DocketNumber: Docket Nos. 19769-81, 23543-81
Citation Numbers: 69 T.C.M. 1962, 1995 Tax Ct. Memo LEXIS 86, 1995 T.C. Memo. 85
Filed Date: 2/28/1995
Status: Non-Precedential
Modified Date: 11/21/2020
1995 Tax Ct. Memo LEXIS 86">*86 Respondent's motion to strike will be granted and decisions will be entered for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN,
The sole issue for decision is whether Judy McCalister, formerly known as Judy Pettinato, qualifies as an innocent spouse under
Section references are to the Internal Revenue Code in effect during the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure. References to petitioner are to Judy McCalister. References to Pettinato are to John Pettinato.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners resided in Miami, Florida, when they filed the petition.
1.
Petitioner graduated from high school around 1965. She married Pettinato on November 16, 1969, when she was 22 years old. Petitioners had one1995 Tax Ct. Memo LEXIS 86">*87 child during their marriage. As discussed below, petitioners divorced in 1983.
2.
From 1976 to 1979, Pettinato owned five automobile parts stores: South Dade Auto Parts, Inc., a corporation with four stores, and A & J Auto Parts, a sole proprietorship. Petitioner was a corporate officer of South Dade Auto Parts, Inc. Petitioners both signed the notes used to finance the purchase of some of the stores.
Pettinato managed the auto parts stores. He decided what merchandise to buy, how to display it, which creditors to pay, and how to deliver merchandise. Petitioner did most of the bookkeeping, wrote most of the checks to the suppliers, and made most of the bank deposits. Pettinato reported his occupation as manager, and petitioner reported her occupation as bookkeeper on their Federal income tax returns for 1976 to 1979.
From 1976 to 1979, the five stores had monthly gross sales of $ 300,000 to $ 400,000 and were very profitable. Petitioner knew how profitable the stores were because she was usually present when the certified public accountant for the businesses, Benjamin Shechter (Shechter), reviewed the financial statements of the stores with 1995 Tax Ct. Memo LEXIS 86">*88 Pettinato each month.
Shechter was petitioners' personal and business accountant from about 1969 through the years in issue. Shechter established the bookkeeping system and did the accounting for the stores. Shechter went to the South Dade Auto Parts premises at least once a month to work with petitioner on bookkeeping for the stores. Shechter discussed personal finances such as tax advice including tax shelters with Pettinato and petitioner after he worked on their business records.
3.
Petitioner kept the records for her and Pettinato's personal checking and savings accounts and wrote most of their personal checks. Petitioner gathered and organized documentation for petitioners' itemized deductions. She gave Shechter a list of itemized deductions to be claimed in petitioners' joint Federal income tax returns with supporting documents.
Imperial Finance, N.V. (Imperial) was a diamond mining tax shelter. Shechter visited Imperial's diamond mines in South Africa and brought back a pouch of diamonds for the promoter's brother in New York. Max Breslow, Shechter's business partner, inspected the mines the year before Shechter visited the mines. 1995 Tax Ct. Memo LEXIS 86">*89 Shechter invested in Imperial. Petitioners invested in Imperial and deducted losses from it in 1977, 1978, and 1979.
B & S Associates, which stands for Breslow and Shechter, was a partnership that invested in S.J. Mineral Associates, Ltd. (S.J.). S.J. was a coal mining tax shelter partnership. Petitioners invested in S.J. and deducted losses from it in 1976 and 1977. Shechter recommended to petitioner and Pettinato that they invest in Imperial and S.J. He explained the investments to petitioner and Pettinato and gave them material to read about the investments.
4.
Shechter prepared petitioners' income tax returns for the years in issue. Petitioners reported the Imperial losses on a Schedule C in Pettinato's name on their returns for 1977, 1978, and 1979. They reported the coal mining shelter losses identified as B & S Associates on Schedule E of their 1976 and 1977 returns in both their names. Respondent determined that petitioners were not entitled to deduct expenses for S.J. and Imperial for the years in issue.
Petitioner's and Pettinato's joint tax returns from 1976-1979, as originally filed, are summarized as follows: 1995 Tax Ct. Memo LEXIS 86">*90
S.J. | Imperial | Petitioner's | Pettinato's | |
Year | Losses | Losses | Wages | Income |
1976 | $ 50,069 | $ 11,900 | $ 78,439 | |
1977 | 3,795 | 30,770 | 20,000 | 92,202 |
1978 | 30,770 | 26,930 | 97,763 | |
1979 | 30,770 | 20,020 | 115,943 |
Petitioner signed the returns for the years in issue without reviewing them.
5.
Petitioners enjoyed an upper-middle-class lifestyle from 1976 to 1979. On July 11, 1978, petitioners bought a new custom-built home in Miami on about an acre of land for $ 368,988. It had four bedrooms, three baths, a game room, a two-car garage, a screened patio with a swimming pool, a safe, and an alarm system. They sold their former residence on December 28, 1978, for $ 105,000. Their adjusted cost basis in their former residence was $ 90,000 when they sold it. Petitioner hired an interior decorator and bought at least $ 75,000 of furnishings for the new house. Petitioner wrote checks for the furnishings.
Petitioners gave each other substantial gifts of jewelry. In 1977 or 1978, Pettinato gave petitioner a marquise diamond ring that cost about $ 10,000. During the years in issue he also gave her a $ 7,900 diamond bracelet1995 Tax Ct. Memo LEXIS 86">*91 and several other pieces of jewelry that cost between $ 2,000 and $ 3,000. Petitioners kept the jewelry in a safe in their Miami home.
Petitioner drove new cars, such as a Cadillac El Dorado, Lincoln Mark VII, Mark VIII, or Town Car, which were leased by the Pettinatos' corporation during each of the years in issue.
Petitioners took about three vacations per year during the years in issue, including ski trips to Colorado and two European vacations. They traveled to Las Vegas, Nevada, on business. Petitioners reported adjusted gross income of $ 27,038.71 in 1976, $ 43,210.78 in 1977, $ 67,349.77 in 1978, and $ 108,702.00 in 1979.
6.
In 1981, petitioners decided to move from Miami to Denver, Colorado. The auto parts stores were sold on June 6, 1981. Pettinato stayed in Miami to work for the new owner as required under the agreement to sell the stores. Petitioner and her son moved to Colorado in July 1981, soon after the sale.
Petitioners paid $ 50,000 as a downpayment to build a $ 225,000 house in Evergreen, Colorado, without selling their Miami home. They built the house on about 2 acres of land. It had three bedrooms, 1995 Tax Ct. Memo LEXIS 86">*92 two baths, and a two-car garage. Petitioner rented a house and oversaw construction of the home. She was not employed at the time. She kept the family jewelry in a safety deposit box in a bank in Evergreen.
During that time, petitioner met Joe McCalister (McCalister), a carpenter. In November 1981, shortly before Pettinato was to move to Colorado, petitioner told him that she was filing for a divorce. Pettinato took one bracelet that he had recently bought for petitioner and a ring petitioner had given to him earlier. Petitioner did not take all of her jewelry when she separated from Pettinato. She sold the jewelry that she took with her.
Petitioners were divorced in 1983 by a decree from the District Court for Jefferson County, Colorado. The judge presiding over the divorce ruled that the stores and notes from the sale of the stores were marital property in which petitioner owned a 50-percent beneficial interest. Under the divorce decree, petitioners' marital assets and liabilities were divided roughly in half. Petitioners were both equally liable to Dixie National Bank for $ 300,000 and Washington Federal Savings for $ 145,000 under the divorce decree. Pettinato received1995 Tax Ct. Memo LEXIS 86">*93 custody of their son. Petitioner later married McCalister in Colorado.
After her divorce, petitioner took evening courses in college for 3 years. Petitioner worked as a bookkeeper and typist for auto parts businesses after the divorce.
Petitioner concedes that she and Pettinato benefited equally from the use of the tax savings from their tax shelter deductions. Petitioner also benefited from the sale of the auto parts stores because she and Pettinato used the proceeds to help pay for the Evergreen home. The lenders foreclosed on the mortgages for petitioners' homes around 1984.
At the time of trial, petitioner earned $ 1,690 per month as a "national sales analyst", which is not explained further in the record. She owned a 1992 Honda Accord and rented her home.
OPINION
1.
Spouses who file joint tax returns are jointly and severally liable for tax.
A taxpayer must meet all of the requirements of
As originally enacted in 1971, the innocent1995 Tax Ct. Memo LEXIS 86">*95 spouse provision applied only if omitted income caused the substantial understatement of income tax. Act of Jan. 12, 1971, Pub. L. 91-679, 84 Stat. 2063 (codified as amended at
1995 Tax Ct. Memo LEXIS 86">*96 Respondent concedes: (a) Petitioner filed a joint return for the years in issue,
2.
Petitioner must prove that the understatements of tax were attributable to grossly erroneous items.
Petitioner attached two letters (Exhibits A and B) to her reply brief to support her position that the deductions were grossly erroneous. Respondent moved to strike Exhibits A and B on the grounds that they were not admitted in evidence. Exhibit A is a letter to this Court dated May 2, 1991, from David N. Brodsky, Assistant District Counsel, Boston, Massachusetts, which states that the Commissioner alleged fraud by the promoters of the Imperial tax shelter. Exhibit B is an unaddressed, undated, and unsigned form letter with a signature block for Aubrey C. Brown, senior attorney for the Commissioner. Exhibit B states that S.J. was an abusive tax shelter and that the promoters pleaded guilty to crimes related to promoting the tax shelter.
Neither Exhibit A nor B was offered or admitted into evidence. The Court can base its decision only on properly admitted evidence.
Petitioner argues that the deductions were grossly erroneous because the tax shelters were abusive, had no foundation in fact, and were shams. We disagree.
There are three factors which tend to show, although do not establish, that the tax shelters were not shams. First, Shechter personally visited the Imperial mines and brought back diamonds, as did his partner Breslow. Second, we did not find that Imperial was a sham when we reviewed it in
3.
To qualify as an innocent spouse, petitioner must prove that she did not know or have reason to know of the substantial understatement when she signed the returns for 1976 to 1979.
a.
Petitioner contends that she had no actual knowledge1995 Tax Ct. Memo LEXIS 86">*100 of the understatements because she had no knowledge of the underlying transactions, she relied on Shechter and Pettinato to file correct tax returns, and did not review the returns for the years in issue when she signed them. We need not decide whether petitioner had actual knowledge of the understatements because even if she did not know of the understatements, we believe she had reason to know of them, as discussed next.
b.
To decide this issue, we consider whether, at the time of signing the returns, a reasonable person in petitioner's circumstances could be expected to know of the substantial understatement.
Petitioner contends that she lacked knowledge or had no reason to know of the understatements in her and Pettinato's tax returns because she signed them without reading them. We disagree. Taxpayers who sign their tax returns are presumed to have knowledge of their contents.
Courts have considered a variety of factors in deciding whether a taxpayer had reason to know of a substantial understatement. These factors may also give a taxpayer a duty to inquire as to the existence of an understatement which, if not satisfied, may lead to the conclusion that the taxpayer had reason1995 Tax Ct. Memo LEXIS 86">*102 to know of the understatement.
(i) Whether petitioner's knowledge about the underlying activity was of such a degree or quality as to put her on notice of the erroneous deduction.
We believe that petitioner knew of Imperial and S.J. when she signed the returns for the years in issue. Shechter had suffered a stroke and his health was poor, but we believe that his testimony was unbiased between petitioner and Pettinato. On direct examination, Shechter testified that he discussed tax shelters with both petitioners and recommended to both petitioners that they invest in the coal and diamond mining tax shelters. Shechter testified that he met with petitioners monthly to discuss business and personal finances, such as tax shelters, that petitioner was the bookkeeper for the stores and wrote most of the checks, and that he discussed petitioners' business and tax returns with petitioner. On cross-examination he said he did not recall any specific discussion he had with petitioner about any tax shelter investment. His testimony on cross-examination that he did not recall any specific discussion does not contradict his direct testimony1995 Tax Ct. Memo LEXIS 86">*104 that he discussed Imperial and S.J. with petitioner and Pettinato. We conclude that Shechter discussed the coal and diamond mining tax shelters with petitioner and that petitioner knew about them when she signed the returns for the years in issue.
Petitioner testified that she had no knowledge of the tax shelters until well after the years in issue. We did not find her testimony credible. She understated her duties with the auto parts stores, as shown by Shechter's testimony. Petitioner testified that she was an accounts receivable clerk who wrote three to four checks per year and was not involved with tax returns. She testified that she was not the bookkeeper. However, her joint tax returns say she was a bookkeeper. Shechter testified and we found that petitioner did most of the bookkeeping, wrote most of the checks, and made most of the bank deposits. Petitioner gave Shechter a list of items to deduct on her and Pettinato's tax returns and related documentation. Contrary to her testimony, petitioner was heavily involved in her family's business and personal finances. Petitioner also testified in this case that she had no interest in the stores. However, in her divorce, 1995 Tax Ct. Memo LEXIS 86">*105 she argued that she had a 50-percent interest in the stores. This factor favors respondent.
(ii) Whether petitioner was involved in her family's finances, and if so, to what extent.
(iii) Whether petitioner was intelligent, well-educated, or had financial aptitude.
(iv) Whether petitioner was involved in preparing the 1982 tax return or met with their tax return preparer,
(v) Evasiveness by the taxpayer's spouse may trigger a duty to inquire.
The record in this case does not show that Pettinato was evasive or uncommunicative during the years in issue. Petitioner and Pettinato's monthly meetings with Shechter show that they communicated about finances. This factor favors respondent.
(vi) Whether petitioner was aware of expenses that were unusual or lavish in comparison to the family's standard of living in prior years.
Petitioner admits that petitioners bought expensive jewelry during the years in issue and that it was not normal support. She argues that we should not consider the jewelry here because she claims Pettinato took the jewelry from her in 1981 after the returns were filed for the years in issue. However, the issue here is whether lavish expenditures gave her reason to know of the understatement; that is not affected by events after the returns were filed.
(vii) Whether there were large deductions on the tax returns in issue. Large deductions, particularly those that completely or substantially eliminate taxable income, may give a taxpayer reason to know that an understatement exists or a duty to inquire as to the legitimacy of the deduction.
Adjusted Gross | Tax Shelter | |
Year | Income | Deductions |
1976 | $ 27,038 | $ 50,069 |
1977 | 46,211 | 34,565 |
1978 | 67,350 | 30,770 |
1979 | 108,702 | 30,770 |
Although these deductions are large, we do not believe that they, in isolation, should have alerted petitioner to the existence of an understatement.
Petitioner argues that she had no reason to know of the understatement because she relied on Shechter to prepare the return correctly. Pettinato also relied on Shechter. We do not believe that Pettinato knew more about Imperial and S.J. than petitioner did. The Court of Appeals for the Eleventh Circuit has held that neither spouse is an innocent spouse under
c.
Petitioner did not convince us that1995 Tax Ct. Memo LEXIS 86">*111 she had no reason to know of the understatements.
4.
Petitioner must prove that it is inequitable to hold her liable for the understatements of income tax.
Petitioner argues that it is inequitable to hold her jointly liable for the understatements of tax because she had very little of the marital assets at the time of the trial of this case. We disagree. The approximately equal division of assets and liabilities in the divorce decree shows that both petitioner and Pettinato benefited equally from their business and financial activities. We conclude that it is equitable to hold petitioner and Pettinato jointly liable for deficiencies in the years in issue.
Petitioner argues that it is inequitable to hold her jointly liable for the understatements of tax because she claims that Pettinato took her jewelry from their safety deposit box after she left him in the fall of 1981. We heard sharply conflicting testimony from petitioner and Pettinato about the disposition of their jewelry. The most credible evidence about petitioners' jewelry is the divorce decree. 1995 Tax Ct. Memo LEXIS 86">*113 were gifts. The divorce decree states that petitioner had substantial amounts of jewelry. In addition, petitioner sold some of her jewelry after she left Pettinato and before the divorce, and thus benefited from the sale. We disagree with petitioner's claim that she did not benefit from the jewelry because Pettinato took it from her. Petitioner's claim about the disposition of jewelry does not convince us that it is inequitable to hold her jointly liable for petitioners' tax in the years in issue.
Petitioner argues that it is inequitable to hold her liable because she did not benefit from petitioners' homes, which were heavily mortgaged. Petitioner benefited from the homes because she lived in them and owned a one-half interest1995 Tax Ct. Memo LEXIS 86">*114 in them. She decorated and furnished them well. Petitioners made the mortgage payments while petitioner lived in the homes. In addition, as discussed above, we do not know the amount of the mortgage used to buy the houses. The fact that the homes may have been heavily mortgaged in 1983 does not convince us that petitioner did not benefit from them during the years in issue and before 1983.
Petitioner also argues that it is inequitable to hold her jointly liable for tax because lenders foreclosed on the home mortgages. As discussed above, the divorce decree divided assets and liabilities roughly equally. We infer that the foreclosures affected both parties about equally. We conclude that the fact that the mortgages on petitioners' homes were foreclosed does not make it inequitable to hold petitioner jointly liable for the deficiencies for the years in issue.
Petitioner contends that she received only normal support. We disagree. Petitioner received expensive jewelry, which she conceded was not normal support, and new homes with expensive amenities. She drove new luxury cars during the years in issue. There is no evidence of petitioner's standard of living before the years1995 Tax Ct. Memo LEXIS 86">*115 in issue. Thus, we cannot conclude that the expensive jewelry, luxury cars, and new homes with expensive amenities were normal support during the years in issue.
For reasons discussed above, we conclude that petitioner fails to meet the requirements of
1. The 1984 amendments to
2. Exhibits A and B prove less than petitioner asserts. Exhibit A states that the Commissioner believed that the Imperial promoters were liable for fraud. It does not necessarily follow that the deductions were grossly erroneous if the Imperial promoters committed fraud. Exhibit B is an unsigned form letter entitled to little, if any, weight.↩
3. We need not decide whether the tax shelter deductions are solely attributable to Pettinato under
4. The record does not indicate how much petitioners paid as a downpayment and how much they financed for this house. They did not have the benefit of proceeds from their previous home because they did not sell it until about 6 months after they bought the new house.↩
5. The divorce decree states in pertinent part: "The Court finds that each party has substantial jewelry which the Court finds are gifts and are therefore non-marital property and each party shall keep the jewelry currently in his or her possession as his or her sole and separate property." ↩
Norman J. Fredkin and Annie G. Fredkin v. Commissioner of ... , 870 F.2d 801 ( 1989 )
Madeline M. Stevens v. Commissioner of Internal Revenue , 872 F.2d 1499 ( 1989 )
Jacquelyn Hayman v. Commissioner of Internal Revenue , 992 F.2d 1256 ( 1993 )
Morris A. Shenker and Lillian K. Shenker v. Commissioner of ... , 804 F.2d 109 ( 1986 )
Richard D. Bokum, Ii, Margaret B. Bokum v. Commissioner of ... , 992 F.2d 1132 ( 1993 )
Patricia A. Price v. Commissioner of Internal Revenue , 887 F.2d 959 ( 1989 )
James A. Guth, and Arlys M. Guth v. Commissioner of ... , 897 F.2d 441 ( 1990 )
Joyce Purcell v. Commissioner of Internal Revenue , 826 F.2d 470 ( 1987 )
Sally A. Shea v. Commissioner of Internal Revenue , 780 F.2d 561 ( 1986 )
Gwen Erdahl v. Commissioner of Internal Revenue , 930 F.2d 585 ( 1991 )
Bettye A. Sanders v. United States , 31 A.L.R. Fed. 1 ( 1975 )
Lucille E. Kistner F/k/a/ Lucille E. Weasel v. Commissioner ... , 18 F.3d 1521 ( 1994 )
United States v. State of Washington , 459 F. Supp. 1020 ( 1978 )