The opinion
T.C. Memo. 1995-511
UNITED STATES TAX COURT
WILLIAM C. AND ELAINE GASKINS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
PASQUALE T. QUINN AND SABINA A. QUINN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 8509-91, 8539-91. Filed October 26, 1995.
James J. Riley, for petitioners.
Keith L. Gorman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARKER, Judge: Respondent determined deficiencies in
Federal income tax for petitioners William C. and Elaine Gaskins
and additions to tax for fraud under section 6653(b) for William
C. Gaskins as follows:
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Taxable Year Deficiency Addition to Tax
Sec. 6653(b)
1979 $16,925 $8,463
1980 21,628 10,814
1981 80,794 40,397
Respondent determined deficiencies in Federal income tax for
petitioners Pasquale T. and Sabina A. Quinn and additions to tax
for fraud under section 6653(b) for Pasquale T. Quinn as
follows:
Taxable Year Deficiency Addition to Tax
Sec. 6653(b)
1979 $20,766 $10,383
1980 25,591 12,796
1981 88,322 44,161
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the taxable years before the
Court, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
After concessions,1 the issues remaining for decision are (1)
Whether petitioner Elaine Gaskins is entitled to relief as an
innocent spouse under section 6013(e), and (2) whether
petitioner Sabina A. Quinn is entitled to relief as an innocent
spouse under section 6013(e).
1
Petitioners William C. Gaskins and Pasquale T. Quinn
conceded they are liable for their respective deficiencies for
taxable years 1979, 1980, and 1981 and for the additions to tax
under sec. 6653(b) for taxable years 1979 and 1980. Respondent
conceded petitioners William C. Gaskins and Pasquale T. Quinn are
not liable for the sec. 6653(b) addition for taxable year 1981.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts, supplemental stipulation of facts, and the
exhibits attached thereto are incorporated herein by this
reference.
Petitioners William C. and Elaine Gaskins (the Gaskins) and
petitioners Pasquale T. and Sabina A. Quinn (the Quinns) resided
in Minersville, Pennsylvania, at the time they filed their
respective petitions. Their cases have been
consolidated for trial, briefing, and opinion.
Petitioners' Business Activities
Prior to 1968, William C. Gaskins (Mr. Gaskins) worked as a
roofer in the Philadelphia and Delaware area. While working in
Philadelphia for the roofers' union, Mr. Gaskins worked for a
John McCullough. From 1968 until 1975 or 1976, Mr. Gaskins owned
and operated his own roofing business known as Minersville
Roofing and Sheet Metal Company (the first roofing company).2
The business address was 142 Sunbury Street, Minersville,
Pennsylvania. Pasquale T. Quinn (Mr. Quinn) worked for the first
roofing company. This company fell behind in its payments of
withheld employment taxes to the Internal Revenue Service (IRS).
Mr. Gaskins was also the subject of a criminal investigation
with respect to these employment taxes but was never charged.
2
Paragraph 13 of the parties' stipulation of facts contains an
incorrect name for this first roofing company. The Court relies upon
Mrs. Gaskins' testimony as to the correct name of the first company.
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The IRS ultimately assessed a responsible officer penalty under
section 6672 (the 100-percent penalty) against Mr. Gaskins for
this delinquency. Tax lines were filed against Mr. Gaskins.
Eugene Clark (Mr. Clark) was the IRS revenue officer responsible
for, collecting this penalty. Mr. Gaskins failed to pay the
taxes, and the first roofing company went out of business.
In 1975 or 1976, the Gaskins organized, and Mr. Gaskins
ran, Minersville Roofing and Siding Company (the second roofing
company). Due to the unpaid debts of the first roofing company,
the Gaskins incorporated the second roofing company in Mrs.
Gaskins' name. Mr. Gaskins, using the equipment from the first
company, performed the jobs he had already arranged and,
thereby, continued in the roofing business. Mr. Gaskins listed
Mrs. Gaskins as president of the second roofing company. While
he had not asked her permission to list her as an officer, he
informed her he was going to do this. Mrs. Gaskins was at all
times aware that she was at least nominally the president of the
second roofing company.
The second roofing company employed the same secretary who
had worked for the first roofing company. Mrs. Gaskins
occasionally assisted her with the secretarial work. The
secretary paid the company bills, but Mrs. Gaskins sometimes
made bank deposits. In the late 1970's, the second roofing
company also became delinquent in remitting its withheld
employment taxes. The IRS contacted the second roofing company,
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and asked for Mrs. Gaskins, since she was listed as that
company's president. The 100-percent penalty was ultimately
assessed against Mrs. Gaskins in 1979 or 1980. Mrs. Gaskins made
monthly payments of about $100 on these taxes, making the
payments either" in person at the IRS office in Pottsville,
Pennsylvania, or by mail, in the period from about 1979 through
late 1981 or early 1982. Finally, equipment of the second
roofing company was-sold to pay off the employment taxes. Mr.
Clark was the revenue officer responsible for collecting this
penalty. The penalty was ultimately paid in full. The second
roofing company operated until late 1981 or early 1982.
In the latter part of 1975, Mr. Gaskins and Mr. Quinn had
organized West Pine Construction Company (West Pine). Initially,
half of the stock was placed in Mr. Quinn's name and the other
half in Mrs. Gaskins' name. West Pine was involved in
stripmining anthracite coal. West Pine opened a bank account at
the Citizens' National Bank of Ashland on September 26, 1975,
with a deposit of $9,674.96. The signature card contained the
signatures of Benjamin Greenberg, Francis McCullough, Charles
Wertz, and Mr. Quinn. Mr. Quinn served as the secretary of West
Pine. Mr. Quinn's home functioned as West Pine's office,
although he did not even have a desk there. For some period West
Pine used a Post Office Box address.
In 1979, through the efforts of John McCullough, other
persons invested in West Pine. Oscar Glassman invested about
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$120,000 and Joseph Crosley about $60,000. Individuals who each
invested approximately $1,800 were Herbert Fisher, Charles
Conwell, Thomas Walsh, John McCullough, and possibly Benjamin
Greenberg. Herbert Fisher was an attorney in Philadelphia. West
Pine entered into various leases to obtain mining rights. One
lease, dated July 21, 1979, was signed in the names of Mrs.
Gaskins as president and Mr. Quinn as secretary. Two leases,
dated January 9, 1981, and June 10, 1981, were signed in the
names of Mr. Gaskins as president of West Pine and Mr. Quinn as
secretary. A Judgment Note in the amount of $15,000 and an
accompanying letter, both dated August 25, 1981, were signed in
the names of Mr. Quinn as secretary and Mrs. Gaskins as
assistant secretary.
Mr. Quinn signed and filed Federal corporate income tax
returns for West Pine for the relevant periods. Mr. Quinn signed
checks for West Pine and kept the checkbook. He would write out
checks at his kitchen table. At some point Mr. Quinn lost his
eyeglasses, and Mrs. Quinn would assist him by writing out the
checks under Mr. Quinn's direction, which Mr. Quinn would then
sign. Sometimes, Mr. Quinn would borrow his wife's glasses so
that he could write out the checks himself.
For some period, Mrs. Gaskins had signatory authority over
the West Pine bank account. Beginning in December of 1979, Mrs.
Gaskins' name appears along with Mr. Quinn's name as
signers(drawers, not endorsers) of West Pine checks. In most
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instances, Mr. Quinn signed Mrs. Gaskins' name as the drawer of
these checks. Mr. Gaskins had given Mr. Quinn permission to sign
Mrs. Gaskins' name. Mr. Quinn and Mrs. Gaskins never discussed
this arrangement, but she was aware that he was signing her name
on the checks. Prior to the time in December of 1979 when Mrs.
Gaskins' name first appears on West Pine checks, Mr. Quinn had
signed the name of-William Devers (Mr. Devers) to the West Pine
checks, with Mr. Devers' permission. Mr. Devers had worked with
Mr. Gaskins, earlier when the latter was a roofer in
Philadelphia and Delaware. Mr. Devers also worked at West Pine.
Mr. Gaskins and Mr. Quinn were generally compensated for
their work on a weekly basis. However, sometimes their paychecks
were delayed or at least were not turned over to their wives in
a timely manner. Mr. Gaskins and Mr. Quinn each received a $100
per-week expense allowance from West Pine; these expense checks
were issued to Mr. Gaskins, Mr. Quinn, or "Cash". On a few
occasions during the years at issue, Mrs. Gaskins received
checks from West Pine in reimbursement for business telephone
calls made from her home.
Some of the investors, Messrs. Crosley, Walsh, and
McCullough, received paychecks, even though they did not perform
any services for West Pine. Messrs. Crosley and Walsh also
received $100 expense checks. West Pine also leased Lincoln
Continental automobiles for Messrs. Crosley, Walsh, Conwell,
Gaskins, and Quinn. During the years in issue, Messrs. Gaskins
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and Quinn drove these Lincoln Continental automobiles. Mr. Quinn
paid the automobile leases and insurance from the West Pine
checking account. John McCullough had asked Mr. Quinn to put
Messrs. Crosley and Walsh on the payroll and to pay the other
expenses as a favor to him for having found the investors. Once
or twice, Mr. Quinn wrote a West Pine check to Mr. Conwell to
cover the latter's personal telephone bill. Substantial amounts
of personal or nonbusiness expenses were paid out of the West
Pine checking account.
West Pine regularly was delinquent in the payment of its
quarterly Federal employment taxes. Beginning in March or April
of 1980 until November of 1981, Mr. Clark was the revenue office
responsible for monitoring West Pine's Federal employment tax
deposits. When West Pine's employment tax returns were late, Mr.
Clark would regularly summons the records necessary to prepare
those returns. Mr. Clark met with Mr. Quinn on numerous
occasions to prepare West Pine's employment tax returns.
In early 1982, IRS revenue officer John Higgins (Mr.
Higgins) took over the West Pine account. On September 9, 1982,
Mr. Higgins interviewed Mr. Quinn with regard to the 100-percent
penalty for West Pine's employment taxes. During that interview,
Mr. Quinn indicated that the officers of West Pine had been:
Mrs. Gaskins, president, 1975 to 1979; Oscar Glassman,
president, 1979 to June or July 1982; Mr. Quinn, secretary, 1975
to June or July 1982; and Joseph Crosley, vice president, 1979
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to June or July 1982.
In February of 1982, West Pine had filed a petition for
bankruptcy protection. The amended disclosure statement filed in
the bankruptcy court on September 20, 1982, listed the
shareholders of West Pine's common stock as: John McCullough
(then deceased) and his widow (13 percent), Thomas Walsh and
Kathleen Walsh (12 percent), Joseph Crosley and Marie Crosley
(12 percent), the Quinns (13 percent), the Gaskins (13 percent),
Oscar and Lillian Glassman (20 percent), Charles T. Conwell (12
percent), and Herbert Fisher (5 percent). All of the shares
except those belonging to the Glassmans and the Crosleys were
pledged as security for loans from Oscar Glassman and Joseph
Crosley of $144,000 and $40,000, respectively. The amended
disclosure statement listed West Pine's officers as: Mr.
Gaskins, acting president; Mr. Quinn, acting secretary; Thomas
Walsh, acting treasurer; Joseph Crosley, acting vice president;
and Charles Conwell, acting assistant vice president; Mrs.
Gaskins was not listed as an officer.
Following a criminal investigation, Mr. Gaskins and
Mr.Quinn were charged with diverting receipts belonging to West
Pine.3 Mr. Gaskins and Mr. Quinn were convicted of Federal
3
Petitioners William C. Gaskins and Pasquale T. Quinn have
conceded in this case that they received receipts nor whether the
diverted receipts included the rental of the Lincoln Continental
automobiles and the payment of personal or nonbusiness expenses
out of the corporate bank account.
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income tax evasion under section 7201, filing a false return
under section 7206(1), and conspiracy under 18 U.S.C. section
371 for the taxable year 1980. They were acquitted of the same
charges for the years 1979 and 1981.
Respondent determined that Mr. Gaskins and Mr. Quinn each
had diverted receipts from West Pine in the amounts of $46,891,
$52,819, and $154,630 for 1979, 1980, and 1981, respectively,
and adjusted the Gaskins' and the Quinns' incomes as reported on
their Federal individual income tax returns upwards accordingly.
See supra note 3. Both the Gaskins and the Quinns filed joint
Federal income tax returns for these years and, therefore,
respondent, in the notices of deficiency, determined the
resulting deficiencies against Mr. and Mrs. Gaskins jointly and
against Mr. and Mrs. Quinn jointly. However, the additions to
tax for fraud were determined only against Mr. Gaskins and Mr.
Quinn. Mr. Gaskins and Mr. Quinn have conceded the deficiencies
for all 3 years and the additions to tax for fraud for 1979 and
1980; respondent has conceded the addition to tax for fraud for
1981. Mrs. Gaskins and Mrs. Quinn seek relief in this Court from
these deficiencies as innocent spouses under section 6013(e) for
all 3 years.
Petitioner Elaine Gaskins
Background
Mrs. Gaskins was born on October 20, 1943. She graduated
from high school in 1961; she received no further formal
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education or training. The Gaskins were married on April 27,
1968, and, as of the date of the trial, remained married. Prior
to her marriage and for 6 months after her marriage, Mrs.
Gaskins worked as a secretary. Thereafter, she worked as a
receptionist for a doctor until March of 1973, when her first
daughter, Rochelle, was born. The Gaskins have two daughters,
Rochelle and Sharon. From 1973 until 1985, Mrs. Gaskins' primary
occupation was that of a homemaker. During the years the second
roofing company was in operation, she assisted Mr. Gaskins to
the limited extent as described earlier.
In 1985, Mrs. Gaskins took a job as cafeteria worker in
the Minersville area school district, which paid between $3.35
and $3.85 per hour, with no employee benefits. She quit this job
in June of 1990. In May of 1992, she began a secretarial job in
the Domestic Relations Office located at the Schuylkill County
Courthouse in Pottsville, Pennsylvania. This job paid $8.05 per
hour and offered medical benefits for her family. Mrs. Gaskins
has also done some freelance work for a local newspaper,
receiving from $20 to $40 per month for articles she submitted.
Financial Responsibilities
Mrs. Gaskins always took care of the family finances,
endorsing and depositing Mr. Gaskins' paychecks into her
checking account or cashing them, and using the funds to pay the
family's bills. Mrs. Gaskins endorsed and deposited many of the
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expense checks Mr. Gaskins received from West Pine from June of
1979 through September of 1981. When the Gaskins were first
married, they had a joint checking account; a year or two later,
this was changed into Mrs. Gaskins' name only, since she paid
all the bills. To Mrs. Gaskins' knowledge, Mr. Gaskins did not
have a checking account or other bank accounts thereafter. For a
short time in the late 1960's, the Gaskins had had a savings
account containing approximately $800 received as wedding gifts.
As far as Mrs. Gaskins knew, the Gaskins had no other bank
accounts between 1972 and 1981. For the years at issue, Mrs.
Gaskins did not prepare the Gaskins' Federal individual income
tax returns, but she assembled the information for preparation
of the returns and met with the tax return preparer.
Prior Tax Liabilities
Mrs. Gaskins first learned of the employment tax problems
with the first roofing company in 1975 or 1976 when the Gaskins
incorporated the second roofing company. Mrs. Gaskins then
learned that Mr. Gaskins had received letters from the IRS,
mailed to the first roofing company's office, requesting payment
of these taxes.
Mr. Gaskins also had problems with his individual Federal
tax returns for taxable years 1970 through 1974. The IRS
assessed a fraud penalty against Mr. Gaskins with respect to his
individual tax deficiencies. Beginning in late December of 1981
through May of 1982, the IRS sent several notices to Mr. Gaskins
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regarding his individual income taxes for those earlier years.
Mrs. Gaskins knew that tax lines were placed against Mr.
Gaskins. Mrs. Gaskins, however, believed Mr. Gaskins' tax
liabilities stemmed from his failure to pay over the first
roofing company's employment tax withholdings. She was not aware
that Mr. Gaskins had problems with his individual income taxes
for 1970-1974. However, Mrs. Gaskins was aware of the IRS
criminal investigation into the first roofing company.
Mrs. Gaskins learned of the second roofing company's
failure to pay employment taxes when the secretary informed Mrs.
Gaskins that the IRS had called the office asking for Mrs.
Gaskins. The IRS ultimately assessed a 100-percent penalty
against Mrs. Gaskins for-this employment tax liability.
Mrs. Gaskins' Knowledge of West Pine's Operations
Mrs. Gaskins did not know who incorporated West Pine. She
never attended any shareholder meetings. She only visited a West
Pine work site on one occasion, in the company of Mr. Gaskins
and their children so the children could see where their father
worked. Mrs. Gaskins never performed any duties for West Pine.
Mrs. Gaskins was not aware of West Pine's suppliers or
customers.
Mr. Gaskins had told Mrs. Gaskins that he wanted her to
be listed as president of West Pine, and that her name would be
used to sign checks since he could not sign anything. Mr.
Gaskins had also told Mrs. Gaskins he had given Mr. Quinn
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permission to sign her name to the West Pine checks. Mrs.
Gaskins believed that it was Mr. Quinn who was signing her name
to West Pine checks. Mrs. Gaskins permitted this practice,
accepting the explanation that he did not know anything about
the business, Mr. Quinn had the checkbook and was at the work
site, and this arrangement was more convenient. Mrs. Gaskins
knew Mr. Quinn was an officer of West Pine, the treasurer she
thought.
During the years 1979 through 1981, Mrs. Gaskins suspected
that West Pine had financial problems when Mr. Gaskins did not
give his paycheck to her at regular intervals. Mrs. Gaskins had
no knowledge of any unreported income which Mr. Gaskins received
from West Pine. See supra note 3.
Every 3 or 4 months, Mrs. Gaskins would make payments on
her 100-percent-penalty for the second roofing company in person
at the Pottsville IRS office. Occasionally, Mrs. Gaskins would
bring in information on Mr. Gaskins' 100-percent penalty for the
first roofing company. During Mrs. Gaskins' visits to the
Pottsville IRS office, she was distressed that she had been
assessed the 100-percent penalty, and Mr. Clark explained the
responsible person penalty to her. In her conversations with Mr.
Clark, Mrs. Gaskins denied she had any position or capacity with
West Pine.
In the latter half of 1981, Mr. Clark came into possession
of copies of some of West Pine's checks and bank signature
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cards. He then met with Mrs. Gaskins about these items, told her
of West Pine's delinquent employment taxes, and advised her of
her potential liability. Mr. Clark showed Mrs. Gaskins the West
Pine checks and asked her about her signatures on the front of
those checks. Mrs. Gaskins told him that Mr. Quinn had signed
her name to the West Pine checks. In response to her concern
about the potential for another 100-percent-penalty assessment,
Mr. Clark advised her to get an affidavit from Mr. Quinn
confirming that Mr. Quinn had signed her name and to have her
name removed from the bank signature cards. On a subsequent
visit in late 1981, Mrs. Gaskins told Mr. Clark that she could
not do that since she had signed the checks. In 1982, after the
Gaskins' 1981 individual return had been filed, Mrs. Gaskins
contacted the family's tax return preparer for advice regarding
West Pine's tax problems. The tax return preparer declined to
get involved or offer assistance. Mrs. Gaskins understood from
Mr. Gaskins that West Pine's tax liabilities and other bills
were discussed at meetings held in Philadelphia, meetings that
she did not attend.
On September 14, 1982, IRS Revenue Officer Higgins
interviewed Mrs. Gaskins relative to the recommendation for a
100-percent-penalty assessment with respect to West Pine's
employment tax liability. During this interview, Mrs. Gaskins
stated that while she was not an officer of West Pine, she may
have been listed as comptroller. At trial, Mrs. Gaskins
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testified that she was listed as West Pine's president, not at
the time of West Pine's incorporation, but closer to the time
West Pine ceased operating. Mrs. Gaskins explained the apparent
discrepancy in her answers by stating that in 1982, she did not
know whether she actually had been listed as president. Mrs.
Gaskins further explained that she answered Mr. Higgin's
questions based on information given to her by Mr. Gaskins in
anticipation of that interview. Mrs. Gaskins did not distrust
her husband, and she simply repeated what he had told her.
House, Mortgages, and Related Expenses
The Gaskins live in a three-bedroom ranch house, where
they have resided since July of 1972. They obtained their first
mortgage on the house from State Capital Savings and Loan in the
principal amount of $21,800. In January of 1978, the Gaskins
obtained a $5,000 loan at an interest rate of 23.04 percent,
secured by their residence, from Pacific Finance Consumer
Discount Company. Of the $5,000 amount, $502.72 was applied
towards credit insurance, $891.07 was disbursed to Household
Finance, $8 was paid to the recorder of deeds, and $3,598.21 was
disbursed to the Gaskins. In February and March of 1981, the
Gaskins borrowed $8,111.09 at an interest rate of 17.10 percent,
and $14,766.14 at an interest rate of 17.64 percent
respectively, from Transamerica Financial Consumer Discount
Company (Transamerica); these loans were secured by their
residence. Transamerica disbursed the proceeds of the February
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1981 loan as follows: $3,104.84 to pay off the balance on a
previous loan from Transamerica, $1,500 to Household Finance,
$730.92 for insurance and recording fees, and $2,775.33 directly
to the Gaskins. Proceeds of the March 1981 loan (the second
mortgage) paid the balance of $7,541.42 remaining on the
February 1981 Transamerica loan, $1,331.82 to Household Finance,
and title insurance and recording fees of $206, leaving
$5,686.90 for the Gaskins. The Gaskins used a portion of these
funds to replace the broken oil burner in their home with a coal
stoker and to pave the dirt driveway at their home. On July 28,
1982, the Gaskins transferred title to their house from their
joint ownership to Mrs. Gaskins individually.
As of September 23, 1985, the Gaskins' property taxes
for1983 and 1984 remained unpaid, and the county scheduled the
property to be sold. From February through August of 1985, the
Gaskins failed to make payments on their first mortgage ($161.11
per month) and were threatened with foreclosure. On March 24,
1986, Transamerica filed to foreclose on the second mortgage,
since the Gaskins-had not made any payments ($234 per month)
since November 17, 1985. The Gaskins' default on the second
mortgage note caused the loan to become immediately due in full;
the amount due on principal and interest, plus attorney's fees,
was $15,192. As will be described below, funds were obtained to
pay this mortgage and the foreclosure sale was averted. Mrs.
Gaskins paid the 1984 and 1985 property taxes on October 27,
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1986.
As of May 16, 1990, the-1988 property taxes remained
unpaid, and, again, the county threatened to sell the house. On
July 12, 1991, Meridian Mortgage Corporation (then the holder
of the first mortgage) sent notice of its intention to foreclose
if defaulted payments and late fees for the months of April
through June of 1991 were not made within 30 days. On November
11, 1991, Meridian Mortgage wrote again, requesting payments for
August through October of 1991. As of April 13, 1993, the
property taxes for 1991 and 1992 remained unpaid.
The Gaskins have made no improvements to this house, which
is in a state of disrepair. They have not purchased any new
furniture since at least 1981.
Personal Bankruptcy
On October 29, 1982, the Gaskins filed a petition in the
United States Bankruptcy Court for the Eastern District of
Pennsylvania. The Gaskins' petition listed the IRS as a creditor
of Mr. Gaskins in the amount of approximately $115,000.
According to the bankruptcy petition, the Gaskins owed local
taxes of $971.07 and owed Household Finance $1,650 on a loan
borrowed to pay taxes. They also owed Household Finance $992.64
on a second loan, used for the purchase of a major appliance.
When the Gaskins filed the bankruptcy petition, a suit was
pending in the case Credit Alliance Corp. and Leasing Service
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Corp. v. William and Elaine Gaskins. On March 10, 1983, the
Gaskins filed to withdraw the bankruptcy petition.
Mr. Gaskins' Medical Condition and Resulting Disability
Income
Mr. Gaskins suffers from several medical problems. He has
had diabetes since about 1977, polycythemia,4 and
arteriosclerosis. In July of 1981, to improve circulation in his
lower extremities caused by aorticiliac occlusive disease, he
had arterial bypass surgery. Due to the limitations in movement
imposed by this condition, Mr. Gaskins' doctor considered him to
be totally disabled. However, sometime in 1984, Mr. Gaskins went
to work in a coal mine. On August 14, 1984, Mr. Gaskins injured
his lower back while lifting rock for the Sharp Mountain Coal
Company; Mr. Gaskins has not worked since this injury. He still
suffers from back pain. In early 1986, Mr. Gaskins returned to
the hospital for tests, and the physician recommended that the
arterial bypass surgery be repeated. That surgery was not
performed until 1991. In 1993, Mr. Gaskins suffered a stroke. In
December of 1993 and March of 1994, he had procedures performed
on his carotid arteries, which were clogged. Mr. Gaskins
continues to have problems with his legs.
In 1982, Mr. Gaskins applied for Social Security
4
Polycythemia is a "condition marked by an abnormal increase in the
number of circulating red blood cells". Webster's Ninth New
Collegiate Dictionary (1983).
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disability benefits. On May 13, 1983, Mr. Gaskins was granted
benefits fora period of disability from July 3, 1981, through
December 30,1982. After his 1984 accident in the coal mine, Mr.
Gaskins appealed the cessation of his benefits. On August 5,
1986, the Social Security Administration issued its decision
that Mr. Gaskins had continued to be disabled since 1982. In
October of 1986, Mr. Gaskins received a lump-sum payment of
$17,282.88 of retroactive Social Security disability income.
Mrs. Gaskins received two checks in the amounts of $2,032.50 and
$4,065 as retroactive payments herself and for her children,
respectively. Mr. Gaskins used his lump-sum award towards the
mortgages to avert the threatened foreclosures on the family
home. Beginning in October of 1986, the family received monthly
Social Security income of $693, from which $15.50 in medical
insurance premiums was deducted. The family continues to receive
Social Security income in the amount of $1,078 monthly for the
benefit of the Gaskins and their daughter, Sharon.
Mr. Gaskins also received Workers' Compensation as a
result of his mining accident. On July 11, 1986, Mr. Gaskins
requested that his Workers' Compensation benefits be commuted to
enable him to pay the second mortgage and prevent foreclosure on
the home. In December-of 1986, a lump-sum payment of $74,000 was
approved, from which $7,500-in attorney fees was deducted. Some
of the remaining funds were used to pay off the second mortgage,
taxes, and other past due bills.
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Health Insurance
From 1982 until 1986, the Gaskins family had no medical
insurance. Beginning in October of 1986, when Mr. Gaskins was
approved for his retroactive Social Security payments, he
received Medicare insurance coverage;5 his hospital insurance
coverage was effective retroactive to January of 1984. These
insurance benefits applied to Mr. Gaskins only, not to the other
members of his family. During 1989 to 1991, the Gaskins received
several past due notices related to medical charges. On November
6, 1990, Mrs. Gaskins was approved for public assistance which
entitled her to free medical care. Mrs. Gaskins' secretarial job
at the Schuylkill County Courthouse, which she began in May of
1992, now provides medical insurance for the Gaskins and their
daughter.
Other Resources and Assistance Received
During-the early 1980's, Mrs. Gaskins' father gave them
money. Mr. Gaskins' sister gave them several hundred dollars.
The Gaskins did not repay this money.
In 1982, the Gaskins sold a piece of undeveloped real
property for $7,500. The Gaskins had purchased this 5 1/2-acre
property in 1970 for $200 at a tax sale. Of the proceeds from
5
It appears that Mr. Gaskins did not elect to take the
supplemental medical insurance coverage retroactive to Jan. 1984
which was made available for a cost of $500.70. This cost could be
paid in a lump sum, or deducted from the next 21 monthly benefit
checks.
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the 1982 sale, $2,184.80 went to the IRS to be applied to Mrs.
Gaskins' 100-percent-penalty debt.
On February 11, 1983, the Department of Public Welfare
authorized fuel energy assistance for the Gaskins; this was used
to buy coal to heat their house. The Gaskins received public
welfare benefits in the amount of $183 every 2 weeks and food
stamps for a period of about 2 years prior to October of 1986.
During the period 1981 through 1986, the Gaskins'
daughters, Rochelle and Sharon, wore second-hand clothes. Sharon
wore her older sister's clothes. In 1988 or 1989, their
neighbors, the Stabinskys, gave some of their daughters' clothes
to Rochelle and Sharon. Relatives also gave the girls their old
clothes. Their grandparents bought them shoes, school clothes,
and other school items. Their grandparents took them to
amusement parks and bought them swimsuits and ice cream in the
summer and toys for Christmas. Mr. Gaskins' mother gave the
Gaskins family food to prepare Thanksgiving and Christmas
dinners. Mrs. Gaskins' parents and Mr. Gaskins' sister also
bought them food. Their neighbor, Michael Stabinsky (Mr.
Stabinsky), brought them coal during the winter of 1989. Mr.
Gaskins' sister also gave them coal. Mr. Stabinsky hooked up
"rabbit ears" to the Gaskins' television on at least three
occasions when their cable service was disconnected for
nonpayment, so that the children could watch television.
On November 21, 1989, Mr. Gaskins cashed in two life
insurance policies; he received only $164.74 due to $4,090.81
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owed on loans made against these policies. These loans had
commenced in 1976, with additional amounts borrowed in 1978,
1979, and 1981.
Lifestyle
From 1971 until 1987, Mrs. Gaskins drove a 1971 Plymouth
Fury (the Fury). In 1981 and 1982, the Gaskins also owned a 1979
Dodge truck, which they financed through Chrysler Credit
Corporation. In 1987, the Fury's transmission failed, and the
Gaskins bought a 1984 Chevrolet Celebrity for Mrs. Gaskins. At
that time, the Gaskins also owned a 1977 Cadillac and a
1973Ford. Mrs. Gaskins had the 1984 Chevrolet for only 4 days
when an accident destroyed the car. Mrs. Gaskins' father then
gave her a 1979 Ford Fairlane, which she was still driving at
the time of the trial. In 1994, the Gaskins owned a 1982 Ford, a
1979 Ford, and a 1980 Oldsmobile.
From 1968 until the early 1980's, Mrs. Gaskins had store
charge cards at the Sears and Pomeroy's department stores. She
stopped using the Pomeroy's card; the Sears account was referred
to a collection agency, and the card was recalled. Mrs. Gaskins
made payments on the delinquent Sears account, restoring her
credit rating so that during the summer of 1993, she was able to
open store charge accounts again. She has never had credit cards
such as Visa or American Express.
Mrs. Gaskins has never owned any expensive jewelry. The
Gaskins have never gone on a family vacation, nor has Mrs.
Gaskins herself gone on a vacation. The only time the Gaskins
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have gone out to dinner, excluding fast food restaurants, was
for their daughter's wedding rehearsal dinner. The Gaskins have
never owned any expensive items such as furs, a boat, or race
horses. The Gaskins have never had any stocks, bonds, or other
investments other than that in Mr. Gaskins' companies. The
Gaskins' older daughter was a senior at Kutztown University at
the time of the trial. Her education was financed primarily by
loans, grants, and a scholarship. The Gaskins contributed only
$300 to $400 per year for her college education.
Petitioner Sabina A. Ouinn
Background
Mrs. Quinn was born on November 25, 1925. She graduated
from high school in 1943 and began working shortly thereafter.
She received no further formal education or training. Except for
5 months of unemployment during 1988, Mrs. Quinn was in the work
force almost continuously from 1943 until June of 1994, when she
stopped working due to an accident. For nearly all of this 50-
year period, Mrs. Quinn has worked as a legal secretary. From
1988 until June of 1994, she worked part time, even though she
was in her 60's and receiving Social Security retirement income.
Mrs. Quinn continued working in her later years to earn money
for her car payments of $300 per month, for her medical
insurance costs of $547 every 2 months, and for spending money.
The Quinns were married in 1947, and, as of the trial in
this case, were still married. In 1955, they moved in with Mrs.
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Quinn's parents, the Angelos. The Angelos continued living in
the house and were living there until at least 1994. At some
point, title to the property was transferred from the Angelos to
the Quinns. Mrs. Quinn has lived in this house for all but 8
years of her life. The house is one half of a duplex, with three
bedrooms, one bathroom, and a small yard. Mrs. Quinn has paid
for maintenance such as new windows, siding, shutters, and
brickwork; however, there have been no material alterations or
additions to the house. During 1980, the Quinns paid off one
mortgage with payments that year totaling $1,657.71. In the same
year, they obtained a new mortgage in the amount of $3,200. The
Quinns have two daughters, Patricia Miller (Patricia) and Linda
Greis (Linda), who were 45 and 35 years of age, respectively, at
the time of the trial. Patricia attended Bloomsburg University
and Albright College; she also did post graduate work at
Bloomsburg. From 1971 to 1975, and from October of 1977 to June
of 1984, Patricia lived with the Quinns. During the latter
period, Patricia did not pay rent but assisted with the
household expenses. In 1975, when Patricia married for the first
time, and in 1984, when Patricia remarried, the Quinns did not
contribute towards the wedding or reception expenses.
Linda attended college with the assistance of student loans
and earnings from her part-time jobs; she was graduated from the
University of Delaware in 1981. Patricia helped Linda with rent
and other college expenses. In August of 1982, Linda moved to
- 26 -
Germany to be with her husband; she lived there for 3 or 4
years. While in Germany, Linda had a child and thereafter worked
as a teacher at a military installation.
Financial Responsibilities
Mrs. Quinn was responsible for paying the family bills with
her own or Mr. Quinn's funds, balancing the checkbook, and
handling the family bank accounts. Mr. Quinn gave Mrs. Quinn his
West Pine paychecks which she deposited into one of their
accounts. She also prepared the Quinns' Federal income tax
returns for the years at issue.
Knowledge of West Pine's Operations
Mrs. Quinn had no knowledge of West Pine's operations or
financial obligations other than what she garnered from the West
Pine checks she wrote out under Mr. Quinn's direction. Mrs.
Quinn was unaware of West Pine's customers, suppliers, or
creditors. From writing out those checks, Mrs. Quinn knew West
Pine had employees by the names of Devers and Hobbs, in addition
to Mr. Quinn and Mr. Gaskins. When she did not receive his
paycheck from Mr. Quinn, she thought that he had not been paid.
She thought that Mr. Quinn did not always receive his paycheck
on time, because he paid the other men first and then himself
when sufficient funds were available. Other than his paychecks
Mrs. Quinn knew of no other funds Mr. Quinn received from West
Pine.
Mrs. Quinn never visited any West Pine work sites. Mrs.
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Quinn never attended any meetings related to West Pine. She was
not an officer or director of the corporation. She did not know
whether she was listed as a shareholder.6
Mrs. Quinn knew Mr. Quinn was the secretary of West Pine.
During the years 1979 through 1981, she knew Mr. Quinn visited
the Pottsville IRS office, but she did not know the purpose of
his visits. She was familiar, with that IRS office and with Mr.
Clark from her own work responsibilities with the law firm, and
she knew Mr. Quinn had to file West Pine's quarterly payroll tax
returns there. Mrs. Quinn did not learn of West Pine's tax
problems until she was called to testify at her husband's
criminal trial in Philadelphia in 1987.
Credit Alliance Action and Aftermath
On June 14, 1982, Credit Alliance Corporation (Credit
Alliance) entered a default judgment against the Quinns in the
United States District Court for the Eastern District of
Pennsylvania on the basis of the Quinns' personal guarantees of
payment of West Pine equipment lease/purchases. Credit Alliance
also entered this judgment in the Court of Common Pleas of
Schuylkill County, Pennsylvania, on September 7, 1982. Mr. Quinn
had signed Mrs. Quinn's name to the guarantee without her
6
In 1984, after the years before the Court, two men from
Philadelphia appeared in her home and insisted that she sign a
blank stock certificate for West Pine. Mrs. Quinn did not wish to
sign without contacting an attorney but did so under pressure
from these men and Mr. Quinn. She did not know the purpose of
this certificate. No evidence of the certificate or its purpose
was presented at trial.
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permission or knowledge. Mr. Quinn had been served with a
summons regarding the Credit Alliance action, but Mrs. Quinn did
not learn about it until a month later.
Mrs. Quinn then hired an attorney to defend her in this
Credit Alliance matter and paid him a retainer of $5,000. Mrs.
Quinn was ultimately relieved of liability for the Credit
Alliance debt. Mrs. Quinn was so distressed by this incident
that she contemplated divorcing Mr. Quinn. She was afraid that
Credit Alliance would attempt to take her home and the assets
for which she and Mr. Quinn had worked hard and scrimped and
saved over a lifetime. She felt Mr. Quinn was destroying their
life together by not making her aware of what he had done and by
jeopardizing their life savings. The Quinns did not get a
divorce, but instead they agreed to transfer their joint assets
to Mrs. Quinn or to Mrs. Quinn jointly with one or the other of
their two daughters. Since that time the Quinns' relationship
has been strained. At the trial, Mrs. Quinn was still visibly
upset by this episode in their lives.
Thus, in December of 1982, the Quinns transferred title to
three undeveloped Schuylkill County lots to Mrs. Quinn's name
alone. The Quinns also transferred title to their house into the
names of Mrs. Quinn and Patricia. Joint bank accounts were
closed or title transferred; none of these accounts contained
any unusually large amounts or any deposits from unknown
sources. At the time of these various transfers, Mrs. Quinn was
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not aware of any tax problems of West Pine and was not aware of
any tax problems that she and her husband might have in regard
to West Pine. Mr. Quinn retained the insurance policies in his
name through the Prudential Insurance Company of America
(Prudential Insurance) and the Franklin Life Insurance Company.
As of the time of the trial, the Quinns had a joint
checking account and two safe deposit boxes.
Mrs. Ouinn's Assets and Other Income
The Quinns have had bank passbook savings accounts since at
least 1951, and they have contributed to them regularly and
accrued interest on these accounts over the ensuing years.
Accounts were held in the names of Mrs. Quinn, the Quinns
jointly, Mrs. Quinn and Patricia, Mrs. Quinn and Linda, and
Linda and Patricia. Throughout the years, amounts were
transferred from one family account to another; accounts were
closed and new ones opened.
As of December of 1978, the Quinns had accumulated at least
$30,974.55 in their bank savings accounts. Of this amount,
$7,480.01 was in Mrs. Quinn's account at Home Savings
Association of Pennsylvania (Home Savings). The savings account
the Quinns held jointly at American Bank and Trust (American)
contained $23,494.54.
Periodically during the 1970's, Mrs. Quinn purchased
Government Savings bonds (Series E or EE bonds) with face values
of $50 and $100 in the names of herself and Patricia. During
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1981 to 1983, Mrs. Quinn cashed in and rolled over some of those
savings bonds into H or HH bonds. For at least the years 1984
through 1987, 1990, and 1991, interest of $600 per year was
earned on Series H or HH savings bonds held in the names of Mrs.
Quinn and Linda and another $b00 per year on Series H or HH
savings bonds held in the names of Mrs. Quinn and Patricia.
The Quinns owned Certificates of Deposit (CD's). Mrs: Quinn
purchased CD's, some in her name only and some jointly with her
children. Mrs. Quinn and Patricia had a money market savings
account they opened in 1983. On August 30, 1984, Mrs. Quinn and
Patricia received $13,365 from the sale of the three undeveloped
lots. On January 25, 1985, Mrs. Quinn deposited $1,997.91, the
proceeds from cashing in a life insurance policy, into the
checking account she had with Patricia.
The Quinns took IRA deductions on their Federal income tax
returns as follows: 1979 ($1,500), 1980 ($1,500), 1981 ($1,500).
No evidence was presented as to where these contributions went,
or to whose credit. During later years, Mrs. Quinn made at least
the following contributions to her IRA's: 1984 ($2,000), 1985
($2,000), 1988 ($1,500). As of September 30, 1985, Mrs. Quinn
had an investment in the T. Rowe Price New Income Fund ,through
her employer's retirement plan worth $1,748.44. On March 15,
1989, a check was written to Mrs. Quinn from her employer's
pension plan in the amount of $20,954.95. On May 12, 1989, Mrs.
Quinn rolled over this distribution into an IRA at Prudential
- 31 -
Bank and Trust Company (Prudential Bank),7 which consisted of
one IRA CD for the same amount.
In 1990, Mrs. Quinn cashed in a Prudential Insurance
annuity, receiving $2,411.71. In December of 1991, Mrs. Quinn
received a partial distribution in the amount of $2,500 from the
ABA Members Retirement Program. Prudential Bank issued a
distribution of $2,250 from Mrs. Quinn's IRA CD on May 26, 1992.
During 1993, Mrs. Quinn received distributions totaling $1,350
from the Prudential Bank IRA, CD. During 1993, she also received
$37,527, in distribution of all of the funds in one of her
employer plans; that fund had earlier been in another such
employer plan.
On March 30, 1993, the Quinns had a total of $106,014.48 in
bank accounts (mostly savings), Keogh plans, and IRA's and
$30,566.86 in various Government savings bonds. The IRA
accounts, which belonged to Mrs. Quinn, totaled $85,314.81. The
bank account funds, with the exception of $1,433.62 held jointly
by Mrs. Quinn and Mr. Quinn, were held by Mrs. Quinn alone or by
Mrs. Quinn and one or the other of their daughters. The savings
bonds were held jointly by Mrs. Quinn and one of her daughters
or grandchildren, and were purchased, or rolled over from
purchases, in the 1970's. Over 40 years of financial records
7
The Prudential Bank and Trust Company later became known as
The Prudential Savings Bank or The Prudential Bank. We will use
the term “Prudential Bank” to refer to this banking institution
throughout this opinion, regardless of its full name at the time
being discussed.
- 32 -
showed no unusual increases in the Quinns' assets, just a steady
accumulation of savings.
Mr. Ouinn's Income
Mr. Quinn has not been employed since 1982, with the
exception of a short period of time during 1984 when he worked
for Sharp Mountain Coal Company. Mr. Quinn incurred a work-
related injury on August 9, 1984. On December 31, 1985, State
Workmen's Insurance Fund sent him a check in the amount of
$13,046.97, representing compensation for August 9, 1984 through
January 16, 1986, less attorney fees. Thereafter, Mr. Quinn
received a disability check of $323.32 every two weeks. In 1982,
Mr. Quinn was already 62 years old and eligible to collect
Social Security Retirement benefits. As of March 30, 1993, Mr.
Quinn's monthly income from Worker's Compensation was $746 and
from Social Security $423.
In 1982, Mr. Quinn opened and made two contributions
totaling $9,996.42 to his annuity account with Prudential
Insurance. Mr. Quinn received a partial withdrawal dated April
7, 1983, of $1,117 from his Prudential Insurance annuity account
which, with his permission, was deposited into a joint bank
account belonging to Mrs. Quinn and Linda. In 1985, Mr. Quinn
received $1,564.98 in retirement income from the cash surrender
of a Metropolitan Life Insurance Company policy. As of April 14,
1987, the Prudential Insurance annuity contract was worth
$15,588.08. On April 6, 1988, Mr. Quinn requested that this
contract be distributed as a life annuity, paying 120 monthly
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payments to him or, after his death, to his beneficiaries; the
amount of each monthly payment is $145.47.
Lifestyle
From 1979 to 1985, Mrs. Quinn drove a Volkswagen Rabbit.
Mr. Quinn may have had a pickup around that time.4 At the time
of the trial, Mrs. Quinn drove a 1990 Volkswagen. During the
years at issue, Mrs. Quinn did not purchase expensive clothing,
drive expensive automobiles, or dine at expensive restaurants.
Mrs. Quinn has simple tastes and has always lived a modest
lifestyle. Mrs. Quinn has never owned any expensive jewelry. She
has store charge cards at Boscov's and Pomeroy's department
stores. The Quinns dine out less than once a month; they go to
moderately priced restaurants or make use of discount coupons.
When their children were young, the Quinns took a few
family vacations, staying at the beach for 4 or 5 days. The
Quinns have not been on a vacation together in 27 years. In
1981, Mrs. Quinn and Linda went to the Bahamas for 5 days to
celebrate Linda's college graduation.
From 1979 until the present, Mrs. Quinn has given gifts
averaging $50 per month to her three grandchildren, using her
own or Mr. Quinn's funds. She also gave gifts of money to her
daughters. From June of 1983 through June of 1984, Mrs. Quinn
made payments totaling $1,887.56 on Linda's student loans. Mrs.
Quinn gave Linda $3,000 to buy a house in August of 1987; the
property was titled in the names of both Linda and Mrs. Quinn.
During 1989, 1990, and 1991, Mrs. Quinn assisted Linda, who was
- 34 -
then a single parent, in paying her bills, including her
mortgage. On December 4, 1989, Mrs. Quinn paid $1,150 for
plastic surgery to remove a scar from Linda's lip. Mrs. Quinn
gave Linda a $500 check for Christmas in 1990. In August of
1991, Mrs. Quinn paid $700 for one of Linda's graduate school
courses. In June of 1993, Mrs. Quinn gave Linda $2,000 to
purchase a different house; the mortgage was issued in both of
their names. Mrs. Quinn also paid $1,200 of the 1993 closing
costs on the new house.
OPINION
The issues for decision in these consolidated cases are:
(1) Whether Mrs. Gaskins is entitled to relief as an innocent
spouse under section 6013(e), and (2) whether Mrs. Quinn is
entitled to relief as an innocent spouse under section 6013(e).
Normally, spouses who have filed a joint return are
jointly and severally liable for the tax due. Sec. 6013(d)(3).
However, section 6013(e)(1) relieves a spouse of liability for
the tax, including interest, penalties, and other amounts,
attributable to the substantial understatement of tax of the
other spouse, if that spouse meets the following requirements:
(1) A joint, Federal income tax return was filed; (2) there is a
substantial understatement of tax attributable to grossly
erroneous items of the other spouse;-(3) in signing the return,
the alleged innocent spouse did not know, and had no reason to
know, of the substantial understatement; and (4) taking into
account all the facts and circumstances, it would be inequitable
- 35 -
to hold the alleged innocent spouse liable for the deficiency
attributable to such substantial understatement. Sec.
6013(e)(1).
Mrs. Gaskins and Mrs. Quinn each have the burden of
proving that she meets these requirements. Rule 142(a). A
petitioner who fails to meet all of the requirements of section
6013(e)(1) will not qualify for innocent spouse relief.
Purificato v. Commissioner, 9 F.3d 290, 293 (3d Cir. 1993),
affg. T.C. Memo. 1992-580; Purcell v. Commissioner, 826 F.2d
470, 473 (6th Cir. 1987), affg. 86 T.C. 228 (1986); Bokum v.
Commissioner, 94 T.C. 126, 138 (1990), affd. 992 F.2d 1132 (11th
Cir. 1993). Respondent has conceded that both Mrs. Gaskins and
Mrs. Quinn meet the first two requirements of section
6013(e)(1). We shall consider each petitioner in turn with
respect to the remaining two requirements.
Mrs. Gaskins
Knowledge of the Understatement
Mrs. Gaskins argues that she had no actual knowledge, nor
did she have reason to know, of any diverted receipts from West
Pine or substantial understatements of tax, and therefore, she
should be afforded relief as an innocent spouse. Respondent
contends that Mrs. Gaskins has not established her lack of
knowledge or that she had no reason to know.
A taxpayer seeking innocent spouse relief must establish
that he or she in signing the return did not know, and had no
reason to know, that there was a substantial understatement of
- 36 -
tax. Sec. 6013 (e)(1)(C). The record clearly shows that Mrs.
Gaskins had no actual knowledge of any understatement of Mr.
Gaskins' income and the resulting substantial understatement of
tax. The question is whether she had reason to know about such
understatement. A spouse has "reason to know" if a reasonably
prudent taxpayer under the taxpayer's circumstances at the time
of signing of the return could be expected to know the return
was erroneous or that further investigation was warranted.
Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989),
affg T.C. Memo. 1988-63; Bokum v. Commissioner, 94 T.C. at 148.
A taxpayer cannot close her eyes to facts or unusual
expenditures that might give her reason to know of unreported
income and a substantial understatement of tax.5 Terzian v.
Commissioner, 72 T.C. 1164, 1170-1171 (1979); Mysse v.
Commissioner, 57 T.C. 680, 699 (1972). If a spouse knows enough
facts to be put on notice of the possibility of a substantial
understatement, she has a duty to inquire further. Guth v.
Commissioner, 897 F.2d 441, 444-445 (9th Cir. 1990), affg. T.C.
Memo. 1987-522; Weiss v. Commissioner, T.C. Memo. 1995-70.
Failure to inquire may cause knowledge of the understatement to
be imputed to the taxpayer. Price v. Commissioner, 887 F.2d 959,
965 (9th Cir. 1989) (citing Levin v. Commissioner, T.C. Memo.
1987-67); McCoy v. Commissioner, 57 T.C. 732, 734 (1972).
Factors to be considered in determining whether the spouse
had reason to know are the alleged innocent spouse's level of
education; the spouse's involvement in the family's business and
- 37 -
financial affairs; the presence of expenditures that appear
lavish or unusual when compared to the family's past levels of
income, standard of living, and spending patterns; and the
culpable spouse's evasiveness and deceit concerning the couple's
finances. Price v. Commissioner, 887 F.2d at 965; Stevens v.
Commissioner, 872 F.2d at 1505; Flynn v. Commissioner, 93 T.C.
355, 365-366 (1989).
Mrs. Gaskins has a high school education. She has had no
training or work experience in financial matters. Mrs. Gaskins
deposited Mr. Gaskins' paychecks and many of his expense checks
into her checking account which, for most of the years of their
marriage, was the only account that she was aware that the
Gaskins had. She was responsible for paying the family's bills.
For the years at issue, the Gaskins used a tax return preparer
to prepare their Federal income tax returns.
Involvement with a spouse's business may give rise to a
duty to inquire into the activities of that business. See Shea
v. Commissioner, 780 F.2d 561, 566 (6th Cir. 1986), revg. and
remanding on other grounds T.C. Memo. 1984-310; Dickey v.
Commissioner, T.C. Memo. 1985-478; Shapiro v. Commissioner, T.C.
Memo. 1986-142. Mrs. Gaskins knew little about West Pine's
operations; however, she knew that Mr. Gaskins wanted to list
her as an officer of West Pine and to use her name to sign West
Pine's checks. Mr. Gaskins had used Mrs. Gaskins' name to
incorporate the second roofing company and had named her as its
president, because the outstanding tax debts from the first
- 38 -
roofing company precluded Mr. Gaskins from conducting business
in his own name. Likewise, Mr. Gaskins used Mrs. Gaskins' name
in running West Pine. However, knowledge of these facts would
not alert Mrs. Gaskins as to any unreported income Mr. Gaskins
received from West Pine.
The evidence is contradictory as to whether and when Mrs.
Gaskins was listed as an officer of West Pine.6 Regardless, Mrs.
Gaskins was not assigned any duties and was not involved in the
operation of West Pine. If she was an officer, she was an
officer in name only, and not charged with any special duty to
inquire because of any office to which she may have been named.
See Bell v. Commissioner, T.C. Memo. 1989-107 (wife was
shareholder and on board of directors, but had no authority);
Carter v. Commissioner, T.C. Memo. 1977-322 (wife's only duty as
secretary was to sign stock certificates at her home).
Mrs. Gaskins had signatory authority over the West Pine
checking account. The mere fact of having signatory authority is
insufficient to charge Mrs. Gaskins with reason to know of the
understatement of Mr. Gaskins' income from West Pine. See Porter
v. Commissioner, T.C. Memo. 1991-561. Mrs. Gaskins' name was
being signed to West Pine checks by Mr. Quinn, beginning in
December of 1979, and Mrs. Gaskins knew this from Mr. Gaskins'
paychecks and expense checks that she endorsed. Yet, we do not
believe that had Mrs. Gaskins signed the checks personally she
would have known any more about West Pine's operations and the
diverted receipts, or that further investigation was warranted.
- 39 -
First, since West Pine did not have an office, Mrs. Gaskins
would have signed these checks at her house or that of the
Quinns, not at the mining site where she might have witnessed
any of the business activities. Second, she would have signed
the checks in blind compliance with Mr. Gaskins' or Mr. Quinn's
instructions, just as she allowed them to sign her name. Third,
given Mrs. Gaskins' lack of knowledge of the mining business,
lack of knowledge of West Pine's activities specifically, and
lack of experience with corporate bookkeeping, it is unlikely
that information presented in the checkbook would have aroused
her suspicions. See Guth v. Commissioner, 897 F.2d 441 (9th Cir.
1990) (wife who signed organization's checks under husband's
instruction held to have no reason to know of understatement);
Coleman v. Commissioner, T.C. Memo. 1988-538 (wife who had
access to business books-for limited period and who had no
understanding of bookkeeping system held to have no reason to
know). Mrs. Gaskins' knowledge of West Pine's withholding tax
problem in late 1981 did not put Mrs. Gaskins on notice of the
possibility of diversion of corporate receipts. West Pine's
failure to pay the withheld employment taxes to the IRS and the
fact that Mr. Gaskins periodically failed to give his paycheck
to her would have suggested that West Pine had no money, not
that Mr. Gaskins was diverting corporate receipts.
Mrs. Gaskins presented evidence about the lack of
expenditures on household repairs, furnishings, clothes, or
vacations. This evidence demonstrated the Gaskins' inability to
- 40 -
make timely payments on many of their financial obligations and
their efforts to avert foreclosure by their creditors. Nothing
in the Gaskins' spending habits and lifestyle would have aroused
Mrs. Gaskins' suspicions. She was living at or below the poverty
level.
Perceived evasiveness of the culpable spouse may trigger a
duty to inquire. Stevens v. Commissioner, 872 F. 2d at 1505;
Park v. Commissioner, T.C. Memo. 1993-252, affd. 25 F.3d 1289
(5th Cir. 1994). Good communication between the spouses may
support a finding that the taxpayer was aware of the
understatement. Hayman v. Commissioner, 992 F.2d 1256, 1262-1263
(2d Cir. 1993), affg. T.C. Memo. 1992-228.This assumes that a
nonevasive spouse is more likely than an evasive spouse to
communicate-relevant knowledge to his or her spouse. Conversely,
a taxpayer who is unaware of being misled by the other spouse
may not have reason to know of the understatement or a duty to
inquire as to the possibility of an understatement. Guth v.
Commissioner, 897 F.2d at 444.
Mrs. Gaskins believed Mr. Gaskins to be trustworthy. In our
view, Mr. Gaskins, while not evasive, just did not share
information about his business activities with Mrs. Gaskins.
Mrs. Gaskins was unaware of Mr. Gaskins' individual tax debts
from earlier years, learned of the first roofing company's
problems only when Mr. Gaskins used her name to incorporate the
second roofing company, and learned of West Pine's employment
- 41 -
tax problems from IRS Revenue Officer Clark. At the time of
signing the individual tax returns for the years 1979, 1980, and
1981, Mrs. Gaskins was not alerted to inquire further into Mr.
Gaskins' business dealings.
Based on our review of these factors as applied to Mrs.
Gaskins, we hold that Mrs. Gaskins did not know, and had no
reason to know, of the substantial understatements of Mr.
Gaskins' income when signing their Federal income tax returns
for the taxable years 1979, 1980, or 1981.
Inequity of Holding Mrs. Gaskins Liable
Mrs. Gaskins argues it is inequitable to hold her liable
because she has not benefited from any unreported income, and
the family has suffered many hardships. Respondent alleges that
Mrs. Gaskins has not proved it would be inequitable to hold her
liable.
To qualify for innocent spouse relief, the taxpayer must
show that, given all the facts and circumstances, it would be
inequitable to hold the taxpayer liable for the tax deficiency
attributable to the substantial understatement of the other
spouse. Sec. 6013(e)(1)(D). One factor to consider is whether
the taxpayer seeking relief significantly benefited from the
erroneous items of the other spouse, here unreported income.
Estate of Krock v. Commissioner, 93 T.C. 672, 677 (1989). Normal
support is not a significant-benefit. Sec. 1.6013-5(b), Income
Tax Regs.; Estate of Krock v Commissioner, supra at 678-679;
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Flynn v. Commissioner, 93 T.C. at 367. Normal support is
determined by the circumstances of the parties. Sanders v.
United States, 509 F.2d 162, 168 (5th Cir. 1975); Estate of
Krock v. Commissioner, supra at 678-679; Flynn v. Commissioner,
supra at 367.
Furthermore, while a meager lifestyle may negate a reason
to know or that a spouse significantly benefited, the Court of
Appeals for the Third Circuit87 has indicated that such a
lifestyle need not lead to the conclusion that it is inequitable
to hold the spouse liable for the tax, particularly where assets
have accumulated for the spouse's later use. Purificato v.
Commissioner, 9 F.3d at 296.
From a financial standpoint, the Gaskins have lived a bleak
existence. They have had a history of borrowing to pay for
consumer items and being delinquent on their debts. Other than
their house and old automobiles, the Gaskins have no assets.
Respondent cites Sonnenborn v. Commissioner, 57 T.C. 373
(1971) and Terzian v. Commissioner, 72 T.C. 1164 (1979), for the
proposition that Mrs. Gaskins has not met her burden of showing
she did not benefit, since she has not accounted for the use of
the diverted income. In Sonnenborn v. Commissioner, Mrs.
Sonnenborn, the treasurer of the corporation from which the
omitted income derived, knew of the payments from the
8
An appeal in this case would lie to the Court of Appeals
for the Third Circuit.
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corporation to the taxpayers. She failed to prove that she did
not know, or have reason to know, such payments were income,
rather than the loans the taxpayers alleged them to be. Since
Mrs. Sonnenborn did not provide any information as to the use of
these payments, this Court would not speculate and held that she
did not establish that she did not benefit. In Terzian v.
Commissioner, the taxpayer did not know the source of funds in a
bank account transferred to her. This Court, therefore, assumed
the account contained funds from the omitted income. However,
since the amount was considered to be for the taxpayer's
ordinary support, this Court found she did not significantly
benefit.
Mrs. Gaskins had no knowledge of any unreported payments to
her husband, nor did she receive any unexplained benefits or
assets. It is impossible for her to explain something she did
not know about. Her burden is to show she did not benefit. It is
clear from the record that Mrs. Gaskins received no benefit from
the omitted income.
Another factor to consider is whether the spouse seeking
relief had been deserted by, or divorced or separated from the
culpable spouse. Sec. 1.6013-5(b), Income Tax Regs. Yet, this is
only one of the factors to be considered, and section 6013(e)
relief is not limited to spouses whose marriages have ended.
Mysse v. Commissioner, 57 T.C. at 700. Mrs. Gaskins continues to
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be married to Mr. Gaskins, a fact which neither helps nor
hinders her case.
A third factor is whether probable future hardships would
be visited upon the innocent spouse if she is not relieved of
liability. Sanders v. United States, 509 F.2d at 171 n. 16. Mrs.
Gaskins has argued that the hardships the family has suffered
due to Mr. Gaskins' disability and the previous lack of medical
coverage make it inequitable to hold her liable for the
deficiency. The Court of Appeals for the Third Circuit has
stated that hardships which do not affect tax liability do not
bear a relationship to the innocent spouse issue. Purificato v.
Commissioner, 9 F.3d at 297. Instead, we must consider the
hardship to the spouse seeking relief if made to share the tax
liability and whether that spouse would have to pay the tax out
of her own assets. Id. at 296-297. If Mrs. Gaskins were made to
share Mr. Gaskins' tax liability, her only asset, their house,
would be used to help satisfy the tax. That house was acquired
long before the years involved in this case. Also the funds to
avert the threatened foreclosure on the mortgages on that house
came from Mr. Gaskins' disability payments under Worker's
Compensation and Social Security, not from any unreported income
from West Pine. Since Mrs. Gaskins has derived no benefit or
assets from Mr. Gaskins' omitted income, it would be inequitable
for Mrs. Gaskins to be required to pay the tax.
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Given these facts and circumstances, we conclude that it
would be inequitable to hold Mrs. Gaskins liable for the
deficiencies in tax arising from Mr. Gaskins' understated income
for the taxable years 1979, 1980, and 1981.
Mrs. Ouinn
Knowledge of the Understatement
Mrs. Quinn argues she did not know, and had no reason to
know, of any substantial understatements of income on the
Quinns' returns. Respondent counters by stating that Mrs. Quinn
has not met her burden of proof on this required element for
relief. The record is clear that Mrs. Quinn had no actual
knowledge of the understatement of Mr. Quinn's income. Thus, we
must decide whether she had reason to know of such
understatement.
Mrs. Quinn has a high school education and work experience
as a legal secretary; she had no special knowledge of financial
matters. She controlled the family finances. Mrs. Quinn
deposited their paychecks, paid the household bills, balanced
the checkbook, and managed their savings. Their savings were in
passbook savings accounts, Government savings bonds, IRA
accounts, employer retirement or pension plans, and certificates
of deposit. She prepared the Quinns' joint tax returns for the
years at issue.
Mrs. Quinn was not familiar with or involved in the
operations of West Pine. She was not an officer or director.
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Occasionally, she wrote out West Pine checks under Mr. Quinn's
direction, for his signature. What knowledge she had of West
Pine's activities was limited to information gathered from this
ministerial duty. As underscored by Mrs. Quinn's strong
emotional reaction to recalling the events related to the Credit
Alliance suit, even after the passing of 12 years, she had-no
awareness of any of Mr. Quinn's business activities that would
give rise to personal liability prior to her discovery of that
matter in June of 1982, after the years involved in this case.
Up until that time, Mrs. Quinn had trusted Mr. Quinn and had no
reason to question his actions. See Pietromonaco v.
Commissioner, 3 F.3d 1342 (9th Cir. 1993), revg. T.C. Memo.
1991361 and T.C. Memo. 1991-472 (Supplemental Opinion).
Moreover, even if she had learned of the Credit Alliance matter
before the filing of their 1981 individual tax return, that
would not have alerted her to the possibility that Mr. Quinn had
received unreported income from West Pine. If anything, that
lawsuit, plus Mr. Quinn's apparent failure to receive his
regular paychecks from West Pine, would have suggested that West
Pine had no money, not that Mr. Quinn was diverting corporate
receipts.
Mrs. Quinn has maintained a moderate lifestyle, with no
lavish expenditures. For most of her married life, she has lived
in the house purchased and occupied by her parents. She and her
husband have worked their entire adult lives, regularly setting
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aside money into passbook savings accounts, Government savings
bonds, CD's, and retirement plans for themselves and their
children. Mrs. Quinn has assisted her children financially when
needed, the largest sum at any one time being $3,000 to help her
younger daughter purchase a house. Nothing in the record
indicates an increase in spending or a large increase in assets
during or after the years at issue.
Based on these facts, we hold that Mrs. Quinn did not know
and had no reason to know of any understatements of income on
the Quinns' Federal income tax returns for the taxable years
1979, 1980, or 1981.
Ineguity of Holding Mrs. Quinn Liable
Mrs. Quinn contends that it would be inequitable to hold
her liable for the tax deficiency arising from the
understatements because she has not benefited from the omitted
income. Respondent's position is that it would not be
inequitable, since Mrs. Quinn has not proved she did not
benefit.
Nothing suggests a significant benefit accrued to Mrs.
Quinn as a result of the understatement of Mr. Quinn's income.
Mrs. Quinn continued her usual frugal spending and savings
habits. See Dakil v. United States, 496 F.2d 431 (10th Cir.
1974). The large volume of financial documents submitted by Mrs.
Quinn fails to indicate any large or unusual amounts being
deposited into her accounts, or into those she previously held
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with Mr. Quinn. The majority of her assets reside in her law
firm retirement plans, and are attributed to her earnings over
the many years of her 50 year participation in the work force.
The assets accumulated in the course of the Quinns' normal
working life do not derive from the omitted income and are not a
significant benefit.
As with Mrs. Gaskins, respondent argues that Mrs. Quinn
must account for the diverted income. She cannot account for
something she knows nothing about. See our discussion of this
requirement as to Mrs. Gaskins, above. As with Mrs. Gaskins, we
reject respondent's argument. Mrs. Quinn knew of no diverted
funds, had no reason to know, of any diverted funds, and
possessed no assets in excess of those accrued in the course of
ordinary support and a lifetime of steady savings. Mrs. Quinn
has amply demonstrated that she derived no benefit from any
unreported income of her husband.
The Quinns remain married, although their relationship has
suffered. During 1982, when learning of the Credit Alliance
suit, Mrs. Quinn considered getting a divorce. Her confidence in
Mr. Quinn was shaken; she felt her financial security, for which
she had worked and scrimped and saved her entire life, being
threatened. Rather than pursue divorce proceedings, the Quinns
agreed that their joint assets, including the house given to
them by Mrs. Quinn's parents, be transferred to Mrs. Quinn,
either in her name alone or jointly with one or the other of
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their two daughters. Remaining in the marriage, however, does
not preclude Mrs. Quinn from relief.
Should liability be imposed on Mrs. Quinn, the debt would
be paid from her assets, primarily her retirement funds and the
house given to her by her parents. This would be inequitable
since she did not benefit from Mr. Quinn's omitted income. Given
all the facts and circumstances, we conclude that it would be
inequitable to hold Mrs. Quinn liable for the deficiencies in
tax arising from Mr. Quinn's understated income for the taxable
years 1979, 1980, and 1981.
We hold that both Mrs. Gaskins and Mrs. Quinn are entitled
to innocent spouse relief under section 6013(e).
Based on the concessions and the above holdings,
Decisions will be entered
for petitioners Elaine Gaskins
and Sabina A. Ouinn on the
innocent spouse issue for 1979,
1980, and 1981.
Decisions will be entered
for respondent on the
deficiencies in tax for 1979,
1980, and 1981, and the addition
to tax for fraud for 1979 and
1980 as to petitioners William C.
Gaskins and Pasquale T. Quinn.