DocketNumber: Docket Nos. 28826-84, 7746-87.
Citation Numbers: 1995 T.C. Memo. 551, 70 T.C.M. 1374, 1995 Tax Ct. Memo LEXIS 551
Judges: WELLS
Filed Date: 11/20/1995
Status: Non-Precedential
Modified Date: 11/21/2020
SUPPLEMENTAL MEMORANDUM OPINION
WELLS,
*553
In her motion, as supplemented, petitioner requests, inter alia, that we reconsider our prior Opinion and either decide that she qualifies for relief as an innocent spouse based on the evidence already in the record or reopen the record to allow introduction of additional evidence in support of her claim that she qualifies for relief as an innocent spouse. Petitioner's requests are based on the following contentions: (1) That newly available evidence establishes that the deductions in issue are "grossly erroneous items" within the meaning of
*554 Although we incorporate into this Opinion by reference the findings of fact in our prior Opinion, we restate below certain of those findings that are relevant to the issues presented by petitioner's motion for reconsideration, and we further set forth certain supplementary findings of fact that were not set forth in our prior Opinion but are, however, based on the record of the trial of the instant case and relevant to our analysis below.
On November 14, 1979, petitioner and Mr. Crowley were married. At that time, petitioner was a Canadian citizen and Mr. Crowley was a U.S. citizen. They were married in a New York civil ceremony. On November 17, 1979, petitioner and Mr. Crowley were married a second time in a Canadian church. Prior to her marriage to Mr. Crowley, petitioner attended the University of Guelph, in Canada, where she received a bachelor of arts degree. From August 1977 until August 1979, petitioner worked in Canada as a life insurance agent first for Prudential Assurance and then Montreal Life Insurance.
Shortly after the marriage ceremony in Canada, petitioner and Mr. Crowley returned to New York. During 1980, petitioner worked for a photographer in New York City for*555 1 week in exchange for learning about photography. For 2 weeks, she solicited, by telephone, on behalf of a messenger service located in New York City, for which she was compensated approximately $ 200.
During December 1980, petitioner was hired as a stockbroker trainee in New York. In order to prepare for the "series seven" stockbroker examination required for her employment, petitioner studied about stocks and bonds at home. Prior to passing the exam, petitioner answered the telephones for her employer. During the early part of 1981, petitioner passed the exam and obtained her stockbroker license. Subsequently, petitioner "cold-called" potential clients to sell them stocks and bonds. Neither petitioner's studies nor her work specifically included commodities tax straddles.
During the years in issue, Mr. Crowley was a partner in TSM Associates, Sinclair Securities Company, and APEX Associates, which were partnerships that had engaged in commodities straddle transactions involving Treasury bill options. Mr. Crowley, as an employee in James Sinclair Trading Corporation, arranged commodities straddle transactions for investors seeking "tax-sheltered investments".
Petitioner was aware*556 of Mr. Crowley's position as a "commodities trader". Petitioner accompanied Mr. Crowley at several commodities seminars during which she "milled about" at the back of the room, "drifted" in and out of the seminar rooms, and socialized with other wives attending the seminars. Petitioner attempted to attract clients for her husband at the hospitality suites provided by Mr. Crowley's employer after those seminars. Petitioner, however, did not discuss commodities straddle transactions during the seminars or in the hospitality suites.
When petitioner and Mr. Crowley were first married, they rented a one-bedroom apartment in Manhattan. During their marriage, petitioner and Mr. Crowley regularly entertained Mr. Crowley's clients at their apartment, and they frequently dined out at expensive restaurants in Manhattan. During 1980, Mr. Crowley and petitioner took vacations to Canada, Vermont, and Florida. Mr. Crowley's American Express bill for that year was approximately $ 90,000, and a substantial portion of that amount was charged by petitioner. During 1981, they moved to a two-bedroom apartment which they rented for approximately $ 1,400 or $ 1,500 per month and garaged Mr. Crowley's BMW*557 automobile for approximately $ 250 to $ 300 per month. Subsequently, they rented a ranch house on Long Island.
During 1982, petitioner and Mr. Crowley decided to separate. After their separation, petitioner moved into a small loft apartment and paid the security deposit with $ 2,000 which Mr. Crowley had given her. On August 18, 1983, petitioner and Mr. Crowley were divorced.
On June 15, 1980, petitioner and Mr. Crowley signed a joint tax return for taxable year 1979, which was filed on June 24, 1980, and reported a negative adjusted gross income in the amount of $ 71,312. During 1979, Mr. Crowley earned $ 81,925 in commissions from the James Sinclair Trading Corporation. On June 15, 1981, petitioner and Mr. Crowley signed a joint tax return for taxable year 1980, which was filed before the end of the month, and reported an adjusted gross income of $ 8,055 and tax due of $ 240. During 1980, Mr. Crowley earned $ 122,683 in commissions from Sinclair Securities Company. On January 26, 1983, petitioner and Mr. Crowley signed a joint tax return for taxable year 1981, which was filed on January 31, 1983, 6 and reported an adjusted gross income of $ 90,658 and tax due of $ 13,980. During*558 1981, Mr. Crowley earned $ 148,141 in commissions from Sinclair Securities Company. Petitioner signed the joint returns for 1979, 1980, and 1981 without reviewing them.
The losses disallowed in the notices of deficiency were claimed by petitioner and Mr. Crowley on their 1979, 1980, and 1981 joint tax returns as Mr. Crowley's share of losses incurred by TSM Associates, Sinclair Securities Company, and APEX Associates. During the years 1979, 1980, and 1981, Mr. Crowley earned more than $ 380,000 in commissions.
Petitioner and Mr. Crowley entered into a settlement agreement with respondent that provides that petitioner and Mr. Crowley may deduct 20 percent of the losses attributable to the commodities straddle transactions for the years in issue, subject to petitioner's right to contest her liability for the taxes arising out of the*559 settlement pursuant to
The decision to grant a motion for reconsideration rests within the discretion of the Court and such a motion will not be granted unless unusual circumstances or substantial error is shown.
Petitioner contends in her motion for reconsideration that we incorrectly held in our prior Opinion that the understatements in issue were not attributable to "grossly erroneous items". However, before deciding whether petitioner would be entitled to relief from liability as an innocent spouse if we were to accept that contention, we shall consider whether petitioner fails to satisfy any of the other requirements for innocent spouse relief under
Our first consideration is whether, for taxable years 1980 and 1981, petitioner has established the requirements of
The Court of Appeals for the Second Circuit, the court to which an appeal in the instant case would lie, interprets subsection 6013(e)(1)(C) as requiring a taxpayer to establish that "'she [or he] did not know and did not have reason to know that the deduction would give rise to a substantial understatement.'"
In the instant case, respondent contends that petitioner knew that the deductions in issue would give rise to substantial understatements when she signed the returns for the taxable years in issue. Respondent relies primarily on the testimony of Robert Kraft to support such contention. During the trial of the instant case, Mr. Kraft testified that he had received a law degree from Georgetown University Law Center. At a subsequent hearing, Mr. Kraft admitted that he has never received a law degree. In light of Mr. Kraft's admission, we regard his testimony*563 as inherently untrustworthy and, therefore, do not accept his testimony. Respondent also argues that, because petitioner was a stockbroker who had passed the "series seven" stockbroker examination prior to the time she signed the returns in issue, she must have been exposed to the mechanics of commodities straddle transactions. Respondent, therefore, contends that petitioner knew that the deductions claimed on the returns for the taxable years in issue would give rise to substantial understatements. Nothing in the record, however, establishes that petitioner's studies or her work as a stockbroker exposed her to the intricacies of commodities straddle transactions. 10 Accordingly, we find that petitioner, when she signed the returns for the taxable years in issue, did not have actual knowledge that the deductions would give rise to the substantial understatements.
*564 Even if a taxpayer does not have actual knowledge that deductions claimed on a return would give rise to a substantial understatement, a taxpayer who has reason to know of such an understatement is not entitled to innocent spouse relief.
The Court of Appeals for the Second Circuit has held that the magnitude of the deductions claimed on a return may give rise to a duty to inquire as to the propriety of the deductions.
In the instant case, we believe that even a cursory review of the returns for the taxable years in issue would have alerted petitioner to the high probability that such returns contained substantial understatements. The 1980 return reported a gain of $ 408,097 on Schedule D that was offset by a loss of $ 407,884 reported on Schedule E, which included a loss of $ 508,045 from TSM Associates. That return reported adjusted gross income of only $ 8,055 for the taxable year 1980, and tax due of $ 240. 11 The 1981 return, which was filed untimely on January 31, 1983, reported a gain of $ 697,896 on Schedule D that was offset by a loss of $ 679,327 reported on Schedule E, which included a loss of $ 413,765 from TSM Associates and a loss of $ 399,489 from APEX Associates. That return reported*566 adjusted gross income of $ 90,658, and tax due of $ 13,980. 12*567 Both the income and deductions with respect to Mr. Crowley's commodities straddle transactions reported on the 1980 and 1981 returns were larger than the other income and deductions reported by Mr. Crowley and petitioner. Under such circumstances, petitioner had a duty to look into the propriety of the deductions taken on the returns in issue, a duty she has failed to satisfy in the instant case. 13
In deciding whether petitioner "had reason to know" of the substantial understatements when she signed the returns, we also take into account the factors that the Court of Appeals for the Second Circuit has held are to be considered in making such a decision: (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 with the family's past levels of income, standard of living, and spending patterns; and (4) the culpable spouse's evasiveness and deceit concerning their finances.
Applying such factors to the facts of the instant case, we conclude that petitioner had reason to know of the substantial understatements when she signed the returns for the taxable years in issue. Petitioner was a college-educated stockbroker who had passed the "series seven" examination. She was a former life insurance agent. Petitioner's involvement in the couple's business and financial affairs was also significant. Petitioner knew that Mr. Crowley was a "commodities trader". She traveled with him to several commodities seminars, where she attempted to attract clients for her husband at the hospitality suites provided by his employer after those seminars. They routinely entertained Mr. Crowley's clients at their apartment. Petitioner and Mr. Crowley lived lavishly during 1980 and 1981, the years*569 for which petitioner seeks relief as an innocent spouse. They frequently dined at expensive restaurants during those years. During 1980, they vacationed in Canada, Vermont, and Florida. Mr. Crowley's American Express bill for that year was approximately $ 90,000, and a substantial portion of that amount was charged by petitioner. During 1981, petitioner and Mr. Crowley rented a two-bedroom apartment in Manhattan for approximately $ 1,400 or $ 1,500 per month and garaged Mr. Crowley's BMW automobile for approximately $ 250 to $ 300 per month. Finally, there is no evidence in the record that shows that Mr. Crowley was evasive or deceitful about their finances or that he attempted to conceal the fact that he had engaged in commodities straddle transactions. 14 Based on the record in the instant case, we conclude that, at the time she signed the returns for the taxable years in issue, petitioner had reason to know of the substantial understatements in issue.
*570 Petitioner contends that the Court of Appeals' decision in
We disagree with petitioner's interpretation of
*572 Petitioner, unlike the taxpayer in
*573 Turning to petitioner's contention that she is eligible for relief as an innocent spouse under the transitional rule, 17 we note that petitioner could have raised the issue of her eligibility for relief under that provision in the prior proceedings in the instant case. We also note that TAMRA, which included the transitional rule, was enacted November 10, 1988, 102 Stat. 3812, well before the instant case was tried. As noted above, it is the policy of this Court to try all of the issues raised in a case in one proceeding in order to avoid piecemeal and protracted litigation.
*574 We note that the transitional rule does provide, in pertinent part, the following: "(D) without regard to any determination before October 21, 1988, 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 an understatement,
The Court of Appeals for the Fifth Circuit has found that the purpose of the foregoing language is to enable a taxpayer, who meets the requirements of the transitional rule, to be relieved of liability for an understatement as an innocent spouse notwithstanding a decision as to the taxpayer's liability prior to the enactment of the transitional rule.
As with the requirements for relief under The "did not know, and had no reason to know" language of the transitional rule virtually mirrors that of
To reflect the foregoing, 18
Appropriate orders will be issued.
*577
*. This Supplemental Memorandum Opinion supplements our prior Memorandum Opinion in the instant case, Crowley v. Commissioner, T.C. Memo. 1993-503, filed November 1, 1993.↩
1. These cases (for convenience, hereinafter referred to as the instant case) have been consolidated for trial, briefing, and opinion.↩
2. As petitioner John P. Crowley has settled all issues in the instant case with respect to himself, hereinafter we will refer to Elizabeth R. Cockrell as "petitioner" and John P. Crowley as Mr. Crowley.↩
3. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the years in issue.↩
4. Because the requirements for relief as an innocent spouse under
5. The transitional rule provides as follows:
Sec. 6004. TREATMENT OF CERTAIN INNOCENT SPOUSES Subsection (c) of section 424 of the Tax Reform Act of 1984 (relating to innocent spouse relieved of liability in certain cases) is amended by adding at the end thereof the following new paragraph: "(3) Transitional Rule. -- If -- "(A) a joint return under "(B) on such return there is an understatement (as defined in section 6661(b)(2)(A) of such Code) which is attributable to disallowed deductions attributable to activities of one spouse, "(C) the amount of such disallowed deductions exceeds the taxable income shown on such return, "(D) without regard to any determination before October 21, 1988, 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 an understatement, and "(E) the marriage between such spouses terminated and immediately after such termination the net worth of the other spouse was less than $ 10,000,
6. Petitioner concedes that she is liable for the addition to tax for failure to file timely with respect to that return, unless she is relieved from such liability as an innocent spouse.↩
7. Respondent concedes that petitioner meets certain of the requirements for relief as an innocent spouse provided by
8. Petitioner requests that we reopen the record to permit her to introduce, inter alia, her transcript from the University of Guelph to show that she took no courses in any tax, business, or financial subject, majored in English, and was "an extremely indifferent student". Petitioner contends that, after the trial of the instant case, the Court of Appeals for the Second Circuit announced a requirement for innocent spouse relief that a taxpayer's education be taken into account in deciding whether the taxpayer knew or had reason to know of the existence of a substantial understatement under
We do not agree with petitioner that she could not have been aware of the relevance of the evidence she now seeks to introduce simply because the Court of Appeals for the Second Circuit, at the time the instant case was tried, had yet to issue its opinions requiring that a taxpayer's education level be taken into consideration. Moreover, petitioner contends that, even without such evidence, the record developed at the trial of the instant case is sufficient to support a finding that she did not know and had no reason to know of the existence of the substantial understatements in issue. We accordingly will not reopen the record to admit additional evidence with respect to the requirements of
9. As to petitioner's allegation that respondent's counsel violated Rule 201 and rule 3.3(a)(3) of the Model Rules, the misconduct asserted by petitioner relates only to evidence potentially pertinent to the "grossly erroneous items" issue. Because we hold that petitioner is otherwise not entitled to relief under
10. At trial, respondent offered the testimony of several witnesses in an attempt to establish that the brokerage firm at which petitioner was employed during 1980 and 1981 routinely taught its stockbroker trainees about commodities straddle transactions. The testimony of respondent's witnesses, however, does not establish that petitioner received detailed instruction concerning commodities straddle transactions as a part of her training.↩
11. During 1980, Mr. Crowley earned $ 122,683 in commissions from Sinclair Securities Company.↩
12. During 1981, Mr. Crowley earned $ 148,141 in commissions from Sinclair Securities Company.↩
13. Petitioner, however, contends that the tax returns for the taxable years in issue "indicated a roll of income from prior years to future years, leading an objective observer to conclude that any disallowance would wipe out all income and deductions relating to the transactions resulting in little or no net tax effect." Such a consideration is not a substitute for the inquiry required by the information disclosed on the returns in issue.↩
14. The Court of Appeals for the Second Circuit recently stated: According to the dissent, the petitioner should be deemed innocent because she is guileless and may not have understood why * * * [her ex-husband] should have reported his full income. This misapprehends the nature of innocence in the context of this statute. Innocent people pay taxes; the obligation to pay taxes rests on liability, not guilt. An innocent spouse within the meaning of
15. The facts of the instant case are more analogous to those of
16. Our holding renders it unnecessary to consider whether petitioner has satisfied the remaining contested requirement of
17. In a reading of the transitional rule in conjunction with
18. Although we sympathize with petitioner's plight, we are guided by the statement we made in The filing of a joint return is a highly valuable privilege to husband and wife since the resulting tax liability is generally substantially less than the combined taxes that would be due from both spouses if they had filed separate returns. This circumstance gives particular emphasis to the statutory rule that liability with respect to tax is joint and several, regardless of the source of the income or of the fact that one spouse may be far less informed about the contents of the return than the other, for both spouses ordinarily benefit from the reduction in tax that ensues by reason of the joint return. However, some highly inequitable results were called to the attention of Congress, particularly where a wife had been divorced or separated or abandoned after the tax year, where she was saddled with a disproportionately high tax liability as a consequence of having filed a joint return, where such liability grew out of income attributable only to the husband, unknown to the wife, and where she had not enjoyed any benefit therefrom. It was in an effort to eliminate the unfairness of the joint and several liability provisions in such circumstances that
Robin Haft Trust v. Commissioner of Internal Revenue , 510 F.2d 43 ( 1975 )
Richard D. Bokum, Ii, Margaret B. Bokum v. Commissioner of ... , 992 F.2d 1132 ( 1993 )
Janet Bliss v. Commissioner of Internal Revenue , 59 F.3d 374 ( 1995 )
Jacquelyn Hayman v. Commissioner of Internal Revenue , 992 F.2d 1256 ( 1993 )
Philip Friedman, Anna Friedman v. Commissioner of Internal ... , 53 F.3d 523 ( 1995 )
Madeline M. Stevens v. Commissioner of Internal Revenue , 872 F.2d 1499 ( 1989 )
Patricia A. Price v. Commissioner of Internal Revenue , 887 F.2d 959 ( 1989 )
Park v. Commissioner , 25 F.3d 1289 ( 1994 )
Haft Trust v. Commissioner , 62 T.C. 145 ( 1974 )
Alexander v. Comm'r , 95 T.C. 467 ( 1990 )
Terzian v. Commissioner , 72 T.C. 1164 ( 1979 )
CWT Farms, Inc. v. Commissioner , 79 T.C. 1054 ( 1982 )