Ballard v. C.I.R., 83-1747

• Decision Date: 13 August 1984
• Docket Number: No. 83-1747,83-1747
• Citation: 740 F.2d 659
• Parties: 84-2 USTC P 9733 Jack BALLARD and Mary Ballard, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 659

740 F.2d 659

84-2 USTC P 9733

Jack BALLARD and Mary Ballard, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 83-1747.

United States Court of Appeals Eighth Circuit.

Submitted May 15, 1984.

Decided Aug. 13, 1984.

Irl B. Baris, St. Louis, Mo., for appellants.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Carleton D. Powell, Douglas G. Coulter, Tax Division, Dept. of Justice, Washington, D.C., for appellee.

Before HEANEY, BRIGHT and JOHN R. GIBSON, Circuit Judges.

HEANEY, Circuit Judge.

Jack and Mary Ballard appeal from the decision of the United States Tax Court imposing various tax assessments and additions based upon omissions of gross income from Jack Ballard's 1968 individual income tax return and from the Ballards' 1969 and 1970 joint income tax returns. They contend that the court's findings of tax deficiencies and fraud on the part of Jack Ballard were erroneous; that the statute of limitations barred the assessments and additions; that the court improperly applied the doctrine of collateral estoppel to establish Jack Ballard's fraud in filing the 1969 return; and that Mary Ballard should be relieved of liability because she was an "innocent spouse." We affirm on all issues with regard to Jack Ballard, but reverse insofar as the court held Mary Ballard liable for the 1969 and 1970 deficiencies.

The Ballards are husband and wife. From 1967 through 1970, Jack Ballard owned and operated a scrap iron and automobile salvage business, known as Ballard Iron & Metal, in St. Louis, Missouri, as a sole proprietorship. In addition, he was an equal partner in a truck leasing business called N & B Leasing and Drayage Company (N & B Leasing) with Fred Neistat from April, 1968, until February or March, 1969. Also, Mr. Ballard operated City Leasing & Drayage Company (City Leasing), another truck leasing business, as a sole proprietorship from 1969 through 1970. He incorporated City Leasing in the State of Missouri on July 18, 1969. Each of these businesses received customer payments in cash or check during their respective years of operation.

In March of 1970, Jack Ballard filed an individual income tax return for 1968. He reported gross income of $12,088.65, consisting of $5,388.65 of net profit from Ballard Iron & Metal and $6,700 in "miscellaneous income" from N & B Leasing. With deductions and exemptions, he reported taxable income of $6,062.05 for 1968.

In April of 1972, the Ballards filed joint income tax returns for 1969 and 1970. For 1969, they claimed $10,407 in gross income, the amount shown as wages on Jack Ballard's W-2 form from City Leasing for that year. They reported no business income and did not attach a Schedule C, "Profit (or Loss) From Business or Profession," as Mr. Ballard had done for Ballard Iron & Metal with his 1968 return. They reported $7,607 in taxable income for 1969. For 1970, their return showed $20,730 in gross income, comprising $11,780 in wages reflected on Jack Ballard's City Leasing W-2 form and $8,950 in wages reflected on his W-2 form from Metropolitan Towing Company, another business he operated in 1970. No Schedule C was attached to the Ballards' 1970 return, and they reported taxable income of $17,855 for that year.

Based on these returns, the 1968 tax liability was shown as $1,432.53, that of 1969 as $1,403.03 ¹, and that of 1970 as $3,873.58.

The Internal Revenue Service conducted a detailed investigation into Jack Ballard's business dealings in the early 1970s. In 1975, a jury convicted him on two counts of willfully making and subscribing false income tax returns for 1969 and 1970. See 26 U.S.C. Sec. 7206(1) (1982). The falsity alleged in the indictment for each of the counts was his failure to report substantial amounts of gross income received from his various businesses. We affirmed the conviction as to his 1969 return, but reversed with regard to the 1970 return because of the trial court's failure to fully instruct the jury on the calculation of gross income from receipts in a merchandising business. United States v. Ballard, 535 F.2d 400, 405-406 (8th Cir.), cert. denied, 429 U.S. 918, 97 S.Ct. 310, 50 L.Ed.2d 283 (1976).

In March of 1976, the Commissioner of Internal Revenue (Commissioner) issued statutory notices of deficiencies to Jack Ballard individually for his 1968 return and to the Ballards jointly for their 1967, 1969, and 1970 returns. The notices assessed deficiencies in reported tax liability for each of these years and stated that the Commissioner attributed all underpayments to fraud, thereby also asserting additions to the tax assessments under 26 U.S.C. Sec. 6653(b) (1982). The Ballards petitioned for a redetermination of the assessments and additions in the United States Tax Court. The Commissioner has since conceded that the Ballards are not liable for any deficiencies or additions for 1967 and that Mary Ballard is not liable for any additions to tax based on fraud for 1969 and 1970. See id. Sec. 6653(b)(4).

The Tax Court held that the Commissioner's determinations of the Ballards' incomes for the years 1968 through 1970 were supported in the record and that the petitioners failed to prove any error in those determinations. It also found that the Commissioner established fraud in Mr. Ballard's failure to report such incomes by clear and convincing evidence. It dismissed the Ballards' statute of limitations defense because section 6501(c)(1) of the Internal Revenue Code lifts the normal three-year bar on civil actions in the case of such "false or fraudulent return[s] with the intent to evade tax." 26 U.S.C. Sec. 6501(c)(1) (1982). Finally, the court held that Mary Ballard did not carry her burden of proving that she was an innocent spouse relieved of liability for tax deficiencies on the 1969 and 1970 returns under section 6013(e)(1). See id. Sec. 6013(e)(1). It thus found a deficiency of $3,907.72 and an addition of $2,670.13, to be assessed against Jack Ballard, for 1968; a deficiency of $17,164.89, to be assessed against the Ballards jointly, and an addition of $9,300.38, to be assessed against Jack Ballard, for 1969; and a deficiency of $531.21, to be assessed against the Ballards jointly, and an addition of $2,202.40, to be assessed against Jack Ballard, for 1970.

The Ballards appeal from the decision of the Tax Court. They allege error in the court's factual findings and legal conclusions, and generally assert that it should have dismissed the notices based on the statute of limitations. Jack Ballard further contests the court's application of the collateral estoppel doctrine to support its finding of fraudulent intent in the filing of the 1969 return. Finally, Mary Ballard claims that the statute of limitations bars the action against her even assuming that it should be lifted against her husband because of his fraud, and that she was an innocent spouse relieved from liability for the tax deficiencies assessed on the Ballards' 1969 and 1970 returns.

Initially, we have no trouble affirming the decision below with respect to Jack Ballard. The Commissioner submitted abundant evidence of Mr. Ballard's receipt of substantial amounts of income during the years in issue which he failed to report. The record also contains clear and convincing evidence that the failure to report these amounts was due to a fraudulent intent on his part. This evidence included his pattern of underreporting income, his failure to report any business activities by Ballard Iron & Metal in 1969 or 1970, his statements to his tax preparer falsely denying his business activities in certain years, and his failure to maintain adequate records of his business transactions. He alleges that the Tax Court erroneously gave collateral estoppel effect on the fraud issue to his previous conviction for willfully making a false income tax return for 1969. The court relied on the collateral estoppel doctrine as an alternative basis for its 1969 fraud finding. We affirm on the ground that the independent evidence supports the court's decision on this question, and thus need not discuss its alternative reliance on the collateral estoppel theory. The proof of fraud also answers Mr. Ballard's statute of limitations defense: section 6501(c)(1) allows the Commissioner to assess deficiencies on fraudulent returns "at any time." See 26 U.S.C. Sec. 6501(c)(1) (1982). Finally, the related contention that the Commissioner's delay of more than three years between completing the investigation and seeking assessments from the Ballards should bar the present action has been answered in the Commissioner's favor by this Court in Estate of Gryder v. Commissioner, 705 F.2d 336, 339 (8th Cir.), cert. denied, --- U.S. ----, 104 S.Ct. 525, 78 L.Ed.2d 709 (1983).

Mary Ballard was only found liable for the deficiencies assessed for 1969 and 1970. The Tax Court correctly held that there was no evidence of fraud on her part and that she thus was not liable for additions to these tax deficiencies. See 26 U.S.C. Sec. 6653(b)(4) (1982). She raises many of the same arguments as her husband with regard to the 1969 and 1970 tax deficiencies. We reject these common claims for the reasons previously discussed and those in the decision of the Tax Court. Two of her arguments, however, do not overlap with those of her husband. We deal with them separately.

First, she asserts, although somewhat tangentially, that Jack Ballard's fraud in filing the 1969 and 1970 returns cannot be used under section 6501(c)(1) to lift the normal three-year statute of limitations with regard to the notices sent to her. We disagree. Section 6501(c)(1) lifts the limitations bar "[i]n the case of a false or fraudulent return with the intent to evade tax." 26 U.S.C. Sec. 6501(c)(1) (1982) (emphasis added). The section does not require fraudulent intent on the part of both spouses who file a joint return, even though such a distinction is explicitly recognized with regard to the assessment...