DocketNumber: Docket No. 15176-93
Citation Numbers: 69 T.C.M. 2501, 1995 Tax Ct. Memo LEXIS 191, 1995 T.C. Memo. 190
Judges: COHEN
Filed Date: 4/27/1995
Status: Non-Precedential
Modified Date: 11/20/2020
*191 Decision will be entered for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN,
After concessions, the issues remaining for decision are (1) whether petitioner is entitled to relief as an innocent spouse under
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in San Jose, California, at the time the petition was filed.
Petitioner and Richard T. Hensel (Hensel) married in 1979; they separated and divorced in 1989. During 1989, petitioner*192 was an art teacher for the Santa Clara County School District. She has an undergraduate degree in art education and a teaching credential, but no postgraduate degree. Hensel was employed as an aviator for the U.S. Naval Reserve and as a stockbroker for the Shearson Lehman Hutton brokerage firm during 1989.
The principal cause of petitioner's divorce from Hensel was financial. Hensel began having financial problems when he commenced work as a stockbroker in 1986. In 1989, Hensel incurred losses of approximately $ 74,000 in transactions labeled as "futures", "future options", and "stock options". Petitioner attempted to control Hensel's financial activities by limiting his credit, but her efforts were not successful. In order to pay off Hensel's debts, petitioner borrowed $ 45,000 by refinancing the mortgage on their home in February 1989. This loan remained as an equity line of credit to continue to pay Hensel's debts until June 1989.
Petitioner lived a modest lifestyle during 1989 and made no major expenditures or purchases. In 1989, Hensel purchased a computer for petitioner that cost approximately $ 3,000. In late December 1989, petitioner and Hensel took a trip to Miami, *193 Florida, in an attempt to reconcile. This was the only trip the couple took in 1989. Both petitioner and Hensel contributed to household expenses from their respective incomes during 1989. Hensel handled the financial affairs of the household. Hensel never consulted petitioner about, and petitioner had no knowledge of, Hensel's business affairs.
During their 10 years of marriage, Hensel was responsible for preparing and filing the couple's tax returns. While they were married, Hensel and petitioner filed joint Federal income tax returns. Hensel was open to discussion of the tax returns with petitioner, but petitioner never questioned Hensel about the returns. Petitioner provided Hensel with her Forms W-2 and her receipts for art supplies and computer items for purposes of preparing their 1989 joint income tax return. At the time their 1989 tax return was filed, petitioner and Hensel were divorced and living apart. Hensel signed petitioner's name to the 1989 tax return, with petitioner's permission. Petitioner never reviewed the 1989 tax return before it was filed. Petitioner first examined the return in September 1994.
On their 1989 tax return, petitioner and Hensel reported*194 $ 118,965 of taxable income, $ 39,748 of which represented petitioner's wages, and itemized deductions totaling $ 67,458. In the notice of deficiency, respondent disallowed $ 32,198 of itemized deductions and determined $ 3,676 of unreported income that consisted of Hensel's wages from the U.S. Naval Reserve and of a State income tax refund.
With respect to the disallowed deductions on Schedule A, respondent's $ 1,667 disallowance of an expense entitled "Spouse's Comp. Equip." was an item solely attributable to petitioner. With respect to a deduction in the amount of $ 5,945 claimed on Schedule A, petitioner has no knowledge as to this item or whether it is solely attributable to Hensel.
OPINION
Spouses filing a joint tax return are jointly and severally liable for the tax arising therefrom.
(e) Spouse Relieved of Liability in Certain Cases. -- (1) In general. -- Under regulations prescribed by the Secretary, if -- (A) a joint return has been made under this section for a taxable year, (B) *195 on such 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 substantial understatement, and (D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement, then the other spouse 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 substantial understatement.
In addition, the understatement must exceed a specified percentage of petitioner's adjusted gross income for the preadjustment year.
The parties agree that a joint return was filed by petitioner and Hensel for 1989, that the return contained a substantial understatement of tax, and that this understatement of tax exceeded 25 percent of petitioner's adjusted gross income for the preadjustment year. Remaining in dispute are: (1) Whether petitioner knew or had reason to know that there was a substantial understatement; (2) whether the itemized deductions attributable to Hensel were grossly erroneous items; (3) whether $ 5,945 of itemized deductions was attributable to Hensel; and (4) whether it would be inequitable to hold petitioner liable for the deficiency attributable to the substantial understatement.
The record indicates that petitioner did not have actual knowledge of the understatement of tax. She did not review the 1989 tax return until September 1994. Consequently, we need only to determine whether petitioner had "reason to know" of the understatement. The relief-seeking 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" or*197 that further investigation was warranted.
Here, petitioner was an art teacher with no financial background. She had limited involvement in the financial affairs in her marriage with Hensel and no involvement in Hensel's business affairs. Petitioner and Hensel did not have a lavish or unusual lifestyle during 1989, and they experienced no noticeable improvement in their standard of living. These factors support petitioner's*198 contention that she did not know or have reason to know of the substantial understatement on the return. The lack of knowledge requirement, however, also establishes a duty of inquiry on the part of the alleged innocent spouse.
Petitioner relies on
Petitioner next maintains that she did not have a duty to inquiry because such a duty is imposed only when the alleged innocent spouse is aware of sufficient facts that would lead a reasonably prudent taxpayer in her position to be led to question the legitimacy of a deduction. We are not persuaded, however, that, under the circumstances here, petitioner lacked a duty of inquiry.
The cases cited by petitioner in her trial memorandum as illustrations of situations where a duty of inquiry was not imposed upon the alleged innocent spouse are factually distinguishable. In
Hensel never led petitioner to believe that the unsubstantiated deductions on the return in issue here were valid. Petitioner simply chose not to involve herself with the preparation and filing of their tax return. In contrast to the innocent spouse in
Petitioner also relies on
In
A spouse cannot obtain the benefits of innocent spouse protection "by simply turning a blind eye to -- by preferring not to know of -- facts fully disclosed on a return, of such a large nature as would reasonably put such spouse on notice that further inquiry needs to be made".
Because petitioner has not satisfied the lack of knowledge requirement of
Petitioner presented no evidence to substantiate or sustain the positions taken on her 1989 joint income tax return, with the exception of respondent's disallowance of $ 1,667 of the depreciation claimed on petitioner's computer equipment. In petitioner's view, she was entitled, pursuant to
Under (A) specify the items of (B)
Petitioner failed explicitly to elect to deduct as an expense the cost of her computer on her 1989 income tax return. Nevertheless, petitioner argues that, because she and Hensel deducted all of the depreciable property that they had purchased in 1989, and the total amount of these expenses did not exceed the $ 10,000 limitation of
We are not persuaded by petitioner's contentions. Entitlement to the benefits of
Respondent determined that petitioner is liable for the accuracy-related penalty under
Petitioner stipulated that there was a substantial understatement of tax on her 1989 Federal joint income tax return. Petitioner is jointly and severally liable for any tax due on her 1989 joint return, including interest and penalties, unless she is entitled to relief from liability as an innocent spouse.
*206
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