published

several articles during his career, including three articles in 2000.

At the time of trial, Dr. Strom was 69 years old and still licensed

as a physician in five states. At that time he was also writing a book

about healthcare in the United States.

B. Mrs. Strom’s Education and Professional Experience

Mrs. Strom holds B.S. and M.A. degrees in mathematics and an

M.B.A. degree, which was conferred on her by UCLA in 1980. After

obtaining her M.B.A., she worked as a management consultant and a

director of circulation at the Los Angeles Herald Examiner newspaper,

and then founded and was a principal at Gemstar Development Corp.,

which created a programming code for VCRs and invented the electronic

program guide now widely used in televisions for program selection.

With a partner, she then formed a company that developed code for

synchronizing electronic devices. She was then recruited to be chief

executive officer of a company that was a consortium of Westinghouse,

5

[*5] CBS, and Gannett Co., Inc., created to develop high-definition

radio. After that, she was recruited to become chief executive officer of

Priceline.com, an online travel agency for finding discount rates for

travel-related purchases such as airline tickets and hotel stays. In

November 1998 Mrs. Strom was hired by InfoSpace as its president and

chief operating officer. Her employment with the company began in

November 1998, shortly before its initial public offering. She also served

on the company’s board of directors.

On January 1, 2000, Mrs. Strom resigned as president and chief

operating officer of InfoSpace and became president of InfoSpace’s newly

formed venture capital division, InfoSpace Venture Capital Fund. She

also resigned from the InfoSpace board of directors effective March 31,

2000. After June 30, 2000, Mrs. Strom was no longer employed by

InfoSpace in any capacity.

At the time of trial, Mrs. Strom was earning $240,000 per year as

chairman of the board of directors and chief executive officer of Web

Tuner, a startup company which at the time was developing a platform

for delivering television programming over the internet via broadband

signal. She was compensated with common stock of the company. In

addition she was serving on the board of directors for Benchmark

Electronics, a contract manufacturer of computer equipment and

medical devices. She was also serving on the board of trustees of the

National Public Radio Foundation and has received numerous awards

and recognitions during her career, including being named as one of the

100 most inspiring alumni of the Anderson School of Management at

UCLA. At the time of trial Mrs. Strom was 67 years old.

C. The Kirkland Condominium

In 1998 the Stroms moved to Seattle, Washington. In June 1999

they purchased a condominium in nearby Kirkland, Washington, for

$3,645,000, and incurred $500,000 for renovations shortly thereafter

(Kirkland condominium). The Stroms financed $1.5 million of the

purchase price.

After completing renovations on the Kirkland condominium, the

Stroms moved into it around May 2000. From that time to the time of

trial, Dr. and Mrs. Strom continued to reside together in the Kirkland

condominium.

6

[*6] D. The Stroms’ Handling of Their Day-to-Day Household

Finances

During the relevant period, Dr. Strom participated in various

aspects of managing the Stroms’ day-to-day household finances,

including drafting checks on joint accounts, determining whether to pay

bills, and communicating on the Stroms’ behalf with financial advisers

and institutions. Although Mrs. Strom primarily handled financial

matters for the household, an arrangement that Dr. Strom preferred, he

was nevertheless involved in, and capable of handling, such matters

when she was away traveling. If an issue arose when Mrs. Strom was

traveling, Dr. Strom would contact her when he was unsure how to

proceed. During the relevant period, the Stroms communicated

constantly about household financial matters, such as bills, and their

personal assistant in Kirkland, Cynthia Donaldson, 7 treated Dr. Strom

as being equally in charge with respect to such matters.

During the relevant period, a bank account at Bank of America

ending in 8864 was jointly controlled by Dr. and Mrs. Strom in their

individual capacities (Strom 8864 Account). During the relevant period,

Dr. Strom had full access to, and signatory authority over the funds held

in, the Strom 8864 Account. Throughout 2000, Dr. Strom prepared and

signed checks drawn on the Strom 8864 Account. These checks involved

the payment of the Stroms’ bills, and the amounts ranged from tens, to

tens of thousands, of dollars.

During the relevant period, a bank account at Wells Fargo ending

in 4870 was jointly controlled by Dr. and Mrs. Strom in the name of the

Strom Family Trust of 1982 (Strom Family Trust 4870 Account). Dr.

Strom had full access to, and signatory authority over the funds held in,

the Strom Family Trust 4870 Account. Throughout 2001, Dr. Strom

prepared and signed checks drawn on the Strom Family Trust 4870

Account. These checks involved the payment of the Stroms’ bills, and

the amounts ranged from tens, to tens of thousands, of dollars.

During the relevant period, Mrs. Strom did not in any way restrict

Dr. Strom’s access to the Stroms’ financial records. The Stroms were

fastidious recordkeepers and shared a home office in the Kirkland

condominium where paper copies of their business and financial records

were kept. Dr. Strom had full access to these records. To the extent

7 From May 20, 2000, until approximately May 2008, Ms. Donaldson worked

40 hours per week for the Stroms as a personal assistant.

7

[*7] records were electronically stored in Quicken, Mrs. Strom would

have shown Dr. Strom the books and records stored therein if he had

asked to see them.

E. The Stroms’ History of Joint Tax Filing

The Stroms filed joint Forms 1040, U.S. Individual Income Tax

Return, for the taxable years 1967 through 2012. During those years

the Stroms relied on professional tax advisers to prepare and file their

returns. For the preparation and filing of their 2000 return, the Stroms

engaged a team of such advisers.

As a matter of course during each year of their marriage, Dr.

Strom provided any relevant tax documents to Mrs. Strom for inclusion

in the preparation of their joint return. This included any Forms W–2

that he received. Dr. Strom understood at all relevant times that

issuance of a Form W–2 indicates that the form’s recipient has received

income.

II. Exercise of InfoSpace Stock Options

A. InfoSpace Stock Option Agreements

When Mrs. Strom was hired by InfoSpace in November 1998, she

was granted incentive stock options and nonstatutory stock options

pursuant to three stock option agreements. These agreements provided

Mrs. Strom with conditional rights to purchase a designated number of

shares of InfoSpace at a specified price. Her ability to exercise the stock

options was tied to a vesting schedule.

A “Consent of Spouse” form was attached to each of the three

stock option agreements. Among other things, the Consent of Spouse

form stated that the consenting spouse had read and understood the

agreement in question and that, in consideration of granting his spouse

the right to purchase shares of InfoSpace, the consenting spouse was

appointing his spouse as his attorney-in-fact with respect to the exercise

of any rights conferred by the agreement (insofar as he may have had

any such rights under the community property laws of the State of

Washington). After reading at least one of the three agreements, Dr.

Strom signed the Consent of Spouse form attached to each agreement. 8

8 Only two of the three stock option agreements in the record have been signed

by Dr. and Mrs. Strom. The remaining agreement has been signed only by Naveen

8

[*8] Although Dr. Strom did not ask Mrs. Strom for an explanation of

the three agreements before signing the Consent of Spouse forms, she

would have provided such an explanation if he had requested one.

B. Exercises of InfoSpace Stock Options in 2000

Pursuant to the stock option agreements, Mrs. Strom exercised

nonstatutory stock options during 2000 with resulting gains as set forth

in the table below:

Date # of Shares 9 Market Value Option Price Total Gain

1/06/2000 133,336 $11,883,571.00 $500,010.00 $11,383,561.00

2/07/2000 150,000 23,568,750.00 562,500.00 23,006,250.00

2/09/2000 13,589 2,432,431.00 50,958.75 2,381,472.25

2/29/2000 150,000 32,550,000.00 562,500.00 31,987,500.00

5/03/2000 143,008 8,616,232.00 268,140.00 8,348,092.00

5/11/2000 25,000 1,218,750.00 46,875.00 1,171,875.00

7/11/2000 175,000 7,590,625.00 328,125.00 7,262,500.00

7/11/2000 486,486 21,101,330.25 912,161.25 20,189,169.00

Total 1,276,419 $108,961,689.25 $3,231,270.00 $105,730,419.25

Personal checks were issued to InfoSpace in the amounts of

$3,085,332.07, $9,982,818.75, and $2,726,653.09 drawn on the Strom

8864 Account, as payment towards the option price and the taxes that

needed to be withheld for the above-referenced option exercises.

Dr. Strom knew that Mrs. Strom was exercising InfoSpace stock

options in 2000 and did not object because he trusted her judgment that

the stock was a good investment. On that same basis Dr. Strom chose

not to review all the documentation relating to the exercise of the

InfoSpace stock options.

C. Financing the Stock Option Exercises

In order to pay the remainder of the option prices and withholding

due for the above-referenced exercises of InfoSpace stock options in

Jain, the then chairman and chief executive officer of InfoSpace. However, at trial

Mrs. Strom testified that she obtained Dr. Strom’s signature on each of the Consent of

Spouse forms. We accordingly find that Dr. Strom signed each.

9 These figures account for stock splits.

9

[*9] 2000, Mrs. Strom borrowed $10 million from InfoSpace and the

Stroms together borrowed $10 million from Bank of America.

1. $10 Million InfoSpace Loan

A dispute later arose with respect to the $10 million InfoSpace

loan. Mrs. Strom and InfoSpace ultimately settled the matter through

Mrs. Strom’s paying InfoSpace $3.3 million in cash and transferring to

it the shares of InfoSpace stock that had been pledged as collateral for

the loan.

2. $10 Million Bank of America Loan

The Stroms together also obtained a $10 million personal loan

from Bank of America 10 in 2000 to pay a portion of the option prices and

withholding due for the InfoSpace stock options. By letter dated

March 3, 2000, the Stroms’ financial adviser provided Bank of America

with a financial statement for the Stroms, listing total assets of

$316,229,977.31 and total liabilities of $29,441,186, for a net worth of

$286,788,791.31 as of February 29, 2000.

Pursuant to an Individual Loan Agreement dated March 10,

2000, the Stroms, as trustees of the Strom Family Trust, and Bank of

America entered into an agreement whereby the latter agreed to provide

the former with access to a $10 million line of credit between the date of

the agreement and September 30, 2000 (BoA Loan Agreement). In

connection with the BoA Loan Agreement, the Stroms each individually

entered into a Continuing and Unconditional Guaranty, whereby each

unconditionally guaranteed, and promised to pay promptly, any and all

indebtedness of the Strom Family Trust to Bank of America. Pursuant

to the BoA Loan Agreement, the Stroms were required to repay in full

all principal and any unpaid interest or other charges by September 30,

2000.

The Stroms and Bank of America subsequently executed

amendments to the BoA Loan Agreement, including three amendments

extending the period for which the $10 million line of credit would be

10 The Stroms’ initial dealings with respect to this loan were with Seafirst

Bank, which was thereafter acquired by Bank of America. In the interest of simplicity,

we refer exclusively to Bank of America when discussing matters concerning the

$10 million line of credit extended by Bank of America to the Stroms in 2000 for the

purpose of exercising InfoSpace stock options, even when the materials being described

refer to Seafirst Bank.

10

[*10] available, and the date by which the Stroms would be required to

repay in full all principal and interest thereunder, to November 1, 2000,

February 1, 2001, and June 28, 2003, respectively. Dr. Strom signed the

BoA Loan Agreement and all amendments thereto.

The Stroms subsequently borrowed $10 million from Bank of

America pursuant to the BoA Loan Agreement for the purpose of

exercising InfoSpace stock options in 2000 ($10 million BoA Loan).

D. Recommendation to Sell InfoSpace Shares

By letter dated October 20, 2000, the Stroms’ financial adviser

recommended, inter alia, that the Stroms “consider selling 300,000

shares of . . . [their] highest basis shares of . . . [InfoSpace stock] between

now and year end.” The Stroms did not heed the advice; most of the

InfoSpace shares acquired by Mrs. Strom in 2000 were retained through

yearend. 11 During 2000 the value of the shares plummeted:

For example, when Mrs. Strom exercised options for 300,000 shares on

February 29, 2000, the market value per share was $108.50. However,

by the end of the year the market value per share had dropped to

$8.8438.

III. Forms W–2 for 2000

For 2000 InfoSpace issued Mrs. Strom four Forms W–2 reporting

wage income to her of (1) $10,421,734.10, (2) $10,421,734.10,

(3) $69,689,666.24, and (4) $15,993,750, resulting in total Form W–2

income of $106,526,884.44. Mrs. Strom informed Dr. Strom about the

InfoSpace Forms W–2 after receiving them in January 2001. Believing

that the income amounts reported on the Forms W–2 were overstated,

Mrs. Strom retained counsel as described hereinafter.

Asterion issued a Form W–2 to Dr. Strom for 2000 reporting

income to him of $95,438.93. He provided a copy to Mrs. Strom and to

the couple’s return preparer.

IV. Development of the Reporting Positions for Income Attributable to

Mrs. Strom’s InfoSpace Option Exercises in 2000

From January 30, 2001, to the filing of the Stroms’ 2000 return

on October 15, 2001, Dr. Strom participated alongside Mrs. Strom in

discussions with a team of attorneys and tax consultants they jointly

11 During 2000 Mrs. Strom sold 109,589 shares of InfoSpace.

11

[*11] retained to gather the facts involving Mrs. Strom’s InfoSpace

option exercises in 2000 and to develop tax-favorable positions on the

2000 return with respect to the income attributable to those exercises.

The Stroms’ advisers in this process included their attorneys George T.

Cowan, 12 Timothy L. Austin, 13 Bruce H. Benson, 14 Darrell D. Hallett,

and John M. Colvin, 15 and the tax consultants Susan K. Swartz and

Richard A. Lintermans from the national accounting firm KPMG, LLP

(KPMG). 16 Karen B. Brenner, the Stroms’ personal financial adviser,

also participated.

During the process, the Stroms and these advisers considered a

number of possibilities for reducing the Stroms’ 2000 tax liability before

settling on a strategy that would defer calculation and recognition of

most of the income attributable to Mrs. Strom’s InfoSpace option

exercises in 2000, to the taxable year 2001, at a time when the market

value of the InfoSpace stock was considerably lower, thereby resulting

in correspondingly lower gains (and tax liabilities) on the option

exercises. 17 This deferral strategy resulted in the omission of over

12 The Stroms retained Mr. Cowan on or about January 30, 2001. The scope of

Mr. Cowan’s engagement with the Stroms also extended to representing them in

connection with their negotiations over repayment of the $10 million BoA Loan.

13 Mr. Austin, a tax lawyer, was referred to the Stroms by Mr. Cowan and

thereafter retained on or about January 30, 2001.

14 Mr. Benson, a securities lawyer, was referred to the Stroms by Mr. Cowan

and retained on or about February 27, 2001.

15 Messrs. Hallett and Colvin, both lawyers with expertise in tax controversy,

were retained by the Stroms in February 2001. Messrs. Hallett and Colvin also

represented the Stroms during the 2000 audit and represent them in these cases. We

therefore note that the Stroms have waived any potential conflict of interest with

respect to Messrs. Hallett and Colvin representing them in these cases.

16 In February 2001 Mr. Cowan referred the Stroms to KPMG, which was

thereafter engaged in two capacities: (1) by Mr. Cowan under a Kovel agreement, see

United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), for purposes of tax consulting,

namely, to assist in gathering facts and developing tax-favorable positions with respect

to income attributable to Mrs. Strom’s InfoSpace option exercises in 2000; and (2) by

the Stroms themselves for purposes of preparing the 2000 return.

17 Most of the InfoSpace shares acquired by Mrs. Strom through option

exercises in 2000 were retained by her and not sold during that year. The above-

referenced deferral strategy applied only with respect to those retained shares. With

respect to the shares that Mrs. Strom acquired in 2000 through option exercises and

sold during that year, the income attributable thereto was included in gross income as

compensation based on the amount realized on the date of sale.

12

[*12] $100 million in income from the 2000 return. 18 As discussed

below, the nearly nine-month process of developing that strategy and

crafting the positions on the 2000 return with respect to the income

attributable to Mrs. Strom’s InfoSpace option exercises included in-

person meetings, conference calls, an opinion letter and memoranda,

letters by KPMG warning about the viability of the positions, and the

preparation of a disclosure statement to be attached the 2000 return. As

also discussed below, Dr. Strom was aware of, participated in, or

approved, each of these steps in the process.

A. In-Person Meetings

At least three in-person meetings were held by the Stroms and

their advisers during the period in question: on February 27, 19

March 2, 20 and June 13, 2001. 21 Dr. Strom attended each of these

meetings. During these meetings the facts, circumstances, and legal

issues involving Mrs. Strom’s InfoSpace option exercises in 2000 were

discussed, and Dr. Strom had the opportunity to ask questions regarding

those matters.

After considering a number of alternatives that were deemed

untenable, the Stroms and their advisers settled on a strategy that

would defer, to the taxable year 2001, calculation and recognition of

most of the income attributable to Mrs. Strom’s InfoSpace option

exercises in 2000. This deferral strategy was effected by the Stroms’

adoption of two positions on the 2000 return with respect to the

InfoSpace shares acquired by Mrs. Strom in 2000 but not sold during

that year; namely, that (1) under section 83(c)(3) 22 calculation and

18 As noted, the Stroms have conceded that the amounts of the unreported

income adjustment and the deficiency respondent determined in the notice of

deficiency ($100,535,826 and $39,812,187, respectively) are correct.

19 Attendees of the meeting on February 27, 2001, included Dr. and Mrs. Strom,

Mr. Austin, Mr. Benson (who may have participated by telephone), Ms. Brenner,

Mr. Cowan, Mr. Hallett, and Ms. Swartz.

20 Attendees of the meeting on March 2, 2001, included Dr. and Mrs. Strom,

Mr. Austin, Mr. Benson, Mr. Colvin, Mr. Cowan, and Ms. Swartz.

21 Attendees of the meeting on June 13, 2001, included Dr. and Mrs. Strom,

Mr. Austin, Mr. Benson, Ms. Brenner, Mr. Colvin, Mr. Cowan, Mr. Hallett, Ms. Swartz,

and Mr. Lintermans.

22 Section 83(c)(3) provides that, so long as a sale of property at a profit could

subject a person to suit under section 16(b) of the Securities Exchange Act of 1934

(Exchange Act), the person’s rights in the property are “subject to a substantial risk of

forfeiture” and “not transferable” for purposes of section 83. “If a taxpayer is permitted

13

[*13] recognition of the income attributable to the exercises were

deferred until June 30, 2000, because a sale of the InfoSpace shares by

Mrs. Strom before that time could have subjected her to a suit under

section 16(b) of the Exchange Act (Section 16(b) Position); 23 and

(2) under Treasury Regulation § 1.83-3(k), 24 calculation and recognition

of the income attributable to the exercises were further postponed until

January 29, 2001, because the InfoSpace shares in question were subject

to restrictions on transfer imposed by “Pooling-of-Interests Accounting”

rules 25 as applied to a merger between InfoSpace and the company

Go2Net, Inc., announced on July 26, 2000 (Pooling-of-Interests

Position).

Concerns at KPMG about the strength of these two positions, and

the potential consequences of adopting them on the 2000 return,

resulted in Messrs. Austin and Benson drafting supporting opinions for

purposes of limiting penalty exposure for both KPMG (as the return

preparer) and the Stroms (as the taxpayers). These opinions were set

forth in a letter by Mr. Austin and three memoranda by Mr. Benson.

to defer tax consequences under IRC § 83(c)(3), the taxpayer will be later taxed on an

amount equal to the fair market value of the stock on the date that § 83(c)(3) no longer

applies minus the option price paid for the stock.” Strom, 641 F.3d at 1054.

23 Under section 16(b) of the Exchange Act, a corporate insider (e.g., an owner,

director, officer) is generally prohibited from profiting on a purchase made within six

months of a sale (or a sale made within six months of a purchase) of the corporation’s

stock. See 15 U.S.C. § 78p(b); see also Strom, 641 F.3d at 1056 (“Section 16(b) of the

Securities Exchange Act of 1934 . . . is a prophylactic rule prohibiting corporate

insiders from profiting on ‘short-swing’ securities trades—specifically, on a purchase

and a sale of their company’s securities made within any period of less than six

months.”).

24 Treasury Regulation § 1.83-3(k) provides: “For purposes of section 83 and

the regulations thereunder, property is subject to substantial risk of forfeiture and is

not transferable so long as the property is subject to a restriction on transfer to comply

with the ‘Pooling-of-Interests Accounting’ rules set forth in Accounting Series Release

Numbered 130 . . . and Accounting Series Release Numbered 135 . . . .” (The pooling-

of-interests rules are discussed infra note 25.)

25 As discussed more fully in the opinion of the U.S. Court of Appeals for the

Ninth Circuit, “[t]he pooling-of-interests rules were a method of accounting for

business mergers permitted during the tax years at issue for companies that met

requirements set out in Accounting Principles Board Opinion No. 16.” Strom, 641 F.3d

at 1069. These rules “required stockholders of both companies in a merger to share

the risks of the combined entities,” and such “[r]isk-sharing was accomplished in part

by restricting officers from trading in shares of their company during the merger

process.” Id.

14

[*14] The aforementioned concerns at KPMG additionally led to the

preparation of a disclosure statement to be attached to the 2000 return.

During the three in-person meetings, the Stroms’ advisers

described and explained to both Dr. and Mrs. Strom the Section 16(b)

Position and the Pooling-of-Interests Position, the levels of authority

supporting them, and the alternatives thereto.

The opinion letter and memoranda that Messrs. Austin and

Benson drafted in support of those positions were also explained to Dr.

and Mrs. Strom, as were the potential for the Stroms’ 2000 return to be

selected for examination, and the advisability and benefits of attaching

a disclosure statement to the 2000 return. Both Dr. and Mrs. Strom

made efforts to understand, ask questions, and otherwise be engaged in

these discussions.

B. Conference Calls

In addition to attending the three in-person meetings, during the

period in question Dr. Strom participated in at least 21 conference calls

with the Stroms’ advisers, including, at various points, Mr. Cowan,

Mr. Austin, Mr. Benson, Ms. Swartz, and Ms. Brenner. Issues discussed

during these calls included the Stroms’ 2000 tax liability, the Section

16(b) Position and the Pooling-of-Interests Position, and the disclosure

statement to be attached to the 2000 return. Mrs. Strom did not

participate in 7 of these 21 calls.

Additionally, Dr. Strom—but not Mrs. Strom—participated in a

conference call in March 2001 with various KPMG professionals and

other KPMG clients regarding the possible creation of a coalition that

would lobby Congress for legislative changes to the federal income tax

laws as they relate to the exercise of stock options in a falling market.

Following the call, Dr. Strom advised Ms. Swartz that the Stroms had

decided to decline KPMG’s invitation to participate in the potential

coalition. Over the course of the Stroms’ engagement with KPMG,

Ms. Swartz never questioned Dr. Strom’s authority to speak on behalf of

Mrs. Strom or his capacity.

C. Opinion Letter and Memoranda

As noted, during his engagement with the Stroms, Mr. Austin

issued an opinion letter in support of the Section 16(b) Position and the

Pooling-of-Interests Position. In his letter, which incorporated the

opinions of Mr. Benson in certain memoranda on the securities law

15

[*15] issues, Mr. Austin opined that substantial authority existed for

both the Section 16(b) Position and the Pooling-of-Interests Position,

and that, pursuant to those positions, calculation and recognition of the

income attributable to most of Mrs. Strom’s InfoSpace option exercises

in 2000 was deferred until at least January 29, 2001. 26 Before issuing

the opinion letter, Mr. Austin was aware of the relevant reporting and

disclosure standards and the level of authority necessary to insulate the

Stroms from potential liability for accuracy-related penalties. Mr.

Austin intended for the Stroms and KPMG to rely on his opinion letter

as the return filers and return preparer, respectively.

At the in-person meeting on June 13, 2001, drafts of Mr. Austin’s

opinion letter and the memoranda of Mr. Benson that it incorporated

were discussed and explained to Dr. and Mrs. Strom. During that

meeting, Dr. Strom had the opportunity to ask Messrs. Austin and

Benson questions regarding their respective opinions.

Before the completion of the final draft of Mr. Austin’s opinion

letter, Messrs. Austin and Hallett discussed edits that had been

proposed by the latter. Mr. Austin’s final draft of the opinion letter

incorporated certain of Mr. Hallett’s proposed edits.

D. Warnings From KPMG About the Viability of the Section

16(b) Position and the Pooling-of-Interests Position

Before the 2000 return was filed, Dr. and Mrs. Strom were

warned by KPMG in writing at least twice that the firm did not expect

the Section 16(b) Position or the Pooling-of-Interests Position to be

sustained upon audit if challenged by the Internal Revenue Service

(IRS).

1. Letter Dated June 8, 2001

On June 8, 2001, Ms. Swartz emailed Dr. Strom, Mrs. Strom, Mr.

Cowan, Mr. Austin, and Ms. Brenner, attaching, inter alia, a letter

bearing the same date addressed to Dr. Strom, Mrs. Strom, and Mr.

Cowan. In the letter, after summarizing KPMG’s conclusions with

26 The Stroms adopted the Section 16(b) Position and the Pooling-of-Interests

Position only with respect to the InfoSpace shares that were acquired by Mrs. Strom

through option exercises in 2000 but not sold during 2000. With respect to the

InfoSpace shares that were acquired through option exercises in 2000 and sold during

2000, Mr. Austin’s letter opined that substantial authority existed that the income

attributable to such exercises would be includible in gross income as compensation

based on the amount realized on the date of sale.

16

[*16] respect to the Section 16(b) Position and the Pooling-of-Interests

Position, Ms. Swartz advised: “These two issues are intertwined, as

when the Section 16(b) trading restrictions lapse June 30, 2000, they are

‘tagged’ with the pooling trading restrictions that begin June 26, 2000

and lapse January 29, 2001. . . . [I]n aggregate, these two positions

reduce the 2000 tax liability by approximately $35 million.”

However, in the letter Ms. Swartz also advised both Dr. and Mrs.

Strom that KPMG had concluded that these two positions were merely

“not frivolous,” meaning that KPMG could sign the return as preparer

only if the positions were properly disclosed:

“Not frivolous” is a minimum standard for taking a position

on a tax return. It does not reflect an expectation of success

if the positions are challenged. Because of the magnitude

of the income and tax involved, and because the positions

are inconsistent with the reporting by Infospace on

Bernee’s Form W–2, we believe the 2000 tax return will be

audited by the Internal Revenue Service. Upon audit, we

would expect these issues to be challenged. While there are

many factors that can impact the outcome of an audit, you

should be prepared for a protracted process that will

require resources and ultimately could put you in a less

favorable position than had the positions not been claimed

(other than from the standpoint of the timing of the tax

payments).

2. Letter Dated October 12, 2001

Several of Ms. Swartz’s colleagues at KPMG subsequently

reviewed her June 8 letter and advised that (1) in order for the Stroms

to avoid a section 6662 accuracy-related penalty, even with disclosure of

the challenged positions, the positions must be found to have had a

“reasonable basis” and (2) they believed the positions had a reasonable

basis.

Thereafter, in a revised letter to both Dr. and Mrs. Strom dated

October 12, 2001, Ms. Swartz summarized KPMG’s “final conclusions”

with respect to the Section 16(b) Position and the Pooling-of-Interests

Position. In that letter Ms. Swartz again advised that the positions were

intertwined and that, when combined, they deferred calculation and

recognition of most of the income attributable to Mrs. Strom’s option

17

[*17] exercises in 2000 until January 29, 2001, thereby reducing the

Stroms’ 2000 tax liability by approximately $35 million.

However, Ms. Swartz also advised both Dr. and Mrs. Strom that

KPMG had concluded that there was only a “reasonable basis” for the

Section 16(b) Position and the Pooling-of-Interests Position, and that “to

protect against imposition of the 20% understatement penalty, the

position[s] must be adequately disclosed in the tax return on Form 8275,

Disclosure Statement.” Ms. Swartz further advised:

“Reasonable basis” is not a standard that reflects an

expectation of success if the positions are challenged.

Because of the magnitude of the income and tax involved,

and because the positions are inconsistent with the

reporting by Infospace on Bernee’s Form W–2, we believe

the 2000 tax return will be audited by the Internal Revenue

Service. Upon audit, we would expect these issues to be

challenged. While there are many factors that can impact

the outcome of an audit, you should be prepared for a

protracted process that will require resources and

ultimately could put you in a less favorable position than

had the positions not been claimed (other than from the

standpoint of the timing of the tax payments).

Dr. Strom reviewed at least one of these two letters.

E. Disclosure Statement

At the in-person meeting on June 13, 2001, the Stroms and their

advisers discussed the advisability of attaching a disclosure statement

to the 2000 return, as well as suggested content for any such statement.

This discussion extended to how a disclosure statement might positively

affect an initial IRS review of the 2000 return (and thus decrease the

chances of an audit) by possibly (1) providing answers to the likely

questions that IRS personnel would have in view of the inconsistency

between the amount of income reported on the InfoSpace Forms W–2

and the amount reported on the Stroms’ return and (2) persuading IRS

personnel that the Stroms’ positions with respect to the income

attributable to Mrs. Strom’s InfoSpace option exercises were well

founded and supported by relevant legal authority. The discussion

concluded with a consensus among the Stroms’ advisers that the Stroms

would be well advised to attach a disclosure statement to the 2000

return.

18

[*18] Over the next two months the Stroms’ team of advisers worked

on a disclosure statement (Disclosure Statement). The Disclosure

Statement in substantial part reflected the input of Messrs. Hallett and

Colvin. It discussed Mrs. Strom’s officer status at InfoSpace and the

claimed error in InfoSpace’s reported income on the Forms W–2 issued

to her due to the failure to account for the purported restrictions arising

from section 83(c)(3) on the transfer of the InfoSpace stock she acquired

pursuant to stock options during 2000 and the purported substantial

risk of forfeiture of the stock during 2000 under Treasury Regulation

§ 1.83-3(k). The Disclosure Statement further opined that the foregoing

transfer restrictions and forfeiture risk caused a deferral of the

recognition of any income resulting from Mrs. Strom’s exercise of her

stock options in 2000 to taxable year 2001, when the transfer

restrictions and forfeiture risks ended.

Mr. Cowan emailed a draft of the Disclosure Statement (which

substantially reflected the final version) to both Dr. and Mrs. Strom on

August 9, 2001, observing in the email: “Hopefully it [the Disclosure

Statement] will prove to be the marketing piece we seek.” The next day,

Mr. Cowan discussed the Disclosure Statement by telephone with Dr.

Strom, Mrs. Strom, Mr. Hallett, and Ms. Swartz, and circulated to them

a version, with minor revisions based on the call, that day.

On August 13, 2001, Dr. Strom responded to Mr. Cowan’s email,

approving the Disclosure Statement and instructing Ms. Swartz as to

the filing of an extension for the Stroms’ 2000 return:

This looks good as per Bernee [Strom], Karen [Brenner],

and Mark [Strom]. Susan—Bernee and Mark will both be

out of town in separate locations from Tuesday until

Friday. Please prepare the extension today and get it to us

via fax . . . , so that we can execute and submit it, or submit

it directly, extending our filing date with the IRS to

October 15. We are choosing the October 15 filing date

instead of October 30 as per your suggestion.[27] Thanks.

Within hours, on the same date, Ms. Swartz responded to Dr.

Strom’s email, writing: “The extension went out today—I can sign as

representative. A copy has been forwarded to Mark & Bernee also.”

27 On August 9, 2001, Ms. Swartz had emailed Mr. Cowan, Dr. Strom, Mrs.

Strom, and Ms. Brenner with an update regarding filing options for the Stroms’ 2000

return.

19

[*19] V. Negotiations with Bank of America Over the Defaulted

$10 Million Loan

At some point after February 1, 2001, Bank of America declared

the Stroms in default of the BoA Loan Agreement; and the $10 million

principal payment, for which each of the Stroms was personally liable,

became immediately due thereunder. Negotiations with the bank

ensued, in which Dr. Strom participated. Mr. Cowan represented the

Stroms in those negotiations. The Stroms sought an extension of the

due date for repayment, representing that they anticipated a

significantly reduced tax liability for 2000 as a result of the reporting

position that would be taken on their return with respect to the income

attributable to Mrs. Strom’s exercise of the InfoSpace stock options.

Dr. and Mrs. Strom sent a “corrected” financial statement to the bank

that listed their anticipated 2000 tax liability as $11.4 million—

as compared to an estimated $20 million liability that the Stroms had

estimated in a previous financial statement provided to the bank

sometime before January 31, 2001.

Negotiations between the Stroms and Bank of America continued

until late June 2001, culminating in a resolution agreement dated

June 28, 2001 (Resolution Agreement). Pursuant to the Resolution

Agreement, and for the purpose of resolving the default under the BoA

Loan Agreement, the Stroms agreed, inter alia (1) to execute,

contemporaneously with the Resolution Agreement, “Amendment No. 4

to Individual Loan Agreement” (Amendment No. 4); 28 (2) to execute,

contemporaneously with the Resolution Agreement, a deed of trust on

the Kirkland condominium and a mortgage on a farm they owned in

Iowa; (3) to execute, contemporaneously with the Resolution Agreement,

an “Assignment of IRS Refunds” and a “Security Agreement,” described

more fully below; (4) to instruct KPMG “to include on Line 67(b)” of the

Stroms’ 2000 return, and any and all amended returns for 1998 or 1999,

“the routing number of the bank for the Vandeburg [sic] Johnson &

Gandara trust account, . . . [a number ending in] 0105, and their trust

account number, . . . [a number ending in] 4542”; (5) to file their 2000

return no later than October 15, 2001; (6) to pay to Bank of America,

contemporaneously with the execution of the Resolution Agreement,

$750,000 to be applied to the principal owing under the BoA Loan

Agreement (thereby reducing the principal amount due from $10 million

28 Among other things, Amendment No. 4 extended the date during which the

$10 million line of credit would be available, and by which the Stroms would be

required to repay in full all principal and interest to June 28, 2003.

20

[*20] to $9.25 million), and $295,832.71 to be applied to the interest due

under the BoA Loan Agreement as of the date of the Resolution

Agreement; (7) to pay $4.25 million to Bank of America in one or more

payments on or before September 28, 2002, to be applied against the

principal balance owing under the BoA Loan Agreement (thereby

reducing the principal amount due to $5 million); and (8) to provide,

within five days of filing it, a full and complete copy of their 2000 return,

and full and complete copies of all amended returns filed for 2000, 1999,

and 1998 within five days of filing the same.

In addition to the foregoing requirements, the Resolution

Agreement included the following paragraph:

10. Mark G. Strom and Bernee D.L. Strom hereby

acknowledge and represent to Bank [of America] that they

are both Trustees and Beneficiaries of the Strom Family

Trust and as such, they will benefit individually as a result

of entering into this Agreement, the “Assignment of IRS

Refunds”, and “Amendment No. 4 to Individual Loan

Agreement”.

Dr. Strom signed the Resolution Agreement.

Contemporaneously with the Resolution Agreement and in

accordance therewith, the Stroms executed an assignment of IRS

refunds dated June 28, 2001 (Assignment of IRS Refunds), and a

security agreement dated June 28, 2001 (Security Agreement).

Pursuant to the Assignment of IRS Refunds, the Stroms

irrevocably assigned to Bank of America all of their “right, title and

interest in and to any and all IRS tax refunds to which . . . [the Stroms

were] entitled.” The Assignment of IRS Refunds included the following

paragraph:

Strom[29] hereby instructs KPMG to file their 1040 Federal

Income Tax Return no later than October 15, 2001 and to

include on Line 67(b) the routing number for the bank for

the trust account of the law firm of [Mr. Cowan], . . . [a

number ending in] 0105, and to include on Line 67(d) the

trust account number of that law firm, which trust account

number is . . . [a number ending in] 4542. Strom further

29 The Assignment of IRS Refunds defined “Strom” to refer collectively to “Mark

G. Strom and Bernee D.L. Strom.”

21

[*21] instruct [sic] KPMG to provide the same information on all

filings for amended returns for the years 1998, 1999, and

2000.

Dr. Strom signed the Assignment of IRS Refunds.

Pursuant to the Security Agreement, the Stroms granted Bank of

America a continuing security interest in “all refunds due or which

become due from the Internal Revenue Service to Debtor,[30] including

but limited to all refunds due to Debtor from the Internal Revenue

Service for Debtors’ 2000 tax return and any amended returns with

regard thereto and with respect to all amended returns for 1999 and

earlier.” Dr. Strom signed the Security Agreement.

Thereafter, Dr. and Mrs. Strom signed a joint return for 2000

claiming a $15,033,879 refund for that year; directing that it be

electronically deposited in the client trust account of Mr. Cowan’s law

firm (client trust account); and assigning $9,263,489.59 of that amount

to Bank of America to satisfy the $10 million BoA Loan in full.

VI. The 2000 Return and the $15,033,879 Refund

A. The 2000 Return

During the preparation of the 2000 return, both Dr. and Mrs.

Strom provided the return preparer, KPMG, with relevant tax

documents. Among the documents provided to KPMG by Dr. Strom was

the Form W–2 issued to him by Asterion, reporting wages of $95,438.32.

That Form W–2 and the four Forms W–2 issued to Mrs. Strom by

InfoSpace, with the latter reporting total wages of $106,526,884.44,

were attached to the Stroms’ 2000 return. 31

30 The security agreement defined “Debtor” to refer to “Mark G. Strom and

Bernee D.L. Strom, Individually and as Trustees of the Strom Family Trust dated July

22, 1982, as Amended and Completely Restated on October 9, 1996.”

31 The parties have stipulated that the four Forms W–2 issued by InfoSpace to

Mrs. Strom were attached to the Stroms’ 2000 return. However, the Exhibit which the

parties have stipulated as a true and correct copy of the Stroms’ 2000 return includes

only three Forms W–2 issued by InfoSpace. Additionally, the Exhibit which the parties

have stipulated as “a copy of the Stroms’ [Form] W–2 information for taxable year

2000, which was attached to their filed 2000 return” also includes only three Forms

W–2 issued by InfoSpace. Nevertheless, the Stroms included an instruction on line 7

(“Wages, salaries, tips, etc.) of their Form 1040 for 2000, stating: “See Statement 1.”

“Statement 1” attached to the 2000 return disclosed the four InfoSpace Forms W–2

22

[*22] After being advised of the Section 16(b) Position and the Pooling-

of-Interests Position, the levels of authority supporting them, and the

associated risks, Dr. and Mrs. Strom, in consultation with their counsel,

together chose to adopt those positions on the 2000 return for purposes

of reporting the income attributable to Mrs. Strom’s InfoSpace option

exercises in 2000. When the Stroms made choices on the 2000 return,

they did so together after discussing the matter in question.

On line 7 (“Wages, salaries, tips, etc.”) of their 2000 return, the

Stroms reported total wages of $6,200,830. However, on the same line

of the return, the Stroms included a typewritten instruction to “See

Statement 1.” A corresponding document marked “Statement 1” was

attached as a supplement to the return (Statement 1). Among other

things, Statement 1 included a table titled “Sources of Compensation”

setting forth the following information with respect to the Stroms’ Form

W–2 income for 2000:

Federal Soc. Sec. Medicare

Description Total Wages

Withheld Withheld Withheld

WAGES

ICOPYRIGHT INC $114,334 $27,985 $4,724 $1,658

ASTERION COM INC 95,439 4,724 1,536

INFOSPACE COM INC 10,421,734 151,115

INFOSPACE COM INC 10,421,734 151,115

INFOSPACE COM INC 15,993,750 4,478,250 231,909

INFOSPACE COM INC 69,689,666 17,574,214 4,724 1,010,652

SEE FORM 8275 (100,535,827)

TOTAL - WAGES $6,200,830 $22,080,449 $14,172 $1,547,985

Additionally, a Form 8275, Disclosure Statement, was attached

to the 2000 return. The Form 8275 disclosed a compensation item of

$100,535,827 and attached the Disclosure Statement previously

discussed.

Dr. Strom read and approved the Disclosure Statement before he

signed the 2000 return. At that time, he understood that the Disclosure

Statement advised the IRS that the Stroms were not reporting certain

income attributable to Mrs. Strom’s InfoSpace option exercises in 2000,

issued to Mrs. Strom and the amounts reported therein. Consequently, we are

satisfied that the parties’ stipulation is substantively accurate notwithstanding the

contents of the Exhibits they reference.

23

[*23] and that the income would instead be reported on their return for

2001.

Dr. Strom reviewed the 2000 return, including the Forms W–2

information attached thereto, before signing it. At the time he signed

the 2000 return, Dr. Strom was aware that, with respect to the amount

of income attributable to Mrs. Strom’s InfoSpace option exercises in

2000, there was a discrepancy between the amount reported on the

InfoSpace Forms W–2 for that year and the amount reported on the

Stroms’ return. He was also aware of the Stroms’ outstanding

$10 million loan with Bank of America.

B. The $15,033,879 Refund

The Stroms claimed a $17,033,879 overpayment on the 2000

return. After discussing the matter, the Stroms together chose to claim

a $15,033,879 refund and apply $2 million to their estimated tax for

2001. The Stroms also together chose to direct that the $15,033,879

refund be electronically deposited in the client trust account.

On November 7, 2001, pursuant to the Stroms’ instructions on the

2000 return, the $15,033,879 refund was wired to the client trust

account. On the same date, two checks were drawn on the client trust

account: (1) a check for $9,263,489.59, issued to Bank of America, to

satisfy in full the $10 million BoA Loan; and (2) a check for

$5,770,389.41, issued to the Stroms. On the same date the Stroms

together chose to initially deposit the $5,770,389.41 check in an account

at Bear Stearns ending in 5308 that Dr. and Mrs. Strom jointly

controlled in the name of the Strom Family Trust of 1982 (Strom Family

Trust 5308 Account). Two days later, on November 9, 2001, the Stroms

wired that same amount from the Strom Family Trust 5308 Account to

an account at Dreyfus ending in 4268 that Dr. and Mrs. Strom also

jointly controlled in the name of the Strom Family Trust of 1982 (Strom

Family Trust 4268 Account). During the relevant period, Dr. Strom had

full access to, and signatory authority over the funds held in, the Strom

Family Trust 5308 Account and the Strom Family Trust 4268 Account.

At trial, both Dr. and Mrs. Strom professed to have no recall

concerning the disposition of the $5,770,389.41 balance of the

$15,033,879 refund that was paid to them after Bank of America was

paid. As discussed more fully hereinafter, most of the remaining

$5,770,389.41, after being subject to a series of transfers among

accounts jointly controlled by Dr. and Mrs. Strom, was invested in Belle

24

[*24] Point Ltd., an offshore company indirectly owned by the Stroms

during the relevant period and formed in part for the purpose of making

their assets more difficult to seize by potential creditors.

VII. Kenneth A. Ziskin and the Stroms’ Asset Protection Plan

Upon becoming the Stroms’ financial adviser in November 2001,

Ms. Brenner recommended that they engage attorney Kenneth A. Ziskin

to revise their estate plan and “add some robust asset protection”

features that would protect their assets from potential creditors and

liabilities. Thereafter, pursuant to an estate planning engagement

letter executed by both Dr. and Mrs. Strom on November 28, 2001, the

Stroms jointly retained Mr. Ziskin for the foregoing purposes.

That same day, the Stroms formed the Sugar Creek Limited

Partnership, an Alaska limited partnership (Sugar Creek LP). The

entity was organized in part to protect Dr. and Mrs. Strom’s assets from

the claims of future creditors by making their interests in the entity

unattractive to creditors. Upon formation, Dr. and Mrs. Strom owned

more than 99% of Sugar Creek LP, either directly or as trustees of the

Strom Family Trust of 1982. Both Dr. and Mrs. Strom also served as

trustees of Carillon Management Trust, the general partner of Sugar

Creek LP, which held an interest of less than one percent.

On November 30, 2001, as part of the formation of Sugar Creek

LP, Dr. and Mrs. Strom each executed a Joint Comprehensive Transfer

Document. Dr. and Mrs. Strom each executed the instrument in their

capacities as individuals and trustees of the Strom Family Trust of 1982

and as trustees of the Carillon Management Trust; that is, the then-

general partner of Sugar Creek LP. By the instrument, Dr. and Mrs.

Strom together transferred total assets with an estimated fair market

value of $12,735,000, and in exchange each received a near 50% limited

partnership interest. Of the $12,735,000 transferred by the Stroms to

Sugar Creek LP from the Strom Family Trust of 1982, $4,970,389 was

transferred from the Strom Family Trust 5308 Account and was, as

discussed hereinafter, traceable to the $5,770,389.41 portion of the

refund claimed on the Stroms’ 2000 return that was paid out to them.

As part of the Stroms’ estate planning engagement with Mr.

Ziskin, they also formed Belle Point Ltd., a Saint Lucia international

business company (IBC), which was incorporated in February 2002.

Belle Point Ltd. was owned by Sugar Creek LP, and therefore indirectly

owned by Dr. and Mrs. Strom, who also served as directors for Belle

25

[*25] Point Ltd. Belle Point Ltd. was formed to hold investment assets

of Sugar Creek LP; to enable such investment assets to be held and

managed in offshore accounts without raising U.S. securities law

concerns for the investment managers; and to make the Stroms’ assets

more difficult to seize by potential creditors. Of the funds that the

Stroms would subsequently invest in Belle Point Ltd., at least

$3,186,000 is traceable to the $5,770,389.41 of the $15,033,879 refund

claimed on the Stroms’ 2000 return that was paid out to them.

In March 2002 the Stroms created Mingus Investors, LLC, a

Delaware limited liability company, through Mr. Ziskin, to extract value

from the Kirkland condominium by lending the equity in the property to

third parties and to pay for the costs of owning and maintaining the

residence. The Stroms transferred the Kirkland condominium to

Mingus Investors, LLC, in 2002.

Over the course of the Stroms’ estate planning engagement with

Mr. Ziskin, Dr. Strom personally communicated with Mr. Ziskin and

dispersed funds to him.

VIII. Disposition of the Remaining Refund Amount

As noted, on November 7, 2001, the Stroms initially deposited the

$5,770,389.41 portion of their 2000 refund paid to them into the Strom

Family Trust 5308 Account, before directing a transfer of that same

amount two days later to the Strom Family Trust 4268 Account.

Thereafter, on December 3, 2001, the Stroms transferred

$4,970,389 of that amount from the Strom Family Trust 4268 Account

back to the Strom Family Trust 5308 Account. On the next day,

December 4, 2001, the Stroms transferred that same amount (i.e.,

$4,970,389) from the Strom Family Trust 5308 Account to an account at

Bear Stearns ending in 0264 that Dr. and Mrs. Strom jointly controlled

during the relevant period in the name of Sugar Creek LP (Sugar Creek

0264 Account). The Stroms left those funds in the Sugar Creek 0264

Account through the end of December 2001 and most of January 2002.

However, between January 28 and April 16, 2002, the Stroms

transferred a total of $1,787,840.97 from the Sugar Creek 0264 Account

to (and through) other accounts under their joint control. 32 When

32 On January 28, 2002, the Stroms transferred $101,340.97 from the Sugar

Creek 0264 Account back to the Strom Family Trust 5308 Account. On January 29,

26

[*26] coupled with certain other transfers from the Strom Family Trust

4268 Account, 33 these transfers resulted in the total transfer of

$1,311,600 to the Strom Family Trust 0144 Account and $825,000 to the

Strom Family Trust 7623 Account during the aforementioned (nearly)

three-month period. All of the funds involved in these transfers can be

traced to the $5,770,389.41 portion of the $15,033,879 refund claimed on

the Stroms’ 2000 return that was paid to them.

Thereafter, on April 25, 2002, the Stroms transferred $3,186,600

from the Sugar Creek 0264 Account to an account at Goldman Sachs

ending in 8814 that Dr. and Mrs. Strom jointly controlled during the

relevant period in the name of the Sugar Creek LP (Sugar Creek 8814

Account). Four days later, on April 29, 2002, the Stroms transferred

$3,186,000 from the Sugar Creek 8814 Account to the client trust

account of Mr. Ziskin. At the Stroms’ direction, and on their behalf, on

2002, those funds were bundled with an incoming transfer of $148,880.30 from the

Strom Family Trust 4268 Account, culminating in a transfer of $250,000 from the

Strom Family Trust 5308 Account to a bank account at Wells Fargo ending in 7623

that Dr. and Mrs. Strom jointly controlled in the name of the Strom Family Trust of

1982 (Strom Family Trust 7623 Account).

On January 31, 2002, the Stroms transferred $437,100 from the Sugar Creek

0264 Account back to the Strom Family Trust 5308 Account.

On the same date, the Stroms then transferred that $437,100 from the Strom

Family Trust 5308 Account to an account at Citibank ending in 0144 that Dr. and Mrs.

Strom jointly controlled in the name of the Strom Family Trust of 1982 (Strom Family

Trust 0144 Account).

On February 1, 2002, the Stroms transferred $874,500 from the Sugar Creek

0264 Account back to the Strom Family Trust 5308 Account. On the same date, the

Stroms then transferred that $874,500 from the Strom Family Trust 5308 Account to

the Strom Family Trust 0144 Account.

On April 16, 2002, the Stroms transferred $375,000 from the Sugar Creek 0264

Account back to the Strom Family Trust 5308 Account. On the same date, the Stroms

then transferred that $375,000 from the Strom Family Trust 5308 Account to the

Strom Family Trust 7623 Account.

33 On December 26, 2001, the Stroms transferred $200,000 from the Strom

Family Trust 4268 Account back to the Strom Family Trust 5308 Account. On the

same date, the Stroms then transferred that $200,000 from the Strom Family Trust

5308 Account to the Strom Family Trust 7623 Account.

As noted, on January 29, 2002, the Stroms transferred $148,880.30 from the

Strom Family Trust 4268 Account back to the Strom Family Trust 5308 Account. On

the same date those funds were bundled with a previous transfer of $101,340.97 from

the Sugar Creek 0264 Account, culminating in a transfer of $250,000 from the Strom

Family Trust 5308 Account to the Strom Family Trust 7623 Account.

27

[*27] April 30, 2002, Mr. Ziskin transferred $3,486,600 34 from his client

trust account to an account at Goldman Sachs ending in 0255 that Dr.

and Mrs. Strom jointly controlled during the relevant period in the name

of Belle Point Ltd. (Belle Point Ltd. 0255 Account).

During the relevant period, Dr. Strom had full access to, and

signatory authority over the funds held in, each of the accounts

referenced in this Part VIII.

IX. U.S. District Court Refund Suit

At the in-person meeting on June 13, 2001, the Stroms and their

advisers discussed the timing and advisability of the Stroms filing an

joint amended return for the taxable year 1999 for purposes of treating

Mrs. Strom’s InfoSpace options exercised in that year consistently with

the tax treatment of her options exercised in 2000. 35 This discussion

extended to strategies involving a potential suit for refund in U.S.

District Court and how such a suit might implicate the taxable year

2000. The discussion also extended to how an audit of the 2000 return

might affect the decision whether to file an amended return for 1999,

with at least some advisers counseling that, if the 2000 return were not

selected for an audit, then the Stroms should not file an amended return.

At some point before September 25, 2002, the Stroms received a

notice of IRS examination with respect to the 2000 return. Thereafter,

the Stroms filed an amended return for 1999, seeking a refund of income

taxes paid for that year. Additionally, the Stroms filed a Form 843,

Claim for Refund and Request for Abatement, seeking refund of

Medicare taxes paid for 1999 and 2000. Both claims were generally

premised upon the same deferral strategy adopted on the Stroms’ 2000

return; namely, that the calculation and recognition of income

attributable to InfoSpace option exercises by Mrs. Strom in 1999 and

2000 was deferred until January 2001 because, pursuant to a

combination of restrictions under section 83(c)(3) and Treasury

34 One day before the above-described transfer, the Stroms had made a transfer

to the client trust account of Mr. Ziskin, which was the source of the additional

$300,600. We need not discuss that transfer further here, as the tracing thereof

reveals no relationship to the refund claimed on the 2000 return.

35 On their joint federal income tax return for 1999, the Stroms had reported

all of the income shown on the Form W–2 issued by InfoSpace to Mrs. Strom for that

year—including the income attributable to the exercise of InfoSpace stock options—

as taxable income.

28

[*28] Regulation § 1.83-3(k), her rights to the property were subject to a

substantial risk of forfeiture and not transferable.

When the IRS failed to act on the foregoing claims, the Stroms

brought suit in the U.S. District Court for the Western District of

Washington. 36 The Government moved for summary judgment and the

Stroms moved for partial summary judgment in that case. The District

Court thereafter held (1) that Mrs. Strom was entitled to defer under

section 83(c)(3) the calculation and recognition of the income

attributable to the InfoSpace option exercises in 1999 and 2000 until

December 23, 2000, 37 but (2) that Mrs. Strom was not entitled to further

defer the tax consequences of those option exercises into 2001 under

36 See Strom v. United States, No. 2:06cv802 (W.D. Wash. filed June 8, 2006).

A court may take judicial notice of another court’s records, and, finding that the

Stroms’ refund suit has a direct relation to the matters at issue, we take notice of the

proceedings in that suit before both the U.S. District Court and the Ninth Circuit. See

United States ex rel. Robison Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244,

248 (9th Cir. 1992) (collecting cases) (explaining that a court “may take notice of

proceedings in other courts, both within and without the federal judicial system, if

those proceedings have a direct relation to matters at issue” (quoting St. Louis Baptist

Temple, Inc. v. FDIC, 605 F.2d 1169, 1172 (10th Cir. 1979))); Kasper v. Commissioner,

150 T.C. 8, 12 n.3 (2018).

37 In ruling on the parties’ cross-motions, the District Court rejected the

Stroms’ argument that each option vesting date should be considered a “purchase” for

purposes of applying section 16(b) of the Exchange Act, holding instead that the

acquisition date of the options constitutes the purchase date. Because Mrs. Strom

acquired her InfoSpace options in November 1998, the District Court concluded that

Mrs. Strom was free to sell her InfoSpace stock in 1999 and 2000.

Nevertheless, the District Court also held that, with respect to their burden of

proof, the Stroms had to show only that a sale of InfoSpace shares could have subjected

Mrs. Strom to a suit under section 16(b) of the Exchange Act—not that such a sale

could have subjected her to liability thereunder. Thus, the District Court held that,

even though “a full and complete review of the relevant authority” would have resulted

in such a suit failing as a matter of law, the suit would not have been frivolous for

purposes of sanctions under Rule 11 of Federal Rules of Civil Procedure (Fed. R. Civ.

P.), and Mrs. Strom “would have had to marshal resources and successfully argue

matters of first impression in order to defeat such a suit.” Strom, 583 F. Supp. 2d

at 1270.

Accordingly, the District Court granted the Stroms’ motion in part, holding

that under section 83(c)(3) Mrs. Strom’s rights in the InfoSpace shares were subject to

a substantial risk of forfeiture and not transferable until December 23, 2000, six

months after her last vesting date. As discussed hereinafter, the Ninth Circuit

reversed the District Court on this point, holding that, rather than a Fed. R. Civ. P. 11

frivolousness standard, a person seeking to defer tax consequences under section

83(c)(3) must show that, if she sold stock and a suit under section 16(b) of the Exchange

Act was brought against her, the suit would have had “an objectively reasonable

chance” of success. See Strom, 641 F.3d 1051.

29

[*29] Treasury Regulation § 1.83-3(k), as Mrs. Strom faced no risk of

forfeiture because of the pooling-of-interests accounting rules. 38 See

Strom, 583 F. Supp. 2d 1264. Thus, the District Court granted in part,

and denied in part, each party’s motion.

On March 6, 2009, the Government filed a Notice of Appeal,

appealing the District Court’s holding that Mrs. Strom was entitled to

defer to a significant extent the calculation and recognition of the income

attributable to the InfoSpace option exercises in 1999 and 2000. On

March 12, 2009, Dr. and Mrs. Strom filed a Notice of Cross Appeal.

X. Notice of Deficiency

On April 4, 2008, respondent issued a notice of deficiency to the

Stroms for the taxable year 2000.

Therein, respondent determined a deficiency of $39,812,187 in

income tax for that year, arising from an unreported income adjustment

of $100,535,826, representing the portion of wages reported on the

Forms W–2 issued to Mrs. Strom by InfoSpace for 2000 but not reported

as income on the Stroms’ 2000 return. The Stroms timely petitioned

this Court. Proceedings in these cases were thereafter stayed pending

the resolution of the Government’s appeal of the District Court’s decision

to the Ninth Circuit.

XI. Property Status Agreement

After the issuance of the notice of deficiency, Dr. and Mrs. Strom

executed a Property Status Agreement, purporting to allocate certain

interests in existing joint assets, including the Kirkland condominium

(via Mingus Investors, LLC), to Dr. Strom as his sole and separate

property. In connection with the matter, Dr. Strom retained attorney

Robert Baker on or about March 9, 2009. Mr. Baker commenced the

engagement by conducting a teleconference on the foregoing date with

Mr. Hallett, who at that time was representing the Stroms in their

refund suit and who had referred Dr. Strom to Mr. Baker. Mr. Baker

thereafter conducted a teleconference with Dr. Strom on March 17, 2009;

38 In ruling on the parties’ cross-motions, the District Court interpreted

Treasury Regulation § 1.83-3(k) to restrict only postmerger sales of stock (and not

premerger sales—an interpretation for which the Stroms had argued). As discussed

hereinafter, the Ninth Circuit disagreed with that interpretation and remanded to the

District Court for further proceedings to develop facts as to the pooling-of-interests

issue. However, the District Court docket record indicates that no further proceedings

were held.

30

[*30] a teleconference with Mr. Hallett on March 18, 2009; and

teleconferences with both Dr. Strom and Mr. Hallett on March 19,

2009. 39 On March 23, 2009, Dr. Strom and Mr. Baker held their first in-

person conference.

On April 6, 2009, Mr. Hallett referred Mrs. Strom to attorney

Pamela McClaran, whom Mrs. Strom subsequently retained at some

point before May 15, 2009, in connection with the Property Status

Agreement matter. Mr. Baker and Ms. McClaran then worked together

to produce an initial draft of an agreement, which was forwarded to the

Stroms on July 30, 2009.

On August 4, 2009, Mr. Baker, Ms. McClaran, Dr. Strom, Mrs.

Strom, and Ms. Brenner held an in-person conference regarding the

matter. Thereafter, by letter dated August 25, 2009, Mr. Baker wrote

to Dr. and Mrs. Strom on behalf of himself and Ms. McClaran to provide

a summary of the decisions that were reached during that meeting.

Among other things, the letter advised that, under the draft Property

Status Agreement, the Kirkland condominium would be transferred

from Mingus Investors, LLC, to Dr. and Mrs. Strom in equal shares as

tenants-in-common, and, thereafter, Dr. and Mrs. Strom would each

transfer his or her one-half interest to a qualified personal residence

trust.

After over four months of additional meetings between the Stroms

and their respective attorneys, Mr. Baker sent an email on January 19,

2010, to Dr. Strom and Ms. McClaran, attaching thereto a revised draft

for their review. This January 2010 draft of the agreement likewise

allocated the Kirkland condominium equally between Dr. and Mrs.

Strom (via 50% interests in Mingus Investors, LLC).

There was no recorded activity on the draft Property Status

Agreement until April 11, 2010, when Dr. Strom sent an email to

Mr. Baker requesting a teleconference and advising him that the Stroms

“would like to work with one attorney only for the purpose of keeping

costs as low as possible.” Thereafter, on April 20, 2010, Mr. Baker, Dr.

Strom, Mrs. Strom, and Ms. Brenner (but not Ms. McClaran) held a

teleconference during which the Stroms expressed their desire to

allocate the Kirkland condominium entirely to Dr. Strom.

39 On June 3 and 16, 2009, Mr. Baker conducted additional teleconferences

with Mr. Hallett in connection with the Property Status Agreement matter.

31

[*31] Ms. McClaran did not participate in any further discussions

concerning the draft Property Status Agreement.

From April 20 to June 28, 2010, there was almost no activity with

respect to the agreement. However, on the latter date, Dr. Strom sent

Mr. Baker an email with the subject line “let’s get it signed,” stating:

Bernee and I would like to get our post nupt and supportive

documents signed ASAP, finally. If there are any

modifications we can deal with that later. Please advise

regarding how we can make that happen. We can come

down to your office as soon as is practicable in order to get

things wrapped up. Please get back to me as soon as you

can. Thanks.

In response, on June 29, 2010, Mr. Baker wrote to Dr. Strom (with

Mrs. Strom copied):

As I recall—I am at home at the moment, without the

files—a complete overhaul of the arrangement was where

we were heading in our last conversation; to wit, the entire

condo was to go into your column based on a very

substantial increase in the value of Bernee’s stock in

Ensequence. To support this revision, Bernee and Karen

were to get support for the new valuation of Ensequence to

me. Then, I would revise the property settlement

agreement, and we would have to consider how we might

deal with the history of correspondence that Pamela

[McClaran] and I crafted to show the rationale for the

arrangement previously proposed (which divided the condo

equally between you and Bernee because there was not

sufficient value in her column to totally allocate the condo

to you.)

So, I can have the docs ready to sign later this week

if the old deal is still in the works. Otherwise, can Bernee

and Karen justify the new deal proposed in our last call?

I haven’t heard anything since our call. If the new deal is

on, with good support, I will try to get to making revisions

over the holiday weekend and get it to you next week—and

deal with getting Pamela to sign off.

On the same date, Mr. Baker followed up with another email to

Dr. Strom (with Mrs. Strom copied): “I am now at the office looking at

32

[*32] my notes from our teleconference on April 20—Bernee expected to

be receiving an additional 1 million shares, the value of which would

allow us to move the condo to Mark. Did that happen?”

On the same date, Dr. Strom replied to Mr. Baker (with Mrs.

Strom copied) and advised that “Bernee did not receive the additional

1 million shares” but that he nevertheless thought “we should try to

stretch her equity as far as we can push it now, get the agreement signed

the way things are now, and then we can make changes later if

necessary.” 40 Dr. Strom added: “If we wait any longer the clock will

catch up with us. . . . [W]e probably cannot afford that.”

Thereafter, on the same date, Mr. Baker replied to Dr. Strom

(with Mrs. Strom copied), writing in relevant part: “I agree about

stretching the equity. Can Bernee or Karen give me more support—

involving the new business or otherwise?”

On July 2, 2010, after apparently not receiving a response to the

just referenced email, Mr. Baker sent a followup email to Dr. Strom

(with Mrs. Strom copied), writing in relevant part: “I agree that we need

to get documents signed. But, can Bernee or Karen give me some

ammunition to add value in Bernee’s column for the new ventures—and

increase your share of the condo accordingly?”

On July 5, 2010, Dr. Strom responded to Mr. Baker by email (with

Mrs. Strom copied) to apologize “that . . . [Mr. Baker] had to ask . . .

[them] for numbers several times” and to advise that “Bernee and Karen

ran through some figures and there most definitely are numbers which

will swing Bernee’s share over the critical point.” He further advised

that Ms. Brenner would be sending Mr. Baker an email with those

figures.

On July 6, 2010, Ms. Brenner sent an email to Dr. Strom and Mr.

Baker (with Mrs. Strom copied) stating in relevant part:

Bernee is still in negotiation with Ensequence but given

the status, she assured [sic] of receiving additional value

40 At trial, Mr. Baker testified that in his view the phrase “stretch the equity,”

as used in the context above, meant finding “some [value-related] figures” to allocate

to Mrs. Strom’s side of the column that in turn “would justify an allocation to the—

of the house to Mark’s side of the column.” When asked to clarify whether “stretching

the equity” specifically meant finding a way to allocate the Kirkland condominium

entirely to Dr. Strom, Mr. Baker testified: “Darn right,” that Dr. Strom “wanted the

house,” and Mr. Baker “wanted to help him.”

33

[*33] for her Board representation for the past 8 years, which up

to now has not been compensated. This recognition is being

offered by the major funding source out of his personal

holdings in the company and is an allocation of his proceeds

to her. We ran an analysis of the current deal offered to

Bernee and believe, depending upon the ultimate sales of

the company as provided by the company that it is

currently worth between $640,000 and $1.28 million. We

believe Bernee will realize a better arrangement than that

currently offered but given what is on the table, I believe

you can safely assume some value which will substantiate

the position that both Mark and Bernee have agreed to re:

the allocation of their assets.

On July 9, 2010, Mr. Baker sent an email to Dr. and Mrs. Strom,

attaching, inter alia, a revised copy of the Property Status Agreement. 41

In the email, he described several changes that he had made “in order

to make the numbers work”:

You will see that I have juggled assets and liabilities in the

PSA. I have not stated the condo debt as a liability in B’s

column, but it is implied given her obligation to pay ½ of

the debt in lieu of rent while she occupies the condo. I have

also eliminated the deferred tax liabilities of . . . Mark’s

retirement plans in order to make the numbers work. Let

me know what you think. I will noodle over what changes

if any need to be made in the correspondence trail that I

have with Pamela. I think I can avoid making any such

changes by a new letter introducing the new Ensequence

stock and the plan to shift the condo to M.

On July 24, 2010, Mr. Baker held a teleconference with Dr. Strom,

Mrs. Strom, and Ms. Brenner, during which the parties discussed the

upcoming oral argument in the Stroms’ refund suit calendared for

August 5, 2010, before the Ninth Circuit.

41 Mr. Baker would subsequently explain to Dr. Strom, in an email sent on

March 11, 2014, that a “math error” resulting in a $2 million overstatement of the total

value of the assets allocated to Mrs. Strom arose in this draft of the Property Status

Agreement, which “moved the condo asset and liability (via Mingus) to your column

and awarded the anticipated additional Ensequence shares to Bernee.”

34

[*34] On or about July 26, 2010, Dr. and Mrs. Strom executed the

Property Status Agreement. Mr. Baker executed it on July 27, 2010. 42

Attached to the Property Status Agreement as Exhibits A and B

were two asset schedules listing the purported separate property that

had been allocated to Mrs. Strom and Dr. Strom, respectively, under the

agreement. Nearly all of the assets therein, including Mingus Investors,

LLC, which at that time held the Kirkland condominium, were allocated

using values as of April 30, 2009; that is, more than a year before the

Property Status Agreement was executed. The Stroms did not obtain a

formal appraisal of the Kirkland condominium before executing the

Property Status Agreement; instead, Mr. Baker based the valuation on

quotes from Zillow and the King County Assessor. The Property Status

Agreement itself states “that the valuations of assets and liabilities in

the exhibits are approximate only” and that “[t]he parties agree that it

is unnecessary and that it would be unduly expensive to secure formal,

up-to-date, fair-market-value appraisals for all assets described in the

exhibits, and each party waives such a valuation demand.” The asset

schedules were prepared by Mr. Baker, who obtained the values of the

assets from Ms. Brenner from time to time. Mr. Baker did not consult

any source documents in preparing the asset schedules and relied on the

information he was provided.

The total value attributed to the assets allocated under the two

asset schedules was $11,263,243. However, Exhibit A, which listed the

purported separate property of Mrs. Strom, overstated by $2 million the

total value of the assets allocated to her. 43 Mr. Baker was advised of

this error on or about May 18, 2012, 44 but failed to advise Ms. McClaran

42 It was not until November 18, 2010, that Mr. Baker sent the Property Status

Agreement to Ms. McClaran for her signature. She executed it on November 22, 2010.

43 The overstatement appears on the face of the document: If one were to add

each of the 12 assets allocated to Mrs. Strom in Exhibit A and compare it to the “Total”

line of Exhibit A, one would discover that the “Total” line of Exhibit A was overstated

by $2 million.

44 At trial, Mr. Baker testified that he learned of the error from Mr. Hallett’s

associate, Cori E. Flanders-Palmer. (Ms. Flanders-Palmer is counsel of record for Mrs.

Strom in the case at Docket No. 16711-08.) The only activity in the Property Status

Agreement matter listed in Mr. Baker’s billing records for 2012 is from May 14 to

May 18, 2012. Those records indicate that Mr. Baker had a teleconference with Mr.

Hallett and Ms. Flanders-Palmer on May 18, 2012. Additionally, in an email sent to

Mr. Hallett and Ms. Flanders-Palmer on May 22, 2012, Mr. Baker references “the math

error that Cori caught.” On the basis of the foregoing, we conclude that, at the latest,

Mr. Baker was advised of the error on May 18, 2012.

35

[*35] of the error until on or about March 13, 2014. 45 The error was not

corrected until April 3, 2014, when Dr. and Mrs. Strom executed an

Amendment of Property Status Agreement, which refers to the

$2 million overstatement as a “math error.” Ms. McClaran was not

involved in the drafting or signing of the Amendment of Property Status

Agreement. 46

At the time Mr. Baker drafted the Property Status Agreement, he

was aware that the Stroms had a potential tax liability and that

Dr. Strom was seeking innocent spouse relief in connection with it.

Mr. Baker was provided with a copy of Dr. Strom’s initial innocent

spouse relief request.

During the engagement, Mr. Baker spent time reviewing the

innocent spouse implications of the Property Status Agreement.

XII. Innocent Spouse Relief Requests

A. Dr. Strom’s First Request for Innocent Spouse Relief

On June 30, 2009, the IRS’s Cincinnati Centralized Innocent

Spouse Operation (CCISO) received a Form 8857, Request for Innocent

Spouse Relief (First Form 8857), completed by Dr. Strom, requesting

relief from joint and several liability with respect to the Stroms’ federal

income tax liability for taxable year 2000. On his First Form 8857,

Dr. Strom did not list the M.B.A. that he had obtained from UCLA in

1985, and, in the space provided on the form to list any college-level

business or tax-related courses that he had completed, he wrote “None.”

In response to the question of whether he had a present mental or

physical health problem, or such a problem at the time the 2000 return

was signed, Dr. Strom checked the box indicating “No.” With respect to

his involvement in the preparation of the 2000 return, Dr. Strom

checked the boxes indicating (1) that he had given tax documents to the

45 The record includes a memorandum dated March 13, 2014, consisting of a

transcription of two voicemails left for Ms. McClaran by Mr. Baker. At trial, Ms.

McClaran testified that she first learned about the error by listening to the voicemails.

It is unclear whether March 13, 2014, is the date that the voicemails were left, or the

date they were transcribed, insofar as an email sent by Mr. Baker to Dr. Strom on

March 11, 2014, attaching a copy of the Amendment of Property Settlement

Agreement, states that Mr. Baker had left a voicemail with Ms. McClaran, “explaining

the situation and advising that . . . [he would] speak with her . . . [the following day].”

46 The only reference to Ms. McClaran listed in Mr. Baker’s billing records for

2014 is on June 30, 2014. It states: “Conference with Pamela McClaran regarding IRS

contacts.”

36

[*36] person who prepared the 2000 return and (2) that he reviewed the

2000 return before it was signed. In response to the question of whether,

at the time the 2000 return was signed, the Stroms were having

financial problems, Dr. Strom checked the box indicating “No.” Lastly,

with respect to his involvement in the Stroms’ household finances

during 2000, Dr. Strom checked only the box indicating that he was not

involved in handling money for the household. He did not check the

boxes indicating that he had or used any joint accounts or that he “made

decisions about how money was spent” during 2000 (e.g., “you paid bills

or made decisions about household purchases”).

In a one-page attachment to the First Form 8857, Dr. Strom wrote

that he “did not participate in the decisions regarding the exercise of the

stock options” and that he “did not make the decisions, or even

participate in the decisions, regarding the reporting of the exercise of

the incentive stock options.”

Dr. Strom signed the First Form 8857 under penalty of perjury on

June 18, 2009, and was represented by counsel in connection with the

preparation of the document.

B. Mrs. Strom’s Questionnaire for Nonrequesting Spouse

Around the same time Dr. Strom submitted the First Form 8857,

Mrs. Strom submitted a Form 12508, Questionnaire for Non-Requesting

Spouse, relating to Dr. Strom’s relief request for 2000. With respect to

Dr. Strom’s use of the Stroms’ joint checking accounts during 2000, Mrs.

Strom checked only the box indicating that Dr. Strom was not involved

in handling money for the household. She did not, for example, check

the boxes indicating that Dr. Strom paid bills or made withdrawals from

such accounts. Mrs. Strom also noted, inter alia, that she had been

primarily responsible for household finances during the marriage and

that Dr. Strom “did not have any involvement in . . . [her] employee stock

options which resulted in the additional proposed tax liability.”

Mrs. Strom signed the Form 12508 under penalty of perjury.

C. Dr. Strom’s Second Request for Innocent Spouse Relief

In June 2012, three years after the First Form 8857 was

submitted, CCISO received an additional Form 8857 (Second Form

8857) from Dr. Strom, again requesting relief from joint and several

37

[*37] liability for 2000. 47 On his Second Form 8857 Dr. Strom listed his

M.B.A. among his college degrees and, within a 17-page attachment,

disclosed that, as part of his M.B.A. program, “he was required to

complete typical courses such as financial planning for managers,

management information systems, quantitative methods for managers,

and economic analysis for managers.” He additionally disclosed that he

“took a single managerial accounting course” but stated that he

“remembers virtually nothing from . . . [it].”

On the Second Form 8857, in response to the question of whether

he had a present mental or physical health problem, or such a problem

at the time the 2000 return was signed, Dr. Strom checked the box

indicating “Yes.” Within the aforementioned attachment to the Second

Form 8857, Dr. Strom wrote that he “had been seeing psychiatrists for

more than twenty years for anxiety and depression” and that

“[s]ometime during the 1990s, as he transitioned from the surgeon’s role

he knew well to a new role of consultant and executive, his condition

worsened.” Dr. Strom wrote that, “[i]n addition to the use of

benzodiazepines prescribed by his psychiatrists,” he “began self-

medicating to control his agitation, using opioids such as Vicodin” and

that, “[b]y 2000,” his “drug use had developed into substance abuse.” He

further wrote that, after Mrs. Strom discovered his drug use in 2000, he

“sought professional assistance” and “began seeing a psychiatrist three

times per week.” Dr. Strom wrote that “[h]e was diagnosed as having

an anxiety disorder, for which he continues to receive treatment,” and

that he “continued taking opioids until 2011 when he voluntarily

entered a rehabilitation program in order to terminate his substance

abuse.”

Dr. Strom also wrote in the attachment that in 2006 he “was

diagnosed with a melanoma that resulted in the amputation of his left

thumb,” that he “continues to suffer from left arm lymphedema as a

complication of his melonoma surgery,” and that “[t]his is a chronic

condition requiring continued medical treatment for the rest of his life.”

47 At trial, respondent’s counsel explained that, at some point after the

submission of the First Form 8857, the IRS issued an internal notice regarding

outstanding innocent spouse cases. That notice advised that such cases could be sent

back to CCISO for further consideration. Dr. Strom’s counsel at the time asked to

resubmit his request for relief, along with a new form and new information, resulting

in the Second Form 8857.

38

[*38] No documentation, such as medical bills or a doctor’s report or

letter were attached to the Second Form 8857 (although the form in

question directs the requesting spouse to provide it).

With respect to his involvement in the preparation of the 2000

return, Dr. Strom checked the boxes indicating (1) that he had given tax

documents to the person who prepared the 2000 return and (2) that he

did not review the 2000 return before it was signed. In the attachment

to the Second Form 8857, Dr. Strom further wrote that, “[t]o the best of

. . . [his] recollection, he did not review the 2000 tax return or the Form

8275 disclosure statement before signing.”

With respect to his involvement in the Stroms’ household finances

during 2000, Dr. Strom checked the boxes indicating (1) that he knew

Mrs. Strom had separate accounts, (2) that he had joint accounts but

“had limited use of them or did not use them,” and (3) that he was not

involved in handling money for the household. He did not check the

boxes indicating that he used any joint accounts or that he “made

decisions about how money was spent” during 2000 (e.g., “you paid bills

or made decisions about household purchases”).

Dr. Strom signed the Second Form 8857 under penalty of perjury

and was represented by counsel in preparing the document.

XIII. Reversal by the Ninth Circuit

As noted, the Government and the Stroms cross-appealed to the

Ninth Circuit the District Court’s decision in the Stroms’ refund suit for

1999 income and Medicare taxes and 2000 Medicare taxes. On June 24,

2010, the Ninth Circuit issued a Notice of Oral Argument, calendaring

the case for oral argument on August 5, 2010.

On April 6, 2011, the Ninth Circuit issued its opinion, reversing

the District Court’s holding as to Mrs. Strom’s entitlement to defer

under section 83(c)(3) the calculation and recognition of the income

attributable to the InfoSpace option exercises in 1999 and 2000. 48 See

48 The Ninth Circuit held that the District Court had correctly rejected the

Stroms’ argument that each option vesting date should be considered a “purchase” for

purposes of applying section 16(b) of the Exchange Act, agreeing that the acquisition

date of the options constitutes the purchase. Because Mrs. Strom acquired her

InfoSpace options in November 1998, the Ninth Circuit also agreed with the District

Court that Mrs. Strom was free to sell her InfoSpace stock in 1999 and 2000.

39

[*39] Strom, 641 F.3d 1051. The Ninth Circuit also held that the

District Court had erred in interpreting Treasury Regulation § 1.83-3(k)

to restrict only postmerger sales of stock (and not premerger sales, an

interpretation for which the Stroms had argued) and remanded for

further proceedings to develop facts as to the pooling-of-interests issue. 49

On April 12, 2011, Dr. Strom sent Mr. Baker, his attorney in the

Property Status Agreement matter, an email, which read in full: “Lost!!

Pull out the documents. Ugh.” Thereafter, on April 13, 2011, Mr. Baker

responded in full: “Ugh is an understatement! I am so sorry to hear this

news. Yes, I will organize the documents.” The “documents” referred to

by Dr. Strom and Mr. Baker included the Property Status Agreement.

On May 22, 2011, the Stroms filed a petition for a panel

rehearing. The Ninth Circuit denied that petition on June 7, 2011, and,

on June 15, 2011, issued the mandate.

On June 22, 2011, Mr. Baker held an in-person conference in the

Property Status Agreement matter with Mr. Hallett. At that time, there

had been no activity in the Property Status Agreement matter since

November 18, 2010, when Mr. Baker had contacted Ms. McClaran and

sent the Property Status Agreement to her for signature.

XIV. The Stroms’ Net Worth

At the time of trial, the Stroms had a net worth of at least

$13,432,098.

But, as noted previously, the Ninth Circuit reasoned that, rather than a Fed.

R. Civ. P. 11 frivolousness standard, as the District Court had applied, a person

seeking to defer tax consequences under section 83(c)(3) must show that, if she sold

stock and a suit under section 16(b) of the Exchange Act was brought against her, the

suit would have had “an objectively reasonable chance” of success. The Ninth Circuit

held that, in view of the fact that the six-month window of potential liability (following

the November 1998 purchase date) had expired before Mrs. Strom had exercised any

options, Mrs. Strom had not made the required showing: “A reasonably prudent and

legally sophisticated person in Strom’s position would have felt free to sell her

property, because, if a § 16(b) suit had been brought against her, she would not have

been forced to forfeit the profit obtained by the sale, nor would she have faced

substantial legal expenses defending herself in a suit not readily dismissable.” Strom,

641 F.3d at 1068.

49 As noted, the District Court docket record indicates that no further

proceedings were held following the remand.

40

[*40] OPINION

Married taxpayers may elect to file a joint federal income tax

return. § 6013(a). After making this election, each spouse is jointly and

severally liable for the entire tax due for that year. § 6013(d)(3); Butler

v. Commissioner, 114 T.C. 276, 282 (2000). In certain circumstances,

however, a spouse who has filed a joint return may seek relief from joint

and several liability under procedures set forth in section 6015.

§ 6015(a), (f).

A requesting spouse may request relief from liability under

section 6015(b) or, if eligible, may allocate liability according to

provisions under section 6015(c). § 6015(a). If relief is not available

under section 6015(b) or (c), an individual may seek equitable relief

under section 6015(f). In determining whether a taxpayer is entitled to

relief under section 6015(b), (c), or (f), we apply a de novo standard and

scope of review. 50 See Porter v. Commissioner, 132 T.C. 203, 210 (2009).

Unless otherwise provided in section 6015, the taxpayer bears the

burden of proving entitlement to such relief. Rule 142(a); Alt v.

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

2004).

Dr. Strom seeks relief from joint and several liability under either

section 6015(b) or (f). 51 For the reasons that follow, we hold that neither

section 6015(b) nor (f) entitles Dr. Strom to such relief.

I. Relief Under Section 6015(b)

Section 6015(b) requires a spouse requesting relief from joint and

several liability to establish each of the following: (1) a joint return was

filed for the taxable year; (2) there is an understatement of tax

attributable to erroneous items of the nonrequesting spouse; (3) in

signing the return, the requesting spouse did not know, and had no

reason to know, that there was an understatement; (4) taking into

account all of the facts and circumstances, it would be inequitable to

hold the requesting spouse liable for the deficiency in tax for such

taxable year attributable to such understatement; and (5) a timely

50 Because Dr. Strom filed his Petition before July 1, 2019, section 6015(e)(7)

does not apply to his case. See Sutherland v. Commissioner, 155 T.C. 95, 104 (2020).

51 As noted, Dr. Strom is ineligible for relief under section 6015(c) because at

all relevant times he has been married to and living with Mrs. Strom.

41

[*41] election was made under section 6015(b). 52 These conditions are

stated in the conjunctive, and the requesting spouse must satisfy all five

in order to be awarded relief. See Alt, 119 T.C. at 313.

There is no dispute as to whether Dr. Strom satisfies the first,

second, and fifth conditions: The Stroms filed a joint return for 2000, the

understatement is attributable to Mrs. Strom’s omitted income, and Dr.

Strom’s request for relief was timely. Accordingly, Dr. Strom must

establish that he did not know and had no reason to know of the

understatement and that it would be inequitable to hold him liable for

the deficiency attributable thereto.

A. Section 6015(b)(1)(C)

Section 6015(b)(1)(C) requires a spouse requesting relief from

joint and several liability to establish that he did not know and had no

reason to know of the understatement of tax on the joint return. In cases

involving an understatement arising from an omission of income, as

here, courts have consistently held that the requesting spouse’s “actual

knowledge of the underlying transaction that produced the income is

sufficient to preclude innocent spouse relief (the ‘knowledge-of-the-

transaction test’).” 53 Cheshire v. Commissioner, 282 F.3d at 333; see also

52 Section 6015(b) was enacted as part of the Internal Revenue Service

Restructuring and Reform Act of 1998, which simultaneously repealed section 6013(e).

See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-

206, § 3201, 112 Stat. 685, 734–40. However, some of the conditions for relief under

section 6015(b) are “virtually identical” to those found in the former section 6013(e),

see Jonson v. Commissioner, 118 T.C. 106, 119 (2002), aff’d, 353 F.3d 1181 (10th Cir.

2003), and therefore cases interpreting the former section 6013(e) remain instructive

in our analysis of the parallel conditions of section 6015(b), see Cheshire v.

Commissioner, 282 F.3d 326, 331 n.9, 332 n.15 (5th Cir. 2002), aff’g 115 T.C. 183

(2000); Butler, 114 T.C. at 283; Doyle v. Commissioner, T.C. Memo. 2003-96, slip op.

at 13 n.11, aff’d, 94 F. App’x 949 (3d Cir. 2004). This includes the third and fourth

conditions listed above that are in dispute in these cases.

53 Dr. Strom argues that the knowledge-of-the-transaction test is improper

because it conflicts with the plain meaning of section 6015(b)(1)(C), which limits relief

to spouses with no knowledge or reason to know of the “understatement.” However,

courts have previously acknowledged this point and “concluded that this deviation

from plain meaning is justified because it avoids ‘acceptance of an ignorance of the law

defense.’” Cheshire v. Commissioner, 282 F.3d at 333 n.16 (quoting Sanders v. United

States, 509 F.2d 162, 169 n.14 (5th Cir. 1975)); Mayworm v. Commissioner, T.C. Memo.

1987-536, 54 T.C.M. (CCH) 941, 944 (1987) (noting that the application of the

knowledge-of-the-transaction test may not necessarily “square with the literal

language of the statute” but that “it avoids the practical problems associated with an

ignorance of the law defense”); see also Price v. Commissioner, 887 F.2d 959, 963 n.9

42

[*42] Richardson v. Commissioner, 509 F.3d 736, 745–46 (6th Cir.

2007), aff’g T.C. Memo. 2006-69; Mitchell v. Commissioner, 292 F.3d

800, 802–03 (D.C. Cir. 2002), aff’g T.C. Memo. 2000-332; Bliss v.

Commissioner, 59 F.3d 374, 378 (2d Cir. 1995), aff’g T.C. Memo. 1993-

390; Purcell v. Commissioner, 826 F.2d 470, 473–74 (6th Cir. 1987), aff’g

86 T.C. 228 (1986); Quinn v. Commissioner, 524 F.2d 617, 625–26 (7th

Cir. 1975), aff’g 62 T.C. 223 (1974); Smith v. Commissioner, 70 T.C. 651,

672–73 (1978); McCoy v. Commissioner, 57 T.C. 732, 734–35 (1972);

Becherer v. Commissioner, T.C. Memo. 2004-282, slip op. at 5–6;

Zoglman v. Commissioner, T.C. Memo. 2003-268, slip op. at 6–8; Estate

of Hall v. Commissioner, T.C. Memo. 1996-93, slip op. at 14–15, aff’d,

103 F.3d 112 (3d Cir. 1996) (unpublished table decision); Mayworm, 54

T.C.M. (CCH) at 943–44. 54 Under the knowledge-of-the-transaction

test, a requesting spouse does not satisfy section 6015(b)(1)(C) if he

knew or had reason to know of the transaction that gave rise to the

understatement at issue. Jonson, 118 T.C. at 115; see also Erdahl v.

Commissioner, 930 F.2d 585, 589 (8th Cir. 1991), rev’g and remanding

T.C. Memo. 1990-101; Wang v. Commissioner, T.C. Memo. 2014-206,

at *17. Whether the requesting spouse understands the tax

consequences of the underlying transaction is immaterial. See Quinn v.

Commissioner, 524 F.2d at 626 (“The knowledge contemplated by the

statute is not knowledge of the tax consequences of a transaction but

rather knowledge of the transaction itself.”); see also Mitchell v.

Commissioner, 292 F.3d at 803–04; Cheshire v. Commissioner, 282 F.3d

at 334–35; Price v. Commissioner, 887 F.2d at 964; Purcell, 86 T.C.

at 237–38; Smith, 70 T.C. at 672–73; McCoy, 57 T.C. at 734–35; Pierce

(9th Cir. 1989) (“[I]n income omission cases, knowledge of the transaction is virtually

equivalent to knowledge of the understatement because if a spouse knows of a

transaction which generated income that the return does not report, then it is

extremely likely that she will know that the return does not report all income (unless

she merely lacks knowledge of tax consequences).”). Moreover, for the reasons fully

discussed infra pp. 43–50, we conclude that Dr. Strom’s arguments in these cases that

he neither knew nor had reason to know of the understatement on the 2000 return are

fundamentally premised on an ignorance of the law defense and illustrate why such a

deviation is justified.

54 Leading treatises also support the applicability of the knowledge-of-the

transaction test in cases involving omitted income. See Karen B. Brown, Innocent

Spouse Relief, 645-2nd Tax Mgmt. (BNA), at A-8 (“Regarding omissions of income, the

proper inquiry is whether the spouse knew or should have known of the underlying

transaction giving rise to the other spouse’s omission.”); Michael I. Saltzman & Leslie

Book, IRS Practice and Procedure ¶ 7C.03[1][b][i] (rev. 2d ed. 2018) (“Knowledge of the

underlying income generating transaction is sufficient to preclude relief, and it is not

relevant whether the taxpayer understands the legal consequences of the

transaction.”).

43

[*43] v. Commissioner, T.C. Memo. 2003-188, slip op. at 25–27; Estate

of Hall, T.C. Memo. 1996-93, slip op. at 14–15; Bollaci v. Commissioner,

T.C. Memo. 1991-108, 61 T.C.M. (CCH) 2137, 2138–39. Consequently,

where the requesting spouse has complete factual knowledge of the

underlying transaction, such that his defense rests entirely upon

ignorance of the law, he is deemed to have “reason to know” of the

understatement as a matter of law. Mitchell v. Commissioner, 292 F.3d

at 804 (“Ignorance of the law, standing alone, . . . is not a defense under

any test.”); Cheshire v. Commissioner, 282 F.3d at 335; Price v.

Commissioner, 887 F.2d at 964.

Absent a stipulation to the contrary, appeal in these cases lies to

the Ninth Circuit, where the knowledge-of-the-transaction test “remains

appropriate when applied to income omission cases.” 55 Guth v.

Commissioner, 897 F.2d 441, 444 (9th Cir. 1990), aff’g T.C. Memo. 1987-

522; see also Price v. Commissioner, 887 F.2d at 963 n.9 (“[I]n income

omission cases, knowledge of the transaction is virtually equivalent to

knowledge of the understatement.”).

Dr. Strom argues that he neither knew nor had reason to know of

the understatement on the 2000 return. He argues that the tax

treatment of the income attributable to Mrs. Strom’s InfoSpace option

exercises in 2000 was a “complex issue which involve[d] many facts and

55 This Court has applied the knowledge-of-the-transaction test in cases

involving understatements attributable to omissions of income and to erroneous

deductions. See Jonson, 118 T.C. at 115–16; Wang, T.C. Memo. 2014-206, at *17.

However, some courts, including the Ninth Circuit, have adopted an alternative

knowledge test in cases involving understatements attributable to erroneous

deductions; under this alternative knowledge test, knowledge of the transaction, while

still relevant, is alone not sufficient to preclude innocent spouse relief. See Price v.

Commissioner, 887 F.2d 959 (9th Cir. 1989). Despite the fact that the understatement

in these cases is attributable to an omission of income, Dr. Strom argues that we should

apply the alternative knowledge test followed by some courts in cases involving

erroneous deductions. We decline to do so. See Cheshire, 115 T.C. at 192–93 (rejecting,

in a Court-reviewed case, a similar argument with respect to the proper knowledge

test under section 6015(b)(1)(C) in cases involving omissions of income). Nevertheless,

we note that the outcome would be the same in these cases under either test because

we conclude that Dr. Strom knew “virtually all of the facts pertaining to the

transaction[s] which underlie[] the . . . understatement.” Price v. Commissioner, 887

F.2d at 964. Therefore, Dr. Strom is deemed as a matter of law to have had reason to

know of the understatement for purposes of section 6015(b)(1)(C). Price v.

Commissioner, 887 F.2d at 964; see also Cheshire v. Commissioner, 282 F.3d at 334–35

(finding that the result would be the same under either the knowledge-of-the-

transaction test or alternative knowledge test where the taxpayer “knew all the facts

surrounding the transaction that gave rise to the understatement”).

44

[*44] circumstances as well as complex issues of law” and that these

cases are unique because he “signed the returns with the good faith

understanding that qualified professionals had properly resolved the

complex fact and legal issues involved.” He further argues that, rather

than an ignorance of the law defense, the foregoing argument

constitutes a reliance “upon his good faith and reasonable belief that the

tax being reported was in accordance with the law, as the professionals

concluded.” Dr. Strom argues that he did “everything he could be

expected to do to be assured that the return correctly reported Bernee’s

[i.e., Mrs. Strom’s] stock option exercises” by attending “meetings with

Bernee, KPMG representatives, Tim Austin, and Bruce Benson where

the facts, circumstances, and legal issues were discussed” and that he

reasonably believed the omission of over $100 million of income from the

2000 return was correct because it “comported with his knowledge that

he and Bernee were not $100 million wealthier at the end of the day as

a result of the stock transactions.”

Among other things, respondent argues that Dr. Strom

“unquestionably” had actual knowledge of Mrs. Strom’s InfoSpace

option exercises in 2000 that gave rise to the income omitted from the

2000 return and that he therefore is ineligible for relief under section

6015(b). We agree with respondent.

First, Dr. Strom was not only aware of Mrs. Strom’s InfoSpace

option exercises in 2000; he was involved in them. He has conceded that

he knew Mrs. Strom was exercising InfoSpace options in 2000 and that

he did not object because he trusted her judgment that the stock was a

good investment. Dr. Strom has also conceded that he had opportunities

to speak with Mrs. Strom about the InfoSpace option exercises but

deferred to her judgment because he “felt that . . . [she] had the

information base and the sophistication to be capable of making the

right decision.” Moreover, he signed the “Consent of Spouse” form

attached to each of the three InfoSpace stock option agreements and has

conceded that he read at least one of those agreements before providing

his consent. Relatedly, Dr. Strom was involved in obtaining the

$10 million BoA Loan that was used to fund Mrs. Strom’s InfoSpace

option exercises in 2000. He signed the BoA Loan Agreement, and the

proceeds of the loan were deposited into a bank account held by the

Stroms jointly. After Bank of America subsequently declared the

Stroms in default of the BoA Loan Agreement, and the outstanding

$10 million principal payment became immediately due, Dr. Strom was

involved in the settlement discussions with the bank concerning

repayment of the loan, including participating in a conference call

45

[*45] regarding the matter with Mrs. Strom and their counsel on

January 31, 2001, and jointly sending a letter with Mrs. Strom (bearing

the same date) to the bank advising that the Stroms anticipated “a

significantly reduced tax obligation” for 2000 based on the revised

“calculations” of their new tax counsel.

Second, Dr. Strom participated alongside Mrs. Strom in the

nearly nine-month process of engaging with the team of lawyers and tax

consultants they jointly retained to gather the facts involving

Mrs. Strom’s InfoSpace option exercises in 2000 and to develop tax-

favorable positions on the 2000 return with respect to the income

attributable to those exercises. Among other things, the process of

gathering the facts and developing the reporting positions on the 2000

return included at least three in-person meetings between the Stroms

and their lawyers and tax consultants. Dr. Strom has conceded that he

was present for these meetings. He testified: “I made it my business to

go to those meetings so that I could . . . fully understand, as best it was

possible for me to understand, what was going on, what the significance

of it was, and so that I could do my own due diligence to understand . . .

what was happening” with respect to the reporting positions being taken

on the return. He further testified that the meetings were held with the

Stroms’ lawyers and tax consultants because he and Mrs. Strom “were

seeking a sophisticated legal opinion regarding the timing of when to

report those stock options on our tax returns” and that he attended the

meetings “to be sure that things were being discussed and ultimately

resolved by consensus to [his] satisfaction to make sure things were

being properly done within [his] level of expertise.” Moreover, Dr. Strom

has conceded that, during the meetings, “the facts, circumstances, and

legal issues” relating to the exercise of InfoSpace stock options were

discussed.

During the aforementioned period Dr. Strom also participated in

at least 21 conference calls with the Stroms’ lawyers and tax

consultants. Notably, Mrs. Strom did not participate in 7 of those

21 calls, meaning Dr. Strom was the only client on those calls. 56 Issues

56 While Mrs. Strom did not challenge the fact that Dr. Strom was present for

these calls, she testified that he was “not participating.” Mrs. Strom testified that Dr.

Strom’s behavior was “erratic” and “irritable” during 2000 and 2001 and that she had

concerns about his well-being and the drugs he was taking at that time. She further

testified: “Mark [Dr. Strom] . . . wasn’t very functional then. He probably—we wanted

to save face. He wanted to be there, but he couldn’t participate. And he didn’t

participate.” She testified: “He was trying to appear competent. I can assure you we—

46

[*46] discussed during the calls included the Stroms’ 2000 tax liability,

the reporting positions on the 2000 return with respect to Mrs. Strom’s

exercise of InfoSpace stock options in that year, and the Disclosure

Statement attached thereto. Additionally, Dr. Strom, but not Mrs.

Strom, participated in a conference call in March 2001 with various

KPMG professionals and other KPMG clients regarding possible

changes to the federal income tax laws as they relate to the exercise of

stock options in a falling market.

Third, Dr. Strom approved the reporting positions on the 2000

return with respect to the income attributable to Mrs. Strom’s InfoSpace

option exercises. Dr. Strom has conceded that at the time the 2000

return was filed, he was aware that there was a discrepancy between

the amount of income reported by the Stroms with respect to Mrs.

it was the appearance of being involved, but [Dr. Strom] truly wasn’t involved and not

capable of being involved.”

With respect to his drug intake during 2000 and 2001, Dr. Strom testified that

he was taking prescription drugs and simultaneously abusing narcotics and that as a

result he was “confused, had difficulty focusing, . . . had difficulty thinking clearly, . . .

had a lot of amnesia, . . . had difficulty remembering, and . . . just couldn’t function.”

On the record before us, we do not find that Dr. Strom’s participation in the

nearly nine-month process in question (including his participation in the conference

calls discussed above) was meaningfully diminished by a lack of competence or

capacity. First, as noted above, Mrs. Strom was not present for 7 of the 21 conference

calls in which Dr. Strom participated during the period, meaning that Dr. Strom was

the only client on the call. Given the ethical obligations of the Stroms’ lawyers and tax

consultants, we find it implausible that they would have conducted those conference

calls with an incompetent or incapacitated client. Second, Mr. Lintermans testified

that he did not observe “anything unusual” about Dr. Strom’s behavior during the in-

person meeting on June 13, 2001, and Ms. Swartz testified that she never questioned

Dr. Strom’s capacity or his authority to speak on behalf of himself or Mrs. Strom.

Third, the record corroborates the testimony of Mr. Lintermans and Ms. Swartz insofar

as it includes at least one noteworthy example of Dr. Strom’s issuing a directive to Ms.

Swartz that she timely followed. On the morning of August 13, 2001, Dr. Strom sent

an email to the Stroms’ lawyers and tax consultants, including Ms. Swartz, wherein

he (1) approved the Disclosure Statement on behalf of himself, Mrs. Strom, and Ms.

Brenner and (2) directed Ms. Swartz to prepare an extension request to October 15,

2001, for the filing of the 2000 return. Later that same morning, Ms. Swartz replied

to Dr. Strom’s email, advising him that she had filed the extension request as he

requested. If Dr. Strom had previously presented as incompetent or incapacitated

during any of the three in-person meetings that preceded the issuance of the foregoing

directive, we find it implausible that Ms. Swartz would have timely responded as she

did. Fourth, at trial Dr. Strom testified that a professional biography describing him

as having published at least two articles in 2000 was accurate and that at the time he

was functioning at a level allowing him to write and publish the articles. We find this

level of functioning to be inconsistent with the contention that Dr. Strom was unable

to attend to his federal income tax obligations during the relevant period.

47

[*47] Strom’s InfoSpace option exercises in 2000 and the amount of

income reported by InfoSpace on the Forms W–2 issued to her for that

year.

Moreover, Dr. Strom has conceded that he reviewed the Stroms’

2000 return, including the Form W–2 information attached thereto,

before signing it, 57 that the Stroms were given a choice of how to report

the income attributable to Mrs. Strom’s InfoSpace option exercises, and

that “Bernee and . . . [he] decided to follow the advice of the consultants

that were called.” Dr. Strom testified that when he and Mrs. Strom

made the choices on the 2000 return with respect to reporting positions,

they did so together as a team. Ms. Swartz confirmed this fact, testifying

that the Stroms, after consulting with their legal counsel, ultimately

chose the reporting positions on the 2000 return with respect to the

income attributable to Mrs. Strom’s InfoSpace option exercises in that

year.

Dr. Strom has also conceded that, before the filing of the Stroms’

2000 return, he read and approved the Form 8275 and the Disclosure

Statement attached thereto. The Form 8275 stated that the Stroms

57 At trial Dr. Strom conceded that his claim on the Second Form 8857 that he

did not review the 2000 return before filing it was not accurate. He testified that he

could not explain the discrepancy. On brief, Dr. Strom attempts to minimize the

significance of his concession that he reviewed the Stroms’ 2000 return before signing

it by citing the following testimony regarding his method of review: “I—these returns

were hundreds and hundreds of pages long, and had been put together with the advice

of these experts in the field. So in view of that, my policy was to flip through the first

few pages of the return and then go ahead and sign them.” Dr. Strom also cites his

testimony that the “huge figures” on the Forms W–2 issued to Mrs. Strom by InfoSpace

“were meaningless” to him and that he did not understand them.

We are not persuaded that the foregoing testimony lessens the impact of Dr.

Strom’s concessions. First, when asked at trial to explain his understanding of the

significance of a Form W–2, Dr. Strom testified that a Form W–2 “[i]ndicates income.”

Second, it is well established that section 6015 does not protect a requesting spouse

who turns a blind eye to facts readily available to him on the return. Porter, 132 T.C.

at 212. The significance of his concession lies in the fact that he was presented with

the opportunity to review the 2000 return and thereafter chose to sign it. Having

signed the 2000 return under penalty of perjury, Dr. Strom is charged with knowledge

of its contents. See Hayman v. Commissioner, 992 F.2d 1256, 1261–62 (2d Cir. 1993),

aff’g T.C. Memo. 1992-228. To that point, we would additionally note that when asked

at trial to explain his understanding of the significance of signing a legal document,

Dr. Strom testified: “To indicate that to a person’s satisfaction things on the document

are as they should be.”

48

[*48] were not reporting $100,535,827 58 of the $106,526,884.44 of Form

W–2 income reported by InfoSpace for Mrs. Strom for 2000. Moreover,

the Disclosure Statement reported that the omitted income was

attributable to Mrs. Strom’s InfoSpace options exercises in 2000 and

asserted that the Stroms were entitled to defer calculation and

recognition of the gain associated with the exercises until 2001 when, in

their view, certain transfer restrictions and forfeiture risks with respect

to the shares lapsed. Thus, the facts pertaining to the underlying

transactions that gave rise to the understatement on the 2000 return

were set forth in the Disclosure Statement. Consequently, Dr. Strom’s

concession that he read and approved the Disclosure Statement is also

a concession that, at the time the 2000 return was filed, he had actual

knowledge of the facts pertaining to the underlying transactions that

gave rise to the understatement at issue.

Additionally, Dr. Strom has conceded that he received a letter

from Ms. Swartz of KPMG regarding the risks associated with the

reporting positions with respect to the income attributable to Mrs.

Strom’s InfoSpace option exercises. 59 By letter dated October 12, 2001,

and addressed to Mr. Cowan, Dr. Strom, and Mrs. Strom, Ms. Swartz of

KPMG not only summarized the facts, circumstances, and legal issues

pertaining to the reporting positions, but also warned of the risks

associated with adopting them. The letter advised that, while KPMG

had concluded that there was a “reasonable basis” for the positions, this

standard did not reflect an expectation of success if the positions were

challenged by the IRS. Moreover, the letter warned that, because of the

“magnitude of the income and tax involved,” and the fact that the

reporting positions were inconsistent with the reporting of InfoSpace on

the Forms W–2 issued to Mrs. Strom, KPMG expected the Stroms’ 2000

return to be audited and the positions to be challenged. The letter

further warned that, with respect to the IRS challenge that would likely

58 As previously noted, the parties have agreed that the correct amount of the

Stroms’ unreported income for 2000 is $100,535,826.

59 During his deposition, when asked whether he recalled Ms. Swartz’s writing

a letter to the Stroms regarding the risks involved with the reporting positions on the

2000 return, Dr. Strom testified: “I do remember that letter.” However, at trial, when

asked the same question, Dr. Strom testified: “No.” In view of Dr. Strom’s inconsistent

testimony, respondent’s counsel moved to admit into evidence the transcript of Dr.

Strom’s deposition testimony for purposes of prior inconsistent statements and party

admissions. Petitioners’ counsel, who was present during the deposition, represented

that petitioners had no objection to the admission of the deposition transcript for the

foregoing purposes. Accordingly, the deposition transcript has been admitted into

evidence under the agreed-to conditions.

49

[*49] ensue, the Stroms “should be prepared for a protracted process”

that would require resources and could ultimately put them “in a less

favorable position than had the positions not been claimed (other than

from the standpoint of the timing of the tax payments).” The foregoing

letter followed the issuance of a letter dated June 8, 2001, and addressed

to Mr. Cowan, Dr. Strom, and Mrs. Strom, wherein Ms. Swartz similarly

summarized the facts, circumstances, and legal issues pertaining to the

reporting positions and advised the Stroms that KPMG had concluded

that the positions were “not frivolous.” The letter dated June 8, 2001,

included a warning substantially similar to that discussed above with

respect to the likelihood that the reporting positions would be

challenged by the IRS. While the record is unclear as to which of these

two letters Dr. Strom’s concession is directed to, both letters

summarized the facts, circumstances, and legal issues relating to the

reporting positions and warned that the positions were likely to be

challenged by the IRS.

Although Dr. Strom insists that he is not relying on an ignorance

of law defense, we disagree. Dr. Strom argues that he did not know or

have reason to know of the understatement because the tax treatment

of the income attributable to Mrs. Strom’s InfoSpace option exercises

was complex and that he therefore relied on a team of lawyers and tax

consultants to determine the reporting positions on the 2000 return,

which he believed were correct at the time the return was filed. Despite

his claims to the contrary, this is fundamentally an argument that his

lack of knowledge of the tax consequences of Mrs. Strom’s exercise of her

InfoSpace stock options in 2000 establishes that he did know or have

reason to know of the understatement. “[I]gnorance of the attendant

legal or tax consequences of an item which gives rise to a deficiency is

no defense for one seeking to obtain innocent spouse relief.” Price v.

Commissioner, 887 F.2d at 964; see also Mitchell v. Commissioner, 292

F.3d at 803–04; Cheshire v. Commissioner, 282 F.3d at 334–35. This is

true even where, as here, the gain was merely “on paper” and was not

realized in cash or some other tangible form. See McCoy, 57 T.C. at 734

(rejecting the taxpayers’ argument “that since as laymen they were

naturally unaware of the tax consequences of incorporating the deficit

partnership and since they did not realize the resulting gain in cash or

other tangible form, neither husband nor wife should be held liable”);

see also Smith, 70 T.C. at 672–73 (holding that the requesting spouse

was ineligible for relief from a joint tax liability arising from

constructive dividend income omitted from the return where she “had a

sufficient familiarity with the facts surrounding the [stock] redemptions

to be charged with knowledge of the transactions which caused the

50

[*50] omissions”); Treas. Reg. § 1.6015-3(c)(2)(i)(A) (providing that, in

cases involving omissions of income, actual knowledge of the

understatement includes knowledge of the receipt of the income, even

where there is no actual receipt of cash, e.g., a dividend reinvestment or

a distributive share from flowthrough entities). 60 We are therefore

unpersuaded by Dr. Strom’s argument that he neither knew nor had

reason to know of the understatement on the Stroms’ 2000 return.

In view of the foregoing, and on the basis of the entire record, we

find, and so hold, that Dr. Strom had actual knowledge of Mrs. Strom’s

InfoSpace stock option exercises in 2000. Accordingly, he does not

satisfy section 6015(b)(1)(C) and is not entitled to relief under section

6015(b). See Cheshire, 115 T.C. at 192–93; Mitchell, T.C. Memo. 2000-

332, slip op. at 8–10. On the basis of the entire record, we also find, and

so hold, that Dr. Strom knew “virtually all of the facts pertaining to the

transaction[s] which underlie[] the . . . understatement, [such that his]

defense . . . is premised solely on ignorance of law.” See Price v.

Commissioner, 887 F.2d at 964. Accordingly, Dr. Strom also had “reason

to know” of the understatement as a matter of law and is not entitled to

relief under section 6015(b). See Mitchell v. Commissioner, 292 F.3d

at 803–04; Cheshire v. Commissioner, 282 F.3d at 334–35; Price v.

Commissioner, 887 F.2d at 964.

B. Section 6015(b)(1)(D)

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

conjunctive; consequently, Dr. Strom’s knowledge of the understatement

on the 2000 return alone is fatal to his claim for relief under section

6015(b). See Alt, 119 T.C. at 313. However, we also conclude, after

considering all of the facts and circumstances, that it would not be

inequitable to hold Dr. Strom liable for the deficiency attributable to the

understatement on the Stroms’ 2000 return, and we therefore

additionally discuss the application of section 6015(b)(1)(D). See Jonson,

118 T.C. at 119.

Section 6015(b)(1)(D) provides that in order for a requesting

spouse to obtain relief, it must be inequitable to hold him liable for the

60 Treasury Regulation § 1.6015-2(c) provides that the rules relating to a

requesting spouse’s actual knowledge are set forth in Treasury Regulation § 1.6015-

3(c)(2). See Wilson v. Commissioner, T.C. Memo. 2017-63, at *7–8 (applying Treasury

Regulation § 1.6015-3(c)(2) in tandem with the knowledge-of-the-transaction test in

determining requesting spouse’s entitlement to relief under section 6015(b) in a case

involving an omission of income).

51

[*51] deficiency in tax attributable to the understatement on the joint

return. “All of the facts and circumstances are considered in

determining whether it is inequitable to hold a requesting spouse jointly

and severally liable for an understatement.” Treas. Reg. § 1.6015-2(d).

The regulations specifically identify several relevant factors: (1) whether

the requesting spouse significantly benefited, directly or indirectly, from

the understatement; (2) whether the requesting spouse has been

deserted by the nonrequesting spouse; (3) whether the spouses have

been divorced or separated; and (4) whether the requesting spouse

received a benefit on the return from the understatement. Id.

Additionally, the regulations provide that the criteria used in

determining whether the requesting spouse is entitled to equitable relief

under section 6015(f) are also considered in the context of section

6015(b)(1)(D). Treas. Reg. § 1.6015-2(d). Rev. Proc. 2013-34, § 4.03(2),

2013-43 I.R.B. 397, 400–03, 61 sets forth a list of nonexclusive factors that

may be considered in determining a requesting spouse’s eligibility for

equitable relief under section 6015(f): (1) whether the spouses are

separated, divorced, or living apart; (2) whether the requesting spouse

would suffer economic hardship if relief were not granted; (3) whether

the requesting spouse knew or had reason to know of the

understatement; (4) whether the requesting spouse or the

nonrequesting spouse has a legal obligation to pay the outstanding

federal income tax liability; (5) whether the requesting spouse received

a significant benefit from the understatement; (6) whether the

requesting spouse has made a good faith effort to comply with the

income tax laws following the taxable years for which relief is sought;

and (7) whether the requesting spouse was in poor mental or physical

health at the time he signed the joint return or requested relief.

The material factors most often cited and considered by this Court

in determining whether it would be inequitable to hold the requesting

spouse liable for the deficiency attributable to the understatement are:

(1) whether there has been a significant benefit to the requesting spouse

and (2) whether the failure to report the correct tax liability on the joint

return resulted from concealment, overreaching, or any other

wrongdoing on the part of the other spouse. Alt, 119 T.C. at 314; Jonson,

61 Rev. Proc. 2013-34, which modifies and supersedes Rev. Proc. 2003-61,

2003-2 C.B. 296, which in turn supersedes Rev. Proc. 2000-15, 2001-1 C.B. 447, applies

to requests for equitable relief under section 6015(f) that were filed on or after

September 16, 2013, or, as is the case here, that were pending in a case docketed with

a federal court on that date. Rev. Proc. 2013-34, § 7, 2013-43 I.R.B. at 403.

52

[*52] 118 T.C. at 119. We therefore begin our analysis by discussing the

application of these two factors.

1. Significant Benefit

A significant benefit is any benefit in excess of normal support.

Treas. Reg. § 1.6015-2(d); see also Rev. Proc. 2013-34, § 4.03(2)(e), 2013-

43 I.R.B. at 402. Normal support is measured by the circumstances of

the particular parties. See Estate of Krock v. Commissioner, 93 T.C. 672,

678–79 (1989). However, even where the requesting spouse’s standard

of living remains constant, a significant benefit may still be found if the

tax savings are “immensely beneficial.” Jonson, 118 T.C. at 119–20. The

requesting spouse bears the burden of proving that he received no

benefit from the understatement in excess of normal support, and this

burden must be satisfied with specific facts regarding lifestyle,

expenditures, asset acquisitions, and the disposition of the benefits of

the understatement. See Estate of Krock, 93 T.C. at 681.

Where an understatement on the joint return results in an

improper refund of a relatively substantial amount, as it did here, 62 we

have held that the requesting spouse may in some cases receive a

significant benefit in terms of increased cashflow. See Abelein v.

Commissioner, T.C. Memo. 2004-274, slip op. at 41–42; Capehart v.

Commissioner, T.C. Memo. 2004-268, slip op. at 45–46, aff’d, 204

F. App’x 618 (9th Cir. 2006); Doyle, T.C. Memo. 2003-96, slip op.

at 14–15, 15 n.13; see also Conrad v. Commissioner, T.C. Memo. 2017-

116, at *12–13; Work v. Commissioner, T.C. Memo. 2014-190, at *28;

Smith v. Commissioner, T.C. Memo. 2009-237, slip op. at 13–14; French

v. Commissioner, T.C. Memo. 1996-38, slip op. at 8–11. For the reasons

that follow, we find that this is such a case and, more specifically, that

Dr. Strom significantly benefited from the understatement in that

(1) $9,263,489.59 of the $15,033,879 improper refund claimed on the

2000 return was paid to Bank of America to satisfy in full the

outstanding balance of the $10 million BoA Loan for which Dr. Strom

was personally liable, thereby relieving him of a substantial personal

debt obligation and avoiding any potential collection action by Bank of

America; and (2) the majority of the remaining $5,770,389.41, after

being subject to a series of transfers among accounts jointly controlled

by Dr. and Mrs. Strom, was invested in Belle Point Ltd., the offshore

62 The Stroms reported a $17,033,879 overpayment on the 2000 return and

together chose to claim a $15,033,879 refund and to elect to have $2 million applied to

their estimated income tax for 2001.

53

[*53] company indirectly owned by the Stroms and formed in part for

the purpose of making their assets more difficult to seize by potential

creditors.

a. Satisfaction of the $10 Million BoA Loan

At the time he signed the 2000 return, Dr. Strom was aware of

the outstanding $10 million BoA Loan. He was involved in obtaining

the loan, having signed the BoA Loan Agreement and amendments

thereto, and, following the Stroms’ default under the agreement, he was

involved in discussions with Bank of America concerning the terms of a

settlement agreement, including advising the bank of details regarding

the Stroms’ federal income tax liability for 2000.

By letter dated January 31, 2001, the Stroms advised Bank of

America that they had engaged new tax counsel to review their 2000

federal income tax liability and that, on the basis of that review, they

anticipated a “significantly reduced tax obligation” for the year. In

support of this claim, the Stroms attached a financial statement listing

an $8.4 million decrease to the amount of the 2000 federal income

liability that they had listed in the previously provided financial

statement. By the letter the Stroms sought to leverage favorable

settlement terms on the basis of what they described as a “tax

correction” for 2000.

The surrounding circumstances make it clear that the

understatement on the 2000 return and the terms of the Stroms’

settlement with Bank of America were inextricably intertwined.

Under the terms of the Resolution Agreement with Bank of

America, the Stroms agreed, inter alia (1) to execute a deed of trust on

their Kirkland condominium and a mortgage on their Iowa farm; (2) to

assign their 2000 refund to Bank of America; (3) to direct that the refund

be deposited in the client trust account of their attorney; (4) to file the

2000 return no later than October 15, 2001; and (5) to provide Bank of

America with a full and complete copy of the 2000 return within five

days of filing it. We find the term requiring the execution of a deed of

trust on the Stroms’ Kirkland condominium and a mortgage on the Iowa

farm to be particularly noteworthy in that it imposed material

consequences on the Stroms if they failed to repay the $10 million BoA

Loan under the terms of the Resolution Agreement. Moreover, the

terms of the Resolution Agreement required the Stroms to acknowledge

and represent to Bank of America that, as trustees and beneficiaries of

54

[*54] the Strom Family Trust, they would “benefit individually” as a

result of entering into the Resolution Agreement, the Assignment of IRS

Refunds, and Amendment No. 4. Dr. Strom’s acknowledgment and

representation to Bank of America that he received an individual benefit

by virtue of having assigned the Stroms’ 2000 refund to Bank of

America, in furtherance of settling the outstanding $10 million BoA

Loan for which he was personally liable, is a party admission by Dr.

Strom that the understatement on the 2000 return improved his

financial position when the return was filed.

To the extent Dr. Strom argues that the $15,033,879 refund did

not result in a net benefit and merely restored the Stroms to the position

they would have held if they had not borrowed $20 million to exercise

the InfoSpace stock options, we are unpersuaded. In determining

whether it is inequitable to hold the requesting spouse liable for the

deficiency attributable to an understatement, “the relevant inquiry is

whether the requesting spouse received significant benefit, not whether

she ultimately received a net benefit.” Haggerty v. Commissioner, 505

F. App’x 335, 340–41 (5th Cir. 2013) (finding that the requesting spouse

received a significant benefit where the omitted income was used to pay

off a lien on her residence, thereby absolving her of any personal

liability), aff’g T.C. Memo. 2011-284. Thus, the relevant inquiry here is

not whether Dr. Strom ultimately received a net benefit but rather

whether he received a significant benefit.

Even if the inquiry were whether Dr. Strom received a net benefit,

his claim that he did not receive such a benefit from the repayment of

the $10 million BoA Loan is not supported by the record. We note, for

example, that the Stroms’ Statement of Assets and Liabilities as of

January 31, 2001, lists the Stroms’ total assets as $50,642,204.83 and

total liabilities as $38,938,847.47, for a net worth of $11,703,357.36. The

$10 million BoA Loan is listed on that document under the Stroms’

liabilities; conversely, the $15,033,879 refund is not listed under the

Stroms’ assets (as it had not been issued to them yet). Consequently,

the removal of the $10 million BoA Loan from the liabilities side of the

ledger alone would have nearly doubled the Stroms’ net worth by

increasing it to $21,703,357.36. 63

63 In a similar respect, we note that the Stroms’ Statement of Assets and

Liabilities as of January 31, 2001, lists a 2000 income tax liability balance due of

$20 million. However, it reduces that amount by $9 million to account for the

alternative reporting position that the Stroms were planning to adopt on the 2000

55

[*55] In view of the foregoing and after considering all of the facts and

circumstances, we find that the use of over $9.26 million of the

$15,033,879 refund to satisfy the outstanding balance of the $10 million

BoA Loan provided Dr. Strom with a significant benefit. See Schlosser

v. Commissioner, T.C. Memo. 1992-233, 63 T.C.M. (CCH) 2807, 2809–10

(finding that the requesting spouse significantly benefited where the

proceeds of improper refunds were used to pay debts for which she was

personally liable), aff’d, 2 F.3d 404 (11th Cir. 1993) (unpublished table

decision); see also Haggerty v. Commissioner, 505 F. App’x at 340–41;

Smith, 70 T.C. at 673 (finding that the requesting spouse significantly

benefited from constructive dividend income omitted from the joint

return because the corporation’s satisfaction of nonrequesting spouse’s

personal obligation prevented a potentially “tremendous” financial

burden on the household); Dosek v. Commissioner, T.C. Memo. 1971-160,

30 T.C.M. (CCH) 688, 690–91 (finding that the requesting spouse

significantly benefited from discharge of indebtedness income omitted

from the joint return where she was liable in her individual capacity for

the indebtedness and, following the execution of the agreement

discharging the debt, her liability ceased).

b. Remaining $5,770,389.41 of the $15,033,879

Refund

At trial both Dr. and Mrs. Strom claimed no recall concerning the

disposition of the $5,770,389.41 balance of the $15,033,879 improper

refund remaining after satisfaction of the $10 million BoA Loan.

Nevertheless, thousands of pages of financial records are in evidence,

and those records have enabled the Court to trace the $5,770,389.41

from their attorney’s client trust account to (and through) various

return with respect to the income arising from the exercise of the InfoSpace stock

options. Yet, even accounting for that discount, the document still indicates that the

understatement on the 2000 return removed at least an additional $11 million from

the liabilities side of the ledger, thereby further increasing the Stroms’ net worth to

over $32.7 million. In view of the foregoing, and considering all of the facts and

circumstances, we find that, even if the Stroms’ lifestyle remained the same after the

understatement (something that Dr. Strom contends but fails to carry his burden to

prove with specific facts regarding lifestyle, expenditures, asset acquisitions, and the

disposition of the benefits of the understatement), the tax savings generated by that

understatement were “immensely beneficial” to him. See Jonson, 118 T.C. at 19–20;

see also Edmonson v. Commissioner, T.C. Memo. 1996-393, slip op. at 14–15 (noting

that the taxpayers’ standard of living did not increase but they continued living

together for four years following the year at issue and “shared equally in the tax

savings generated by the understatement”).

56

[*56] accounts jointly controlled by Dr. and Mrs. Strom during the

relevant period. 64

On November 7, 2001, pursuant to the Stroms’ instructions on the

2000 return, the $15,033,879 improper refund was wired to their

attorney’s client trust account. On the same date, two checks were

drawn on the client trust account: (1) a check for $9,263,489.59, issued

to Bank of America in satisfaction of the Stroms’ outstanding $10 million

BoA Loan and (2) a check for $5,770,389.41. Also on the same date, the

Strom Family Trust 5308 Account jointly controlled by Dr. and Mrs.

Strom received an incoming wire transfer from U.S. Bank (where the

client trust account was located) of $5,770,389.41. Two days later, that

same amount (i.e., $5,770,389.41), was wired to the Strom Family Trust

4268 Account also jointly controlled by Dr. and Mrs. Strom.

In the light of the timing and amounts of the foregoing

transactions, we find that the $5,770,389.41 check drawn on the client

trust account on November 7, 2001, was issued to the Stroms and that

they initially deposited the amount in the Strom Family Trust 5308

Account before directing a transfer of the same amount two days later

to the Strom Family Trust 4268 Account. Dr. Strom has conceded that

he and Mrs. Strom had a choice of where to send the $15,033,879

improper refund and that, after discussing the matter, they made the

choice together to send the refund to their attorney’s client trust account

in accordance with the Resolution Agreement and Assignment of IRS

Refunds. We believe that the foregoing concession gives rise to a

reasonable inference, which we make here, that Dr. and Mrs. Strom also

had a choice of where to send the $5,770,389.41 check drawn on the

client trust account on November 7, 2001, and that, upon receipt thereof,

they made the choice together to deposit it in the Strom Family Trust

5308 Account (and thereafter to transfer it to the Strom Family Trust

4268 Account).

Under the terms of the Resolution Agreement between the

Stroms and Bank of America, Dr. Strom was required to acknowledge

and represent to the bank that, as a trustee and beneficiary of the Strom

Family Trust, he would “benefit individually” as a result of entering into

the Resolution Agreement, the Assignment of IRS Refunds, and

64 We initially discuss only two of these accounts for purposes of our holding

that Dr. Strom has failed to carry his burden to prove that he did not receive a

significant benefit from the $5,770,389.41 in question. However, our discussion

continues by further tracing those funds through various other accounts jointly

controlled by Dr. and Mrs. Strom during the relevant period.

57

[*57] Amendment No. 4. As noted, Dr. Strom’s acknowledgment and

representation is a party admission that the understatement on the

2000 return improved his financial position at the time the return was

filed. It follows that if, as a trustee and beneficiary of the Strom Family

Trust, Dr. Strom would “benefit individually” by assigning the Stroms’

2000 refund to Bank of America in furtherance of settling the

$10 million BoA Loan for which he was personally liable, he would

“benefit individually” by depositing the amount of the refund remaining

after satisfaction of that loan (i.e., $5,770,389.41) into a Strom Family

Trust account that he and Mrs. Strom jointly controlled as trustees.

Accordingly, we find that Dr. Strom benefited individually by virtue of

the deposit (and subsequent transfer) of the remaining $5,770,389.41 of

the $15,033,879 improper refund into the Strom Family Trust accounts.

In view of the foregoing, and the Stroms’ failure to account for the

disposition of the remaining $5,770,389.41 of the improper refund, we

hold that Dr. Strom has failed to carry his burden to prove that he did

not receive a benefit beyond normal support with respect to that full

amount. See Estate of Krock, 93 T.C. at 681; see also Work, T.C. Memo.

2014-190 (finding that the requesting spouse received an indirect

significant benefit where the proceeds from the improper refund were

deposited into a joint checking account); French, T.C. Memo. 1996-38,

slip op. at 10 (rejecting the taxpayer’s argument that $150,000 in

certificates of deposit sourced to the understatement “merely amounted

to normal support” where the taxpayer could not account for how it was

spent); Buchine v. Commissioner, T.C. Memo. 1992-36 (rejecting the

taxpayer’s argument that she received only normal support where the

proceeds from the improper refunds were deposited into a joint checking

account, and she failed to provide any objective evidence or trace the

benefit received), aff’d, 20 F.3d 173 (5th Cir. 1994).

Although our analysis could end there, a further parsing of the

Stroms’ financial records from the relevant period confirms that Dr.

Strom did in fact significantly benefit from the $5,770,389.41 in question

by virtue of, among other things, substantial overseas investments made

on his behalf. The Stroms initially transferred the full $5,770,389.41

from the Strom Family Trust 5308 Account to the Strom Family Trust

4268 Account. The record further establishes that, on December 3, 2001,

the Stroms transferred $4,970,389 of that amount from the Strom

Family Trust 4268 Account back to the Strom Family Trust 5308

Account (i.e., where the $5,770,389.41 balance of the improper refund

was initially deposited on November 7, 2021). On the next day,

December 4, 2001, the Stroms transferred that same amount (i.e.,

58

[*58] $4,970,389) from the Strom Family Trust 4268 Account to their

jointly controlled Sugar Creek 0264 Account. 65 The Stroms left those

funds in the Sugar Creek 0264 Account through the end of December

2001 and most of January 2002.

However, between January 28 and April 16, 2002, the Stroms

transferred a total of $1,787,840.97 from the Sugar Creek 0264 Account

to (and through) other bank accounts under their joint control during

the relevant period. When coupled with certain other transfers from the

Strom Family Trust 4268 Account, these transfers resulted in the total

transfer of $1,311,600 to the Strom Family Trust 0144 Account and

$825,000 to the Strom Family Trust 7623 Account during the

aforementioned nearly three-month period. As discussed in detail supra

notes 32 and 33, all of the funds involved in these transfers can be traced

to the improper refund claimed on the 2000 return.

Thereafter, on April 25, 2002, the Stroms transferred

$3,186,600—that is, approximately the amount of the improper refund

then remaining in the Sugar Creek 0264 Account after accounting for

the just-described transfers, plus interest—to the Sugar Creek 8814

Account. On April 29, 2002, the Stroms transferred $3,186,000 from the

Sugar Creek 8814 Account to the client trust account of Mr. Ziskin.

At the Stroms’ direction and on their behalf, on April 30, 2002, Mr.

Ziskin transferred $3,486,600 66 from his client trust account to the Belle

65 The foregoing transfer of $4,970,389 from the Strom Family Trust 5308

Account to the Sugar Creek 0264 Account was made pursuant to the Joint

Comprehensive Transfer Document executed by Dr. and Mrs. Strom on November 30,

2001. Dr. and Mrs. Strom each executed that instrument in their capacity as

individuals and as trustees of the Strom Family Trust of 1982 and as trustees of the

Carillon Management Trust (i.e., the then general partner of Sugar Creek LP). By the

instrument, Dr. and Mrs. Strom together transferred total assets with an estimated

fair market value of $12,735,000, and in exchange, each received a near 50% limited

partnership interest. Thus, the transfer of $4,970,389 from the Strom Family Trust to

Sugar Creek LP—an amount that can be traced directly to the $15,033,879 improper

refund claimed on the 2000 return—constituted nearly 40% of the total asset value

transferred under the instrument. Sugar Creek LP was formed as part of the Stroms’

estate planning and asset protection engagement of Mr. Ziskin. Indeed, the Limited

Partnership Agreement of Sugar Creek LP states that the entity was organized in part

to provide asset protection for partners and “may protect the family resource base from

claims of future creditors of Partners by making Partner’s interests herein

unattractive to creditors.”

66 Before the above-described transfer on April 29, 2002, the Stroms had made

a previous transfer to the client trust account of Mr. Ziskin, which appears to have

been the source of the additional $300,600. We need not discuss that transfer further

here, as tracing reveals no apparent relation to the improper refund.

59

[*59] Point Ltd. 0255 Account. As noted, Belle Point Ltd. was a Saint

Lucia IBC indirectly owned by the Stroms and formed for the purpose of

holding and managing the investment assets of the Sugar Creek LP in

offshore accounts without raising U.S. securities law concerns for the

investment managers. Moreover, Belle Point Ltd. was formed for the

purpose of protecting the Stroms’ assets. Thus, over half of the

remaining $5,770,389.41 of the improper refund was invested in an

offshore company formed in part for the purpose of making the Stroms’

assets more difficult for potential creditors to seize. This fact gives rise

to a reasonable inference, which we make, that the Stroms chose to

transfer those improper refund proceeds to Belle Point Ltd., at least in

part in an attempt to place them beyond the reach of potential creditors.

A significant benefit need not be present consumption and may

instead include acquiring savings or other investment assets. See

Purificato v. Commissioner, 9 F.3d 290, 294 (3d Cir. 1993), aff’g T.C.

Memo. 1992-580. After considering all of the facts and circumstances,

including the fact that most of the proceeds were invested in Belle Point

Ltd., at least in part in an attempt to place those proceeds beyond the

reach of potential creditors, we find that Dr. Strom received an

additional significant benefit from the remaining $5,770,389.41 of the

improper refund. 67

c. Conclusion

For the foregoing reasons, and after considering all the facts and

circumstances, we conclude that Dr. Strom significantly benefited from

67 We note that, in view of the size of the total transfers to the Strom Family

Trust 0144 Account and the Strom Family Trust 7623 Account, see supra notes 32

and 33, the fact that Dr. Strom jointly controlled those two accounts with Mrs. Strom

during the relevant period, and the Stroms’ failure to account for the ultimate

disposition of the transferred amounts, we find, after considering all of the facts and

circumstances, that those amounts, too, provided him with a significant benefit.

Additionally, we note that, although on this record the Court has been unable

to trace the subsequent disposition of approximately $447,789 of the refund (it was

included in the initial transfer on November 9, 2001, of $5,770,389.41 from the Strom

Family Trust 5308 Account to the Strom Family Trust 4268 Account, but appears to

have been transferred out of the latter account at some point before December 31,

2001), that amount was part of the $5,770,389.41 remaining of the improper refund

after satisfaction of the $10 million BoA Loan. It is therefore covered by our holding

supra p. 57 with respect to Dr. Strom’s failure to carry his burden to prove that he did

not receive a benefit beyond normal support from that amount.

60

[*60] the understatement of tax on the 2000 return. Accordingly, this

factor weighs against relief.

2. Concealment, Overreaching, or Other Wrongdoing

“The purpose of the innocent spouse rule is to protect one spouse

from the overreaching or dishonesty of the other.” Purcell v.

Commissioner, 826 F.2d at 475; see also Becherer, T.C. Memo. 2004-282,

slip op. at 7; Bartak v. Commissioner, T.C. Memo. 2004-83, slip op. at 34,

aff’d, 158 F. App’x 43 (9th Cir. 2005). It is thus well established that

where, as here, “the understatement results from ‘a misapprehension of

the income tax laws by the preparers of the tax returns and the

signatory parties,’ both husband and wife are perceived to be ‘innocent,’

and there is ‘no inequity in holding them both to joint and separate

liability.’” Hayman v. Commissioner, 992 F.2d at 1262 (quoting McCoy,

57 T.C. at 735); see also Zoglman, T.C. Memo. 2003-268, slip op. at 9–10

(finding no inequity where the understatement was attributable to the

taxpayers’ reliance on the tax return preparer’s incorrect determination

that certain Social Security benefits were not taxable income); Pierce,

T.C. Memo. 2003-188, slip op. at 25 (finding no inequity where taxpayers

“relied on their accountants to properly assess the validity of the NOL

deductions that were ultimately disallowed” and the requesting spouse

“was fully aware of the facts underlying the tran

This text is long and has been trimmed here. Open the source document for the complete record.