The opinion
T.C. Memo. 2003-274
UNITED STATES TAX COURT
ISAAC BARANOWICZ AND LORA D. BARAN,
f.k.a. LORAINE D. BARANOWICZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 15515-84, 25399-86, Filed September 22, 2003.
41668-86.
Steven D. Blanc, for petitioner Isaac Baranowicz.
Lora D. Baran, pro se.
Gary S. Stirbis, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: In these consolidated cases, the parties have
stipulated deficiencies in petitioners’ Federal income taxes for
1979, 1980, 1981, and 1982 as follows:
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Year Deficiency
1979 $ 7,662
1980 13,123
1981 22,834
1982 16,069
The parties have also stipulated that these deficiency amounts
constitute substantial underpayments of tax attributable to tax-
motivated transactions under section 6621(c),1 and that there are
no additions to tax due from petitioners for 1980, 1981, and 1982
under section 6653(a)(1) and (2).
The issue for decision is whether petitioner Lora D. Baran
(Lora) is entitled to relief from joint and several liability
from the above deficiencies and additional interest, which relate
to investments in equipment leasing partnerships.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petitions were filed, petitioners resided in
Los Angeles, California.
Lora did not graduate from high school. Lora earned an
associate’s degree in art, but she never completed a 4-year
college degree. In 1966, petitioners married. Between 1969 and
1979, Lora was employed at various times as a clerical employee
at banks and as a legal secretary. In 1979, with the arrival of
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
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petitioners’ son, Lora ceased employment outside the home and
became a housewife and mother. Between 1980 and 1984, Lora also
attended college courses pertaining to interior decorating and
design. Lora has no training in finance, tax, accounting, or
business.
Early in petitioners’ marriage, petitioner Isaac Baranowicz
(Isaac) attended college and earned a bachelor’s degree, master’s
degree, and a certified public accountant (C.P.A.) license. In
1968, Isaac began working for an accounting firm in which, by
1975, he had become a partner. In 1978, Isaac formed I.B.
Management, Inc. (the firm), to establish his own accounting and
financial planning firm. Isaac, as sole owner and a board member
of the firm, made Lora the secretary of the firm, but Lora’s only
responsibility as secretary was to sign the minutes of the firm’s
board meetings.
During petitioners’ marriage, Isaac handled all family
financial matters. Because of Isaac’s education and experience,
Lora relied on and trusted Isaac to handle properly the family’s
finances. Isaac managed and handled the family’s checkbooks,
retirement accounts, and other investments. When a financial
matter required Lora’s signature, Isaac instructed Lora where to
sign, and Lora did so without question.
Through one of Isaac’s clients, Isaac was introduced to
certain equipment leasing partnerships. Isaac invested in
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several of these partnerships. Isaac generally withdrew funds
from a joint bank account owned by Lora and himself to make the
partnership investments, but the investments were made only in
the name of Isaac. Upon referral by Isaac, some of Isaac’s
clients also invested in the equipment leasing partnerships.
Isaac charged these clients fees for his advice relating to the
investments.
Specifically regarding Isaac’s investments in the equipment
leasing partnerships, Lora relied on Isaac’s accounting and tax
expertise. Occasionally, Isaac provided Lora with general
information about the equipment leasing partnership investments
he made. Lora was not familiar with the tax opinions that were
associated with the promotion of the equipment leasing
partnership investments and did not understand the “at risk”
rules of the Internal Revenue Code.
Petitioners timely filed their joint Federal income tax
returns for 1979, 1980, 1981, and 1982. Isaac prepared these
income tax returns and instructed Lora to sign the returns. In
each of these tax returns, Isaac claimed deductions for interest
expense and partnership losses relating to the equipment leasing
partnerships. Lora signed the tax returns even though she did
not understand the equipment leasing partnership transactions or
how they were reported on the tax returns.
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In February of 1985, petitioners separated, and on
October 13, 1987, their divorce became final. In the divorce
decree, several of the investments previously held only in
Isaac’s name were designated as owned by Isaac and Lora jointly,
including the equipment leasing partnership investments giving
rise to the stipulated deficiencies.
On audit of petitioners’ joint Federal income tax returns
for 1979, 1980, 1981, and 1982, respondent determined
deficiencies in petitioners’ Federal income taxes, based largely
on the disallowance of claimed interest expense and partnership
losses relating to two of the equipment leasing partnerships.
Specifically, respondent determined that the partnership losses
claimed with respect to the equipment leasing partnerships were
not allowable because petitioners did not establish that the
alleged partnership transactions constitute bona fide, arm’s-
length transactions, entered into at fair market value, that such
transactions were entered into for profit, or that such
transactions had any economic substance. Respondent also
determined that the claimed interest expense deductions relating
to the equipment leasing partnerships were not allowable because
petitioners had not shown that the claimed expenses arose from a
bona fide debtor-creditor relationship.
On July 12, 2000, Lora filed a Form 8857, Request for
Innocent Spouse Relief, with regard to the above income tax
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deficiencies for 1979 through 1982. On July 24, 2000, before
respondent replied to Lora’s request for relief, Lora filed an
amended petition, specifically requesting relief under section
6015(b) and (c) from joint and several liability. On July 9,
2001, respondent determined Lora was entitled to relief from
joint and several liability under section 6015(c) for each year
in issue. Isaac disputes respondent’s determination that Lora is
entitled to relief from joint and several liability.
OPINION
Taxpayers filing joint Federal income tax returns are
generally jointly and severally liable for all taxes due. Sec.
6013(d)(3). Relief from joint liability is available in limited
circumstances under section 6015. Sec. 6015(b), (c), (f). Lora
claims she is entitled to relief from joint and several liability
under section 6015(b) and (c). Lora makes no claim for equitable
relief under section 6015(f).
Generally, relief is available under section 6015(c) with
respect to taxpayers who are divorced, legally separated, or
living apart from the spouse with whom he or she filed a joint
income tax return for the year in issue. Such relief is
available only to taxpayers who establish that the items giving
rise to the deficiency are allocable to the former spouse.
Relief is not available where respondent establishes that a
taxpayer had actual knowledge of the items allocable to the
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former spouse. Sec. 6015(c) and (d); Culver v. Commissioner, 116
T.C. 189, 194 (2001). In the context of a disallowed deduction,
“actual knowledge” under section 6015(c) requires proof that the
spouse seeking relief had actual knowledge of the factual
circumstances which made the item disallowable as a deduction.
Mora v. Commissioner, 117 T.C. 279, 292 (2001); King v.
Commissioner, 116 T.C. 198, 204 (2001).
Isaac argues that the investments in the equipment leasing
partnerships were allocable to Lora and himself and that Lora had
actual knowledge of those investments. As a consequence, Isaac
contends that Lora should not be entitled to relief under section
6015(c). Lora argues that the investments in the equipment
leasing partnerships were allocable to Isaac and that she lacked
actual knowledge of the underlying circumstances resulting in the
disallowance of the deductions relating to these investments.
Lora contends, and respondent has determined, that she meets the
requirements for relief from joint liability under section
6015(c).
We conclude that the equipment leasing partnership
transactions are allocable to Isaac. Isaac made these
investments in his name only. Isaac was a C.P.A. Isaac actively
sought out the investments, and he marketed the investments to
his own clients.
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On the evidence before us, we conclude Lora did not have
actual knowledge of the underlying circumstances resulting in the
disallowance of the deductions related to the equipment leasing
partnership investments. Isaac sought out these equipment
leasing partnership investments. Lora was a homemaker, mother,
and part-time student of interior decorating. Lora was only
generally familiar with the existence of the investments in the
equipment leasing partnerships. Isaac invested in the equipment
leasing partnerships in his own name, and Isaac, independently of
Lora, used the information relating to those investments in
preparation of the joint income tax returns. Lora relied on
Isaac’s professional experience as a C.P.A. in signing the joint
income tax returns. Based on all the facts before us, we agree
with Lora and respondent that Lora did not have actual knowledge
of the underlying equipment leasing partnership transactions
giving rise to the stipulated deficiencies, and, therefore, that
Lora is entitled to relief from joint liability under section
6015(c) for the years in issue.
Herein, we need not address arguments regarding whether Lora
is entitled to relief under section 6015(b). Other arguments
made by petitioners that are not specifically addressed have been
considered and rejected.
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Based on the foregoing,
Appropriate decisions
will be entered.