992 F.2d 1256 (2nd Cir. 1993), 733, Hayman v. C.I.R.

Docket Nº:733, Docket 92-4110.
Citation:992 F.2d 1256
Party Name:Jacquelyn HAYMAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Case Date:May 04, 1993
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 1256

992 F.2d 1256 (2nd Cir. 1993)

Jacquelyn HAYMAN, Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 733, Docket 92-4110.

United States Court of Appeals, Second Circuit

May 4, 1993

Argued Dec. 29, 1992.

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James B. Lewis, Director, Student Tax Clinic Benjamin N. Cardozo School of Law, New York City, for petitioner-appellant.

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Marion E.M. Erickson, Attorney, Tax Div., Dept. of Justice, Washington, DC (James A. Bruton, Acting Asst. Atty. Gen., Gary R. Allen and Ann B. Durney, Attorneys, Tax Div., Dept. of Justice, Washington DC, of counsel), for respondent-appellee.

Before: OAKES, MINER and McLAUGHLIN, Circuit Judges.

MINER, Circuit Judge:

Petitioner-appellant Jacquelyn Hayman ("Hayman") appeals from a decision entered April 21, 1992 in the United States Tax Court (Clapp, J.) sustaining the deficiency determinations made by respondent-appellee Commissioner of Internal Revenue ("Commissioner") and assessed jointly against her and her husband John Hayman ("John") for the taxable years 1977, 1978 and 1979. The Haymans reported losses from tax shelters that substantially offset their reported income for these years. The Commissioner disallowed the deductions, finding, inter alia, that the shelters were not activities entered into for profit. On appeal, the Tax Court affirmed the Commissioner's determinations and rejected Hayman's claim for relief from liability as an innocent spouse under I.R.C. § 6013(e). For the reasons that follow, we affirm.

BACKGROUND

Hayman received a bachelor of science degree in retailing from the Rochester Institute of Technology in 1963. During the years that are the subject of this appeal, she was vice president and merchandising director for the Ann Taylor retail clothing store chain, earning an annual salary of approximately $70,000. She assisted buyers in selecting merchandise from around the world; directed a design team that produced products for Ann Taylor; and was assigned responsibility for an operating budget in the millions of dollars.

John, during the same period of time, was a promoter of various tax shelter investments, including Barbour Energy Resources Program ("Barbour") and Sand Run Energy Program ("Sand Run"). He also was a general partner of Signet Properties ("Signet") and Island Properties ("Island"). Barbour and Sand Run were coal extraction projects in which investors purchased interests in a sublease granting the right to mine and remove coal from land located in West Virginia. Signet and Island were partnerships formed to purchase and distribute motion pictures. Although Hayman discussed some aspects of John's business with him and knew that he was in the "tax shelter syndication business," she testified that she did not understand what he did for a living. The Haymans, who separated in 1984, lived in a rented Manhattan apartment and employed a full-time housekeeper. Their two children attended private school.

The Haymans jointly invested $111,250 in Sand Run. They also invested $75,000 in Barbour: Hayman issued a check from their joint account for $50,000 on December 30, 1977, and John issued a check from his special account for $25,000 on January 6, 1978. In connection with the Barbour investment, Hayman signed ten documents, including a Prospective Offeree Questionnaire, an Operating Agreement, a Revocable Sales Agreement, a Sublease Agreement, an Addendum to Sublease Agreement, a Subscription Agreement and Power of Attorney, an Advanced Minimum Annual Royalties Non-Recourse Promissory Note, a Security Agreement (Sublease and Note), a Mining Services Contract and a Mining Contract Security Agreement. Hayman also was provided with a Confidential Descriptive Memorandum (a private placement memorandum) for each investment. The memoranda contained lengthy opinions of tax counsel in support of the claimed losses.

Hayman claims that she signed the investment documents at John's request without understanding them. Even though the coal mining investments were in Hayman's name, John testified that they were his because he paid for them out of his profits as a tax shelter promoter. When Hayman asked John whether the coal investments were legal, he assured her that they were.

The Haymans filed joint tax returns for the years 1977, 1978 and 1979. Although Hayman was responsible for paying the family's bills, John prepared the returns with the assistance of a certified public accountant,

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who signed them as a paid preparer. Although Hayman signed all the returns, she did so in 1977 and 1978 on the last day allowed under an extension. The Haymans claimed on the returns the following losses due to their investments in Barbour and Sand Run: $193,598 (1977); $538,414 (1978); and $124,319 carry forward (1979). In each year, the claimed losses resulted in all or virtually all of the tax that had been withheld from the Haymans' salaries being refunded. In 1977 and 1978, their claimed deductions were greater than their combined incomes. Hayman did not receive any asset of significant value from John during 1977, 1978 or 1979, and her net worth at the end of each of those three years was zero. Hayman testified that she was not shocked by the large losses claimed on the returns because she knew that John's business "dealt in those kinds of numbers." Hayman was listed on each year's return as the sole proprietor of the Barbour investment and co-owner with John of Sand Run, due to a purported concern that John's dual role as promoter and investor could have been construed as improper. The Commissioner disallowed the losses claimed on these two investments as well as the losses claimed on the Signet and...

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