Berenbeim v. Commissioner
| Decision Date | 12 May 1992 |
| Docket Number | Docket No. 37873-87.,Docket No. 1281-88. |
| Citation | 63 T.C.M. 2975 |
| Parties | Phyllis M. Curtis Berenbeim v. Commissioner. Jerome P. Berenbeim v. Commissioner. |
| Court | U.S. Tax Court |
Paul Frederic Marx and Joseph D. Carruth, for the petitioner Phyllis M. Curtis Berenbeim. Jerome P. Berenbeim, pro se. Frank R. Bailey III, Bernard Lambert, and Donald P. Gilliland, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in income tax and additions to tax for several years and issued three separate notices of deficiency,1 all dated October 23, 1987, to petitioners2 reflecting the following amounts:
Jerome P. Berenbeim
Addition to Tax
---------------------------
Year Deficiency Sec. 6653(b) Sec. 6654(a)
1979 .............................................. $66,215 $33,107.50 $2,621
Phyllis M. Curtis Berenbeim
Addition to Tax
---------------------------
Year Deficiency Sec. 6653(b) Sec. 6654(a)
1979 .............................................. $64,360 $32,180 $2,544
Jerome P. & Phyllis M. Berenbeim
Additions to Tax
------------------------------------------------------
Year Deficiency Sec. 6653(b) Sec. 6653(b)(1) & (2) Sec. 6661
1980 ............................. $163,109 $81,555 none none
1981 ............................. 5,817 6,117 none none
1982 ............................. 297,705 none $152,1861
1 Plus 50 percent of the interest due on any income tax deficiency
Respondent, by means of amendments to her answers in both consolidated cases, seeks an increased income tax deficiency for the 1981 taxable year from $5,817 to $45,981. Concerning petitioner Jerome P. Berenbeim the addition to tax under sec. 6653(b)3 would also be increased from $6,117 to $26,199. Concerning petitioner Phyllis M. Curtis Berenbeim the addition to tax under sec. 6653(a) would be $2,620 and under sec. 6651(a)(1) would be $11,409 if respondent is sustained regarding the increased deficiencies and if petitioner wife is found liable for such additions.
These cases present a panoply of innocent spouse issues as follows:
(1) Whether petitioner husband earned and failed to report illegal income for any of the 4 taxable years;
(2) whether petitioner husband is liable for an addition to tax under section 6653(b) or 6653(b)(1) and (2) for fraud in any of the 4 taxable years; and in the alternative, whether petitioner husband is liable for additions to tax under sections 6651(a)(1), 6653(a), or 6653(a)(1) and (2) for any of the taxable years;
(3) whether photocopies of signed joint Federal income tax returns delivered to respondent's agents upon their request and later filed by those agents constitute valid tax returns;
(4) if the photocopied returns constitute "returns", whether petitioner wife is an innocent spouse under the provisions of section 6013(e);
(5) if the unsigned returns are not "returns", whether petitioner wife is an innocent spouse under the provisions of section 66(c);
(6) whether the illegal income or any other income of petitioner husband constitutes community property under California law and can be attributed to petitioner wife; and
(7) whether petitioner wife is liable4 for additions to tax under sections 6653(a), 6653(a)(1) and (2), 6651(a)(1), 6654, or 6661, as determined or asserted by respondent.
The parties have entered into agreed stipulations of fact, along with attached exhibits, all of which are incorporated by this reference. Petitioners were, at all pertinent times, married and had their legal residence at Mission Viejo, California, at the time of the filing of the petitions herein.
Mr. Berenbeim received a bachelor of arts degree in psychology from the University of California at Los Angeles in 1954 and since then has, at various times, been a licensed insurance salesman and a financial adviser, and from 1972 to 1974 he was employed as a salesman of tax shelters. During the years under consideration, Mr. Berenbeim held himself out as a financial consultant involving insurance, real estate, pension and profit sharing-type plans, tax shelters, and tax return preparation.
Mrs. Berenbeim received a bachelor of music education degree from East Texas State, a master of education degree from Adam State College, Colorado, and a supervisory credential from the University of Southern California. From 1959 through the taxable years under consideration, she has held various teaching positions, most of which involved music. She has served as the music coordinator for a county public education program. From 1977 to the time of trial, she was a county department of education coordinator of arts for the handicapped and coordinator of special awards, which included organizing an annual festival, teacher workshops, and other related matters. She had no formal training in bookkeeping, accounting, taxation or business administration.
During the years 1978 through 1984, petitioner wife's annual salary was $23,763.24, $32,356.83, $32,810.56, $35,306.26, $37,723.75, $40,260.53, and $43,039.96, respectively. Federal income tax was withheld from petitioner wife's salary in the amounts of $5,613, $6,200, $6,763, $6,989, and $7,098 for the years 1979, 1980, 1981, 1982, and 1983, respectively. Additionally, she earned interest on her bank accounts of $4,858, $6,321, $5,058, $9,724, and $9,841 for 1979, 1980, 1981, 1982, and 1983, respectively. Petitioner wife's father died during 1973 and she received the following distributions from his estate: 1973 through 1978— $73,045.72; 1979 through 1982—$43,258.05; and 1983—$5,696.06. Petitioner wife had savings and checking accounts. The inheritance received was deposited at various times in savings or checking accounts and used for all types of expenditures, including living expenses. Petitioner wife also inherited (and retained) from her father a 60-acre parcel of Texas ranchland worth about $2,000 per acre.
Mrs. Berenbeim was married to her first husband from 1957 until she obtained a divorce in 1971. Thereafter, until 1974 when she married Mr. Berenbeim, she was single and resided with her son Kurt. At the time of his marriage to petitioner wife, petitioner husband did not own a house. Petitioner husband gave three significant gifts to petitioner wife during the years under consideration: An electric piano during 1977; a $6,000 grand piano during 1979; and a $700 ring during 1982. Mrs. Berenbeim did not own any other expensive jewelry or a fur coat and no other significant items were purchased for or by her during the marriage. Mr. Berenbeim also leased a Datsun 280ZX automobile for Mrs. Berenbeim during the years 1979 through 1982 at an annual cost of approximately $3,300. At the time of the lease Mrs. Berenbeim already owned two automobiles, a late model Toyota Celica and an older Jaguar. During the years 1979, 1980, 1981, and 1982, petitioners' vacation expenses were in the amounts of $2,400, $5,280, $2,280, and $2,461, respectively, which were paid by Mr. Berenbeim. Mr. Berenbeim also paid $4,800 of a $5,000 fee for plastic surgery for Mrs. Berenbeim during 1982. Mrs. Berenbeim paid household expenses out of her checking account and Mr. Berenbeim would contribute any amounts in excess of Mrs. Berenbeim's salary needed to run the household.
Prior to her marriage to petitioner husband, Mrs. Berenbeim caused the execution of a prenuptial agreement in order to protect her separate property, including her inheritance from her father. The prenuptial agreement contained the following language concerning petitioner husband: "All income from labor and/or salary by the [petitioner] husband shall be the community property of the husband and wife." During their marriage, petitioners separated on two occasions, each time for a period somewhat less than a month. Prior to her marriage to Mr. Berenbeim, petitioner wife's income tax returns were prepared by an accounting firm.
Petitioner husband, during the years in issue, was involved in a "Ponzi-type" scheme.5 He convinced people that he was a successful financial adviser and that he could obtain a large percentage of return on money invested. The investors were led to believe that there was no risk. Many of the investors were friends, acquaintances, and coworkers of petitioners. Although the story may have varied somewhat concerning each individual, Mr. Berenbeim led the investors to believe he had access to a group of successful and/or wealthy business people who turned over capital relatively quickly and were willing to pay high interest on borrowing. Mr. Berenbeim sometimes referred to the investment opportunity as "The Fund". On some occasions he would tell investors that he was investing their money in factoring transactions. Petitioner husband promised interest or a return in excess of 20 percent. Some of the investors were promised returns as high as 30 percent.
The investor would remit money to Mr. Berenbeim, who would in turn execute a note in the amount of the remittance along with interest to be paid monthly for a period of time (i.e., 2 years), at which time the principal of the note would be repaid to the investor. Mr. Berenbeim would request investors to turn over their investment...
To continue reading
Request your trial