Butler v. Comm'r of Internal Revenue

• Decision Date: 28 April 2000
• Docket Number: No. 27554–96.,27554–96.
• Parties: Michael B. BUTLER and Jean Butler, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

114 T.C. 276

114 T.C. No. 19

Michael B. BUTLER and Jean Butler, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 27554–96.

United States Tax Court.

April 28, 2000.

Taxpayer petitioned for review of IRS' denial of her request for innocent spouse relief. The Tax Court, Wells, J., held that: (1) taxpayer had reason to know of understatement on joint tax return; (2) taxpayer was not entitled to proportionate innocent spouse relief; (3) Tax Court had jurisdiction to review denial of request for equitable innocent spouse relief; and (4) denial of innocent spouse relief was not an abuse of discretion.

Decision for IRS. P and H filed a joint 1992 Federal income tax return on which H failed to report income from an S corporation in which he was a shareholder. R issued a notice of deficiency jointly to P and H who in response filed a joint petition in this Court. H conceded that his share of the income from the S corporation was improperly omitted from the return. In the petition, P alleged that she was entitled to innocent spouse relief pursuant to sec. 6013(e), I.R.C. After trial, Congress enacted sec. 6015, I.R.C., and simultaneously repealed sec. 6013(e), I.R.C. The parties agreed to treat P's claim pursuant to sec. 6013(e), I.R.C., as an election pursuant to sec. 6015(b)(1), I.R.C., which R denied. Additionally, after trial, P requested that R consider equitable relief pursuant to sec. 6015(f), I.R.C. R considered P's request but denied P equitable relief. P seeks to reopen the record to introduce evidence as to P's ability to qualify for proportionate innocent spouse relief pursuant to sec. 6015(b)(2), I.R.C.P contends that she is an innocent spouse pursuant to sec. 6015(b)(1), I.R.C. Additionally, P contends that it was an abuse of R's discretion not to allow equitable relief pursuant to sec. 6015(f), I.R.C. Alternatively, P contends that she is entitled to proportionate relief, pursuant to sec. 6015(b)(2), I.R.C., for a portion of the omitted income. P contends that the Tax Court has jurisdiction to review R's determination that P is not entitled to equitable relief pursuant to sec. 6015(f), I.R.C. R contends that P is not entitled to innocent spouse relief pursuant to either sec. 6015(b)(1), I.R.C., or sec. 6015(f), I.R.C. and contends that we do not have jurisdiction to review R's denial of relief pursuant to sec. 6015(f), I.R.C.Held: P had reason to know of the understatement on P's and H's joint return, and, therefore, P is not entitled to innocent spouse relief, pursuant to sec. 6015(b)(1), I.R.C.Held, further, P's motion to reopen the record to introduce evidence as to P's ability to qualify for proportionate innocent spouse relief pursuant to sec. 6015(b)(2), I.R.C. is denied.Held, further, On the basis of the evidence in the record, P is not entitled, to proportionate innocent spouse relief pursuant to sec. 6015(b)(2), I.R.C.Held, further, The Tax Court has jurisdiction to review for abuse of discretion R's decision to deny P's request for equitable relief pursuant to sec. 6015(f), I.R.C.Held, further, R's denial of P's request for equitable relief was not an abuse of discretion.Robert H. Culton II, for petitioners.

Michael D. Zima, for respondent.

OPINION

WELLS, J.

Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1992 in the amount of $26,720 and an addition to tax pursuant to section 6651(a)(1) ¹ in the amount of $4,008.

After concessions, the issues to be decided ² are: (1) Whether Jean Butler (petitioner) is entitled to innocent spouse relief pursuant to section 6015(b) relating to the understatement of tax on petitioners' 1992 joint Federal income tax return; (2) whether the record in the instant case should be reopened to receive additional evidence regarding petitioner's ability to qualify for proportionate innocent spouse relief pursuant to section 6015(b)(2); and (3) whether this Court has jurisdiction to review for abuse of discretion respondent's denial of P's request, pursuant to section 6015(f), for equitable innocent spouse relief and, if so, whether it was an abuse of respondent's discretion to deny such relief.

Background

Some of the facts have been stipulated for trial pursuant to Rule 91. The parties' stipulations are incorporated into this Opinion by reference and, accordingly, are found as facts in the instant case. When they filed their petition, petitioners resided in Longwood, Florida.

Petitioners were married at the time they filed their petition, are currently married, and have always had a “smooth” marital relationship. Petitioner Michael B. Butler (petitioner's husband) has always applied all of his income toward the benefit of his family. Throughout their 35–year marriage, petitioner's husband has never concealed any assets from petitioner and has always told her about his financial endeavors.

Petitioner's husband operates a lucrative surgical practice in three Florida locations: Orlando, Apopka, and Altamonte Springs. Petitioner's family lived quite comfortably, with a very high standard of living, during 1992. They paid $19,963 in home mortgage interest during 1992, making their monthly mortgage payment more than $1,600. Their average monthly electricity bill during 1992 was greater than $275, and their average monthly phone bill was more than $100. Petitioner had credit cards from various upscale department stores, including Saks Fifth Avenue, Jacobsen's, Nieman Marcus, Dillard's, and Burdines. During the 8 months of 1992 for which petitioner provided canceled checks, petitioner spent $5,162.55 at such department stores. During 1992, petitioner also had credit cards at Sears and Montgomery Ward department stores, and had a Visa Gold charge card. Petitioner and her husband were members of the Orlando Opera Guild.

Petitioner's husband works at his surgical practice on an average of more than 70 hours per week. During 1992, petitioner worked with her husband as a medical transcriber, earning $11,700 in wages. Petitioner graduated from St. Louis University in 1960 with a degree in medical records administration. Because she had more free time, petitioner maintained the family's checking account and handled the bills for all of the household expenses. She usually retrieved the mail because she arrived home earlier than her husband.

Petitioner oversees the operation of JCB Construction, Inc. (JCB), an S corporation of which she has been the sole owner since its creation in 1987. As secretary-treasurer of JCB, petitioner maintains its books and records, keeps track of income and expenditures, handles payroll and personnel responsibilities, writes checks for materials and supplies, and collects information for the preparation of JCB's tax returns. JCB filed Forms 1120S with the Internal Revenue Service (IRS) from 1988 through 1996, and FICA and FUTA returns since at least 1989. The gains or losses of JCB were reported on petitioners' Federal income tax returns for the year at issue and in prior years.

B.G. Enterprises, Inc. (BGE) was an S corporation owned by petitioner's husband and Thomas George. BGE was engaged in the foliage nursery business in Apopka, Florida, on land owned jointly by petitioners. In 1990, BGE rented the Apopka property from petitioners and operated the nursery, as Sweetwater Greenery, from that time until some time in 1992. Petitioner's husband and Thomas George were each 50–percent shareholders of BGE. Petitioner never favored petitioner's husband's involvement with the nursery, and their discussions on the subject were usually contentious.

During mid-December 1990, BGE applied a fungicide called Benlate, manufactured by E.I. DuPont De NeMours and Co. (Dupont), to its plant inventory for protection against fungi. The Benlate treatments damaged the foliage, prompting BGE to seek damages from Dupont. Petitioner's husband told petitioner that he was going to Atlanta during August 1991 to negotiate a claim for damages against Dupont. BGE and Dupont reached a settlement (settlement) whereby Dupont paid BGE a total of $812,411 (settlement proceeds). The damage award represented compensation for three items: Crop damage in the amount of $367,046, replacement costs of $55,244, and business interruption of $390,121. Dupont paid BGE $455,000 during 1991 and $357,411 during 1992. After expenses, BGE received net proceeds of $158,759 from Dupont during 1992. Because BGE did not reenter the nursery business after the destruction of its inventory, most of the money BGE received was not spent on replacements. BGE paid JCB to remove unsalvageable plants and other waste materials from the nursery premises.

The exact amount of the distributions from BGE to petitioner's husband during 1992 is unknown, and petitioner has provided insufficient evidence to fully account for the settlement proceeds. The record contains no documents illustrating where the distribution of money from BGE to petitioner's husband was deposited during 1991 or 1992. Petitioner failed to explain the use of the following funds: $40,000 paid to petitioner's husband on January 14, 1992, from the escrow account holding the settlement proceeds; another $23,654 disbursed from the escrow account to petitioner's husband on March 31, 1992; and $5,238.47 which remained in the escrow account as of March 24, 1998. Petitioner offered only 8 monthly bank statements from petitioner and her husband's personal joint bank account for 1992. Petitioner failed to offer statements or canceled checks from any of petitioner's and her husband's other bank accounts. Petitioners held a bank account throughout 1992 at Southern Bank of Florida. Petitioners did not produce bank statements relating to that account from the periods March 12 to April 12, 1992, from May 12 to July 12, 1992, from August 12 to September 12, 1992, and from December 12 to December 31, 1992. Petitioners failed to offer any bank statements or other financial records from petitioner...