MICHAEL B. BUTLER AND JEAN BUTLER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 27554-96
United States
Filed April 28, 2000.
114 T.C. 276
WELLS, Judge
Robert H. Culton II, for petitioners.
Michael D. Zima, for respondent.
OPINION
WELLS, Judge: Respondent determined a deficiency in petitioners’ Federal income tax for the taxable year 1992 in
After concessions, the issues to be decided2 are: (1) Whether Jean Butler (petitioner) is entitled to innocent spouse relief pursuant to
Background
Some of the facts have been stipulated for trial pursuant to Rule 91. The parties’ stipulations are incorporated into this opinion by reference and, accordingly, are found as facts in the instant case. When they filed their petition, petitioners resided in Longwood, Florida.
Petitioners were married at the time they filed their petition, are currently married, and have always had a “smooth” marital relationship. Petitioner Michael B. Butler (petitioner‘s husband) has always applied all of his income toward the benefit of his family. Throughout their 35-year marriage, petitioner‘s husband has never concealed any assets from petitioner and has always told her about his financial endeavors.
Petitioner‘s husband operates a lucrative surgical practice in three Florida locations: Orlando, Apopka, and Altamonte Springs. Petitioner‘s family lived quite comfortably, with a very high standard of living, during 1992. They paid $19,963 in home mortgage interest during 1992, making their monthly mortgage payment more than $1,600. Their average
Petitioner‘s husband works at his surgical practice on an average of more than 70 hours per week. During 1992, petitioner worked with her husband as a medical transcriber, earning $11,700 in wages. Petitioner graduated from St. Louis University in 1960 with a degree in medical records administration. Because she had more free time, petitioner maintained the family‘s checking account and handled the bills for all of the household expenses. She usually retrieved the mail because she arrived home earlier than her husband.
Petitioner oversees the operation of JCB Construction, Inc. (JCB), an S corporation of which she has been the sole owner since its creation in 1987. As secretary-treasurer of JCB, petitioner maintains its books and records, keeps track of income and expenditures, handles payroll and personnel responsibilities, writes checks for materials and supplies, and collects information for the preparation of JCB‘s tax returns. JCB filed Forms 1120S with the Internal Revenue Service (IRS) from 1988 through 1996, and FICA and FUTA returns since at least 1989. The gains or losses of JCB were reported on petitioners’ Federal income tax returns for the year at issue and in prior years.
B.G. Enterprises, Inc. (BGE), was an S corporation owned by petitioner‘s husband and Thomas George. BGE was engaged in the foliage nursery business in Apopka, Florida, on land owned jointly by petitioners. In 1990, BGE rented the Apopka property from petitioners and operated the nursery, as Sweetwater Greenery, from that time until some time in 1992. Petitioner‘s husband and Thomas George were each 50-percent shareholders of BGE. Petitioner never favored petitioner‘s husband‘s involvement with the nursery, and their discussions on the subject were usually contentious.
The exact amount of the distributions from BGE to petitioner‘s husband during 1992 is unknown, and petitioner has provided insufficient evidence to fully account for the settlement proceeds. The record contains no documents illustrating where the distribution of money from BGE to petitioner‘s husband was deposited during 1991 or 1992. Petitioner failed to explain the use of the following funds: $40,000 paid to petitioner‘s husband on January 14, 1992, from the escrow account holding the settlement proceeds; another $23,654 disbursed from the escrow account to petitioner‘s husband on March 31, 1992; and $5,238.47 which remained in the escrow account as of March 24, 1998. Petitioner offered only eight monthly bank statements from petitioner and her husband‘s personal joint bank account for 1992. Petitioner failed to offer statements or canceled checks from any of petitioner‘s and her husband‘s other bank accounts. Petitioners held a bank account throughout 1992 at Southern Bank of Florida. Petitioners did not produce bank statements relating to that account from the periods March 12 to April 12, 1992, from May 12 to July 12, 1992, from August 12 to September 12, 1992, and from December 12 to December 31, 1992. Petitioners failed to offer any bank statements or other financial records from petitioner‘s husband‘s surgical practice.
In the notice of deficiency sent to petitioners in the instant case, respondent determined that petitioners failed to include flowthrough income from BGE in the amounts of $79,380 and $18 on their 1992 joint Federal income tax return. Petitioners concede that the flowthrough from BGE for petitioner‘s husband‘s share of the net settlement proceeds ($79,380) received by BGE during 1992 was not reported on petitioners’ 1992 Federal income tax return.3 Petitioners also concede the receipt of $18 in interest income during 1992 from BGE which was not reported on their 1992 Federal income tax return.
Discussion
Petitioners filed their petition in the instant case in response to a notice of deficiency. In the petition, petitioner claimed that she was entitled to innocent spouse relief pursuant to section 6013(e). After the trial and briefing of the instant case, Congress enacted
Petitioners’ Claim for Innocent Spouse Relief Pursuant to Section 6015(b)(1)
Generally, spouses filing a joint tax return are each fully responsible for the accuracy of their return and for the full tax liability. See
SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON JOINT RETURN.
(a) IN GENERAL.—Notwithstanding
section 6013(d)(3) —(1) an individual who has made a joint return may elect to seek relief under the procedures prescribed under subsection (b) * * *
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(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 one 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.
(2) APPORTIONMENT OF RELIEF.—If an individual who, but for paragraph (1)(C), would be relieved of liability under paragraph (1), establishes that in signing the return such individual did not know, and had no reason to know, the extent of such understatement, then such individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent that such liability is attributable to the portion of such understatement of which such individual did not know and had no reason to know.
Former section 6013(e) is, for the most part, the same as new
Of the several elements necessary for innocent spouse relief listed in new
As to the first factor, level of education, petitioner earned a college degree in medical records administration from St. Louis University. She also owned and operated her own construction business (JCB) that was, like the corporation in which her husband was a shareholder (BGE), an S corporation. Petitioner was primarily responsible for JCB‘s day-to-day affairs. She collected the information with which to file tax returns for JCB and signed those tax returns. Consequently, we believe that she must have been familiar with the manner in which income of an S corporation flows through to the individual shareholders for Federal tax purposes. Although petitioner testified that she had nothing to do with petitioner‘s husband‘s nursery business during its existence, she admitted that she was the secretary-treasurer of Sweetwater Greenery, Inc. (the bankrupt predecessor company of BGE and the initial S corporation operating the foliage nursery). By 1992, petitioner had considerable experience in business and financial matters. At a minimum, given her experience in the family‘s financial affairs, her knowledge of the settlement between BGE and Dupont, and her apparent experience and knowledge of the tax implications of doing business as an S corporation, petitioner should have inquired into whether the flowthrough of income from the Dupont settlement with BGE was properly accounted for on petitioners’ return. Accordingly, petitioner‘s education and experience weigh heavily against allowing innocent spouse relief to petitioner.
As to the second factor, involvement in the family‘s finances, petitioner had full responsibility for maintaining
Although respondent requested petitioners to provide the bank statements from all of their bank accounts for 1992, petitioner produced only 8 of the 12 1992 bank statements from their joint personal account, and they produced no statements from any of the other accounts they held. The failure to introduce such evidence leads us to conclude that it would not have been helpful in proving petitioner‘s innocent spouse claim. The evidence pertaining to petitioner‘s involvement in her family‘s finances weighs heavily against petitioner.
As to the third factor, unusual or lavish expenditures, although the record demonstrates that petitioner enjoyed a high standard of living during 1992 and maintained accounts at various upscale department stores where she made significant purchases, there is no evidence in the record indicating whether such expenditures were out of the ordinary when compared to petitioners’ spending habits in prior years. Accordingly, the evidence pertaining to unusual and lavish expenditures neither supports nor weakens petitioner‘s claim for innocent spouse relief.
As to the fourth factor, whether petitioner‘s husband was evasive about his finances, he never attempted to hide any of his income or assets from petitioner. In his own words, he “always told her about everything he was involved in.” All of his income was applied toward the benefit of the family. Consideration of this factor weighs against innocent spouse relief.
In sum, consideration of the foregoing factors leads us to believe that petitioner should have known of the understatement on petitioners’ 1992 tax return. At a minimum, petitioner‘s knowledge of the settlement and the tax consequences of S corporations placed on her the duty to inquire about the amount of the settlement and the flowthrough of petitioner‘s husband‘s share of BGE‘s income as it might affect petitioners’ 1992 tax return. Consequently, we hold that petitioner is not entitled to innocent spouse relief pursuant to
Petitioner‘s Motion To Reopen the Record To Introduce Evidence of Her Ability To Qualify for Proportionate Relief Pursuant to Section 6015(b)(2)
Petitioner requests that we reopen the record in the instant case to submit evidence as to petitioner‘s qualification for relief pursuant to new
The Tax Court‘s Authority To Review the Commissioner‘s Discretion as Exercised Pursuant to Section 6015(f)
Petitioner asked respondent to consider equitable relief pursuant to
As a part of our traditional authority in deficiency proceedings, we have jurisdiction in the instant case to review respondent‘s denial of equitable relief. Petitioner raised her claim for innocent spouse relief in a petition for redetermination filed pursuant to
In Naftel v. Commissioner, 85 T.C. 527, 533 (1985), we held that where a taxpayer files a petition for a redetermination of a deficiency, we take jurisdiction over the entire tax liability, not just the items determined to be erroneous in the notice of deficiency. Consequently, where a taxpayer raises an affirmative defense to a deficiency determination, we need no additional basis for our authority to render an opinion on such issues because the affirmative defense is part of the deficiency proceeding over which we have jurisdiction. See Rule 39. Accordingly, in the instant case, our authority to review petitioner‘s affirmative defense that she is entitled to innocent spouse treatment is governed by our general jurisdiction to consider any issue which affects the deficiency before us. See
Respondent argues that
This Court has stated that there exists a strong presumption that the actions of an administrative agency are subject to judicial review. See, e.g., Mailman v. Commissioner, 91 T.C. 1079, 1082 (1988); Estate of Gardner v. Commissioner, 82 T.C. 989, 994 (1984). Agency action is exempt from judicial review only: (1) Where the governing statutes expressly preclude such review, or (2) where the action is “committed to agency discretion” by law.
As to respondent‘s argument that
SEC. 6015(e). PETITION FOR REVIEW BY TAX COURT.—
(1) IN GENERAL.—In the case of an individual who elects to have subsection (b) or (c) apply—
(A) IN GENERAL.—The individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed during the 90-day period beginning on the date on which the Secretary mails by certified or registered mail a notice to such individual of the Secretary‘s determination of relief available to the individual.
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(3) APPLICABLE RULES.—
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(B) RES JUDICATA.—In the case of any election under subsection (b) or (c), if a decision of the Tax Court in any prior proceeding for the same taxable year has become final, such decision shall be conclusive except with respect to the qualification of the individual for relief which was not an issue in such proceeding. The exception contained in the preceding sentence shall not apply if the Tax Court determines that the individual participated meaningfully in such prior proceeding.
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(4) NOTICE TO OTHER SPOUSE.—The Tax Court shall establish rules which provide the individual filing a joint return but not making the election under subsection (b) or (c) with adequate notice and an opportunity to become a party to a proceeding under either such subsection.
We find nothing in
Moreover, the legislative history supports our interpretation that
The Tax Court has jurisdiction of disputes arising from the separate liability election. For example, a spouse who makes the separate liability election may petition the Tax Court to determine the limits on liability applicable under this provision. [S. Rept. 105-174, at 56 (1998).]
The conference report states that it follows the “House bill and the Senate amendment in establishing jurisdiction in the Tax Court over disputes arising in this area.” H. Conf. Rept. 105-599, at 251 (1998). In short, there is no language in either the statute or the legislative history that precludes our review of the Commissioner‘s denial of equitable relief pursuant to
We also disagree with respondent‘s argument that the Commissioner‘s authority to grant equitable relief pursuant to
To determine whether an action has been committed solely to agency discretion, we have followed the standards followed in other Federal courts. Only in cases in which it can be found that the existence of broad discretionary power is not appropriate for judicial review, or that the agency determination involves political, economic, military, or other managerial choices not susceptible to judicial review, or that the agency determination requires experience or expertise for which legal education or the lawyer‘s skills provide no particular competence for resolution and for which there are no ascertainable standards against which the expertise can be measured, have the courts refrained from reviewing administrative discretion.
None of the foregoing circumstances, where action is committed solely to agency discretion, are present in the instant case. Our review does not involve political, economic, military, or other managerial choices not susceptible to judicial review.
Respondent argues that there is no ascertainable standard upon which to review respondent‘s discretionary denial of relief pursuant to
We have consistently applied a “facts and circumstances” analysis in considering the application of former section 6013(e)(1)(D). See Terzian v. Commissioner, 72 T.C. 1164, 1170 (1979); French v. Commissioner, T.C. Memo. 1996-38; Bouskos v. Commissioner, T.C. Memo. 1987-574. In Kistner v. Commissioner, T.C. Memo. 1995-66, on remand from the Court of Appeals for the Eleventh Circuit, we discussed the particular standards to be applied when deciding the appropriate relief pursuant to section 6013(e)(1)(D). Accordingly, we are well equipped to decide whether it was an abuse of discretion for respondent to deny relief to petitioner under
On the basis of the foregoing, we conclude that we have the authority to review respondent‘s denial of petitioner‘s claim for equitable relief pursuant to
Whether Respondent Appropriately Denied Petitioner Equitable Spouse Relief Pursuant to Section 6015(f)
On February 4, 1999, petitioner submitted a Form 8857, Request for Innocent Spouse Relief, to the IRS. The Form 8857 was forwarded to the IRS Appeals Office, and the claim was assigned to an Appeals officer who, after meeting with petitioner, made petitioner a settlement offer that petitioner rejected. In a September 22, 1999, letter, the Appeals officer informed petitioner that he had determined that petitioner is not entitled to relief pursuant to either subsection (b)(1) or (f) of
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.
In deciding above whether petitioner qualified for relief pursuant to
To reflect the foregoing,
An appropriate order will be issued, and decision will be entered for respondent.