Capehart v. Comm'r of Internal Revenue (In re Estate of Capehart) , 9943–97.

• Citation: 125 T.C. 211,125 T.C. No. 10
• Decision Date: 14 November 2005
• Docket Number: No. 9943–97.,9943–97.
• Parties: ESTATE OF Robert J. CAPEHART, Deceased, Ingrid Capehart, Personal Representative, and Ingrid Capehart, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

125 T.C. 211
125 T.C. No. 10

ESTATE OF Robert J. CAPEHART, Deceased, Ingrid Capehart, Personal Representative, and Ingrid Capehart, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 9943–97.

United States Tax Court.

Nov. 14, 2005.

[125 T.C. 211]

H & W filed a joint Federal income tax return for 1994. R disallowed losses attributable equally to H & W. As a result of the disallowance of the losses, R also disallowed a deduction for medical/dental expenses claimed on the return. The parties agree that W is entitled to relief from liability pursuant to sec. 6015(c), I.R.C. Consequently, W's liability cannot exceed the portion of the deficiency properly allocable to her under sec. 6015(d), I.R.C. The parties disagree as to the amounts of the deficiency and the sec. 6662(a), I.R.C., accuracy-related penalty for 1994 that are to be allocated to W under sec. 6015(d), I.R.C.

1. Held: The disallowed medical/dental expenses are erroneous items that gave rise to a portion of the deficiency and must be allocated between H & W in determining the portion of the deficiency properly allocable to W under sec. 6015(d), I.R.C.

2. Held, further, sec. 6015(d), I.R.C., does not limit the portion of the deficiency properly allocable to W to the amount of tax W would have owed had she filed a separate return.

3. Held, further, sec. 6015(d), I.R.C., does not limit the portion of the deficiency properly allocable to W to W's proportionate share of the taxable income properly reported on the joint return.

4. Held, further, the erroneous items attributable to W are allocable to W under sec. 6015(d), I.R.C., to the extent of W's taxable income properly included on the joint return.

5. Held, further, the alternative allocation method set forth in sec. 1.6015–3(d)(6)(i), Income Tax Regs., does not apply because erroneous deductions are not “erroneous items that are subject to tax at different rates”.

6. Held, further, computation of the portions of the deficiency and the sec. 6662(a), I.R.C., accuracy-related penalty allocable to W for 1994 under sec. 6015(d), I.R.C., determined.

Terri A. Merriam, Wendy S. Pearson, and Jennifer A. Gellner, for petitioners.

Nhi T. Luu–Sanders, for respondent.

[125 T.C. 212]

OPINION JACOBS, J.

Respondent determined the following deficiency in petitioners' Federal income tax and accuracy-related penalties for 1994: ¹

+--------------------------------------------------------------+
                ¦ ¦Accuracy–Related Penalty ¦
                +----------+---------------------------------------------------¦
                ¦Deficiency¦Sec. 6662(h)¦Sec. 6662(e)¦Sec. 6662(d)¦Sec. 6662(c)¦
                +----------+------------+------------+------------+------------¦
                ¦ ¦ ¦ ¦ ¦ ¦
                +----------+------------+------------+------------+------------¦
                ¦$17,059 ¦$6,823 ¦$3,411 ¦$3,411 ¦$3,411 ¦
                +--------------------------------------------------------------+
                

In the second amendment to petition, Ingrid Capehart (petitioner) elected and requested relief from tax liability under section 6015(b), (c), and (f).

The parties have filed a stipulation of settled issues and a stipulation of facts. In the stipulation of settled issues the parties have settled the substantive issues for determining the deficiency and the penalties. The parties agree that petitioners have a Federal income tax deficiency of $8,225 and are liable for an accuracy-related penalty under section 6662(a) in the amount of $507 for 1994. In addition, petitioner no longer seeks relief under section 6015(b) and (f), and respondent agrees that petitioner is entitled to relief under section 6015(c).

The sole issue for decision concerns the computation of the portion of the deficiency and the accuracy-related penalty for 1994 allocable to petitioner under section 6015(d).

Background

The facts in this case have been stipulated and are found accordingly. The stipulation of settled issues, the stipulation of facts, and the exhibits submitted therewith are incorporated herein by this reference.

When the petition in this case was filed, petitioner and her husband, Robert J. Capehart (Mr. Capehart), resided in

[125 T.C. 213]

Sparks, Nevada. Mr. Capehart died on January 23, 2002, after the petition in this case was filed. The Estate of Robert J. Capehart, Deceased, has been substituted as a party. Petitioner is the personal representative of Mr. Capehart's estate.

On April 15, 1995, Mr. Capehart and petitioner filed a joint Federal income tax return for 1994 on which they reported the following:

+-------------+
                ¦Item¦¦Amount ¦
                +----++-------¦
                ¦ ¦¦ ¦
                +-------------+
                

Income
                Wages, salaries, tips, etc. $52,071
                Interest 473
                Dividends 135
                State tax refund 373
                Capital gain 190
                Other gain or loss (Form 4797) (37,239)
                Pension 12,426
                Gambling income 2,458
                

Adjustments to income
                Mr. Capehart's IRA deduction (1,200)
                Petitioner's IRA deduction (1,200)
                Adjusted gross income $28,487
                

Itemized deductions (Schedule A)
                Medical/dental 1 1,143
                State income taxes 442
                Real estate taxes 907
                Personal property taxes 504
                Mortgage interest 4,164
                Charitable gifts 180
                Theft loss 4,183
                Gambling losses 2,458
                Total (13,981)
                Net income 14,506
                Exemptions (4,900)
                Taxable income 9,606
                Tax 1,444
                Federal income tax withheld 2 7,132
                Refund 5,688
                

[125 T.C. 214]

Respondent did not refund the $5,688 overpayment reflected on the joint return but instead issued a “pre-filing notification letter” that the refund was “suspended”.

Respondent issued petitioner and Mr. Capehart a notice of deficiency dated March 28, 1997. In the notice of deficiency, respondent, inter alia, disallowed the $37,239 loss claimed on Form 4797, Sale of Business Property (the Form 4797 loss), and the $4,183 theft loss claimed on the return. Petitioners now agree that they are not entitled to deduct these losses in 1994. The Form 4797 loss and the theft loss are related to petitioner's and Mr. Capehart's participation in a partnership formed, promoted, and operated by Walter J. Hoyt III. These losses are attributable equally to petitioner and Mr. Capehart.

Discussion

As a general rule, spouses filing joint Federal income tax returns are jointly and severally liable for all taxes due. Sec. 6013(d)(3). Section 6015 provides three alternative grounds for granting relief from joint and several liability. First, section 6015(b) provides for traditional relief from joint and several liability for a tax deficiency following the model of former section 6013(e). Second, section 6015(c) provides for an allocation of liability for a tax deficiency. Finally, section 6015(f) provides for relief from liability for any unpaid tax or deficiency on equitable grounds, but only if section 6015(b) and (c) does not apply.

Under section 6015(c)(3), if spouses who filed a joint return are no longer married or are legally separated, then the requesting spouse may elect to limit his/her liability to the portion of the deficiency allocated to him/her as provided in section 6015(d). The deficiency is determined from the joint return on the basis of the married filing joint return status (the rate elected by the spouses when they filed the joint return). The electing spouse generally bears the burden of proof with respect to establishing the portion of any deficiency that is allocable to him/her. Sec. 6015(c)(2).

The parties agree that petitioners have a deficiency in their 1994 Federal income tax of $8,225 and are liable for an accuracy-related penalty under section 6662(a) of $507. They also agree that petitioner qualifies for relief under

[125 T.C. 215]

section 6015(c). The parties disagree as to the amounts of the deficiency and the penalty for which petitioner is liable pursuant to section 6015(d).

A. Proportionate Allocation Method

Generally the portion of the deficiency on a joint return allocated to an individual is the amount that bears the same ratio to the deficiency as the net amount of items taken into account in computing the deficiency and allocable to the individual under section 6015(d)(3) bears to the net amount of all items taken into account in computing the deficiency. Sec. 6015(d)(1). Section 6015(d)(3)(A) provides that items giving rise to a deficiency on a joint return (erroneous items) shall be allocated to each spouse as though each had filed a separate return for the taxable...