Rowe v. Comm'r
This text of 2001 T.C. Memo. 325 (Rowe v. Comm'r) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
*361 Respondent conceded that, pursuant to
MEMORANDUM OPINION
RUWE, Judge: Respondent determined deficiencies in petitioners' Federal income taxes, additions to tax, and penalties as follows: 1
| Additions to Tax and Penalties | ||||
| Sec. | Sec. | |||
| Year | Deficiency | 6653 (b) (1) (A) | 6654 (b) (1) (B) | Sec. 6661 |
| 1987 | $ 173,817 | $ 130,363 | 1 | $ 43,454 |
| Sec. 6653(b)(1) | Sec. 6661 | |||
| 1988 | 53,937 | $ 40,453 | $ 13,484 | |
| Sec. 6651(a)(1) | Sec. 6663 | |||
| 1989 | 73,279 | $ 13,792 | $ 54,959 | |
| Sec. 6654 | Sec. 6662(c) | |||
| 1990 | 124,891 | $ 8,057 | $ 24,978 | |
*362 After concessions, 2 the primary issue for decision is whether petitioner Donna A. Rowe is entitled to relief from joint liability pursuant to
General Background
*363 Some of the facts have been stipulated and are so found. The stipulation of facts, first supplemental stipulation of facts, stipulations of agreed issues, stipulation of settled issues, and the attached exhibits are incorporated herein by this reference. Petitioners, John A. Rowe (Mr. Rowe) and Donna L.
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*361 Respondent conceded that, pursuant to
MEMORANDUM OPINION
RUWE, Judge: Respondent determined deficiencies in petitioners' Federal income taxes, additions to tax, and penalties as follows: 1
| Additions to Tax and Penalties | ||||
| Sec. | Sec. | |||
| Year | Deficiency | 6653 (b) (1) (A) | 6654 (b) (1) (B) | Sec. 6661 |
| 1987 | $ 173,817 | $ 130,363 | 1 | $ 43,454 |
| Sec. 6653(b)(1) | Sec. 6661 | |||
| 1988 | 53,937 | $ 40,453 | $ 13,484 | |
| Sec. 6651(a)(1) | Sec. 6663 | |||
| 1989 | 73,279 | $ 13,792 | $ 54,959 | |
| Sec. 6654 | Sec. 6662(c) | |||
| 1990 | 124,891 | $ 8,057 | $ 24,978 | |
*362 After concessions, 2 the primary issue for decision is whether petitioner Donna A. Rowe is entitled to relief from joint liability pursuant to
General Background
*363 Some of the facts have been stipulated and are so found. The stipulation of facts, first supplemental stipulation of facts, stipulations of agreed issues, stipulation of settled issues, and the attached exhibits are incorporated herein by this reference. Petitioners, John A. Rowe (Mr. Rowe) and Donna L. Rowe (hereinafter petitioner), resided in Florida at the time they filed their petitions.
Mr. Rowe graduated from the University of Tennessee in 1969 with a degree in dental science. Thereafter, he attended the University of Tennessee Dental School and received a degree in dental surgery in 1972 and a degree in oral surgery in 1975. Petitioner graduated from the University of Tennessee in 1971 with a degree qualifying her as a registered dental hygienist. Petitioners were married in Kingsport, Tennessee, on June 27, 1971, and they had two children during their marriage, Christopher and Elizabeth.
From 1971 to 1977, petitioners lived in Memphis, Tennessee, where Mr. Rowe conducted an oral surgery practice. From 1977 to 1982, petitioners lived in Bristol, Tennessee, where Mr. Rowe also conducted an oral surgery practice. In 1981, Mr. Rowe became licensed to practice oral surgery in*364 the State of Florida. In 1982, Mr. Rowe was suspended by the Board of Dentistry in Tennessee and, as a result, Mr. Rowe stopped practicing dentistry in Tennessee. In 1983, petitioners moved to Madisonville, Kentucky, where Mr. Rowe worked in a dental clinic. In late 1984, petitioners moved from Kentucky to Osceola County, Florida, where they resided during the years in issue.
From October 1984 through October 1989, Mr. Rowe was employed as a dentist and oral surgeon by the Central Florida Dental Association (CFDA) in Kissimmee, Florida, and St. Cloud, Florida. Mr. Rowe's annual salary while at the CFDA was approximately $ 240,000, and he also shared in the profits of the business. Dr. Frank Murray (Dr. Murray) was the president of the CFDA during the years in issue. In 1989, Dr. Murray suspected that Mr. Rowe was improperly handling payments from clients and insurance companies. Mr. Rowe's employment with the CFDA was subsequently terminated. The local prosecuting attorney was informed of Dr. Murray's suspicions regarding the improper handling of payments, and Mr. Rowe was investigated and eventually arrested for embezzling funds. Mr. Rowe was indicted on charges of grand theft and*365 computer fraud; however, the charges were dropped because of insufficient evidence of criminal intent.
After his employment with the CFDA ended, Mr. Rowe started his own dental practice, and he also provided dental services through another business. In April 1995, Mr. Rowe was convicted of Federal money laundering. He was sentenced to 33 months in prison and ordered to make restitution of $ 359,452.17 to the Bank of New York. In November 1997, Mr. Rowe pleaded guilty to 51 counts of unlawful compensation under Florida State Medicaid laws and one count of organized fraud. He was sentenced to 8 months in prison and ordered to make restitution of $ 5,051.45 to the Department of Health and Human Services. The 1997 conviction stemmed from unlawful acts performed by Mr. Rowe in connection with providing dental services.
During her marriage to Mr. Rowe, petitioner was primarily a housewife. She engaged in occasional work as a substitute teacher, did some office filing, and volunteered at church. Petitioner's personal income during the years in issue was minimal. Petitioner has no background in accounting, tax, or other financial matters. During the years in issue, petitioner did not have*366 expensive jewelry, drive a luxurious car, or wear designer clothes. Petitioners' primary residence during the years in issue was sparsely furnished with old office furniture from Mr. Rowe's business, and the walls were decorated with arts and crafts which were handmade by petitioner.
While petitioner was primarily responsible for the household duties, Mr. Rowe controlled all aspects of petitioners' financial matters. Mr. Rowe regularly prepared petitioners' joint tax returns, occasionally with the assistance of other individuals. 4
During the years in issue, petitioners maintained a joint checking account (NCNB account) at NCNB National Bank. Deposits totaling approximately $ 624,286, $ 383,557, $ 26,176, and $ 7,086, 5 respectively, were made into the NCNB account in 1987, 1988, 1989, and 1990. Mr. Rowe deposited money into the NCNB account at irregular intervals and in amounts necessary*367 to cover household expenses. Petitioner and Mr. Rowe both wrote checks on the NCNB account. The majority of the amount paid by checks from the NCNB account in 1987 and 1988 was related to the purchase of property and the construction of a residence thereon, and the checks were written by or at the direction of Mr. Rowe.
Mr. Rowe also maintained separate bank accounts which petitioner was unaware existed. Petitioner did not have access to Mr. Rowe's separate accounts, and he did not provide her with information regarding these accounts. Mr. Rowe opened accounts in petitioner's name without her knowledge and also signed petitioner's name on several occasions without her knowledge.
Petitioner and Mr. Rowe's divorce was finalized in June 1996. The Final Judgment for Dissolution of Marriage between petitioner and Mr. Rowe states that petitioner's "standard of living and financial circumstances*368 have been devastated by * * * [Mr. Rowe's] wrong-doing and incarceration." The final judgment also notes that petitioner "does not have the present financial resources to support herself and * * * [petitioners' daughter, Elizabeth] adequately, but that * * * [Mr. Rowe] does not have the present ability to pay alimony." As a result of Mr. Rowe's criminal activities, petitioner had to move out of the family's residence in Florida and back to Kingsport, Tennessee, to live with her parents. At the time of trial, petitioner was employed full time as a dental hygienist, and she was paid by commission only.
For the taxable years 1987, 1988, 1989, and 1990, petitioners filed joint Federal income tax returns which were received by respondent on October 19, 1988, October 17, 1989, July 31, 1991, and October 18, 1991, respectively. On June 25, 1993, respondent issued a notice of deficiency to petitioners for their taxable years 1987, 1988, and 1989. On August 18, 1994, respondent issued a notice of deficiency to petitioners for their taxable year 1990. Petitioners timely filed petitions seeking redeterminations. Petitioners subsequently moved to have their cases consolidated, and we ordered*369 the cases consolidated for trial, briefing, and opinion.
Petitioner subsequently made valid elections for relief under
Overview of Applicable Law
If a joint return is filed, the liability with respect to the tax is normally joint and several. Sec. 6013(d)(3). In 1971, Congress enacted section 6013(e) to correct perceived inequities resulting from the imposition of joint and several liability in certain circumstances. S. Rept. 91-1537, at 2 (1970),
Relief under section 6013(e) was difficult for many taxpayers to obtain. In 1998, Congress repealed section 6013(e) and enacted
A spouse seeking relief from joint liability is not limited to seeking relief under only one subsection; rather, the spouse may make simultaneous claims for relief under all provisions. In the instant case, the parties have treated petitioner's claim for relief from joint liability as elections pursuant to
A. Section 6015(b)
(1) In general. -- Under procedures prescribed by the Secretary, if --
(A) a joint return has been made for a taxable
*372 year;
(B) on such return there is an understatement of tax attributable to erroneous items of 1 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*373 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.
B. Section 6015(c)
(1) In general. -- Except as provided in this subsection, if an individual who has made a joint return for any taxable year elects the application of this subsection, the individual's liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under subsection (d).
(2) Burden of proof. -- Except as provided in subparagraph (A)(ii) or (C) of paragraph (3), each
*375 individual who elects the application of this subsection shall have the burden of proof with respect to establishing the portion of any deficiency allocable to such individual.
(3) Election. --
* * * * * * *
(C) Election not valid with respect to certain deficiencies. -- If the Secretary demonstrates that an individual making an election under this subsection had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual under subsection (d), such election shall not apply to such deficiency (or portion). * * *
1. Allocation of Items
In enacting
*378 Congress has authorized the Secretary to prescribe regulations providing methods of allocation other than the methods provided in
Under the bill, allocation of items of income and deduction follows the present-law rules determining which spouse is responsible for reporting an item when the spouses use the married, filing separate filing status. The Secretary of the Treasury is granted authority to prescribe regulations providing simplified methods of allocating items.
In general, apportionment of items of income are expected to follow the source of the income. Wage income is allocated to the spouse performing the job and receiving the Form W-2. Business and investment income (including any capital gains) is allocated in the same proportion as the ownership of the business or investment*379 that produces the income. Where ownership of the business or investment is held by both spouses as joint tenants, it is expected that any income is allocated equally to each spouse, in the absence of clear and convincing evidence supporting a different allocation.
The allocation of business deductions is expected to follow the ownership of the business. Personal deduction items are expected to be allocated equally between spouses, unless the evidence shows that a different allocation is appropriate. For example, a charitable contribution normally would be allocated equally to both spouses. However, if the wife provides evidence that the deduction relates to the contribution of an asset that was the sole property of the husband, any deficiency assessed because it is later determined that the value of the property was overstated would be allocated to the husband.
Items of loss or deduction are allocated to a spouse only to the extent that income attributable to the spouse was offset by the deduction or loss. Any remainder is allocated*380 to the other spouse.
Income tax withholding is allocated to the spouse from whose paycheck the tax was withheld. Estimated tax payments are generally expected to be allocated to the spouse who made the payments. If the payments were made jointly, the payments are expected to be allocated equally to each spouse, in the absence of evidence supporting a different allocation.
The allocation of items is to be made without regard to the community property laws of any jurisdiction.
If the electing spouse establishes that he or she did not know, and had no reason to know, of an item and, considering all the facts and circumstances, it is inequitable to hold the electing spouse responsible for any unpaid tax or deficiency attributable to such item, the item may be equitably reallocated to the other spouse. In cases where the IRS proves fraud, the IRS may distribute, apportion, or allocate any item between spouses. [S. Rept. 105-174, supra at 56-57,
On January 17, 2001, the Secretary issued*381 proposed regulations under
*382 2. Actual Knowledge
If the Commissioner demonstrates that an individual making the election under
On the basis of the circumstances of this case, we initially consider the merits of petitioner's claims for relief with respect to income and deduction items under
In 1990, lump-sum distributions were made from various pension, profit sharing, and retirement accounts bearing the name of either petitioner or Mr. Rowe. The taxable amount distributed from the accounts in Mr. Rowe's name totaled $ 112,979. The taxable amount distributed from an individual retirement account (IRA) in petitioner's name totaled $ 3,426. These amounts were not reported on petitioners' 1990 Federal income tax return. Respondent concedes that petitioner is entitled to be relieved from joint liabilities attributable to the amount distributed from Mr. Rowe's accounts.
1. Allocation of Item
Petitioner argues that the distributions from the IRA in her name are allocable to Mr. Rowe because he concealed the account from petitioner and she was not aware of the account or the distributions until after she signed the return for the year in issue. Respondent contends that the distributions from the IRA are allocable to petitioner because*385 the account was in her name and she received the distributions.
In analyzing relief from joint liability under
Petitioner testified that before 1995 she was not aware of any retirement accounts or plans established in her name. She could not recall signing any papers to open a retirement account, authorizing withdrawals, signing distribution checks, or receiving any funds from a retirement account. Mr. Rowe testified that he personally established the retirement account and that he could have opened it in petitioner's name without her knowledge. Mr. Rowe also testified that he believed funds were borrowed from the account, but that he did not consult*386 petitioner regarding the loan. Mr. Rowe further testified that he provided no information to petitioner regarding retirement planning.
The process of distilling truth from falsehood from the testimony of witnesses, whose demeanor and credibility we observe, is the daily grist of judicial life.
In the instant case, this item is allocable to Mr. Rowe, and petitioner will be entitled to relief from joint liability under
If the electing spouse establishes that he or she did not know, and had no reason to know, of an item and, considering all the facts and circumstances, it is inequitable to hold the electing spouse responsible for any unpaid tax or deficiency attributable to such item, the item may be equitably reallocated to the other spouse. * * * [S. Rept. 105-174, supra at 57,
In our opinion, *388 the extreme facts and circumstances presented represent just such a situation envisioned by Congress.
2. Actual Knowledge
Respondent argues that even if this item were allocable to Mr. Rowe, petitioner still had actual knowledge and reason to know of the item because she testified that she sorted the mail and opened letters addressed to her. Respondent claims that petitioner must have known about the IRA because periodic statements from the financial institution managing the account were addressed to her individually at her home address.
As we mentioned earlier, petitioner credibly testified that before 1995 she was not aware of the existence of any retirement accounts or plans in her name. Petitioner testified that she usually collected the mail, but that she never saw any letters notifying her of the existence of the IRA or the distributions. Mr. Rowe testified that sometimes he picked up the mail, and petitioners' son, Christopher, testified that whoever got home first would pick up the mail. Additionally, Mr. Rowe testified that he provided petitioner with no information regarding retirement planning. Whether petitioner had an actual and clear awareness of the omitted income*389 is an essential fact respondent is required to establish under
From late 1984 until May 1987, petitioners lived in Osceola County, Florida, and resided at certain property known as Lots 22 and 27. Petitioners eventually purchased Lots 22 and 27 and the property was titled jointly in their names.
On May 11, 1987, petitioners sold lots 22 and 27 to Harry and Shelby Justice for a total sale price of $ 367,900. Petitioners' basis in the property at the time of the sale was $ 310,000, and the commission paid on the sale was $ 25,753. The gain on the sale was $ 32,147. In connection with the sale, a check for $ 89,210.53 representing the proceeds of the sale was issued payable to "John A. & Donna L. Rowe". Petitioner signed the settlement statement for the property and endorsed the check. 10 The check was deposited into petitioners' NCNB account on May 11, 1987. Petitioners' 1987 Federal income tax return listed a capital gain*390 of $ 30,159. The capital gain reported on the return did not include any portion of the $ 32,147 gain from the sale of Lots 22 and 27.
In 1987, certain real property (Anorada property) was purchased in the names of petitioner and Mr. Rowe. 11 On September 30, 1988, the Anorada property was sold to Mohamed and Nabila Mohamed for a total sale price of $ 25,000. Before the sale, the property was titled jointly in the names of petitioner and Mr. Rowe. The basis in the Anorada property at the time of the sale to the Mohameds was $ 20,000, and the commission paid on the sale was $ 2,500. The gain on the sale was $ 2,500. In connection with the sale, a check for $ 13,552.31 representing the sale proceeds was issued payable to "John Rowe and Donna Rowe". Petitioner's name is signed on both the settlement statement and the check. 12 The check was deposited into petitioners' NCNB account on September 30, 1988. Petitioners' 1988*391 return listed a capital gain of $ 20,695. The capital gain reported on the return did not include the $ 2,500 gain from the sale of the Anorada property.
Petitioner argues that Mr. Rowe's secretive nature regarding his personal and financial activities supports allocating these items to him because petitioner did not know, or have any reason to know, that the gains were not reported on the 1987 and 1988 tax returns. Respondent contends that the capital gain income is allocable evenly between petitioner and Mr. Rowe because the properties were jointly titled, and petitioner would have been required to report half of the proceeds from the sales had she filed separate returns.
*392 Petitioner claims that she was often required to sign documents by Mr. Rowe under conditions where she was not allowed to question the contents of the documents. Petitioner maintains that Mr. Rowe did not tell her that she was listed as an owner of assets on any of the documents she signed. Petitioner acknowledges on brief that she and Mr. Rowe purchased properties; however, she claims that she was unaware of the disposition of many of the properties. Petitioner has not specifically asserted that she unknowingly signed documents related to the Anorada property or that she was unaware that her name was listed as a joint owner of the property.
Lots 22 and 27 and the Anorada property were titled jointly in the names of petitioner and Mr. Rowe. Petitioner testified that she was aware that she was listed as joint owner of Lots 22 and 27, and she remembered the approximate purchase price of the property. Petitioner's testimony also reflected that she was aware that loans were obtained to finance the purchase of the property.
The evidence in the record reflects that petitioner knew that Lots 22 and 27 and the Anorada property were purchased, and she knew that she was listed as a joint*393 owner of the property. Petitioner has failed to establish that the items should be allocated in a manner other than in proportion to petitioner's and Mr. Rowe's respective ownership interests. Accordingly, these items are allocable evenly between petitioner and Mr. Rowe. Therefore, to the extent petitioner lacked actual knowledge of these items, she will qualify for relief from joint liability under
Respondent maintains that petitioner had actual knowledge of the capital gain income from the sales of Lots 22 and 27 and the Anorada property because petitioner was a co-owner of the properties, she signed the settlement statements, and she endorsed the settlement checks. *394 Petitioner claims that she was unaware of any gain on the sale of Lots 22 and 27 because she did not have access to financial records, and she relied on Mr. Rowe's determination that there was no gain. Additionally, petitioner contends that she was unaware that the Anorada property was sold in 1988 and that it should have been reported on the 1988 return.
In
i. Lots 22 and 27
With respect to Lots 22 and 27, petitioner testified that she was aware that the property was sold to Harry and Shelby Justice in 1987. Petitioner signed the settlement statement for the property and endorsed the check representing the proceeds from the sale. However, the evidence in the record supports petitioner's claim that she did not know the actual amount of gain on the sale. Petitioner testified that she simply signed loan and deed documents and nobody explained them to her. *396 She testified she did not see any type of financial statements at the closing of any real estate, and she did not have access to any statements or documents identifying the amount of interest paid on any mortgages. 14
The testimony of petitioner and Mr. Rowe reflects that when petitioners filed their Federal income tax returns for the years in issue, petitioner was given the first two pages only of the tax returns when signing the returns, and she was not afforded the opportunity to see or review any attachments, schedules, or other documents pertaining to the returns. Petitioner testified that Mr. Rowe assured her he had records for petitioners' tax returns. Petitioner claims that she was unaware of any gain from the sale of real estate and that she believed that all income, capital gains or otherwise, was included on petitioners' tax returns. 15
*397 Petitioner has admitted that she knew Lots 22 and 27 were sold in 1987. However, respondent has not proven that petitioner knew the amount of the gain on the sale, or even that any gain was made on the sale. Therefore, respondent has failed to establish that petitioner had actual knowledge of this item giving rise to a deficiency. Accordingly, we hold that petitioner is entitled to relief from joint liability under
ii. Anorada Property
Petitioner maintains that she was unaware that the Anorada property was sold in 1988. In connection with the sale of the Anorada property, a settlement check dated September 30, 1988, for $ 13,552.31 was written payable to "John Rowe and Donna Rowe". Petitioner claims that she did not endorse the settlement check because the signature does not look like hers and because she signs her name "Donna L. Rowe", not "Donna Rowe". Mr. Rowe testified that he signed petitioner's name on different documents, and he supposed he might have done so on a settlement statement. Although Mr. Rowe initially testified that he did not sign petitioner's name on the settlement statement or the check for*398 the Anorada property, he then testified that "there's no telling what I might have done."
Petitioner's testimony that she was unaware of the sale of the Anorada property was credible and persuasive. Mr. Rowe's testimony regarding whether he signed petitioner's name on the settlement statement and check was unclear. Indeed, Mr. Rowe admitted that he had signed petitioner's name in the past without her knowledge and that he generally did not provide her with information regarding real estate transactions. Overall, we find that respondent has not satisfied his burden of proving that petitioner had actual knowledge of this item giving rise to a deficiency. Accordingly, we hold that petitioner is entitled to relief from joint liability under
In May 1987, petitioners sold Lots 22 and 27 and purchased two adjoining 5-acre lots (Albritton property) across the street from Lots 22 and 27. One lot was fenced and on it were a horse barn, a maintenance shed, and a larger building. A sign on the road indicated that the lot was the Lake Gentry Horse Farm. On the adjoining lot, petitioners*399 constructed a new residence. From May 1987 until late 1988, petitioners temporarily resided at property known as Acorn Court while their new home was being constructed. In the summer of 1988, petitioners moved into their new residence. The total cost for the Albritton property and the new residence exceeded $ 1 million. The residence was jointly titled in the names of petitioner and Mr. Rowe.
On the Schedule A, Itemized Deductions, attached to their 1987 return, petitioners claimed a home mortgage interest deduction of $ 62,545. Petitioners substantiated $ 50,376 of this amount. Respondent disallowed the remaining $ 12,169 of the claimed deduction on the basis of a lack of substantiation.
On the Schedule A attached to their 1988 return, petitioners claimed a home mortgage interest deduction of $ 97,341. On the attached Schedule A, the notation "84,186 + 13,155" appears next to the figure $ 97,341. The Schedule E, Supplemental Income Schedule, attached to the return lists $ 13,155 as mortgage interest paid on rental property identified as "Bayview House". Petitioners substantiated $ 84,186 of the amount claimed for the home mortgage interest deduction. The remaining $ 13,155 of the*400 home mortgage interest deduction was disallowed by respondent because it was a duplicate deduction of interest paid on the Bayview House. 16
On the Schedule A attached to their 1990 return, petitioners' claimed a home mortgage interest deduction of $ 122,526. Additionally, an interest expense of $ 60,564 was listed on the Schedule F, Farm Income and Expenses, attached to the return. In the*401 notice of deficiency for 1990, respondent allowed a mortgage interest deduction of $ 66,105 and disallowed the remaining $ 56,421 claimed on the Schedule A. The notice of deficiency provided the following explanation:
(h)(I) It is determined that the Schedule A Itemized Deductions claimed on the 1990 return for Interest Expense is only allowable to the extent of $ 66,105.00. Since you claimed $ 122,526.00, your taxable income is increased in the amount of $ 56,421.00 as shown below:
| Substantiated Interest Expense | |
| Household Finance | $ 69,770 |
| Farmers Bank and Trust | 9,671 |
| Home Savings of America | 11,417 |
| Central Fidelity | 7,922 |
| Allowable Interest Expense | 98,780 |
| Factor (33.1% for Schedule F & 66.9% | |
| for Scheduel A) | x .669 |
| Allowable Scheldue A Itemized Deduction | 1 66,105 |
| Claimed on the 1990 Tax Return | 122,526 |
| Increase on Taxable Income | 2 56,421 |
Petitioners' 1987, 1988, and 1990 tax returns overstated itemized deductions for home mortgage interest. Generally, this personal deduction item is allocated evenly between individuals.
During the years in issue, petitioners resided at Lots 22 and 27, Acorn Court, and the Albritton property. These residences and the corresponding mortgages were in the joint names of petitioner*403 and Mr. Rowe. Petitioner testified that she was aware that the residences were jointly titled, and she knew that loans were acquired on these properties. Petitioner acknowledged signing the loan and deed documents for the properties. Under these circumstances, these items are allocable evenly between petitioner and Mr. Rowe. Therefore, to the extent petitioner lacked actual knowledge of these items, she will qualify for relief from joint liability under
Respondent argues that petitioner had actual knowledge of the erroneous mortgage interest deductions. In order to prove actual knowledge in the context of an erroneous deduction, respondent must show that petitioner*404 had "actual knowledge of the factual circumstances which made the item unallowable as a deduction."
i. 1987 Mortgage Interest
Respondent disallowed $ 12,169 of the claimed mortgage interest deduction for 1987 on the basis of a lack of substantiation. Thus, respondent must show that petitioner knew or believed that the mortgage interest for 1987 was overstated by $ 12,169. See id.
Respondent claims that petitioner had actual knowledge of the existence and amount of the home mortgage interest payments in 1987 because she wrote the checks to pay the mortgage interest. Petitioner agrees that she knew of the mortgage; however, she claims that she was unaware of the amount of interest paid or that it was incorrectly reported on the tax return.
The evidence in the record demonstrates that petitioner wrote the checks for the mortgage payments in 1987 and 1988. However, there is no evidence that petitioner knew what portion of the payments for 1987 constituted interest or the total amount of interest paid in that year. The testimony of both petitioner and Mr. Rowe indicates that petitioner was given only the first two pages of the tax*405 return when signing the return and she was not afforded the opportunity to see or review any attachments, schedules, or other documents pertaining to the return. Therefore, respondent has failed to show that petitioner knew or believed that the 1987 mortgage interest was overstated. Accordingly, we hold that petitioner is entitled to relief from joint liability under
ii. 1988 Mortgage Interest
Petitioners claimed a home mortgage interest deduction of $ 97,341 in 1988. Petitioners substantiated $ 84,186 of the amount claimed for the home mortgage interest deduction. The notice of deficiency for 1987, 1988, and 1989, provided the following explanation for disallowing the remaining $ 13,155 claimed as deductible home mortgage interest:
It is determined that $ 13,155 of home mortgage interest expense claimed on Schedule A in the 1988 tax year is disallowed because this amount relates to one of your rental properties and has already been deducted on Schedule E. Thus, this mortgage interest must be disallowed from Schedule A to prevent it from being deducted twice.
*406 Accordingly, your taxable income for the 1988 tax year is increased by $ 13,155.
Thus, in order to establish actual knowledge, respondent must show that petitioner knew or believed that $ 13,155 of the claimed mortgage interest was unallowable because it was already listed on Schedule E.
Respondent claims that petitioner had actual knowledge of the existence and the amount of the home mortgage interest payments in 1988 because she also wrote the checks to pay the mortgage interest for that year. Petitioner agrees that she knew of the mortgage; however, she claims that she was unaware of the amount of interest paid or that it was incorrectly reported on the tax return. Petitioner testified that she received the first two pages only of the tax return and that she did not see any attached schedules or other documentation. Respondent failed to present evidence showing that petitioner had actual knowledge that the 1988 mortgage interest was overstated because the $ 13,155 had already been listed as a rental expense on Schedule E. Therefore, we find that petitioner did not have actual knowledge of the factual circumstances which made $ 13,155 unallowable as a Schedule A itemized*407 deduction. Accordingly, we hold that petitioner is entitled to relief from joint liability under
iii. 1990 Mortgage Interest
Petitioners claimed a home mortgage interest deduction of $ 122,526 in 1990. Respondent determined that petitioners' allowable interest expenses was $ 98,780 but that 33.1 percent of this amount should have been reported on Schedule F. 18 On the basis of this determination, respondent allowed a mortgage interest deduction of $ 66,105 and disallowed $ 56,421. 19 Thus, in order to establish actual knowledge, respondent must show that petitioner knew or believed that petitioners' home mortgage interest was limited to $ 66,105.
*408 Respondent's sole contention is that because petitioner had actual knowledge of the amount of interest payments in 1987 and 1988, petitioner also had actual knowledge of the amount of interest paid on the mortgage in 1990. Petitioner agrees that she knew of the mortgages; however, she claims that she was unaware of the amount of interest paid or that it was incorrectly reported on the tax returns. Petitioner claims that the interest payments for 1990 were deducted on Schedule A as home mortgage interest and on Schedule F as farm interest expense. Petitioner contends that she did not know how much interest was paid on the mortgage, and, because she was allowed to review the first two pages only of the 1990 return and not the corresponding schedules, she was unaware that the interest payments were deducted twice.
No evidence was presented establishing what funds were used to make the mortgage interest payments in 1990. Our review of the bank statements for 1990 for the NCNB account reveals that the opening balance was approximately $ 1,855 and that deposits totaling only approximately $ 7,086 were made during that year. Thus, it appears that little, if any, funds were used from the*409 NCNB account to make the mortgage interest payments in 1990. 20 As we mentioned earlier, the record indicates that petitioner saw the first two pages only of the tax returns, and she was not afforded the opportunity to see or review any attachments, schedules, or other documents pertaining to the returns. Thus, petitioner would not have known that a portion of the interest payments was deducted as both a Schedule A itemized deduction and a Schedule F interest expense. Respondent has not established that petitioner had actual knowledge of the factual circumstances which limited the 1990 Schedule A mortgage interest to $ 66,105. Accordingly, we hold petitioner is entitled to relief from joint liability under
During the years in issue, Mr. Rowe owned and showed*410 horses. Petitioner had little or no involvement in this horse activity. In 1987, Mr. Rowe employed Joseph and Patricia Shortino (the Shortinos) as horse trainers, and they showed and stabled Mr. Rowe's horses during the years in issue. 21 The Shortinos had been in the horse business since 1979, and they operated an S corporation called Showcase Farm, Inc. Mr. Rowe purchased a horse trailer for the Shortinos to use in connection with the horse activity. Mr. Rowe and petitioners' son, Christopher, also participated in showing horses during the years in issue. For the years in issue, the income and expenses of the horse activity were reported on a Schedule F attached to petitioners' tax returns.
At some point in time during the years in issue, Mr. Rowe became involved in raising fish. The income and expenses for the horse and fish activities (collectively, farming activity) were combined*411 for tax reporting purposes. Petitioner was not involved in the fish activity.
For the years in issue, the following losses from the farming activity were reported on the Schedules F:
| Year | Loss Amount |
| 1987 | $ 143,650 |
| 1988 | 117,278 |
| 1989 | 139,448 |
| 1990 | 184,221 |
For the taxable years 1987, 1988, and 1989, petitioner and Mr. Rowe were listed on the Schedules F as the proprietors of the farming activity. For the taxable year 1990, Mr. Rowe alone was listed on the Schedule F as the proprietor of the farming activity.
Petitioner argues that the farming activity is allocable to Mr. Rowe because petitioner had little or no involvement in either the horse activity or the fish activity. However, respondent contends that the farming activity is still allocable evenly between petitioner and Mr. Rowe. Respondent relies on the fact that petitioner's name is listed on the tax returns for 1987, 1988, and 1989 as a proprietor of the farming activity to support his contention. Additionally, respondent argues that the horse activity was a family affair that petitioner*412 participated in by attending different events.
Petitioner testified that she watched Christopher participate in horse shows "less than half a dozen times" during the years in issue. Contrary to respondent's argument, petitioner testified that only Christopher was involved in showing horses during the years in issue and that Elizabeth did not become involved until later. Mr. Shortino corroborated petitioner on this point, testifying that Elizabeth did not begin showing horses until sometime around 1992. Petitioner claims she did not know the extent of the horse activity, played no role in the decision to acquire the farm property, and only saw the horses in the possession of the Shortinos. Christopher testified that petitioner was not involved in the horse activity and that she did not make any decisions relating to the activity.
Mr. Rowe testified that he made the original decision to start the horse activity and that he did not discuss it with petitioner. Mr. Rowe considered the activity principally his, and he included his children in the activity. Mr. Rowe testified that he made all decisions regarding the horse activity and told petitioner nothing about the horse activity. Additionally, *413 Mr. Rowe testified that he did not consult petitioner before starting the fish activity, and he did not believe she wrote any checks in connection with the fish farm. With respect to the fact that petitioner's name was listed as a proprietor on the 1987, 1988, and 1989 tax returns, Mr. Rowe testified that the 1987 and 1988 returns were filled out by another individual and he simply signed them without reviewing their contents. As we have mentioned previously, the record indicates that petitioner was given the first two pages only of the tax returns when signing the returns, and she was not afforded the opportunity to see or review any attachments, schedules, or other documents pertaining to the returns.
The Shortinos testified that the checks they received for their services as horse trainers while employed by Mr. Rowe always came from him and never from petitioner. Our review of the checks written on petitioners' joint account during the years in issue confirms that petitioner's signature does not appear on any of the checks written to Showcase Farms, Inc., the Shortinos' S corporation. 22 The Shortinos also testified that they consulted only with Mr. Rowe regarding the horses.*414 Mr. Shortino testified that he never saw petitioner's name listed as an owner of any of the horses and that petitioner was not involved in the activity. Mr. Shortino testified that petitioner did not know Mr. Rowe had purchased the horse trailer, and Mrs. Shortino testified that Mr. Rowe specifically told her not to tell petitioner about the horse trailer.
The evidence in the record reflects that petitioner's involvement in*415 the farming activity during the years in issue was minimal and purely social in nature. Other than infrequent attendance at horse shows to support her son, petitioner's only apparent link to the activity is that her name is listed as a proprietor on the 1987, 1988, and 1989 tax returns. In this regard, the evidence reflects that petitioner was unaware she was listed as a proprietor, and we decline to allocate any portion of this item to her simply because her name was listed as such on the tax returns. See, e.g.,
In the notice of deficiency for the years 1987, 1988, and 1989, respondent determined that petitioners were not entitled to the claimed Schedule F losses because the farming activity was not engaged in for*416 profit. In the notice of deficiency for 1990, respondent determined that petitioners were not entitled to the claimed Schedule F loss because it had not been established that the farming activity was engaged in as a trade or business within the meaning of
*417
The regulations under
Respondent argues that petitioner knew that the farming activity was not engaged in for profit. Respondent bases his argument on petitioner's testimony that the horse activity was a fun thing for Mr. Rowe to do with his son on the weekends and that petitioner did not consider the activity an "operation" but rather her husband just "had a couple of horses in Tampa". Respondent contends that petitioner understood that the horse activity was a fun family recreational activity, and this understanding establishes that she had actual knowledge that the horse activity was not engaged in for profit. Additionally, respondent claims that petitioner had actual knowledge of both the horse and fish*420 activities, as well as actual knowledge of the claimed Schedule F losses.
As we noted earlier, petitioner had little or no involvement in the farming activity. Additionally, she testified that she saw the first two pages only of the tax returns; thus, she was not afforded the opportunity to review the Schedules F listing the income and expenses attributable to the farming activity. Petitioner also testified that she trusted Mr. Rowe when she signed the tax returns because he told her the returns were correct, and he assured her he had appropriate records. 24
The evidence in the record indicates that Mr. Rowe controlled all aspects of the farming activity, and he conducted the activity without any assistance from petitioner. He testified that he did not consult with petitioner before making decisions concerning the farming activity, and he did not provide her with any information about*421 the activity. In fact, Mr. Rowe testified that he felt that he was operating the horse activity as a business. He also testified that he started the fish activity in order to make the farming activity a more viable business. The testimony of Mr. Danley and the Shortinos, as well as the testimony and affidavit of Mr. Murray, all indicates that Mr. Rowe acted as if he was engaged in the farming activity for profit. There is no evidence that Mr. Rowe acted in such a manner that would cause petitioner to know or believe that Mr. Rowe was not engaged in the farming activity for profit.
Respondent has failed to establish that petitioner knew or believed that her former spouse was not engaged in the farming for profit. Accordingly, we hold petitioner is entitled to relief under
On their 1987 return, petitioners claimed a charitable contribution deduction of $ 5,556. Of this amount, $ 4,059 was listed as contributed to "1st United Methodist". In 1987, petitioner wrote five checks to the St. Cloud First United Methodist Church on the NCNB account totaling $ 5,500. Respondent allowed*422 the $ 5,556 charitable contribution deduction claimed on the 1987 return.
On their 1988 return, petitioners claimed a charitable contribution deduction of $ 8,165. On the attached Schedule A, the claimed contribution was identified as "ERS-106, 1st United Meth. 8,059". Respondent disallowed the entire amount claimed as a charitable contribution deduction for 1988 on the ground that petitioners had failed to substantiate the charitable contribution. In 1988, neither petitioner nor Mr. Rowe wrote any checks on the NCNB account to the St. Cloud First United Methodist Church.
On their 1989 return, petitioners claimed a charitable contribution deduction of $ 8,111. The Schedule A attached to the return did not identify any organization to which a contribution was made. Respondent disallowed the entire amount claimed as charitable contribution deduction for 1989 on the ground that petitioners had failed to substantiate the charitable contribution. No evidence was presented establishing whether any checks were written on the NCNB account to the St. Cloud First United Methodist Church in 1989.
Petitioner claims that this item is allocable to Mr. Rowe*423 because he controlled the amount contributed to the church and he represented to her that the contributions had been made. Respondent argues that this item should be allocated evenly between petitioner and Mr. Rowe because the contributions were to a church which they both attended and in which petitioner was actively involved.
Congress intended for personal deduction items to generally be allocated equally between spouses, unless the electing spouse establishes that a different allocation is appropriate.
*425 2. Actual Knowledge
Respondent argues that petitioner had actual knowledge that the charitable contributions were not made in 1988 and 1989. In order to prove actual knowledge, respondent must show that petitioner had "actual knowledge of the factual circumstances which made the item unallowable as a deduction."
In the instant case, Mr. Rowe was in charge of petitioners' financial and business affairs. Petitioner testified that the amount petitioners' tithed to the church was Mr. Rowe's decision. Petitioner further testified that she was "told when to write checks to the church", and she wrote checks only when directed to by Mr. Rowe. Petitioner credibly testified that she was not surprised by the amounts of charitable contributions deductions claimed in 1988 and 1989, and she believed that contributions were*426 made during those years.
Respondent maintains that if only petitioner wrote checks to the church from the joint account in 1987, then the fact that no checks were written to the church from the joint account in 1988 demonstrates that petitioner had actual knowledge that no contributions were made in either 1988 or 1989. 27 However, petitioner testified that, beginning in 1988, her role in paying bills and writing checks diminished because Mr. Rowe began to take over those duties. Mr. Rowe corroborated this point by testifying that at some point during the years in issue he took over the responsibility of paying certain bills, such as mortgage payments, car payments, and credit card payments. Mr. Rowe further testified that he had various other accounts which he used to transfer money and that petitioner did not have knowledge of these accounts.
*427 The fact that no checks were written on petitioners' joint account in 1988 does not establish that petitioner had actual knowledge that no contributions were made to the church in either 1988 and 1989. Mr. Rowe testified that he did not know whether he provided petitioner with any information regarding charitable contributions. In the instant case, petitioner had no reason to believe that Mr. Rowe had not contributed to the church in 1988 and 1989 in the same manner as petitioners contributed in prior years. Under the circumstances presented in this case, respondent has failed to show that petitioner had actual knowledge that the charitable contributions were not made in 1988 and 1989. Accordingly, we hold that petitioner is entitled to relief from joint liability under
Petitioner claims that she is entitled to complete relief from liability under
Petitioner claims that, to the extent she fails to qualify for relief under
Petitioner's claim for relief from joint liability was initiated in her amended petition to this Court. Before trial, respondent conceded that petitioner was entitled to relief with respect to certain items contained in the notices of deficiency. We must presume that "before doing so, respondent followed standard procedures by reviewing his administrative files and considered petitioner's contentions."
We have previously found that petitioner did not have actual knowledge under
Petitioner also testified that she was unaware of the audits of petitioners' taxable years 1987 through 1990 until late 1995 and that she never received any correspondence from the Internal Revenue Service. Mr. Rowe could not remember who received the notices of deficiency, and he could not remember discussing or giving petitioner copies of them. However, Mr. Rowe testified that he, not petitioner, would have opened up any correspondence from the*431 Internal Revenue Service. Mr. Danley testified that when petitioners where audited, he never spoke to petitioner about the audit. At trial, the revenue agent assigned to the examination of petitioners' 1987, 1988, and 1989 tax returns, testified that he did not talk with petitioner during the examination. Moreover, he did not recognize petitioner in the courtroom at trial. 28 The revenue agent assigned to the examination of petitioners' 1990 tax return testified that he had never met petitioner. 29
*432 Petitioner testified that she did not sign the tax returns under duress. However, petitioner did testify that Mr. Rowe would get "verbally ugly" if she questioned him about business documents and that she was only provided with information when Mr. Rowe wanted her to know. Christopher testified that there were several arguments between petitioner and Mr. Rowe, and they usually centered around the discussion of financial matters. Christopher further testified that when petitioner asked Mr. Rowe questions concerning financial matters, Mr. Rowe would either ignore her and leave or become angry and tell her it was none of her business.
The record also reflects that petitioner will suffer economic hardship if relief is not granted. In 1995, Mr. Rowe was convicted of Federal money laundering. He was sentenced to 33 months in prison and ordered to make restitution to the Bank of New York in the amount of $ 359,452.17. 30 Petitioner testified that in 1995 she moved from Florida back to Kingsport, Tennessee, to live with her parents because she was destitute and had no funds to provide a home for herself. Petitioner and Mr. Rowe's divorce was finalized in June 1996. The final judgment for*433 Dissolution of Marriage between petitioner and Mr. Rowe states that petitioner's "standard of living and financial circumstances have been devastated by * * * [Mr. Rowe's] wrong-doing and incarceration." The Final Judgment also notes that petitioner "does not have the present financial resources to support herself and * * * [petitioners' daughter, Elizabeth] adequately, but that * * * [Mr. Rowe] does not have the present ability to pay alimony." 31 On the basis of the factual circumstances present, Mr. Rowe was ordered to pay petitioner $ 1 of permanent alimony per year, although the court reserved jurisdiction to modify the amount upon Mr. Rowe's release from incarceration and re-entry into the job market.
*434 Petitioner testified that after the divorce there was very little money left in a college fund to pay for Elizabeth's undergraduate education. Petitioner testified that she and Elizabeth had to supplement the fund with student loans and whatever money petitioner could contribute from her own income. At the time of trial, petitioner was employed full time as a dental hygienist, and she was paid by commission only.
Finally, the evidence in the record demonstrates that petitioner has not significantly benefited, either during or after her marriage, from the items giving rise to the deficiencies. Petitioner did not have expensive jewelry, drive a luxurious car, or wear designer clothes. In fact, petitioner testified that she generally made clothes for herself and her daughter. Mr. Rowe testified that petitioner did not expend money lavishly. Petitioner testified that the only trip the family went on contemporaneous to the years in issue was a 1986 trip to Hawaii, and the testimony indicates that the trip was inexpensive and not lavish. 32
*435 Although the purchase price of the Albritton property and construction of a residence at that location exceeded $ 1 million, the inside of the residence was sparsely furnished with old office furniture from Mr. Rowe's business, and the walls were decorated with arts and crafts which were handmade by petitioner. As a result of Mr. Rowe's criminal activities, petitioner had to move out of the Albritton residence and back to Kingsport, Tennessee, to live with her parents because she was destitute and had no funds to provide a home for herself. 33
Despite the fact that Mr. Rowe was earning substantial amounts of income during the years in issue, in 1989 and 1990*436 only $ 26,176 and $ 7,086, 34 respectively, were deposited into the NCNB account, which petitioner testified was the only account she used during the years in issue. Mr. Rowe testified that he put almost all the money he earned back into his dental business and horse activity. Presumably, Mr. Rowe was also depositing most of his earnings into his separate accounts which petitioner was unaware existed. In his deposition, Mr. Shirah stated that Mr. Rowe purchased a house in the name of Mr. Shirah's business for another woman. 35 Mr. Shirah stated that Mr. Rowe was involved with the other woman during his marriage to petitioner. At trial, Mr. Rowe admitted becoming involved with the other woman in 1993. Petitioner testified that the reason she filed for divorce was because Mr. Rowe was involved with the other woman while he was still married to petitioner. 36
*437 On the basis of all the facts and circumstances of this case, we find that compelling reasons existed for respondent to grant petitioner equitable relief. Consequently, we hold that respondent abused his discretion in denying petitioner's claim for relief under
Respondent did not determine that the fraud additions to tax pursuant to section 6653(b) for the taxable years 1987 and 1988, and the fraud penalty pursuant to section 6663 for the taxable year 1989, were applicable to petitioner. On brief, respondent concedes that to the extent any relief is granted for a portion of the deficiencies, relief is automatic for the penalties related to that portion. Petitioner concedes that the estimated tax penalty pursuant to section 6654 for 1990 should be allocated proportionally to the allocation of the underlying deficiency. Petitioner contends that it is inequitable to hold her liable for any remaining additions to tax or penalties.
We have previously held that we have jurisdiction to review the denial of relief from*438 joint liability under
In our opinion, it is an abuse of discretion to deny relief under
Respondent determined that petitioners were liable for the addition to tax pursuant to section 6651(a)(1) for 1989. Section 6651(a)(1) imposes an addition to tax for failure to file a required return on the date prescribed. After factoring in the parties' *439 concessions and our decisions in petitioner's favor, petitioner does not have an unpaid tax liability for 1989. In light of respondent's concession, petitioner is not liable for the addition to tax for 1989.
For the taxable years 1987 and 1988, respondent determined that petitioners were liable for the substantial understatement penalty pursuant to section 6661. However, after taking into account respondent's concessions and the issues decided in petitioner's favor, petitioner's sole remaining liability for those years involves an $ 85 theft loss adjustment in 1987 which the parties agree is allocable one-half to petitioner. 37 With the minimal theft loss adjustment remaining as the only issue for petitioner for 1987, the predicate for the substantial understatement penalty no longer exists. Accordingly, we hold that petitioner is not liable for this penalty for either taxable year.
Finally, respondent determined that petitioner*440 was liable for the accuracy-related penalty pursuant to
After factoring in the parties' concessions and our decisions in petitioner's favor, petitioner's tax liability for 1990 stems from $ 6,253 of omitted W-2, Wage and Tax*441 Statement, income and $ 48.50 of omitted interest income. In
Petitioner trusted and relied upon Mr. Cheshire when it came to the preparation of their tax returns. She is an elementary school teacher, having taken no courses in accounting or tax return preparation. She asked Mr. Cheshire about the potential tax ramifications of the retirement distributions, and Mr. Cheshire assured petitioner that he had consulted with a certified public accountant and had been advised that the payment of the outstanding mortgage on the family residence and any amount rolled over into a qualified account reduced the taxable amount of the retirement distributions. Mrs. Cheshire had no reason to doubt the truthfulness of Mr. Cheshire's statement, and in fact believed him. Under these circumstances, we do not believe petitioner had an obligation to inquire
*442 further. [
Petitioner has no background in accounting, tax, or other financial matters, and she was primarily a housewife during her marriage to Mr. Rowe. Like the spouse claiming relief in
We find that petitioner had reasonable cause for the understatement caused by the omitted wage income*443 and omitted interest income. Furthermore, we believe petitioner acted in good faith in erroneously concluding that the wage income and interest income was included in the 1990 return. Given the extreme facts and circumstances of this case, we believe that respondent abused his discretion by failing to grant petitioner relief from joint liability for the accuracy-related penalty for 1990. Accordingly, we hold that petitioner is not liable for this penalty for 1990.
To reflect the foregoing,
Decisions will be entered under Rule 155.
Appendix
In stipulations of agreed issues, petitioner John A. Rowe conceded the following deficiencies in income taxes, additions to tax, and penalties: 38
| Additions to Tax and Penalties | ||||
| Sec. | Sec. | |||
| Year | Deficiency | 6653(b)(1)(1) | 6653(b)(1)(B) | Sec. 6661 |
| 1987 | $ 173,817 | $ 130,363 | 1 | $ 43,454 |
| Sec. 6653(b)(1) | Sec. 6661 | |||
| 1988 | 53,937 | $ 40,453 | $ 13,484 | |
| Sec. 6651(a)(1) | Sec. 6663 | |||
| 1989 | 73,279 | $ 13,792 | $ 54,959 | |
| Sec. 6654 | Sec. 6662(c) | |||
| 1990 | 124,891 | $ 8,057 | $ 24,978 | |
*444 In a stipulation of settled issues, respondent and petitioner Donna L. Rowe agreed to the following disposition of certain issues:
Ms. Rowe conceded that she is not entitled to relief from joint liability for an $ 85 theft loss adjustment in 1987 and a $ 6,253 income adjustment in 1990. Ms. Rowe also conceded that she is not entitled to relief from joint liability for $ 48.50 of interest income, still in dispute, which was part of a $ 4,847 adjustment in 1990.
Respondent conceded that Ms. Rowe is entitled to relief*445 from joint liability under
In the stipulation of facts and first supplemental stipulation of facts, the following concessions were made:
Respondent conceded that, pursuant to
Footnotes
1. The fraud additions to tax pursuant to sec. 6653(b) for the taxable years 1987 and 1988, and the fraud penalty pursuant to sec. 6663 for the taxable year 1989, relate only to petitioner John A. Rowe.↩
1. 50 percent of the interest due on $ 173,817.↩
2. See appendix.↩
3. References to
sec. 6015↩ are to that section as added to the Internal Revenue Code by the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201, 112 Stat. 734. unless otherwise indicated, all other section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.4. Richard Danley (Mr. Danley), an accountant, assisted Mr. Rowe in preparing petitioners' 1990 Federal income tax return.↩
5. Approximately $ 4,102 of the deposit total for 1990 represented petitioner's earnings from her employment as a substitute teacher.↩
6. Sec. 6013(e) initially provided relief only in cases involving an omission of income. The scope of sec. 6013(e) was expanded in 1984 to provide relief in cases involving erroneous deductions. Deficit Reduction Act of 1984, Pub. L. 98-369, sec. 424, 98 Stat. 494, 801-803; H. Conf. Rept. 98-861, at 1119 (1984), 1984-3 C.B. (Vol. 2) 1, 373.↩
7.
Sec. 6015(d) provides, in pertinent part:SEC. 6015(d) . Allocation of Deficiency. -- For purposes of * * *[section 6015(c) ] --(3) Allocation of Items Giving Rise to the Deficiency. -- For purposes of * * *
[section 6015(c) ] --(A) In general. -- Except as provided in paragraphs (4) and (5), any item giving rise to adeficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.↩
8. On Mar. 29, 2001, minor corrections were made to the proposed regulations.
Sec. 1.6015-1, Proposed Income Tax Regs. ,66 Fed. Reg. 17130 (Mar. 29, 2001). The proposed regulations provide that erroneous items are generally allocated between spouses as if separate returns are filed, subject to four exceptions.Sec. 1.6015- 3(d)(2) , Proposed Income Tax Regs.,66 Fed. Reg. 3888, 3898 (Jan. 17, 2001). The exceptions cover situations where: (1) One spouse receives a tax benefit on the joint return, (2) one or both spouses commit fraud, (3) erroneous items of income are present, and (4) erroneous deduction items are present.Sec. 1.6015-3(d)(2)(i)-(iv), Proposed Income Tax Regs. , supra. With respect to situations involving omitted income and erroneous deduction items, the proposed regulations provide language similar to that contained in the legislative history.Sec. 1.6015-3(d)(2)(iii) ,(iv), Proposed Income Tax Regs. ↩, supra. The proposed regulations omit Congress's reference to the equitable reallocation of an item where the electing spouse did not know, or have reason to know, of an item.9. On the basis of Mr. Rowe's control and concealment of the retirement account and the distributions, it appears that Mr. Rowe, not petitioner, would have been required to report this item if he had filed a separate return. See, e. g.,
James v. United States, 366 U.S. 213, 219, 6 L. Ed. 2d 246, 81 S. Ct. 1052 (1961) (holding that embezzled funds must be included in the embezzler's gross income for Federal income tax purposes in the year in which they were misappropriated);Yerkie v. Commissioner, 67 T.C. 388, 390↩ (1976) (same).10. Petitioner's name is signed "Donna L. Rowe" on the settlement statement and the check.↩
11. Copies of a deed and a settlement statement list petitioner and Mr. Rowe as the purchasers of the Anorada property; however, neither petitioner's nor Mr. Rowe's signature appears on the copies of the documents.↩
12. Petitioner's name is signed "Donna Rowe" on the settlement statement and check.↩
13. Because petitioner cannot qualify for relief under
sec. 6015(c) for the portions of items which are allocable to her, we analyze her ability to qualify for relief for such portions in our later discussion undersec. 6015(b) and(f)↩ . See infra pp. 53- 61.14. We note that the settlement statement does not identify petitioners' basis in the property at the time of sale.↩
15. We note that the first page of the 1987 return lists a capital gain of $ 30,159, which is almost the same amount of gain realized on the sale of Lots 22 and 27.↩
16. In the notice of deficiency for the years 1987, 1988, and 1989, respondent provided the following explanation:
1.f.II. It is determined that $ 13,155 of home mortgage interest expense claimed on Schedule A in the 1988 tax year is disallowed because this amount relates to one of your rental properties and has already been deducted on Schedule E. Thus, this mortgage interest must be disallowed from Schedule A to prevent it from being deducted twice. Accordingly, your taxable income for the 1988 tax year is increased by $ 13,155.↩
1. We nore that 98,780 x .669 yields a result of 66,083.82, not 66,105.↩
2. After factoring in respondent's previously mentioned mathematical error the actual increase in taxable income would be $ 56,442.18. Thus, respondent's mathematical error benefits petitioners.↩
17. Because petitioner cannot qualify for relief under
sec. 6015(c) for the portions of items which are allocable to her, we analyze her ability to qualify for relief for such portions in our later discussion undersec. 6015(b) and(f)↩ . See infra pp. 53- 61.18. The notice of deficiency provides no explanation as to how this allocation was determined or why 33.1 percent of the allowable interest expense should have been reported on Schedule F. At trial, Robert Bamber (Mr. Bamber), the revenue agent assigned to the examination of petitioners' 1990 tax return, testified that he examined the interest expense claimed on Schedule F, $ 60,564, and the mortgage interest deduction claimed on Schedule A, $ 122,526, and calculated the proportion claimed on each Schedule in relation to the overall interest amount claimed, $ 183,090. On the basis of information reported by other sources, Mr. Bamber determined that petitioners' allowable interest related deduction was $ 98,780, and he allocated this amount between the Schedule A and the Schedule F in the same proportion as the amounts claimed on the 1990 return. Consequently, respondent limited petitioners' Schedule A mortgage interest deduction to $ 66,105.↩
19. As previously mentioned, the notice of deficiency contains a mathematical error which benefits petitioners by approximately $ 21. For purposes of this issue, we shall use the amounts determined by respondent in the notice of deficiency.↩
20. We note that Mr. Rowe testified that at some point during the years in issue he took over the responsibility of making the mortgage payments.↩
21. Mr. Rowe first met Joseph and Patricia Shortino (the Shortinos) in 1985, and they became personal friends of petitioners.↩
22. No checks from petitioners' joint account were written to either Joseph Shortino or Patricia Shortino. Only Mr. Rowe's signature is listed on various checks payable to Showcase Farms, Inc., dated during the years in issue. Additionally, only Mr. Rowe's signature is listed on two other checks with memo notations of "Horse show" and "Stable". Our review of all the checks written on petitioners' joint account reveals that petitioner's signature is not listed on any checks which, on the basis of the payee and the memo notation, indicate payment in connection with any horse or fish activity.↩
23. As an alternative ground for disallowing the Schedule F losses, respondent determined that petitioners failed to substantiate the claimed losses. On brief, respondent limits his
sec. 6015(c)↩ argument to the contention that petitioner had actual knowledge that the horse and fish activities were not engaged in for profit. While respondent asserts that petitioners have failed to prove that the losses were actually incurred, respondent has not proven that the losses were not incurred and makes no allegation that petitioner had actual knowledge that such losses were not incurred.24. Petitioner testified that she did not know whether parentheses around a number on a tax return indicated a loss or a profit.↩
25. The legislative history of
sec. 6015 provides the following example of an allocation of charitable contributions:Personal deduction items are expected to be allocated equally between spouses, unless the evidence shows that a different allocation is appropriate. For example, a charitable contribution normally would be allocated equally to both spouses. However, if the wife provides evidence that the deduction relates to the contribution of an asset that was the sole property of the husband, any deficiency assessed because it is later determined that the value of the property was overstated would be allocated to the husband. [S. Rept. 105-174, at 57 (1998),
1998-3 C.B. 537↩, 593 .26. Because petitioner cannot qualify for relief under
sec. 6015(c) for the portions of items which are allocable to her, we analyze her ability to qualify for relief for such portions in our later discussion undersec. 6015(b) and(f)↩ . See infra pp. 53- 61.27. As previously mentioned, no evidence was presented establishing whether any checks were written on the NCNB account to the St. Cloud First United Methodist Church in 1989.↩
28. The revenue agent originally testified that he had met petitioner when he issued a summons because he personally went to petitioners' home and gave copies of the notice to the woman who answered the door. However, the revenue agent then testified that he had assumed petitioner was the woman who answered the door but that petitioner was presently "not the least bit familiar to me".↩
29. There is other evidence in the record to support petitioner's claims that Mr. Rowe did not keep her informed about their financial affairs. For example, petitioner and John Albers, the police officer who arrested Mr. Rowe in 1989 in connection with the embezzlement charges related to Mr. Rowe's employment at the Central Florida Dental Association, both testified that petitioner was not aware that Mr. Rowe was arrested for embezzlement until she read about it in the newspaper.↩
30. Mr. Rowe was subsequently convicted in 1997 of 51 counts of unlawful compensation under Florida State Medicaid laws and one count of organized fraud. He was sentenced to 8 months in prison and ordered to make restitution of $ 5,051.45 to the Department of Health and Human Services in the amount.↩
31. The final judgement also found that petitioner did not have the financial ability to accept collect calls from Mr. Rowe.↩
32. Joseph Shirah, who accompanied petitioners on the Hawaii trip, testified that the plane tickets for the trip were at a discount rate and "it was a very inexpensive trip."↩
33. Respondent determined that petitioners had unreported income of $ 283,928, $ 29,924, $ 94,648, and $ 82,053, respectively for the years 1987 through 1990. This unreported income was attributable solely to Mr. Rowe, and respondent concedes that petitioner is not liable for any deficiency associated with this unreported income for the years in issue.↩
34. Of this deposit total, approximately $ 4,102, represented petitioner's earnings from her employment as a substitute teacher.↩
35. Mr. Shirah stated that Mr. Rowe signed the realty contract and the mortgage on the house. However, Mr. Shirah stated that Mr. Rowe had no connection to Mr. Shirah's business.↩
36. At trial, Mr. Rowe testified that he married the other woman after he and petitioner were divorced.↩
37. See appendix.↩
38. Petitioner John A. Rowe's concessions encompass all the determinations made by respondent in the notices of deficiency.↩
Related
Cite This Page — Counsel Stack
2001 T.C. Memo. 325, 82 T.C.M. 1020, 2001 Tax Ct. Memo LEXIS 361, 27 Employee Benefits Cas. (BNA) 1596, Counsel Stack Legal Research, https://law.counselstack.com/opinion/rowe-v-commr-tax-2001.