Freck v. I.R.S.
| Citation | 37 F.3d 986 |
| Decision Date | 21 July 1993 |
| Docket Number | No. 93-7007,93-7007 |
| Parties | -6544, 94-2 USTC P 50,518 Lucy FRECK, a/k/a Lucy Cameron, Appellant, v. INTERNAL REVENUE SERVICE, Appellee. . Submitted Under Third Circuit LAR 34.1(a) |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Lucy Freck, pro se.
Michael L. Paup, Acting Asst. Atty. Gen., James J. West, U.S. Atty., Gary R. Allen, Gilbert S. Rothenberg, Curtis C. Pett, U.S. Dept. of Justice, Tax Div., Washington, DC, for appellee.
Present: STAPLETON, HUTCHINSON and ROTH, Circuit Judges.
Appellant, Lucy Freck ("Freck"), a/k/a Lucy Cameron, appeals pro se a judgment the United States District Court for the Middle District of Pennsylvania entered against her and in favor of the United States on her claims for refunds of income taxes the Internal Revenue Service ("IRS") 1 collected for 1978, 1979, and 1980. 2 During each of these three tax years, Freck and a man named William Cameron ("Cameron") signed and filed joint income tax returns. When Freck signed these returns, she thought that she was Cameron's common law wife but neither New York nor New Jersey, the only two states in which Freck and Cameron cohabitated, recognize common law marriage. Freck seeks refund of a payment of $32,500.00 that a lawyer remitted to IRS out of a settlement fund due her and her current husband, Stephen Freck, without instruction as to its application. The fund arose from an unrelated state lawsuit settled in 1988. IRS contends it was entitled to the settlement funds by virtue of tax liens arising out of taxes assessed against Cameron and Freck on income attributable to Cameron for tax years 1978, 1979 and 1980 and, in the absence of instructions, that it was entitled to credit the payment first to interest and principal for the earliest years or in the manner most advantageous to the government. The district court concluded that Freck could not qualify for relief from the assessment under 26 U.S.C.A. Sec. 6013(e)(1) (West Supp.1994) as an innocent spouse because she was never married to Cameron. It then accepted IRS's argument that she was equitably estopped from asserting she was not liable for taxes on Cameron's income because of IRS's reliance on her innocent misrepresentation that Freck was Cameron's wife in giving him the benefit of the lower joint rates he was not entitled to as a single person during taxable years now closed.
Freck contends the settlement funds were paid to IRS by her adversary's counsel without her knowledge and that she had no opportunity to tell IRS how to apply them. She also argues that if she is barred from claiming an "innocent spouse" exemption under 26 U.S.C.A. Sec. 6013(e)(1) 3 because her common law marriage is not recognized by New York or New Jersey, she should be allowed to amend her returns to reflect her status as a single taxpayer for her own 1978, 1979 and 1980 tax years, all of which do remain open. 4
The district court found the payment made on Freck's behalf was voluntary but failed to make any finding as to whether Freck had an opportunity to exercise her right to direct the application of that payment. We believe a taxpayer who volunteers a payment should be given an opportunity to tell IRS how to allocate her payment against any unsatisfied assessments against her. Therefore, we will remand the case for further proceedings so the district court can make a finding on whether Freck had that opportunity. Because of IRS's strict insistence on its legal right to allocate the payment made on Freck's behalf in the manner most advantageous to the government and so leave Freck with a large and ever-growing liability for an assessment of tax and interest on income that was not hers, we also believe the district court should not have accepted IRS's equitable estoppel argument without considering whether IRS's appeal to equity was foreclosed by the equitable maxim that he who desires equity must be willing to do equity.
Freck and Cameron lived together in New Jersey and New York for about ten years from 1972 until 1982. Neither state recognizes common law marriages, and Freck and Cameron never took steps to legitimize their relationship through any type of formal ceremony. They did have three children. Cameron was the sole breadwinner for all five members of his family. He started his business career as a "runner" on the New York Commodity Exchange. In 1980, he incorporated the Trading Corporation ("L and B") to conduct business as a commodities trader. He was "L and B's" sole stockholder.
IRS has been unable to produce the filed original of Freck's and Cameron's returns for any of the years in question. At trial, it offered what appears to be a copy of the 1978 tax return on which Freck's signature appears as Lucy Cameron. The district court admitted the copy. IRS does not have either originals or copies of Freck's or Cameron's returns for 1979 and 1980, but records it also offered and admitted at trial indicate that joint returns were filed for these years.
Freck could not recall signing the tax returns but testified at trial she would probably have done so if Cameron had asked her to. Freck took no part in managing the family's finances beyond handling the basic household expenses out of an allowance Cameron provided her. Freck also said that if she did sign the joint returns for 1978, 1979, and 1980, she would have accepted the figures Cameron presented to her without any reason to believe they were false.
In October of 1979, Freck and Cameron purchased a home at 9 Euclid Avenue, Ridgefield Park, New Jersey. They made a $7,000.00 down payment and financed the $50,000.00 balance with a mortgage. Freck testified that she became aware that Cameron was experiencing financial difficulties as a result of his trading on the commodities exchange sometime during that year. By 1981, Cameron was in arrears on periodic payments due on the mortgage and delinquent on the real estate taxes assessed against the home.
On their 1978 tax return, Cameron reported a gross income of $13,200.00 and, improperly using the joint rates, claimed a refund of $703.00. In 1979, Freck and Cameron received a refund of $89.00, again with the improper benefit of the joint rates. In 1980, they reported a tax liability of $15,125.00 but failed to pay it. The district court found Freck acted innocently without any intent to mislead IRS.
In 1982, Freck and Cameron separated. Freck continued to reside at the 9 Euclid Avenue address; Cameron moved to 173 Martin Avenue, Staten Island, New York. On February 23, 1983, Freck and Cameron sold a two-thirds interest in the residence at 9 Euclid Avenue to Freck's brother and sister-in-law and a one-third interest to Freck's brother Thomas, for a total of $62,500.00. Freck and her three children continued to reside at 9 Euclid Avenue, and Thomas later transferred his one-third interest in the property back to Freck.
Cameron's abandonment of his family forced Freck and her children to go on welfare in April 1983. They remained on the welfare rolls until January 1986, but Freck attended college during this time, and in 1986 she obtained full time employment as a secretary. In April 1987, Freck married Stephen Freck. The Frecks took up residence at 9 Euclid Avenue.
In 1983 IRS performed an audit and recalculated Freck and Cameron's tax liabilities, using the rates applicable to joint returns, as follows:
1978 corrected taxable income $32,510.00
tax deficiency $7,118.00 5
1979 corrected taxable income $61,255.00
tax deficiency $19,778.00
1980 corrected taxable income $36,158.00
tax deficiency $8,274.00
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Total Deficiencies $35,170.00 6
5. The IRS also assessed a fraud penalty of $3,559.00 against Cameron for the
1978 tax year. No fraud penalty was assessed against Freck
6. IRS's allocation of the $32,500.00 payment left Freck still owing about
$15,000.0.00 in taxes. See supra note 4 and infra note 9
See Appendix ("App.") at 35, 38.
On December 9, 1983, IRS sent Freck and Cameron a statutory notice of deficiency by certified mail addressed to 173 Martin Avenue and sent a copy of the notice to 9 Euclid Avenue, also by certified mail. The notice mailed to 173 Martin Avenue, Cameron's last known address, was returned to IRS marked "return to sender, moved left no address." Freck admits that she resided at 9 Euclid Avenue in December 1983 but denies receiving the notice of deficiency. When neither Cameron nor Freck paid the deficiencies or filed a timely petition for review by the Tax Court, see 26 U.S.C.A. Secs. 6213-14, 7442 (West 1989), IRS assessed the deficiencies pursuant to section 6213(c) and, in June 1987, filed a notice of federal tax lien against 9 Euclid Avenue pursuant to 26 U.S.C.A. Secs. 6321, 6323(f) (West 1989 & Supp.1994).
That same year, Freck became involved in a dispute with the brother and sister-in-law who had jointly acquired record title to a two-thirds undivided interest in the 9 Euclid Avenue property as a result of the 1983 sale. They filed an action in state court against the Frecks and her other brother Thomas. The parties agreed to settle this case in September 1988. Under the settlement, the Frecks were to receive $40,000.00 in exchange for whatever interest they had in the 9 Euclid Avenue property. 7
On September 27, 1988, Mark Winkler, Esquire of the law firm of Woodcock & Kingman mailed IRS a check for $32,500.00 from the settlement fund in exchange for a release of the tax lien against the property. The letter stated:
Pursuant to our conversation [today] enclosed please find a...
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