DocketNumber： Docket No. 5770-74.
Citation Numbers： 38 T.C.M. 749, 1979 Tax Ct. Memo LEXIS 348, 1979 T.C. Memo. 178
Filed Date： 5/8/1979
Status： Non-Precedential
Modified Date： 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
HALL,
Petitioners do not dispute the amount of the deficiency or the additions to the tax. The sole issue is whether petitioner Earlene Rogers is entitled to be relieved of liability for payment of the deficiency and the additions to the tax under the "innocent spouse" provisions of section 6013(e). Clyde and Earlene were married in 1962. During the year in issue, Clyde owned and operated two small retail grocery stores in Cleveland. 1979 Tax Ct. Memo LEXIS 348">*349 Clyde also owned and operated a notary and tax service and a juke-box and pinball machine rental company. Between 1966 and 1968 Clyde and Earlene acquired two parcels of real estate consisting of (1) a brick commercial building which housed one of Clyde's grocery stores and two rental suites and (2) a residential building containing six rental apartments. Title to the properties was held in the joint names of Clyde and Earlene Rogers. During 1970 Clyde, Earlene and their two children resided in one of the apartments. In 1968 Clyde individually acquired a single family dwelling. This building was rented for part of the year in issue. In 1969 Clyde individually acquired a commercial building which was used throughout 1970 to house his other retail grocery store. In 1970 Clyde acquired individually an unimproved lot for $9,000. On June 16, 1970, Earlene acquired for $2,900 a 1970 Ford automobile, title to which was solely in her name. As of December 31, 1970, the automobile was unencumbered. Throughout 1970 Clyde and Earlene maintained a joint checking account. This was the only bank account they maintained during the year in issue. Earlene often discussed the couple's financial 1979 Tax Ct. Memo LEXIS 348">*350 matters with Clyde. Neither Clyde nor Earlene received any gifts or inheritances during 1970. Earlene did not maintain regular fulltime employment in 1970. She did, however, occasionally work at one of Clyde's grocery stores when a regular employee failed to appear for work. Also, she occasionally collected rent from occupants of the couple's jointly-owned rental properties. On September 21, 1971, Clyde and Earlene jointly purchased a single family residence at 1345 Forest Hills Boulevard in Cleveland Heights for $47,500, making a $14,850 down payment. In 1973 Clyde and Earlene were in the process of obtaining a divorce when Clyde died. After Clyde's death, Earlene received $4,000 and the children received approximately $25,000 from Clyde's estate. By 1975 the probate of Clyde's estate was still incomplete. During 1973 and 1974 Earlene earned income from the operation of an escort service. She also worked occasionally as a typist, and at one time took care of an older woman. At the time of trial, Earlene and her two children lived in the Forest Hills Boulevard home. On their 1970 return, Clyde and Earlene reported $76,670 gross receipts from the grocery store business and 1979 Tax Ct. Memo LEXIS 348">*351 rentals plus $1,000 income from Clyde's notary and tax service. They claimed the following costs of goods sold and business deductions: Cost of goods sold $ 50,616.00 Depreciation 10,767.00 Miscellaneous other deductions 30,528.36 $ 91,911.36
Adjusted gross income reported on the return was minus $14,241.36 ($77,670 business and rental income minus costs of sales and business deductions of $91,911.36). The remainder of Form 1040 for 1970 consists of zeros in the columns for the amount of tax, credits, total tax withheld, 1970 estimated tax payments, and overpayments. Both Clyde and Earlene signed the return, which was prepared by an income tax return preparer. Clyde and Earlene filed a joint income tax return for 1971 on which they reported adjusted gross income of $13,487.17.
Using the net worth method for reconstructing income, respondent determined that Clyde and Earlene understated their adjusted gross income for 1970 by $91,063.36 as follows:
| Assets | 1/1/70 | 12/31/70 |
| Cash in bank | $ 270.00 | $ 231.00 |
| Inventory | 3,200.00 | 29,600.00 |
| Automobile | 0 | 2,900.00 |
| Business depreciable assets | 0 | 24,900.00 |
| Real estate | 125,200.00 | 134,200.00 |
| $128,670.00 | $191,831.00 | |
| Liabilities | ||
| Notes and mortgages payable $ 72,518.00 | $ 62,169.00 | |
| Reserve for depreciation 0 | 4,688.00 | |
| $ 72,518.00 | $ 66,857.00 | |
| Balance | $ 56,152.00 | $124,974.00 |
| Balance, 1/1/70 | 56,152.00 | |
| Increase in net worth | $ 68,822.00 | |
| Add: Personal living expenses | 8,000.00 | |
| Economic income | $ 76,822.00 | |
| Statutory adjustments for adjusted gross income | 0 | |
| Adjusted gross income as corrected | $ 76,822.00 | |
| Add: Negative adjusted gross income as reported | 14,241.36 | |
| Understatement of adjusted gross income | $ 91,063.36 |
The deficiency notice was computed on this basis.
OPINION
The sole issue for decision is whether petitioner Earlene Rogers ("Earlene"), in her individual capacity, is an innocent spouse entitled to relief from payment of the deficiency and additions to the tax under section 6013(e). Respondent contends that Earlene does not qualify for relief as an "innocent spouse" because she cannot satisfy the requirements of section 6013(e).
Under section 6013(e) a wife [or husband] is relieved from liability for the deficiencies resulting from omitted gross income on a joint return filed with her husband if three prerequisites are met: (1) on the joint return filed for the taxable year there was erroneously omitted gross income attributable to her husband which is in excess of 25 percent of the amount of gross income stated in the return; (2) in filing the return she did not know of and 1979 Tax Ct. Memo LEXIS 348">*353 had no reason to know of such omission; and (3) after taking into account all the facts and circumstances, including the significant benefit she received from the omitted income, it is inequitable to hold her liable. The spouse seeking relief from liability under section 6013(e) carries the burden of proof and must establish that
Respondent contends, first, that the 25 percent omission from gross income requirement under section 6013(e)(1)(A) is not satisfied. On their 1970 return Clyde and Earlene Rogers reported $76,670 gross receipts from rentals and the grocery store business plus $1,000 income from Clyde's notary and tax service, and an adjusted gross income of minus $14,241.36. Using the net worth method, respondent determined that Clyde and Earlene understated their 1970 adjusted gross income by $91,063.36. This determination is not disputed.
Section 6013(e)(2)(B) provides that the amount omitted from gross income is determined with reference to section 6501(e)(1)(A). For such purposes, 1979 Tax Ct. Memo LEXIS 348">*354 in the case of a trade or business, the term "gross income" means amounts received from the sale of goods prior to diminution for the cost of such sales. Section 6501(e)(1)(A)(i).
In this case we know that adjusted gross income was understated by $91,063.36. However, the amount of omitted gross income is not readily ascertainable. In order to equate the unreported adjusted gross income figure as determined by respondent to omitted gross income, Earlene must show that the unreported adjusted gross income does not result from excessive deductions or overstated cost of goods sold.
The only bank account maintained by either Clyde or Earlene throughout 1970 was a joint checking account. We have no reason to believe that Earlene did not have full access to this account. Although Earlene may not have asked Clyde about the specifics of the couple's financial affairs, Clyde and Earlene did discuss their financial matters. In addition, there is no showing that the books and records for the couple's business ventures were not available to Earlene. See
On the basis of these facts, we conclude that Earlene knew that the income reflected in Clyde and Earlene's 1970 joint return was understated. The only direct evidence of Earlene's lack of such knowledge is her assertion to that effect. However, we find her entire testimony conflicting, unworthy 1979 Tax Ct. Memo LEXIS 348">*357 of belief, and unsupported by the factual record. 1979 Tax Ct. Memo LEXIS 348">*358 Earlene received a benefit from this understatement of income in subsequent years. Under
Earlene contends, nonetheless, that it would be inequitable to hold her liable for this deficiency. Section 6013(e)(1)(C) provides, notwithstanding that a spouse received 1979 Tax Ct. Memo LEXIS 348">*359 significant benefit from the omitted items, that if all the other facts and circumstances of the case make the imposition of the tax inequitable, the spouse may be relieved of liability. The facts here, however, do not support Earlene's claim that imposition of the tax would be inequitable. After Clyde died, the children received approximately $25,000 and Earlene received $4,000 from Clyde's estate. The probate of the estate had not been completed at the time of trial, so we do not know what additional assets Earlene might receive. Although a widow, Earlene is not without financial resources. During 1973 and 1974 she derived income from the operation of an escort service. She also worked as a typist and took care of an older woman. At the time of the proceedings before this Court, Earlene and the children still resided in the house on Forest Hills Boulevard. In light of the above facts, we believe that it would be neither harsh nor inequitable to decline to relieve Earlene of her statutory duty. Compare
Accordingly,
1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the year in issue.↩
2. There was approximately a $7,000 decrease of the mortgage balance on property held jointly by Clyde and Earlene. The remaining mortgage balance reduction is attributable to reduction of Clyde's individual liabilities. ↩
3. Respondent allowed $4,688 of the $10,767 depreciation deduction claimed by petitioners.↩
4. Gross income stated in the return is $77,670. Twenty-five percent of this amount is $19,417.50.↩
5. At trial respondent's counsel offered Exhibits U and V solely for purposes of impeachment of petitioner Earlene Rogers' testimony under