Cruea v. Commissioner
| Decision Date | 06 November 1985 |
| Docket Number | Docket No. 26283-82. |
| Citation | 50 TCM (CCH) 1377,1985 TC Memo 553 |
| Parties | Gerald B. and Sharon S. Cruea v. Commissioner. |
| Court | U.S. Tax Court |
W. Joseph Owen, III, for the petitioners. Scott Anderson, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioners' 1979 Federal income taxes in the amount of $7,442.35 and a section 6653(b)1 fraud addition in the amount of $3,721.18. The issues for decision are as follows:2
(1) The amount of income petitioners must recognize from petitioner Sharon S. Cruea's embezzlement activities;
(2) Whether petitioner Gerald B. Cruea qualifies for innocent spouse treatment under section 6013(e); and
(3) Whether petitioners are liable for the addition to tax under section 6653(b) for fraud.
Most of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioners Gerald B. Cruea (Mr. Cruea) and Sharon S. Cruea (Mrs. Cruea), husband and wife, resided at 1124 Wilderness Road, Richmond, Virginia, at the time they filed their petition in this case. Mr. and Mrs. Cruea filed a joint 1979 Federal income tax return (Form 1040).
Sometime during 1969, Mrs. Cruea began working in the Reimbursement Section of the Patient Accounting Department of the Medical College of Virginia (MCV), a part of Virginia Commonwealth University. The Patient Accounting Department at MCV maintains computerized patient accounts to record patient billings and payments. Because of overlapping payments made by patients and subsequent direct reimbursements of medical expenses by the patients' insurance companies, some of MCV's patients have credit balances in their accounts and are therefore due refunds from MCV. It is the general policy of MCV not to refund a credit balance in a patient's account unless the patient requests such a refund.
Beginning in late June of 1979, Mrs. Cruea began searching the Patient Accounting Department's files for inactive patient accounts with relatively substantial credit balances. She manipulated those accounts on the Department's computer to consolidate them and then transfer their credit balances to accounts that she had established for fictitious patients or patients who were not due refunds. Mrs. Cruea then caused checks to be made payable and sent to such individuals. The following table shows the dates, amounts, and payees of such checks:
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Check No. Date Amount Payee
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1............. 7-25-79 $ 3,154.95 J. B. Cruea
2............. 8-23-79 7,856.76 G. B. Cruea
3............. 8-28-79 3,747.29 G. O. Cruea
4............. 7-26-79 614.10 Delores Edwards
5............. 7-26-79 1,375.90 Helen L. Covey
6............. 9-14-79 4,283.90 Delores Edwards
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Total: $21,032.90
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Mrs. Cruea caused checks numbered 1 and 2 in the above table to be sent to an address from which her sister had recently moved. When the sister received the checks, she gave them to Mrs. Cruea. Mrs. Cruea caused check No. 3 to be sent to the mother of one of her friends. When the check was delivered, the friend gave it to Mrs. Cruea. After receiving these three checks totalling $14,759, Mrs. Cruea endorsed and cashed them and used the proceeds for her own personal benefit.
Delores Edwards is Mrs. Cruea's aunt. Mrs. Cruea caused checks numbered 4 and 6 to be sent to her aunt. The aunt endorsed and cashed the checks totalling $4,898 and used the proceeds for her own personal benefit.
Helen L. Covey is Mrs. Cruea's mother. Mrs. Cruea caused check No. 5 to be sent to her mother. The mother endorsed and cashed the check for $1,375.90 and used the proceeds for her own personal benefit. Petitioners kept no records of any of these checks.
On October 11, 1979, James R. Johnson (Mr. Johnson), Director of Internal Audit for MCV and Virginia Commonwealth University, interviewed Mrs. Cruea. At the time of the interview, Mr. Johnson suspected that Mrs. Cruea had manipulated MCV patient accounts so that she could embezzle funds from MCV through those accounts. Shortly after that interview, Mrs. Cruea attempted to commit suicide. After this attempt, she was admitted to the psychiatric ward at St. Mary's Hospital in Richmond for one week. In October of 1979, Mr. Johnson reported to the Virginia State Police his suspicion that Mrs. Cruea was embezzling money from MCV. On October 29, 1979, Mr. Cruea retained W. Joseph Owen, III (Mr. Owen), to represent Mrs. Cruea with respect to the allegations that she had embezzled funds from MCV patient accounts.
On January 17, 1980, Investigator Charles D. Bryant (Investigator Bryant) of the Virginia State Police interviewed Mrs. Cruea. Mr. Owen was present with Mrs. Cruea during the interview. By that date, Investigator Bryant had discovered all of the above-listed checks that Mrs. Cruea had caused to be written. Also by that date, Mrs. Cruea and her attorney, Mr. Owen, knew the total amount of checks that Investigator Bryant had determined Mrs. Cruea had caused to be written. Investigator Bryant completed his investigation on March 14, 1980.
During the period from October 29, 1979, when Mr. Cruea retained Mr. Owen to represent his wife, to April 10, 1980, when Mr. Cruea and his wife signed their 1979 joint tax return, Mr. Cruea met with Mr. Owen three or four times. During these meetings, Mr. Cruea and Mr. Owen discussed Mrs. Cruea's embezzlement activities and the investigation thereof. Mr. Cruea first learned about his wife's embezzlement activities shortly after the investigation began and no later than November or December of 1979.
Sometime before April 4, 1980, Mr. Cruea provided S. L. Bartling of H. & R. Block Company with information to prepare petitioners' 1979 tax return. At the time that Mr. Cruea provided S. L. Bartling with such information, Mr. Cruea knew that Mrs. Cruea was under investigation for embezzling money from MCV; Mr. Cruea knew that his wife had in fact embezzled a substantial amount of money from MCV. On April 4, 1980, S. L. Bartling completed the preparation of petitioners' 1979 return. On April 10, 1980, both petitioners signed their 1979 joint return. At the time petitioners signed their 1979 return, both of them knew that Mrs. Cruea had embezzled money from MCV that was not reported as income on the return. On or before April 15, 1980, petitioners filed their 1979 joint return with the Internal Revenue Service Center at Memphis, Tennessee.
On May 5, 1980, Mrs. Cruea was indicted on six counts of grand larceny under Va. Code sec. 18-2-95, one indictment for each check in the table set forth above. Sometime in May of 1980, Mrs. Cruea again attempted to take her own life, and was admitted to a psychiatric hospital for a brief time thereafter. On June 30, 1980, Mrs. Cruea was found guilty of grand larceny as charged in each of the six grand larceny indictments. On August 11, 1980, Mrs. Cruea was sentenced to four years of confinement in the state penitentiary for those crimes. The judge's sentencing order recommended psychiatric treatment, but the record does not indicate whether or not Mrs. Cruea received such treatment while in the state penitentiary.
Petitioner's aunt, Delores Edwards, was indicted on two counts of grand larceny under Va. Code sec. 18.2-95, to which she pled guilty. On June 30, 1980, she was sentenced. The court suspended the imposition of a sentence during the aunt's good behavior provided, inter alia, that she be placed on supervised probation, and that she make restitution to MCV in the amount of $4,898 and pay court costs.
Petitioner's mother, Helen L. Covey, was indicted on one count of grand larceny under Va. Code sec. 18.2-95, to which she pled guilty. On July 1, 1980, she was sentenced. The Court suspended the imposition of a sentence during the mother's good behavior provided, inter alia, that she be placed on supervised probation, and that she make restitution to MCV and pay court costs.
Before and during 1979, Mrs. Cruea maintained the family checkbook and paid all of the bills. Mr. Cruea simply endorsed his paycheck and gave it to Mrs. Cruea. At the time of the trial of this case, petitioners had lived at 1124 Wilderness Road, Richmond, Virginia, for about eight years. They paid about $39,000 for their home, which is mortgaged. Petitioners made no improvements to their house during 1979 and early 1980. During that period, petitioners did not buy any automobiles, take any trips, or make any unusual expenditures.
On their 1979 joint tax return, petitioners reported total gross income in the amount of $27,011. This amount consisted solely of wages, salaries, and state and local income tax refunds. Petitioners did not report on their return any of the money Mrs. Cruea embezzled from MCV. In a statutory notice of deficiency dated September 21, 1982, respondent determined that the $21,0323 Mrs. Cruea embezzled from MCV was income to petitioners. Respondent also determined that all or a part of the resulting underpayment of tax was due to fraud, and therefore determined an addition to the tax under section 6653(b).
1. Petitioners omitted from their 1979 joint tax return income in the amount of the $21,032 that Mrs. Cruea had embezzled from the Medical College of Virginia.
2. Mr. Cruea knew that the embezzlement income had been omitted and that there was accordingly an...
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