The opinion
T.C. Memo. 1996-101
UNITED STATES TAX COURT
ESTATE OF RAYMOND E. JONES, DECEASED, DOROTHY J. JONES,
INDEPENDENT EXECUTRIX, AND DOROTHY J. JONES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23835-88. Filed March 6, 1996.
Sidney Levine, for petitioners.
Melanie R. Urban, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined deficiencies in and
additions to petitioners Dorothy J. Jones and Raymond E. Jones'1
1
Raymond E. Jones died during 1989, after the notice of
deficiency in the instant case was issued. The caption of the
instant case was amended to substitute the Estate of Raymond E.
Jones, Deceased, Dorothy J. Jones, Independent Executrix, for
Raymond E. Jones as a petitioner. For convenience, we will
hereinafter refer to petitioner Dorothy J. Jones as petitioner,
(continued...)
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Federal income taxes as follows:
Additions to Tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2)
1
1981 $40,352.17 $2,017.61
1
1982 1,118.92 55.95
1
50 percent of the interest due on the amount of the
deficiency.
For the years in issue, respondent also determined that
petitioners are liable for increased interest under section
6621(c). Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
After concessions, the issues to be decided are: (1)
Whether the period of limitation on assessment of the deficiency
in and additions to tax for the Joneses' 1981 taxable year
expired prior to the date the notice of deficiency was issued;
and, if it did not, (2) whether petitioner is entitled to relief
under section 6013(e) for the 1981 taxable year.
FINDINGS OF FACT
Some of the facts were stipulated for trial pursuant to Rule
91. The parties' stipulations are incorporated herein by
reference and are found accordingly.
1
(...continued)
Raymond E. Jones as Mr. Jones, petitioner and Mr. Jones as the
Joneses, and petitioner and the Estate of Raymond E. Jones,
Dorothy J. Jones, Independent Executrix, as petitioners.
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At the time they filed the petition in the instant case, the
Joneses resided in Houston, Texas.
Petitioner married Mr. Jones during 1967. Petitioner and
Mr. Jones had both been married previously, and they both had
minor children from prior marriages at the time they married.
Petitioner had quit school at the age of 15. Mr. Jones had only
an eighth grade education. At the time the Joneses married, Mr.
Jones worked as a welder on a pipe-laying barge for Brown & Root,
an international construction company owned by Halliburton.
Until 1984, when he was terminated, Mr. Jones received regular
promotions from Brown & Root, eventually rising to the level of
vice president.
Shortly after their marriage, the Joneses moved to Bahrain
for 6 months and then to England, where they lived for
approximately 8 years. Petitioner returned to the United States
during 1977 with the children who still lived with them. In
order to find a house, petitioner returned from England prior to
the time Mr. Jones returned.
After the Joneses returned from England during 1977,
petitioner took full responsibility for paying the house and
family expenses because Mr. Jones traveled extensively. As part
of her household responsibilities, petitioner wrote the checks
for the Joneses’ family expenses on a jointly held household
account at the Citizens State Bank in Sealy, Texas (the household
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account). Mr. Jones deposited his Brown & Root paychecks into
the household account. Petitioner wrote all but 2 of 340 checks
drawn on the household account in 1981, paying the monthly and
regular household bills, as well as bills totaling $10,000 for
improvements to their home.
After the Joneses returned from England during 1977,
petitioner also handled the family savings account, transferring
between the checking account and the savings account the
following amounts on the following dates: $2,500 on April 25,
1981, $1,500 on May 13, 1981, and $1,500 on June 8, 1981.
Petitioner opened most of the mail that came to their house,
except for Mr. Jones' important, personal mail. As a result of
opening the mail, petitioner discovered things that caused her to
question Mr. Jones about his financial affairs.
Two or three years after returning from England, petitioner
started a small dress shop in Sealy, Texas. She opened the dress
shop without any prior experience in either retail sales or
keeping books. After she opened the dress shop, petitioner hired
others to perform bookkeeping and accounting services because she
had no interest or expertise in bookkeeping or accounting and she
knew how important it was to keep receipts and other records for
that purpose. Emma Rice, petitioner's daughter-in-law, did most
of the bookkeeping in the early years of the business, but
petitioner subsequently hired an accountant named Jack Singleton
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to do the bookkeeping. At that time, as Mr. Jones was also
looking for an accountant, petitioner recommended Mr. Singleton
to him.
In her dress shop, petitioner had full responsibility for
buying the inventory and selling it, areas in which she had skill
and interest. During 1980, the dress shop's first year,
petitioner grossed $78,207. Petitioner acquired, on her own, the
dress shop's first (and continuing) inventory and opened on her
own a separate bank account for the dress shop at the Citizens
State Bank in Sealy, Texas.
Mr. Jones did not write checks on petitioner's dress shop
bank account, and she did not keep him apprised of the operations
of the dress shop. Occasionally, petitioner used the household
account for transactions involving the dress shop.
During its first year, petitioner operated the dress shop in
leased space, but petitioner subsequently moved the shop to a
building she purchased in 1981 for $42,500. The building
afforded a larger space and, during 1981, petitioner opened a
bridal shop in addition to the dress shop. During 1981, the
dress and bridal shops employed three to four employees per day.
During 1981, the dress and bridal shops grossed $128,549.67,
almost double the first year's results, and reported a profit.
After opening the bridal shop, petitioner opened a third
business, a tea room that served lunch.
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Petitioner operated her businesses for approximately 9
years, working very long hours. Mr. Jones took no responsibility
for the dress shop or other businesses petitioner undertook in
Sealy, Texas, and he had very little to do with them. On the
other hand, Mr. Jones did not ignore petitioner's efforts, and he
helped her when she asked him for his assistance.
Petitioner began noticing a difference in her relationship
with Mr. Jones about the time they returned from England and she
started her businesses (i.e., prior to 1981), when Mr. Jones
became more and more private, even secretive. Nonetheless,
petitioner possessed information about many of Mr. Jones'
financial affairs. During relevant times, she knew Mr. Jones was
buying stock in Halliburton, the parent company of Brown & Root,
because she saw the contemporaneous deductions taken out of his
paycheck. Petitioner kept track of Mr. Jones' earnings from
Brown & Root. She also knew that he had perfected certain
inventions while working for Brown & Root. She knew that Mr.
Jones bought stock in the Citizens State Bank of Sealy. She knew
how much she and Mr. Jones paid for the small house they acquired
in Sealy in 1974, which they used for summer vacations while they
were living in England, and she knew how it was financed. She
knew about the 95 acres of land Mr. Jones purchased in 1971, how
much he paid for it, how it was used, how it was financed, and
how it came to be mortgaged again. She knew about the 23 acres
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of land Mr. Jones purchased in 1970 for cash. She knew that Mr.
Jones purchased U.S. savings bonds through his paycheck during
the period 1972 to 1982. She knew about a 5-acre tract of land
near Sealy that Mr. Jones sold in 1982, and how the buyer paid
for it. She knew that Mr. Jones consulted with David Lye about
the purchase of a lumber yard in 1980 or 1981. She knew that Mr.
Jones wanted to build a Holiday Inn in Sealy.
After petitioner found and recommended Mr. Singleton to Mr.
Jones (during 1979 or 1980) and they met with him briefly, Mr.
Jones took responsibility for transmitting all pertinent
information to Mr. Singleton and seeing that their joint income
tax returns were prepared. Mr. Singleton prepared the 1981 joint
income tax return filed by the Joneses. Mr. Singleton found both
petitioners difficult to deal with when he needed information.
The Joneses filed their joint income tax return for the
taxable year 1981 on August 23, 1982. On their 1981 return, the
Joneses claimed deductions with respect to an investment in an
art tax shelter.
In addition to the deductions claimed for the art tax
shelter, the Joneses claimed partnership losses from Auburn
Mining Joint Venture (related to Munro Shuman) (Auburn Mining
partnership) in the amount of $76,674 and Choate Square Joint
Venture (Choate Square partnership) in the amount of $11,798.92.
During 1981, Mr. Jones had invested $10,000 in the Auburn Mining
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partnership using funds out of his expense account at Citizens
State Bank, in Sealy, Texas. During 1981, petitioner did not
know that Mr. Jones maintained a separate bank account for his
business and travel expenses. However, she knew that Mr. Jones'
employer, Brown & Root, paid for his travel by advancing him
funds, and that he did not deposit those funds into their
household account. Nonetheless, petitioner did not know about
the $10,000 investment in the Auburn Mining partnership when Mr.
Jones made it.
On their 1981 return, the Joneses claimed an overpayment of
$17,732.28, resulting at least in part from the deductions taken
from the Auburn Mining and Choate Square partnerships. The 1981
return, with its overpayment claim, contrasted with their 1979
and 1980 returns, which respectively reported an overpayment of
only $33 and an amount due of $1,444. A substantial portion of
the refund claimed on the 1981 return was carried over to be used
as an additional payment on the income tax liability shown on the
joint return filed by the Joneses for their 1982 taxable year.
Petitioner signed the returns filed for taxable years 1979
and 1980, as well as the return filed for the 1981 taxable year.
Although she signed the tax returns, petitioner did not see the
complete returns or inspect each of the pages given to her
because Mr. Jones always presented them for signature at
inconvenient times. Petitioner did not inspect the portions of
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the tax returns Mr. Jones gave her to sign during 1981 because,
at that time, she trusted him.
Upon audit of the Joneses’ 1981 return, the Internal Revenue
Service (Service) proposed disallowing the Schedule C loss
claimed by the Joneses with respect to the art tax shelter and
allowing only their cash outlay as a deduction. On August 20,
1984, the Joneses agreed to the assessment of additional tax for
1981 resulting from disallowance of the Schedule C loss with
respect to the art tax shelter by signing Form 1902-B, Report of
Individual Income Tax Examination Changes. The Joneses made an
advance payment of $610.52 on the art tax shelter adjustment on
August 22, 1984, that covered the additional tax as originally
proposed plus interest. On September 29, 1984, and March 1,
1985, respectively, the Joneses and a representative of the
Service also executed a Closing Agreement on Final Determination
Covering Specific Matters concerning only the art tax shelter for
which the Joneses had claimed deductions for 1980, 1981, and
1982.
On April 25, 1985, the Joneses and a representative of the
Service executed a Form 872-A, Special Consent to Extend the Time
to Assess Tax, extending the period of limitation for assessment
with respect to their 1981 year. The Form 872-A provided that
the Service could assess additional tax with respect to the 1981
taxable year at any time subject only to certain limitations.
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The relevant portions of the Form 872-A stated as follows:
(1) The amount(s) of any Federal income tax due on any
return(s) made by or for the above taxpayer(s) for the
period(s) ended December 31, 1981 may be assessed on or
before the 90th (ninetieth) day after: (a) the Internal
Revenue Service office considering the case receives Form
872-T, Notice of Termination of Special Consent to Extend
the Time to Assess Tax, from the taxpayer(s); or (b) the
Internal Revenue Service mails Form 872-T to the
taxpayer(s); or (c) the Internal Revenue Service mails a
notice of deficiency for such period(s)* * *
(2) This agreement ends on the earlier of the above
expiration date or the assessment date of an increase in the
above tax that reflects the final determination of tax and
the final administrative appeals consideration. An
assessment for one period covered by this agreement will not
end this agreement for any other period it covers. Some
assessments do not reflect a final determination and appeals
consideration and therefore will not terminate the agreement
before the expiration date. Examples are assessments of:
(a) tax under a partial agreement; (b) tax in jeopardy; (c)
tax to correct mathematical or clerical errors; (d) tax
reported on amended returns; and (e) advance payments.
On June 17, 1985, the Service assessed the additional tax
owed with respect to the art tax shelter adjustments for the 1981
year. On April 13, 1988, the Service received from the Joneses a
Form 872-T, terminating the consent granted by the Form 872-A for
the 1981 taxable year. On June 21, 1988, within 90 days of its
receipt of the Form 872-T, the Service issued to the Joneses a
statutory notice of deficiency covering both the 1981 and 1982
taxable years.
OPINION
The first issue we must decide is whether the period of
limitation on assessment of the deficiency in and additions to
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tax against the Joneses for their 1981 taxable year had expired
prior to the date the notice of deficiency was issued.
Generally, the Commissioner must assess any deficiency
within 3 years of the filing of a return. Sec. 6501(c). A
taxpayer and the Commissioner can agree to extend the assessment
deadline if they memorialize their agreement in writing prior to
the expiration of the original assessment period. Sec.
6501(c)(4). The agreement terminates only by the methods set out
on its face. Kernen v. Commissioner, 902 F.2d 17, 18 (9th Cir.
1990); Estate of Camara v. Commissioner, 91 T.C. 957, 962 (1988).
The bar of the statutory period of limitation is an
affirmative defense which must be specifically pled and proved.
Rules 39, 142(a); Mecom v. Commissioner, 101 T.C. 374, 382
(1993), affd. without published opinion 40 F.3d 385 (5th Cir.
1994); Amesbury Apartments, Ltd. v. Commissioner, 95 T.C. 227,
240 (1990). Petitioners may establish a prima facie case by
proving the filing date of their 1981 tax return and that the
notice of deficiency was mailed after the normal 3-year
expiration date for the period of limitation. Mecom v.
Commissioner, supra at 382; Amesbury Apartments, Ltd. v.
Commissioner, supra at 240-241; Adler v. Commissioner, 85 T.C.
535, 540 (1985). The burden of going forward then shifts to
respondent. J.H. Rutter Rex Manufacturing Co. v. Commissioner,
853 F.2d 1275, 1281 (5th Cir. 1988), affg. in part, revg. in part
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and remanding T.C. Memo. 1987-296; Armes v. Commissioner, 448
F.2d 972, 974 (5th Cir. 1971), affg. in part, revg. in part and
remanding T.C. Memo. 1969-181; Mecom v. Commissioner, supra at
382; Adler v. Commissioner, supra at 540-541.
Respondent’s burden is met by the receipt into evidence of
one or more properly executed, facially valid, written agreements
extending the period of limitation on assessment along with
evidence that the notice of deficiency was mailed prior to the
end of the extended period. J.H. Rutter Rex Manufacturing Co. v.
Commissioner, supra at 1281; Mecom v. Commissioner, supra at 382-
383; Adler v. Commissioner, supra at 540. Once respondent makes
such a showing, the burden of going forward with the evidence
shifts back to petitioners to prove their contentions with
respect to agreements. J.H. Rutter Rex Manufacturing Co. v.
Commissioner, supra at 1281; Mecom v. Commissioner, supra at 383;
Adler v. Commissioner, supra at 541.
An agreement extending the period of limitation on
assessment is a unilateral waiver of a defense by a taxpayer; the
interpretation of the terms contained in the agreement is
governed by contract principles. Stange v. United States, 282
U.S. 270 (1931); Kronish v. Commissioner, 90 T.C. 684, 693
(1988); Piarulle v. Commissioner, 80 T.C. 1035, 1042 (1983). The
terms of the parties’ agreement are determined from their
objective manifestations of mutual assent as shown by their overt
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acts. Mecom v. Commissioner, supra at 384-385. In signing a
written agreement, the parties manifest assent to its provisions.
Id. at 385. To construe the terms of the parties’ agreement,
therefore, we look to the language of the written agreement. Id.
at 384, 385; Kronish v. Commissioner, supra at 693.2 Only if a
written agreement is ambiguous do we look behind it to ascertain
the intentions of the parties. Rink v. Commissioner, 100 T.C.
319, 325 (1993), affd. 47 F.3d 168 (6th Cir. 1995). A written
agreement is ambiguous if it can reasonably be interpreted to
have more than one meaning. Woods v. Commissioner, 92 T.C. 776,
780 (1989). If the written agreement is ambiguous, the finder of
fact may resort to extrinsic facts to interpret the parties'
intent in signing the agreement. Id.
With the foregoing in mind, we look to the words the parties
to the agreement used to memorialize their agreement. The
Joneses and the Service’s agent signed Form 872-A, which
contained the following language relating to termination of the
agreement:
(1) The amount(s) of any federal income tax due on any
return(s) made by or for the above taxpayer(s) for the
period(s) ended December 31, 1981 may be assessed on or
before the 90th (ninetieth) day after: (a) the Internal
Revenue Service office considering the case receives Form
872-T, Notice of Termination of Special Consent to Extend
the Time to Assess Tax, from the taxpayer(s); or (b) the
Internal Revenue Service mails Form 872-T to the
taxpayer(s); or (c) the Internal Revenue Service mails a
2
See Masraff v. Commissioner, T.C. Memo. 1989-638.
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notice of deficiency for such period(s). * * *
(2) This agreement ends on the earlier of the above
expiration date or the assessment date of an increase
in the above tax that reflects the final determination
of tax and the final administrative appeals
consideration. An assessment for one period covered by
this agreement will not end this agreement for any
other period it covers. Some assessments do not
reflect a final determination and appeals consideration
and therefore will not terminate the agreement before
the expiration date. Examples are assessments of: (a)
tax under a partial agreement; (b) tax in jeopardy; (c)
tax to correct mathematical or clerical errors; (d) tax
reported on amended returns; and (e) advance payments.
Petitioners argue that the language of the Form 872-A is
clear and that the assessment made with respect to the art tax
shelter adjustment falls within the language of paragraph (2),
thereby terminating the extension on June 17, 1985, the date of
the assessment. Accordingly, we must decide the meaning of "the
assessment date of an increase in * * * tax that reflects the
final determination of tax and the final administrative appeals
consideration." As the record establishes that a facially valid,
written consent was properly executed, the burden of going
forward shifts back to petitioners to prove that the consent
terminated in accordance with its terms.
The record contains no evidence of Appeals Office
involvement in the art shelter matter. Accordingly, petitioners
rely solely on the Service’s assessment of tax concerning the art
shelter adjustment as "the final determination of tax" thereby
terminating the extension provided in the Form 872-A.
Petitioners contend that any assessment of tax for the 1981 year
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is what is meant by the term “tax” in the phrase “the final
determination of tax”. Respondent, on the other hand, argues
that only a closing agreement covering all adjustments or issues
for an entire year can finalize a taxpayer’s liability for that
year. Respondent’s argument presumes that the phrase “the final
determination of tax” means the final determination of the
taxpayer’s tax for the entire year.
We agree with respondent that the words used in the
agreement evince an intent that only a final determination of the
Joneses’ tax for the entire period covered by the agreement would
terminate the agreement. Paragraph (2) of the agreement states
that “Some assessments do not reflect a final determination” and
then sets forth some examples, including the assessment of “tax
under a partial agreement” and the assessment of "advance
payments". We interpret the closing agreement with respect to
the art tax shelter to be a partial agreement, in that the
closing agreement did not purport to cover the Joneses’ entire
1981 taxable year. The closing agreement was limited only to the
art tax shelter adjustment. Consequently, the assessment of tax
with respect to the art tax shelter adjustment was not a final
determination of tax as called for in the Form 872-A. See
Drummond Co. v. United States, 70 AFTR 2d 92-5185, 92-2 USTC par.
50,339, (N.D. Ala. 1992).
Even were we to conclude that the words used in the Form
872-A are susceptible of more than one meaning and, therefore,
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that we must resort to extrinsic facts to interpret the parties’
intent, we would reject petitioners’ interpretation because it is
inconsistent with the very purpose that the parties must have had
in mind when they executed the Form 872-A. The Joneses signed
the closing agreement with respect to the art tax shelter in
September 1984, and the Service approved it in March 1985. The
Form 872-A was signed by the Joneses on April 1, 1985, and the
Service signed it on April 25, 1985. The obvious purpose for
signing a Form 872-A is to extend the period during which the
Service is permitted to send a notice of deficiency to the
taxpayer. However, the Joneses had already entered into a
closing agreement with the Service covering the art tax shelter
adjustment, and the signing of a Form 872-A therefore would have
been a useless act as to that adjustment. As the parties had
agreed to the liability arising out of the art shelter adjustment
by executing a closing agreement, the Service could have
immediately assessed the tax on that adjustment. Consequently,
the only logical purpose that could have been served by entering
into the extension agreement would have been to allow the Service
to audit other items on the Joneses’ 1981 return and determine
whether any additional tax might be due, e.g., from disallowance
of other deductions claimed on the return. If the Joneses had
merely wanted to keep the assessment period open for the art
shelter adjustment, they could have signed a limited or
restricted Form 872-A limiting the extension to the art tax
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shelter adjustment. They, however, did not sign such a limited
consent; instead, they chose to extend the period of limitation
as to all matters concerning their 1981 year for an indefinite
period by signing the unrestricted Form 872-A.
We cannot conclude on the record in the instant case that
the Joneses intended, at the time they signed the Form 872-A, to
ascribe the meaning to the phrase “the final determination of
tax” to which they now adhere. No evidence was offered that
would point to such an intent on the part of the Joneses. The
failure of such evidence is significant because petitioner
testified at trial and therefore could have enlightened the Court
about such an intent, a fact peculiarly within her knowledge.
Petitioner’s failure to testify as to such an intent suggests
that the testimony would have been unfavorable to petitioners.
Mecom v. Commissioner, 101 T.C. at 385 n.17 (and cases cited
therein). We think that by signing the Form 872-A under the
circumstances of the instant case, the Joneses’ actions were more
consistent with respondent’s interpretation of the agreement,
i.e., that the parties’ intended the term “tax” in the phrase
“the final determination of tax” to mean the Joneses’ tax
liability for the entire 1981 year.
Based on the foregoing, we hold that, because there was no
closing agreement signed for the Joneses’ entire 1981 year, sec.
7121; Estate of Meyer v. Commissioner, 58 T.C. 69, 70 (1972); see
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also Botany Worsted Mills v. United States, 278 U.S. 282, 288
(1929)3, and the assessment made on June 17, 1985, was not a
final determination of tax, the Form 872-A did not terminate.
Instead, it terminated when the notice of deficiency was sent.
We next consider the innocent spouse issue. The innocent
spouse provisions of the Internal Revenue Code provide that a
spouse is relieved of liability for tax attributable to an
understatement of tax on a return in cases where: (a) A joint
return has been filed for the taxable year; (b) on the return
there is a substantial understatement of tax attributable to
grossly erroneous items of one spouse; (c) the other spouse
establishes that in signing the return he or she did not know,
and had no reason to know, that there was such an understatement;
and (d) taking into account all of the facts and circumstances,
it is inequitable to hold the other spouse liable for the
deficiency in tax attributable to the understatement. Sec.
6013(e)(1).
Failure to prove any one of the four elements set forth in
section 6013(e)(1) prevents a taxpayer from qualifying for relief
under the “innocent spouse rule”. Park v. Commissioner, 25 F.3d
1289, 1292 (5th Cir. 1994), affg. T.C. Memo. 1993-252.
Petitioners have the burden of proving all four elements. Estate
of Krock v. Commissioner, 93 T.C. 672, 677 (1989).
3
See also Fudim v. Commissioner, T.C. Memo. 1994-235.
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The parties do not dispute that the Joneses filed a joint
return for the 1981 taxable year.4 Additionally, respondent
agrees that the deductions claimed with respect to the Auburn
Mining partnership were grossly erroneous.5 Finally, respondent
concedes that petitioner did not actually know of Mr. Jones’
investment in the Auburn Mining partnership. The dispute,
therefore, as to the Auburn Mining partnership centers on two
questions; i.e., whether petitioner had reason to know of the
substantial understatement and whether it is inequitable to hold
petitioner liable for the understatement. As to the Choate
Square partnership, in addition to the foregoing two matters, the
question of whether the deductions were grossly erroneous remains
to be decided as well.
The relevant standard by which a claim that a taxpayer is an
innocent spouse must be judged is whether “a reasonably prudent
taxpayer in his or her position could be expected to know that
the stated tax liability was erroneous or that further
investigation was warranted.” Park v. Commissioner, supra at
4
The parties have agreed that for purposes of defining
"substantial understatement" under sec. 6013(e): (1) The taxable
year 1987 is petitioner’s "preadjustment year"; (2) petitioner's
adjusted gross income for 1987 does not exceed $20,000; and (3)
the deficiency attributable to the Auburn Mining partnership in
1981 exceeds 10 percent of petitioner's adjusted gross income for
1987.
5
Respondent does not concede that the deductions for the
Choate Square partnership taken on the Joneses’ 1981 return are
grossly erroneous.
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1298. See Sanders v. United States, 509 F.2d 162, 168 (5th Cir.
1975). Even complete deference to the husband’s judgment and the
alleged innocent spouse’s role as a traditional homemaker will
not always sustain an innocent spouse claim. See, e.g., Stevens
v. Commissioner, 872 F.2d 1499, 1505-1506 (11th Cir. 1989), affg.
T.C. Memo. 1988-63. “[A] spouse seeking innocent spouse relief
cannot turn ‘a blind eye’ to, by preferring not to know of, a
deduction fully disclosed on a return when the amount of that
deduction is so large that it would reasonably put her on notice
that she should inquire further.” Park v. Commissioner, supra at
1299.
Significant factors to an analysis of the innocent spouse
claim are the taxpayer’s level of education, the taxpayer’s
experience in business affairs and bookkeeping, the taxpayer’s
level of involvement in the family’s financial affairs, the
presence of expenditures that appear lavish or unusual when
compared to the taxpayer’s past standard of living, the
“culpable” spouse’s openness concerning the family finances,
whether the tax treatment of the transaction in issue was hidden
in the recesses of the return, whether the taxpayer relied on an
expert, and whether the taxpayer reviewed the return. Park v.
Commissioner, supra at 1298-1299; Sanders v. United States, supra
at 167; Bokum v. Commissioner, 94 T.C. 126, 146-149 (1990), affd.
992 F.2d 1132 (11th Cir. 1993). We consider the interplay among
the various factors. Different factors will predominate in
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different cases. Bliss v. Commissioner, 59 F.3d 374, 378 (2d
Cir. 1995), affg. T.C. Memo. 1993-390.
In the instant case, petitioner ran her own businesses,
having started them prior to the year in question. She expanded
them successfully during, and after, 1981. She handled the
buying and selling of the inventory, purchased a building out of
which the businesses were operated, and paid the mortgage. She
operated her businesses independently of Mr. Jones in spite of
her lack of formal education.
Because Mr. Jones traveled extensively and for long periods
of time, petitioner managed the family and household finances.
Petitioner also managed the Joneses’ monthly bills and large
expenditures, freely transferring funds between accounts to do
so. The evidence shows that petitioner managed most of the
family money, except for Mr. Jones’ expense account. Petitioner
demonstrated by her testimony that she kept track of Mr. Jones’
earnings and where they went. Petitioner knew about many of Mr.
Jones’ investments and asked about others.
Petitioner testified that she saw at least part of the 1981
return that she signed and that she also saw the amount of the
refund claimed. She also testified that the amount of the refund
claimed on the 1981 return was very large compared to the
overpayment claimed on the 1979 return and the tax shown as due
on the 1980 return. She signed the 1981 joint return just below
the place on the return which reflected the unusual overpayment
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of tax. The deductions were not hidden in the recesses of the
return but were clearly set forth on Schedule E. The sum of the
losses from Schedule E, totaling $106,755, was set forth on line
17 on the front page of the return. Clearly, under such
circumstances, petitioner should have been on notice of the
substantial and unusual losses. Petitioner, however, testified
that she did not examine the return in any detail and that she
signed the return even though she had questions about it. As
stated above, petitioner is not entitled to turn “a blind eye” to
such facts. Park v. Commissioner, 25 F.3d at 1299.
As to the notion that “an expert” prepared the Joneses’
return, thereby relieving petitioner from pursuing questions she
might otherwise have raised, it was petitioner who found Mr.
Singleton and was the first to make use of his services. She
introduced him to Mr. Jones who then hired him to do their joint
return for 1981. She had some responsibilities in helping the
accountant and Mr. Jones prepare the return; i.e. gathering the
information on their charitable contributions and her businesses.
Under the circumstances, we do not think that she should now be
allowed to claim that she was denied access to the return
preparer.
Based on the record in the instant case, the image we have
of petitioner is that of an intelligent, inquiring, and diligent
businesswoman. Even though she lacked formal education, her
experience in the business world was certainly a good substitute.
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Petitioner was an enterprising individual, savvy enough in
business affairs and bookkeeping to have built the successful
businesses that she operated. We are satisfied, based on the
record in the instant case, that petitioner had the ability to
understand that there was a substantial understatement on the
1981 return and that she was sufficiently put on notice that she
needed to inquire further into the partnership deductions
generating the understatement. Consequently, we hold that
petitioner has failed to prove that she did not have reason to
know that there was an understatement of tax on the return for
the 1981 taxable year and that petitioner is therefore not
entitled to relief as an innocent spouse under section 6013(e).6
To reflect the foregoing,
Decision will be
entered under Rule 155.
6
Because we hold that petitioner had reason to know of the
understatement, we need not address the questions of whether the
Choate Square partnership deductions were grossly erroneous or
whether it would be inequitable to hold petitioner liable for the
deficiency attributable to the understatement.