Pealii Loligo owned and operated three “House of Calamari” restaurants from 1998 through 2000. His wife, Cleopatra Decacera, assisted with the management of the restaurants.

In May 1999, Ms. Decacera and Mr. Loligo purchased a $900,000 home.

In relation to this home purchase, in 1996 and 2000 they signed mortgage loan applications indicating joint annual incomes of $235,000 and $321,000, respectively.

On their 1998 joint Federal income tax return, however, Ms. Decacera and Mr. Loligo reported that they earned no salaries and had net losses of

$55,000; and on their 1999 joint tax return, they reported that Mr. Loligo earned a salary of $23,000, and that they had net losses of $77,000.

During 1998–2000, Ms. Decacera and Mr. Loligo paid approximately

$70,000 for home furnishings, $30,000 for a swimming pool, and $40,000 for Ms. Decacera’s jewelry. In addition, they leased two Mercedes-Benz automobiles and took Ms. Decacera’s parents on vacations to Florida and Nevada.

In 2003, Decacera and Loligo were indicted and charged with filing false tax returns in 1998–2000. Loligo pled guilty, while Decacera signed a deferred prosecution agreement and admitted filing false returns. The couple divorced in 2005, and in 2006, the IRS issued a deficiency notice for the 1998–2000 taxes. In September 2006, Ms. Decacera filed a petition in which she requested relief from joint and several liability for 1998–2000 income taxes. During January 2007, Mr. Loligo filed his “notice of intervention.” In July, an IRS Appeals officer determined that Ms. Decacera did not qualify for Innocent Spouse relief under §6015(f).

After appropriate research, prepare in good form a research memorandum to the file. (See Chapter 2 for an illustration of the structure of a tax memo.)

Then write a letter to Cleopatra explaining your findings. Her address is 4567 Whome Lane, Escondido, CA 92069.