Bokum v. Comm'r of Internal Revenue
| Citation | 94 T.C. No. 11,94 T.C. 126 |
| Decision Date | 28 February 1990 |
| Docket Number | Docket No. 19755-83. |
| Parties | RICHARD D. BOKUM, II AND MARGARET B. BOKUM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Petitioner husband (H) owned all the stock of Q, a subchapter S corporation. Q sold its horse and cattle ranch. Q distributed to H the proceeds of this sale and additional amounts. Petitioners filed a joint Federal income tax return. To the extent of Q's earnings and profits, petitioners reported the distribution as a long-term capital gain. This amount was then reduced by H's claimed basis in Q to arrive at the net long-term capital gain reported on petitioners' income tax return. Petitioner wife (W) was aware of the sale of the ranch, but was not involved in preparation of the tax return. The parties filed with the Court a stipulation settling all issues except the innocent spouse issue as to W. In this stipulation of settled issues, petitioners concede that (a) they should have reported a portion of the distribution as ordinary income instead of long- term capital gain and (b) they are not entitled to offset the distribution by H's claimed basis in Q.
Petitioners moved to be relieved from this stipulation on the ground that H's basis in Q was greater than the amount that had been taken into account in arriving at the settlement; this motion was denied.
HELD: (1) Petitioners' unsuccessful motion to be relieved from a stipulation as to basis does not cause the doctrine of judicial estoppel to preclude petitioners from contending that W is entitled to innocent spouse status (sec. 6013(e), I.R.C. 1954) as to the mischaracterized ordinary income or the erroneous basis deduction.
(2) Both the mischaracterization of ordinary income and the erroneous claim of basis are items of H, not of W. (Sec. 6013(e)(1)(B), I.R.C. 1954.)
(3) Both of these items are deduction, etc., items (and not income items), and so petitioners must show that these items do not have a basis in fact or law. (Sec. 6013(e)(2)(B), I.R.C. 1954.)
(4) The mischaracterization of ordinary income has a basis in fact or law, and so W is not entitled to innocent spouse status on account of that item.
(5) The erroneous basis deduction does not have a basis in fact or law.
(6) W knew of the underlying transaction or had reason to know of the erroneous claim of basis on petitioners' tax return, and so W is not entitled to innocent spouse tax benefits on account of that item. Richard C. Conover, for the petitioners. 1
W. Scott Green, for the respondent.
*
Respondent determined deficiencies in Federal individual income tax against petitioners as follows:
+-------------------+
¦Year2 ¦Deficiency ¦
+-------+-----------¦
¦1977 ¦$879,877 ¦
+-------+-----------¦
¦1979 ¦38,160 ¦
+-------+-----------¦
¦1981 ¦37,923 ¦
+-------------------+
After concessions, 3 the issues for decision are as follows:
(1) Whether petitioners are judicially estopped from arguing that petitioner wife qualifies for innocent spouse tax benefits under section 6013(e); 4 and
(2) If not, then whether petitioner wife qualifies as an innocent spouse with respect to any portion of petitioners' 1977 agreed tax deficiency.
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions were filed in the instant case, petitioners Richard D. Bokum, II (hereinafter sometimes referred to as ‘Richard‘) and Margaret B. Bokum (hereinafter sometimes referred to as ‘Margaret‘), husband and wife, had their legal residence in Miami, Florida. They have been married to each other since 1941.
Margaret received a high school diploma and attended college for 2 years. She was graduated from Finch College in New York City, but did not receive any training in business. In particular, she has never taken any courses in business, finance, accounting, or taxation. Throughout her married life, Margaret has never worked outside the home, but has devoted herself to managing the household and raising petitioners' six children.
Margaret is a beneficiary of certain trusts, established by her parents, which generate income for her of about $120,000 to $150,000 annually. She has lent money from time to time to Richard from her separate funds to finance his business ventures. She has not otherwise been personally involved in any of Richard's business affairs.
Richard is a geologist by training and a graduate of Princeton University. He is the founder and president of Bokum Resources Corporation (hereinafter sometimes referred to as ‘Bokum Resources‘). Bokum Resources was established to engage in the mining and milling of uranium. Its shares were offered for sale to the public in December 1976. However, Bokum Resources was never able to begin operations because of the effect of safety concerns on the nuclear power industry, and was forced into involuntary chapter XI bankruptcy in December 1980.
In 1971, Richard formed Quinta Land and Cattle Company (hereinafter sometimes referred to as ‘Quinta‘), a subchapter S corporation with a June 30 fiscal year. Quinta was formed for the purpose of entering the cattle and ranch business through the purchase of an 11,000-acre cattle ranch (hereinafter sometimes referred to as ‘the ranch‘) in Montana. To this end, Richard transferred shares in Bokum Resources to Quinta in exchange for all of its stock. Quinta then transferred the Bokum Resources shares and cash to Charles Kyd in exchange for all the shares of Kyd Cattle Company which had title to the ranch. Margaret knew that Quinta acquired the ranch from Charles Kyd or from Kyd Cattle Company. Richard continued to own all of the outstanding shares of Quinta through the years in issue and was Quinta's president in 1977. Margaret never was a shareholder of Quinta. She was not an officer or director of Quinta in 1977. Margaret became an officer and director of Quinta in 1981; however, she was appointed merely to fill a vacancy and did not take any part in Quinta's affairs. Margaret did not do any bookkeeping for Quinta.
After Quinta bought the ranch, Richard made various improvements to the ranch property. An existing irrigation system was expanded and an office building and barn were constructed. He also built a home for his family on the ranch property in 1971, at a cost of about $800,000. Margaret has spent summers at the ranch since construction of the home.
During the fiscal year ended June 30, 1977, Quinta sold a substantial portion of the ranch to Madison River Cattle Company for $3,800,000. This resulted in a gain of $3,119,045. Margaret knew of this sale, although she did not participate in the business decision to sell, and did not know how much Quinta received on the sale. The portion of the ranch on which the house was built and about 237 acres of surrounding land were not sold. After subtracting sales commissions, taxes, and payment of $1,005,000 owed to the Federal Land Bank on the property, the net sales proceeds of $2,095,000 were deposited into Richard's personal account. Richard used $1,677,795 of this amount to pay the balance of a personal loan he had previously incurred from the First National Bank of Albuquerque. The proceeds of this loan had been transferred by Richard to Bokum Resources to pay operating expenses and to finance certain litigation. The remaining $417,205 of net sales proceeds were used for petitioners' personal living expenses. Margaret did not know what Richard did with the sales proceeds.
Petitioners' living expenses were about $500,000 per year, which included the cost of maintaining their two residences in the Miami area and the Montana ranch house, including the employment of three gardeners and a house servant in Florida and various employees in Montana. Petitioners also employed a captain and mate and incurred additional expenses in maintaining a yacht. Richard paid the household bills, and Margaret helped when he could not afford to pay the bills. Richard wrote most of the checks, but Margaret wrote some checks when Richard was out of town.
In its fiscal year ended June 30, 1977, Quinta distributed $3,553,678 (hereinafter sometimes referred to as ‘the distribution‘) to Richard, Quinta's sole shareholder. On its Form 1120S, Quinta reported $2,605,272 of dividend distributions as long-term capital gain, and $948,406 as a nondividend distribution. For that fiscal year, Quinta reported taxable income of $2,605,272, which was the amount of its current earnings and profits. 5 With respect to the sale of the ranch Quinta reported the gain as shown in table 1.
Of the $3,800,000 sale price, $2,681,856 was allocated to land, $436,010 to various categories of depreciable property other than buildings and livestock (equipment, autos, irrigation systems, stockwells, and furniture and fixtures), $148,809 to buildings, and $533,325 to livestock.
Petitioners filed a joint Federal income tax return for 1977. 6 Each petitioner signed this tax return. Petitioners' 1977 Schedule D shows $541,347 as long-term capital gain, computed as follows: (1) of the $3,553,678 distribution, petitioners did not report or otherwise account for the $948,406 nondividend distribution; (2) petitioners reported $2,605,272 as long-term capital gain from dividend distributions from Quinta; 7 (3) petitioners reduced that amount by $2,087,057, which was purportedly Richard's basis in his Quinta stock; 8 (4) petitioners reported the remaining $516,215 as long-term capital gain; and (5) petitioners also reported $25,132 as their share of net long-term gain from a trust, for a total net long-term capital gain of $541,347. Petitioners reduced this by $270,673 pursuant to section 1202, and reported capital gain of $270,674 as an element of adjusted gross income. The $516,215 amount that petitioners reported on their Schedule D, Part II, as a dividend distribution from Quinta and the $541,347...
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