1984 Tax Ct. Memo LEXIS 602 | Tax Ct. | 1984
MEMORANDUM FINDINGS OF FACT AND OPINION
WILBUR,
1984 Tax Ct. Memo LEXIS 602">*604 FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioner resided in Santa Paula, California, at the time of filing the petition in the instant case.
During 1973, petitioner was employed by the Santa Paula School District to teach children with emotional learning handicaps, and has been employed in that capacity continuously from 1961 to November 1980.
Petitioner married Donald A. LaBelle (Donald) in January 1957. In 1965 or 1966, Donald purchased a used car lot in Santa Paula, California, and did business under the name Don LaBelle's Wholesale Center. Sometime between 1965 and 1971, Donald expanded the business and opened two other used car lots. In 1971, he purchased a new automobile dealership and began doing business under the name Steve Love's Chrysler-Plymouth. Although petitioner did the bookkeeping and taxes for the three used car lots, she did not participate in the new dealership.
In early 1973, petitioner separated from Donald and on August 9, 1973, an interlocutory judgment of dissolution of marriage was filed to dissolve their marriage.1984 Tax Ct. Memo LEXIS 602">*605 A marital settlement agreement signed by Donald and petitioner and dated June 25, 1973, was incorporated in the interlocutory judgment.
The marital agreement provided that the parties would file joint tax returns for taxable years prior to the year in which a final judgment of dissolution was obtained and that the parties would sign and deliver such other documents as may be necessary or desirable to accomplish the agreements provided therein. The agreement further provided that (a) Donald would file the petition for dissolution of marriage; (b) the settlement to petitioner would be $7,000--paid in installments; the furniture and fixtures from the family residence; a $10,000 insurance policy and use of a car; and (c) Donald would retain the family residence and pay all community debts known to him at the time of the execution of said agreement.
The final judgment of dissolution of marriage was filed on January 9, 1974.
In March 1974, petitioner supplied Donald with her W-2 (Wage and Tax Statement) form from the Santa Paula School District showing a salary of $12,797, Federal taxes withheld of $1,998, and a list of deductions for 1973 so that he could file a return for 1973.
1984 Tax Ct. Memo LEXIS 602">*606 In June 1974, petitioner and Donald executed a power of attorney (Department of the Treasury, Internal Revenue Service Form 2848) appointing Peter J. Celeste, Esq. as her attorney-in-fact with respect to all Internal Revenue tax matters for the 1971, 1972 and 1973 tax years. At the time petitioner signed the power of attorney, she thought that the 1973 tax return had been filed. Petitioner did not separately file a tax return for 1973.
A Federal income tax return, Form 1040, was filed for 1973 with the Ventura, California, office of the Internal Revenue Service on June 5, 1975. The return was signed by Donald and petitioner's signature was entered by Mr. Celeste pursuant to the 1974 power of attorney. The return did not contain a signature in the preparer's signature line.
In August 1980, petitioner first became aware that the return had been filed late and without her signature. Until then, petitioner never inquired of Donald or the Internal Revenue Service as to whether such return had been filed.
The 1973 tax return reflected Schedule C expenses for Donald's automobile business (Steve Love's Chrysler-Plymouth) and included the following:
(a) Cost of goods sold and/or operations | $2,071,997 |
(b) Salaries and wage expenses | 37,533 |
(c) Advertising expenses | 20,961 |
(d) Demonstration expenses | 8,743 |
(e) Travel and entertainment expenses | 7,336 |
1984 Tax Ct. Memo LEXIS 602">*607 In his statutory notice of deficiency, the Commissioner made the following adjustments:
(a) Decreased the cost of goods sold (used cars) by | $447,137.71 |
(b) Decreased salary and wage expense by | 4,800.00 |
(c) Decreased advertising expenses by | 4,700.00 |
(d) Decreased demonstrator expense by | 1,390.00 |
(e) Decreased travel and entertainment expenses by | 4,768.00 |
(f) Allowed the standard deductions and exemptions | |
not previously claimed on the return. |
OPINION
The central issue for decision is whether petitioner and Donald filed a joint return for the 1973 tax year.
It is well settled that a determination of whether income tax returns are joint or separate returns of a husband and wife is a question of fact to be determined by all the evidence.
We think it is clear that petitioner intended to file a joint return for the 1973 taxable year.
The marital settlement agreement signed by petitioner and Donald on June 25, 1973 provided that the tax returns for taxable years prior to the year in which a final judgment for dissolution was obtained would be filed as joint returns. The final judgment of dissolution of their marriage was filed on January 9, 1974. As her testimony indicates, petitioner then contemplated that Donald would file the return jointly. She therefore provided Donald with her W-2 form and all deductions which he needed to fill out the return and assumed that the return would be timely filed. In June 1974, upon Donald's request, petitioner signed a power of attorney which appointed Peter Celeste as her attorney-in-fact with respect to all Internal Revenue tax matters for the 1971, 1972, and 1973 tax years.Approximately 1 year later, a 1973 tax return containing Donald's signature and petitioner's signature which was entered by Mr. Celeste was filed with the Internal Revenue Service.
Petitioner conceded in her testimony that her signature1984 Tax Ct. Memo LEXIS 602">*609 on the power of attorney was genuine. She argues, however, that she signed the power of attorney upon Donald's representation that their prior years' tax returns were being audited and that they would probably get a refund. She claims that she was never advised that her execution of the power of attorney would entitle the attorney to sign the 1973 tax return on her behalf. Petitioner thus contends that her signature is not valid since it was procured by trickery.
1984 Tax Ct. Memo LEXIS 602">*610 It is clear that petitioner intended to file a joint return and that she signed through an attorney does not alter this intent. Indeed, if an intent to file a joint return otherwise exists, it is not fatal that one spouse did not sign the return.
Our conclusion that the return filed for 1973 was a joint return necessitates consideration of petitioner's contention that she was an innocent spouse entitled to protection from liability for the deficiency determined in 1973 by virtue of
(A) a joint return has been made under this section for a taxable year and on such return there was omitted from gross income an amount properly includable therein which is attributable to one spouse and which is in excess of 25 percent of the amount1984 Tax Ct. Memo LEXIS 602">*612 of gross income stated in the return,
(B) the other spouse establishes that in signing the return he or she did not know of, and had no reason to know of, such omission, and
(C) taking into account whether or not the other spouse significantly benefited directly or indirectly from the items omitted from gross income and taking into account all other facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such omission, * * *.
(i) In the case of a trade or business, the term "gross income" means the total of the amounts received or accrued from the sale of goods or services (if such amounts are required to be shown on the1984 Tax Ct. Memo LEXIS 602">*613 return) prior to diminution by the cost of such sales or services, * * *.
Thus, the overstatement of cost of goods sold giving rise to the deficiency herein is not an omission from gross income for purposes of applying
We reluctantly conclude that petitioner is not an innocent spouse entitled to relief pursuant to
Petitioner nevertheless insists that she was the victim of her husband's fraud and that this Court should apply general principles of equity and fairness to relieve1984 Tax Ct. Memo LEXIS 602">*614 her from joint liability. 3 We must decline petitioner's request. This case is typical of many that arise involving innocent spouses, and while the result is extremely unfortunate, we are not at liberty to rewrite the statute on an
1984 Tax Ct. Memo LEXIS 602">*615 That the technical rules of
1984 Tax Ct. Memo LEXIS 602">*617 The next issue is whether petitioner is liable for the additions to tax under
Petitioner contends that she should be excused from the addition since she timely provided Donald with her W-2 form and information relating to her deductions. However, she testified that she never inquired of Donald or the Internal Revenue Service as to whether a return had been filed. Petitioner also testified that she was unsure all along whether she had signed the return, but was assured by Donald that she had. Such reliance on her ex-spouse does not constitute reasonable cause.
As to the addition to tax under
1984 Tax Ct. Memo LEXIS 602">*620
Footnotes
1. All sections references are to the Internal Revenue Code of 1954, as in effect during the tax year in issue, unless otherwise indicated.↩
2. On brief, petitioner has cited cases dealing with the defense of duress. E.g.,
(9th Cir. 1958);Furnish v. Commissioner, 262 F.2d 727">262 F.2d 727 (1968). However, any claim that her signature was executed under duress is meritless. To establish that her signature was executed under duress, petitioner must prove both (1) that she was unable to resist demands to sign the power of attorney, and (2) that she would not have signed it except for constraint applied to her will.Brown v. Commissioner, 51 T.C. 116">51 T.C. 11651 T.C. 116"> There is nothing in the record to indicate that petitioner signed the power of attorney in fear of her husband or under any type of pressure which deprived her of contractual volition.Thus, we find that petitioner was able to exercise her free will when she signed the power of attorney.Brown v. Commissioner, supra.↩ 3. Petitioner relies on three opinions of the Sixth Circuit Court of Appeals which indicated that a victimized spouse may be relieved of liability as a result of fraudulent conduct practiced upon her by the other spouse.
(6th Cir. 1969), vacating and remanding a Memorandum Opinion of this Court;Sharwell v. Commissioner, 419 F.2d 1057">419 F.2d 1057 (6th Cir. 1969), remanding a Memorandum Opinion of this Court;Huelsman v. Commissioner, 416 F.2d 477">416 F.2d 477 , 405 F.2d 222">226 (6th Cir. 1968), remandingScudder v. Commissioner, 405 F.2d 222">405 F.2d 22248 T.C. 36">48 T.C. 36 (1967), rehearing denied,410 F.2d 686">410 F.2d 686 (6th Cir. 1969). However, the circumstances of those cases were dramatically different from these before us, and even more to the point, these cases arose prior to the enactment ofsec. 6013(e) . In fact, the Tax Court decision inScudder was explicitly referred to by the House Ways and Means Committee (H. Rept. No. 91-1734, to accompany H.R. 19774 (Pub. L. 91-679 (1971), p. 2), as well as by the Senate Finance Committee (S. Rept. No. 91-1537 (1970),1 C.B. 606">1971-1 C.B. 606↩ , 607).4. See sec. 66 which was enacted after the decision in
(1971).United States v. Mitchell, 403 U.S. 190">403 U.S. 190↩5. A bill is currently pending before Congress which may provide the needed relief (H.R. 3475, Tax Law Simplification and Improvement Act of 1983). The Joint Committee on Taxation explained the bill as follows:
Joint return liability of innocent spouse
Under the bill, the innocent spouse rule (
sec. 6013(e) ) would apply to cases in which the tax liability results from a substantial understatement of tax that is attributable to grossly erroneous items (including claims for deductions or credits, as well as omitted income) of one spouse. Grossly erroneous items would include any item of income that is omitted from gross income, regardless of the basis for omission. A claim for deduction or credit would be treated as a grossly erroneous item only if the claim had no basis in law or fact. The bill would define a substantial understatement as any understatement that exceeds 10 percent of the tax required to be shown on the return or $500, whichever is less.As under present law, relief may be granted only where it would be inequitable to hold the innocent spouse liable.In applying these rules, community property laws would continue to be disregarded in determining to whom an item is attributable. The bill would not specifically require that the determination of whether it would be inequitable to hold the innocent spouse liable include consideration of whether such spouse benefitted from the erroneous item. The omission from income determination may apply notwithstanding that adequate information about the erroneous items was provided on the return. [Staff of Joint Comm. on Taxation, Tax Law Simplification and Improvement Act of 1983 (Comm. Print July 22, 1983).] ↩
6. We therefore need not address respondent's alternate theory that petitioner in any event must report one-half of the income under the community property laws of California.↩
7. The parties stipulated to the correct amount of adjustments originally in issue, asking the Court to decide whether a joint return was filed and whether the innocent spouse provisions of
sec. 6013(e)↩ are applicable. As noted earlier, in view of our decision on these issues, we do not pass on respondent's alternative contention that in any event petitioner would be liable for a substantial portion of the deficiency due to her rights as a spouse in a community property state.