DAVID C. JONSON AND ESTATE OF BARBARA J. JONSON, DECEASED, DAVID C. JONSON, SUCCESSOR IN INTEREST, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21648-87
UNITED STATES TAX COURT
Filed February 8, 2002
118 T.C. No. 6
H and W filed joint Federal income tax returns for 1981 and 1982 on which they took large deductions attributable to a tax shelter investment. R disallowed the deductions. W claimed relief from joint liability under
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Held: W had reason to know of the understatement attributable to the disallowed deductions, and, therefore, W is not entitled to relief under sec. 6015(b)(1)(C), I.R.C. - Held, further, it would not be inequitable to hold W liable for the deficiencies in tax, and, therefore, W is not entitled to relief under
sec. 6015(b)(1)(D), I.R.C. - Held, further, because W did not satisfy the eligibility requirements of
sec. 6015(c)(3)(A)(i), I.R.C. , prior to her death, H, as personal representative, is not entitled to elect relief undersec. 6015(c), I.R.C. - Held, further, under the facts and circumstances, R’s denial of equitable relief under
sec. 6015(f), I.R.C. , does not constitute an abuse of discretion.
Declan J. O’Donnell, for petitioners.
Randall L. Preheim, for respondent.
HALPERN, Judge:
By notice of deficiency dated April 14, 1987, respondent determined deficiencies in, and additions to, the Federal income tax liabilities of David C. and Barbara J. Jonson (separately, David or Barbara; together, the Jonsons), as follows:1
| Tax Year Ending Dec. 31 | Deficiency | Sec. 6659 Addition |
|---|---|---|
| 1981 | $32,998 | $9,862 |
| 1982 | 33,504 | 10,038 |
On account of concessions made by the parties (which we accept),2 the sole issue for our decision is whether Barbara is relieved of any liability for tax pursuant to the provisions of
FINDINGS OF FACT4
Some facts are stipulated and are so found. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference.
Residence
At the time of the petition, the Jonsons resided in Golden, Colorado.
The Joint Returns
For 1981 and 1982 (the audit years), the Jonsons made joint returns of income (the 1981 joint return, the 1982 joint return, and, collectively, the joint returns). Among the attachments to the 1981 joint return is a Schedule K-1, Partner’s Share of Income, Credits, Deductions, Etc. – 1981, identifying David as a limited partner in a partnership, Vulcan Oil Technology (Vulcan), and showing, as a “distributive
David prepared the joint returns. Barbara knew that the Vulcan losses were claimed on those returns.
Respondent’s Adjustments
Respondent’s adjustments giving rise to the deficiencies here in question (sometimes, the deficiencies) result from respondent’s disallowances of the Vulcan losses and a small credit (without distinction, the Vulcan losses) claimed on the joint returns. In the notice, respondent explains the disallowances as follows:
It is determined that you incurred no deductible loss for the taxable years 1981 and 1982 from the Vulcan Oil Technology a partnership in which you own an interest. It has not been established that the partnership incurred any loss for the taxable years 1981 and 1982, nor has it been established that if the partnership did have a loss for the taxable years 1981 and 1982, that you are entitled to deduct any portion of that loss on your income tax return. Accordingly, your taxable income for the years 1981 and 1982 is increased by $75,620.00 and $71,078.00.
After the initiation of this action, and following respondent’s prevailing in certain test cases involving investments similar to Vulcan (the test cases),5 petitioners conceded the deficiencies.
The Jonsons
Barbara was born on March 21, 1930. She received an associate’s degree from Colorado Women’s College in 1949, a bachelor’s degree in physical education from the University of Colorado in 1952, and a master’s degree in gifted and talented education from the University of Denver in 1979. She
During the audit years, David was a consulting geologist, carrying on that business as a sole proprietor out of the Jonsons’ home. He reported earnings from such business of $85,183 and $99,878, for 1981 and 1982, respectively. Sometime during the early 1990s, David incorporated his consulting business as Johnson Management, Inc.
For the audit years, in addition to Barbara’s wages and David’s business income, the Jonsons reported $12,538 and $29,317 for 1981 and 1982, respectively, as interest, dividends, and capital gains.
The Jonsons’ Marriage
The Jonsons were married on January 7, 1956. They lived together as a married couple (and were not legally separated) on March 16, 1996, the date of Barbara’s death.
The Jonsons had three children, all of whom were in college during the audit years. Aside from some unspecified amounts of money from student loans and the children’s summer employment, the Jonsons paid for their children’s college educations. For at least a portion of the audit years, they had a Guatemalan exchange student living with them.
Barbara’s Estate
Barbara died testate, leaving her entire estate (the estate) to David. The estate had a value of $365,204, and it consisted primarily of Barbara’s retirement savings. On December 2, 1996, David disclaimed his interest in the estate pursuant to a document that directed that the residual estate “be advanced to their three children in equal shares, in [stock of] Jonson Management Company, Inc.” and that he, David, “continue to manage that corporation under his contract“.6
During the audit years, the Jonsons maintained only one checking account and one savings account, over both of which each had signature authority. During those years, Barbara reconciled and balanced the bank statements and wrote checks on the checking account (the joint checking account) to pay routine household bills.
Barbara managed her retirement savings. During the audit years, she and David were both partners in a partnership, Continental South Apartments. In 1980, Barbara recommended to David that they sell an apartment house they owned because Barbara thought they were not making money on the investment. David followed her recommendation, and they sold the apartment house in the same year. Neither David nor Barbara made any attempt to deceive the other with regard to his or her respective financial affairs. Barbara participated in financial matters with David, who valued her advice and participation.
Vulcan
Vulcan was a limited partnership formed to invest in technology for the recovery of oil and gas. David invested in Vulcan on October 2, 1981. On that date, he signed the “Vulcan Oil Technology Partners Subscription Agreement” (the subscription agreement), and he delivered to the promoters of Vulcan a check in the amount of $18,750 and two promissory notes in like amounts, which notes he subsequently paid, also by check. All three checks were drawn on the joint checking account. Because she routinely balanced the checkbook, Barbara saw the checks when they cleared.
Although Barbara was not present when David met the promoters of Vulcan and executed the subscription agreement and the notes, she later reviewed the subscription agreement, and David gave her a general explanation of the nature of the investment, expressing the view that it would provide substantial tax savings to them.
I am aware that the tax effects which may be expected by the Partnership are not susceptible to certain prediction, and new developments in rulings of the Internal Revenue Service, court decisions, or legislative changes may have an adverse effect on one or more of the tax consequences sought by the Partnership.
Request for Section 6015 Relief
On June 13, 2000, David submitted to respondent a Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief) (the Form 8857), on behalf of the “Estate of Barbara J. Jonson“. David signed the Form 8857: “David C. Jonson (Personal Representative)“. Among the attachments to the Form 8857 is a document entitled “Statement of Estate of Barbara J. Jonson * * * by David C. Jonson, Personal Representative“, in which David states: “Any financial benefits that resulted to the Jonson family [from Vulcan] went into the general funds administered by David. It eventually contributed to their normal middle class lifestyle and the education of 3 children and service of credit card and other debt.” Among the attachments to the Form 8857 is a questionnaire answered by Barbara before her death and containing the following question and answer pertaining to her knowledge of the circumstances surrounding David’s investment in Vulcan:
Q. Explain what you knew about the investment and how you learned about the investment.
A. This investment was recommended by a banker friend of my husband. My husband explained that the investment was entirely legal and proper, according to the lawyers and accountants associated with this tax shelter. Even the Attorney General for the U.S. at the time, William French Smith, thought it was proper (see attached news clipping). At the time, IRS tax rates for the upper brackets were very high and we had three kids in college. We were desperate for some tax relief to make ends meet. I took my husband’s word that it was OK.
The referenced news article, from the May 13, 1982, edition of the Rocky Mountain News, reported that Attorney General Smith considered some $66,000 in deductions attributable to a $16,500 “investment in a risky energy tax shelter” to be “proper“, but it quoted a Justice Department
OPINION
I. Introduction
The Jonsons made joint returns of income for the audit years, and respondent determined deficiencies in the taxes shown on those returns, which deficiencies petitioners concede. Normally, therefore, on account of
SEC. 6015(a) . In General.–-Notwithstandingsection 6013(d)(3) --(1) an individual who has made a joint return may elect to seek relief under the procedures prescribed under subsection (b), and
(2) if such individual is eligible to elect the application of subsection (c), such individual may, in addition to any election under paragraph (1), elect to limit such individual’s liability for any deficiency with respect to such joint return in the manner prescribed under subsection (c).
Petitioners ask the Court to find that Barbara is entitled to
Except as otherwise provided in
A. Statutory Language
SEC. 6015(b) . Procedures for Relief From Liability Applicable to All Joint Filers.--(1) In general.--Under procedures prescribed by the Secretary, if--
(A) a joint return has been made for a taxable year;
(B) on such return there is an understatement of tax attributable to erroneous items of 1 individual filing the joint return;
(C) the other individual filing the joint return establishes that in signing the return he or she
did not know, and had no reason to know, that there was such understatement;
(D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement, and
(E) the other individual elects (in such form as the Secretary may prescribe) the benefits of this subsection not later than the date which is 2 years after the date the Secretary has begun collection activities with respect to the individual making the election,
then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement.
B. Application to Barbara
1. In General
Respondent does not dispute that Barbara satisfies the requirements of
a. Introduction
(1) Similarity to Section 6013(e)
The no-knowledge-of-the-understatement requirement of
(2) Application of Knowledge Requirement in Deduction Cases
The relief-seeking spouse knows of an understatement of tax if she knows of the transaction that gave rise to the understatement. E.g., Purcell v. Commissioner, 826 F.2d 470, 473-474 (6th Cir. 1987), affg. 86 T.C. 228 (1986); see also Smith v. Commissioner, 70 T.C. 651, 672 (1978). She has reason to know of the understatement if she has reason to know of the transaction that gave rise to the understatement. See, e.g., Bokum v. Commissioner, 94 T.C. 126, 146 (1990), affd. 992 F.2d 1132 (11th Cir. 1993). While courts consistently apply this approach to omission of income cases, certain of the Courts of Appeals, beginning with the Court of Appeals for the Ninth Circuit, have adopted what may be a more lenient approach to deduction cases, which requires “a spouse seeking relief to establish that she did not know and did not have reason to know that the deduction would give rise to a substantial understatement.”7 See Price v. Commissioner, 887 F.2d 959, 963 (9th Cir. 1989), revg. an Oral Opinion of this Court; see also Reser v. Commissioner, 112 F.3d 1258 (5th Cir. 1997), affg. in part and revg. in part T.C. Memo. 1995-572; Resser v. Commissioner, 74 F.3d 1528 (7th Cir. 1996), revg. and remanding T.C. Memo. 1994-241; Kistner v. Commissioner, 18 F.3d 1521 (11th Cir. 1994), revg. and remanding T.C. Memo. 1991-463; Hayman v. Commissioner, 992 F.2d 1256, 1261 (2d Cir. 1993), affg. T.C. Memo. 1992-228; Erdahl v. Commissioner, 930 F.2d 585, 589 (8th Cir. 1991), revg. and remanding T.C. Memo. 1990-101. In Bokum v. Commissioner, supra at 153, however, we declined to apply the Price approach to deduction cases.8
The Court of Appeals for the Tenth Circuit is the likely venue for any appeal of this case. We have found no published authority of the Court of Appeals for the Tenth Circuit adopting the Price approach. In an unpublished order and judgment, however, the Court of Appeals for the Tenth Circuit recently quoted Price, as follows: “A spouse has ‘reason to know’ of the substantial understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the substantial understatement.” Estate of Sympson v. Commissioner, 79 AFTR 2d 97-2942, at 97-2944, 97-1 USTC par. 50,484, at 88,288 (10th Cir. 1997).
Because we believe that Barbara had reason to know of the understatements under the more lenient approach followed by the Court of Appeals for the Ninth Circuit in Price v. Commissioner, supra, any disparity between our interpretation of
b. Reason to Know
(1) Introduction
In Price v. Commissioner, supra at 965, the Court of Appeals for the Ninth Circuit said:
A spouse has “reason to know” of the substantial understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the
substantial understatement. Factors to consider in analyzing whether the alleged innocent spouse had “reason to know” of the substantial understatement
include: (1) the spouse‘s level of education; (2) the spouse‘s involvement in the family‘s business and financial affairs; (3) 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 (4) the culpable spouse‘s evasiveness and deceit concerning the couple‘s finances. [Citations omitted.]
(2) Discussion
(a) Education
Barbara was highly educated, with a master’s degree relating to education, her chosen professional field.
(b) Involvement in Financial Affairs
Barbara was peripherally involved in David’s consulting business; she kept him advised of collections and reminded him to pursue delinquent accounts. She had full responsibility for writing the checks for household bills, reviewing the bank statements, and balancing the family checkbook. She controlled the investment of her own retirement savings. She was a coinvestor with David in a real estate limited partnership, and she was a coowner with him of an apartment building, which building they sold, at least in part, on the basis of her advice to David that the investment was unprofitable. She was shown the documents relating to the investment in Vulcan and understood that it would result in substantial tax savings. She was also aware of the large deductions taken on the returns for the audit years that were attributable to the Vulcan investment, and she was made aware of the tax risks by the Vulcan subscription agreement, with its reference to tax risks, and (for 1982) by the May 13, 1982, newspaper article confirming Vulcan’s status as an “aggressive” and “questionable” tax shelter subject to potential IRS attack. For all of those reasons, it is clear that Barbara had significant involvement in the family’s financial affairs. In particular, she had reason to know of the tax benefits and potential tax risks associated with the investment in Vulcan.
(c) Expenditure Levels, Standard of Living, Etc.
There is no evidence that the tax savings generated by the investment in Vulcan resulted in lavish or unusual expenditures benefiting Barbara when compared to prior years’
(d) Other Spouse’s Evasiveness and Deceit Regarding Finances
David made clear during his trial testimony that Barbara was aware of his investments, she had access to all of his files and to his office, and he made no effort to deceive her with respect to his financial affairs.
(3) Conclusion
All the foregoing factors support a finding that Barbara had reason to know of the understatements. It is significant that Barbara knew (1) of the investment in Vulcan, (2) that it was designed to generate large deductions that, in turn, would result in substantial tax savings, (3) that those deductions were taken on the joint returns for the audit years, and (4) that there was a risk that the deductions might be attacked by respondent and disallowed on audit. “Tax returns setting forth large deductions, such as tax shelter losses offsetting income from other sources and substantially reducing * * * the couple’s tax liability, generally put a taxpayer on notice that there may be an understatement of tax liability.” Hayman v. Commissioner, 992 F.2d at 1262. See also Price v. Commissioner, 887 F.2d at 964, where the Court of Appeals stated:
[I]f a spouse knows virtually all of the facts pertaining to the transaction which underlies the substantial understatement, her defense in essence is
premised solely on ignorance of law. * * * In such a scenario, regardless
Therefore, applying the approach of Price v. Commissioner, supra, we find that Barbara had reason to know of the understatements.
3. Section 6015(b)(1)(D)
a. Introduction
Because the requirements of
b. Discussion
The requirement, in
Whether it is inequitable to hold a spouse liable for a deficiency is determined “taking into account all the facts and circumstances“.
As noted in connection with our discussion of the application, to Barbara, of the lack of knowledge requirement of
It is also clear that there was no “concealment” on David‘s part. As noted supra p. 20, Barbara had access to David‘s files and to his office, and he never tried to deceive her with respect to his financial affairs. Barbara was fully aware of the Vulcan investment, of the tax benefits to be derived, and of the risk that those benefits might be challenged by the IRS on audit.
Under the foregoing circumstances, we find that it would not be inequitable to hold Barbara liable for the deficiencies arising out of the Vulcan investment.
c. Conclusion
Barbara has failed to satisfy the requirements of either
III. Relief Under Section 6015(c)
A. Statutory Language
SEC. 6015(c). Procedures To Limit Liability for Taxpayers No Longer Married or Taxpayers Legally Separated or Not Living Together.--
(1) In general.--Except as provided in this subsection, if an individual who has made a joint return for any taxable year elects the application of this subsection, the individual‘s liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under subsection (d).
* * * * * * *
(3) Election.--
(A) Individuals eligible to make election.--
(i) In general.--An individual shall only be eligible to elect the application of this subsection if--
(I) at the time such election is filed, such individual is no longer married to, or is legally separated from, the individual with whom such individual filed the joint return to which the election relates; or
(II) such individual was not a member of the same household as the individual with whom such joint return was filed at any time during the 12-month period ending on the date such election is filed. * * * * * * *
(C) Election not valid with respect to certain deficiencies.–-If the Secretary demonstrates that an individual making an election under this subsection had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual under subsection (d), such election shall not apply to such deficiency (or portion). This subparagraph shall not apply where the individual with actual knowledge establishes that such individual signed the return under duress.
B. Application to Barbara
1. Introduction: Eligibility; Validity
Prior to Barbara‘s death on March 16, 1996, she did not satisfy the eligibility requirements of
2. Eligibility
a. Introduction
On the face of it, then, because, prior to her death, Barbara did not satisfy the eligibility requirements, David, acting in her stead, is ineligible to elect to limit her joint return liability. We do, nevertheless, consider whether Congress intended a spouse‘s eligibility to arise on account of her death.
Both petitioners and respondent refer to the history of
Reasons for Change
The Committee is concerned that the innocent spouse provisions of present law are inadequate. The Committee believes that a system based on separate liabilities will provide better protection for innocent spouses than the current system. The Committee generally believes that an electing spouse‘s liability should be satisfied by the payment of the tax attributable to that spouse‘s income and that an election to limit a spouse‘s liability to that amount is appropriate.
The conferees did not explain their addition of the eligibility requirements. See H. Conf. Rept. 105-559, supra at 251, 1998-3 C.B. at 1005. They did however state that, for purposes of the eligibility requirements, a taxpayer is no longer married if he or she is widowed. Id. at 252 n.16, 1998-3
c. Conclusion
At the time of her death, Barbara did not satisfy the eligibility requirements. Because, at the time of her death, Barbara did not satisfy the eligibility requirements, David, as her personal representative, cannot elect to limit Barbara‘s joint return liability in the manner prescribed in
IV. Relief Under Section 6015(f)
A. Statutory Language
SEC. 6015(f). Equitable Relief.--Under procedures prescribed by the Secretary, if-
- (1) taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either); and
(2) relief is not available to such individual under subsection (b) or (c),
the Secretary may relieve such individual of such liability.
B. Application to Barbara
1. Introduction
Respondent has denied Barbara relief under
2. Discussion
As directed by
Petitioners have failed to introduce any evidence showing the basis for respondent‘s rejection of their claim for equitable
3. Conclusion
Under the facts and circumstances of this case, we hold that respondent did not abuse his discretion in denying equitable relief to Barbara under
V. Conclusion
Barbara is not entitled to any relief under
An appropriate decision will be entered for respondent with respect to the deficiencies and for petitioners with respect to the additions to tax under
Notes
RULE 151. BRIEFS
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(e) Form and Content: * * *
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(3) * * * In an answering or reply brief, the party shall set forth any objections, together with the reasons therefor, to any proposed findings of any other party, showing the numbers of the statements to which the objections are directed; in addition, the party may set forth alternative proposed findings of fact.
Petitioners have filed an answering brief, but petitioners have failed therein to set forth objections to the proposed findings of fact made by respondent. Accordingly, we must conclude that petitioners have conceded respondent‘s proposed findings of fact as correct except to the extent that petitioners’ proposed findings of fact are clearly inconsistent therewith. See Estate of Freeman v. Commissioner, T.C. Memo. 1996-372; Fein v. Commissioner, T.C. Memo. 1994-370; Estate of Stimson v. Commissioner, T.C. Memo. 1992-242; Cunningham v. Commissioner, T.C. Memo. 1989-260.