Cole v. Comm'r of Internal Revenue (In re Estate of Krock)
| Citation | 93 T.C. No. 55,93 T.C. 672 |
| Decision Date | 11 December 1989 |
| Docket Number | Docket Nos. 6935-73,1097-74. |
| Parties | ESTATE OF MIRIAM KROCK, DECEASED, NANCY COLE, ADMINISTRATOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
H and W understated their joint tax liabilities in an amount in excess of $2.2 million. P contests R's determination by claiming that W was an innocent spouse within the meaning of sec. 6013(e), I.R.C. 1954. P argues that it would be inequitable to hold W's estate liable because W did not receive benefits from the uncontested understatements, other than normal support. P argues that H and W were ‘wealthy‘ before, during, and after the years in issue and that W's lifestyle was always consistent with that wealth.
HELD: P bears the burden of proving that W received no significant benefit from the understatements other than normal support. This burden must be met with specific facts regarding such things as lifestyle expenditures, asset acquisitions, and the disposition of the benefits of the understatements. P has failed to meet its burden of proof. Oscar N. Persons and Steven M. Collins, for the petitioner.
Charles W. Maurer, Jr., for the respondent.
In a notice of deficiency dated June 18, 1973, respondent determined deficiencies in the joint Federal income taxes of Edward and Miriam Krock and additions to tax for the taxable years 1965 through 1969 as follows:
+--------------------------------------+
¦ ¦ ¦Additions to tax ¦
+------+------------+------------------¦
¦Year ¦Deficiency ¦sec. 6653(b)1 ¦
+------+------------+------------------¦
¦1965 ¦$109,600.98 ¦$54,800.49 ¦
+------+------------+------------------¦
¦1966 ¦840,825.72 ¦420,412.86 ¦
+------+------------+------------------¦
¦1967 ¦811,227.64 ¦405,613.82 ¦
+------+------------+------------------¦
¦1968 ¦477,665.21 ¦238,832.60 ¦
+------+------------+------------------¦
¦1969 ¦44,878.36 ¦22,439.18 ¦
+------+------------+------------------¦
¦Total ¦2,284,197.91¦1,142,098.95 ¦
+--------------------------------------+
In a second notice of deficiency dated December 13, 1973, respondent determined a deficiency in the joint Federal income tax of Edward and Miriam Krock and an addition to tax pursuant to section 6653(b) for taxable year 1964 in the respective amounts of $8,068.11 and $4,034.06.
Respondent has conceded that Miriam Krock is not liable for the additions to tax under section 6653(b) for any of the years in issue.
Edward and Miriam Krock filed separate petitions contesting the deficiencies. We have previously sustained the deficiencies and fraud additions to tax with respect to Edward Krock. 2 We have also previously decided certain issues involved in the instant consolidated cases regarding Miriam Krock's tax liabilities. Estate of Krock v. Commissioner, T.C. Memo. 1983-551. The sole remaining issue for decision is whether Miriam Krock was an innocent spouse within the meaning of section 6013(e). Miriam Krock died on August 29, 1978, and her estate has been substituted as a party in these cases.
Miriam Krock (Mrs. Krock) was a legal resident of Brookfield, Massachusetts when the petitions were filed in these cases. 3
In 1934, Mrs. Krock graduated from the Boston University Sargent College of Physical Education with a bachelor of science degree. On July 30, 1937, she married Edward Krock (Mr. Krock) and remained his wife until the date of her death. Mrs. Krock was not employed outside the home after 1956. She devoted her time to raising her two children and was also involved in various community, school, religious, and volunteer activities.
Mr. Krock had no formal education beyond the junior high school level. At an early age, he became involved in the organization, purchase, and sale of various business enterprises. During the years in issue, Mr. Krock was an internationally known financier. His business activities included many complicated and sophisticated financial transactions. During the Kennedy Administration in the early 1960s, Mr. and Mrs. Krock were frequent guests at the White House.
Mrs. Krock never became involved in Mr. Krock's business activities. Mrs. Krock left the responsibility for making the family's financial decisions to her husband.
In January 1948, Mr. and Mrs. Krock purchased a 40-room residence on 500 acres of land in Brookfield, Massachusetts for $50,000. The property included a swimming pool and tennis court, and it encompassed the largest private lake in Massachusetts. Several servants were employed, including a housekeeper, a gardener, and a chauffeur. The Krocks owned the residence and over 100 acres of the land as tenants by the entirety until June 5, 1969, when title was transferred to Mrs. Krock individually.
In 1967, Mr. Krock began cooperating with the Government in an investigation involving alleged violations of the Federal Securities Act. In 1968, he participated in over a hundred conferences with the United States Attorney's Office relating to the investigation. Because of Mr. Krock's involvement in the investigation, he was unable to devote much time to his business activities.
On November 22, 1968, the Grand Jury of the United States District Court for the Southern District of New York returned an indictment against Mr. Krock charging him with three counts of making false statements and omitting required information in a proxy statement and two annual reports of Fifth Avenue Coach Lines, Inc., and in an Annual Report of Defiance Industries, Inc. On November 3, 1969, Mr. Krock pleaded guilty to these charges.
The original joint income tax returns of Mr. and Mrs. Krock for the taxable years 1967, 1968, and 1969, were filed with the Internal Revenue Service in April 1970. These returns reported no tax liability for each year and claimed refunds for the years 1967 and 1968 of $39,415.96 and $2,767.91, which were paid.
Sometime in late 1968 or early 1969, Mr. Krock purchased a yacht for approximately $400,000 to $450,000. The yacht, named the ‘Speculator,‘ was approximately 125 feet long. It had a stateroom and two small bedrooms, and it required a crew of at least three. Sometime after the beginning of 1970, Mr. Krock began living in the Bahamas on the Speculator. He eventually established residence in the Bahamas. Mrs. Krock moved to the Bahamas to live with Mr. Krock. They both lived on the Speculator until sometime after September 1973, when they moved into an apartment on Paradise Island. They later moved into a house on the main island. Mrs. Krock returned periodically to the family residence in Brookfield, Massachusetts. Mrs. Krock continued to live with Mr. Krock until her death in 1978.
On April 11, 1973, a Grand Jury of the United States District Court for the District of Massachusetts returned a seven-count indictment against Mr. Krock charging him with income tax evasion for 1966, 1967, and 1968, and with subscribing to income tax returns containing false statements for 1966 through 1969. He did not appear for arraignment on the indictment, and a warrant was issued for his arrest. Substantial efforts were made to arrest Mr. Krock; however, he was never taken into custody. He lived in the Bahamas, at least part of the time, until his death there in July 1986.
On April 20, 1973, the Commissioner made jeopardy assessments against Mr. and Mrs. Krock, jointly and severally, for tax liabilities for the years 1965 through 1969. Notices of Federal tax liens arising from these jeopardy assessments were filed the same day. The parties instituted several actions in local courts with respect to the liens arising from these jeopardy assessments. On May 3, 1973, Mrs. Krock instituted an action in the United States District Court seeking a declaration that, under section 6013(e), she was not liable for the jeopardy assessments made against her and Mr. Krock. This action was dismissed. On May 22, 1973, the United States instituted an action in the same district court seeking to inventory the Krock residence. The court denied the Government's request, but ordered Mrs. Krock to file an inventory. As of September 16, 1974, no amounts had been collected or paid on the jeopardy assessments.
Mr. and Mrs. Krock filed joint income tax returns for each of the taxable years 1948 through 1969. From the late 1950s through 1969, the joint returns were prepared by Robert J. Hurwitz, a certified public accountant. Neither Mr. Krock nor Mrs. Krock filed any Federal income tax returns subsequent to filing their 1969 return.
Mrs. Krock maintained records of her separate income and expenses for 1964 through 1969. She reported all items of personal income and deductions to Mr. Krock's secretary, Joan Robbins, who furnished the information to Mr. Hurwitz. Mrs. Krock reported the following income and deductions:
+----------------------------------------------------+
¦Year ¦Total income ¦Total deductions ¦Net ¦
+------+--------------+------------------+-----------¦
¦1964 ¦$1,169.95 ¦$3,807.60 ¦($2,637.65)¦
+------+--------------+------------------+-----------¦
¦1965 ¦1,377.43 ¦7,674.07 ¦(6,296.64) ¦
+------+--------------+------------------+-----------¦
¦1966 ¦1,379.52 ¦5,996.04 ¦(4,616.52) ¦
+------+--------------+------------------+-----------¦
¦1967 ¦2,520.20 ¦4,761.41 ¦(2,241.21) ¦
+------+--------------+------------------+-----------¦
¦1968 ¦1,113.88 ¦7,065.93 ¦(5,952.05) ¦
+------+--------------+------------------+-----------¦
¦1969 ¦1,197.93 ¦6,007.99 ¦(4,810.06) ¦
+----------------------------------------------------+
All the income that Mrs. Krock reported was from dividends, interest, or other investment income. Deductions attributable to Mrs. Krock consist exclusively of charitable contributions, medical expenses, and real estate taxes. Respondent made no adjustments to Mrs. Krock's...
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