Charlton v. Comm'r of Internal Revenue, Nos. 11412–98

CourtUnited States Tax Court
Writing for the CourtCOLVIN
Citation114 T.C. No. 22,114 T.C. 333
PartiesFredie Lynn CHARLTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSarah K. HAWTHORNE, f.k.a. Sarah K. Charlton, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Number11861–98.,Nos. 11412–98
Decision Date16 May 2000

114 T.C. 333
114 T.C. No. 22

Fredie Lynn CHARLTON, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, RespondentSarah K. HAWTHORNE, f.k.a. Sarah K. Charlton, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 11412–98

11861–98.

United States Tax Court.

May 16, 2000.


Taxpayers, individuals who filed joint return, petitioned for redetermination of deficiencies arising from adjustments to self-employment tax and disallowed business expenses. Both parties requested innocent spouse relief. The Tax Court, Colvin, J., held that: (1) self-employment income was allocable to wife; (2) preoperational startup expenses of cabin rental business were nondeductible; and (3) husband qualified for limited innocent spouse relief.

Decision for IRS in part, and for taxpayer in part.

[114 T.C. 333]

Fredie Lynn Charlton, Petitioner, pro se.

Sarah K. Hawthorne, Petitioner, pro se.

[114 T.C. 334]

Carl D. Inskeep, Sheila R. Pattison, Deborah H. Delgado, and Lewis J. Hubbard, for respondent.COLVIN, J.

Ps were married in 1989, separated in 1995, and divorced in 1996. In 1994, W operated Medi–Task, a physician's transcription business. H was employed full time by a large corporation until September 1994. In the fall of 1994, he moved to a lake and began to renovate some rental cabins. Ps filed a joint tax return for 1994 in which they reported that they had self-employment tax liability for the transcription business and deducted rental cabin expenses.

R determined a deficiency based in part on adjustments to Ps' self-employment tax and denial of deductions relating to the cabins. Ps filed petitions disputing R's determination. Ps also alleged they each qualified for relief as an innocent spouse.

H contends that he qualifies for relief under sec. 6015(b) and (c), I.R.C. W contended at trial that she qualifies for relief under sec. 6015(b), (c), and (f), I.R.C., but now contends that she qualifies for relief only under sec. 6015(f), I.R.C. R contends that the Tax Court lacks jurisdiction to decide W's claim under sec. 6015(f), I.R.C.

Held: All transcription-related self-employment income is allocated to W under secs. 6017 and 1402(a)(5)(A), I.R.C.

Held, further, Ps' rental cabin expenses are not deductible because they are preoperational startup expenses. See sec. 195, I.R.C.

Held, further, H does not qualify for relief under sec. 6015(b), I.R.C., but he qualifies for limitation of liability under sec. 6015(c), I.R.C., to the extent stated herein.

Held, further, We have jurisdiction to review whether relief is available under sec. 6015(f), I.R.C.

Respondent determined that, for 1994, petitioners were liable for a $15,192 deficiency in income tax and a $1,731 accuracy-related penalty under section 6662(a).

Following concessions,1 the issues for decision are:

1. Whether all of petitioners' self-employment income from Medi–Task is allocated to petitioner Sarah K. Hawthorne (Hawthorne) for purposes of computing self-employment tax for 1994. We hold that it is.

2. Whether petitioners may deduct expenses relating to their rental cabins in 1994. We hold that they may not.

3. Whether petitioner Fredie Lynn Charlton (Charlton) is entitled to relief from joint and several liability under section 6015(b) for the income tax deficiency arising from petitioners' 1994 joint return. We hold that he is not.

4. Whether petitioner Fredie Lynn Charlton qualifies for limitation of liability under section 6015(c) for the income tax deficiency arising from petitioners' 1994 joint return. We hold that he does to the extent described below.

5. Whether we have jurisdiction to review whether relief is available to petitioner Sarah K. Hawthorne under section 6015(f). We hold that we do. Thus, we will delay entry of decision to permit Hawthorne and respondent to report on the status of Hawthorne's application for relief under section 6015(f), and if relief is denied, to file a motion as part of this docketed case requesting our review of the Secretary's denial.

Section references are to the Internal Revenue Code in effect for 1994. Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioners

Petitioner Sarah K. Hawthorne (Hawthorne) lived in Burnet, Texas, when she filed her petition. Petitioner Fredie Lynn Charlton (Charlton) lived in Buchanan Dam, Texas,

[114 T.C. 335]

when he filed his petition. Petitioners lived in Texas, a community property State, at all times relevant to this case.

Hawthorne has a college degree in English. She completed an accounting class and a marketing class but she did not do well in them. Hawthorne did not take any income tax courses. Petitioners were married in 1989. Before they were married, Charlton hired Hawthorne to be an office manager for a large manufacturing business.

Charlton was employed full time in Houston, Texas, until September 1994. He moved his residence to Buchanan Dam, Texas, in the fall of 1994.

B. Medi–Task

Medi–Task was a physician's transcription service. Hawthorne managed Medi–Task and performed most of its day-to-day operations. Medi–Task had one employee in 1994. Independent contractors did most of the transcribing for Medi–Task. Charlton did not devote much time to Medi–Task because he was employed full time until September 1994. He was not involved with Medi–Task's hiring or marketing. He did not type any reports for Medi–Task, but he assisted when there were computer problems. Hawthorne kept Medi–Task's business records in petitioners' home in a file cabinet next to Charlton's records. She deposited Medi–Task's gross receipts in Charter Bank of Houston, and Lake Buchanan State Bank.

Charlton had access to Medi–Task's records while he prepared petitioners' 1994 return. Hawthorne prepared and gave Charlton lists that included all but $22,601 of Medi–Task's income and all but $2,050 of Medi–Task's expenses for 1994. She also gave him bank statements for Medi–Task, Forms 1099, Forms W–2, Wages and Tax Statement, and documents showing Medi–Task's expenses.

Charlton received unemployment compensation and VA disability payments in the last quarter of 1994. Medi–Task was Charlton's and Hawthorne's only other source of income during that 3–month period.

Petitioners signed a personal financial statement on April 15, 1995, which stated that Medi–Task was worth $110,000. Hawthorne sold Medi–Task in 1995 without Charlton's consent or participation and kept the proceeds.

[114 T.C. 336]

C. Rental Cabins

Petitioners bought real property in the spring of 1993 at Charlton Pointe on Lake Buchanan in Llano County, Texas. There were some rental cabins on the property which were built in the 1950's and were rented until 1988 or 1989.

Petitioners began to rehabilitate the cabins in the fall of 1994. Charlton spent time in 1994 working on the cabins and other aspects of the Charlton Pointe property. Petitioners incurred expenses for travel to Charlton Pointe and expenses to rehabilitate the cabins. However, petitioners rented no cabins at Charlton Pointe in 1994. Charlton began renting the cabins in 1998.

D. Petitioners' Income Tax Returns

Charlton used tax return preparation software to prepare returns for petitioners for 5 years, including 1994.

Petitioners filed a joint income tax return for 1994. On it, they reported profits and losses on Schedules C, Profit or Loss From Business, for Medi–Task and the cabins. Charlton used the gross revenue amounts from the lists Hawthorne prepared to prepare the return. He did not review the bank statements. He also used the lists that Hawthorne prepared to report Medi–Task's expenses. He decided how to report the expenses on part II of Schedule C for Medi–Task; e.g., as advertising, legal and professional services, travel and meals, utilities, wages, and other expenses.

Petitioners reported that the Medi–Task income was divided equally between themselves for self-employment tax purposes.

Petitioners reported that Charlton had $62,135 in wages for 1994. They reported that Medi–Task had gross receipts and gross income of $147,782, total expenses of $117,588, and net profit of $30,194. Petitioners underreported 1994 gross receipts for Medi–Task by $22,601 and did not deduct $2,050 of Medi–Task expenses. They reported that they had no income from the cabins and $27,724 in expenses. Hawthorne examined parts of the 1994 return, such as the children's names and Social Security numbers and child care credits, but otherwise accepted the return that Charlton prepared.

[114 T.C. 337]

E. The Divorce

Petitioners separated in 1995, after they filed their 1994 return, and were divorced in 1996. Under the divorce settlement, Charlton received the rental cabin property and Hawthorne received Medi–Task. As required by the divorce settlement, Charlton deposited petitioners' 1994 refund check for $4,453 in a joint bank account at Texas Bank in Burnet, Texas, on June 2, 1995. Charlton used some of the 1994 refund to pay his personal expenses.

OPINION
A. Whether All Medi–Task Income Is Attributable to Hawthorne for Self–Employment Tax Purposes

Charlton contends that the Medi–Task income should be divided equally between him and Hawthorne for self-employment tax purposes. Respondent and Hawthorne contend that all of the Medi–Task income is attributable to Hawthorne and that the self-employment tax reported by petitioners for 1994 should be increased by $6,962.

Self-employment tax for a husband and wife filing a joint return is the sum of the taxes computed on the self-employment income of each spouse. See sec. 6017. All of the gross income and deductions from a trade or business over which one spouse exercises substantially all of the management and control are attributable to that spouse. See sec. 1402(a)(5)(A). For these...

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45 practice notes
  • Holman v. Comm'r of Internal Revenue, No. 13558–06.
    • United States
    • United States Tax Court
    • 23 Abril 2009
    ...(6th Cir.1987). Section 6015 does not protect a spouse who turns a blind eye to facts readily available to her. Charlton v. Commissioner, 114 T .C. 333, 340, 2000 WL 626760 (2000); Bokum v. Commissioner, supra. In such instances, we may impute the requisite knowledge to the putative innocen......
  • Porter v. Commissioner of Internal Revenue, 132 T.C. No. 11 (U.S.T.C. 4/23/2009), No. 13558-06.
    • United States
    • United States Tax Court
    • 23 Abril 2009
    ...(6th Cir. 1987). Section 6015 does not protect a spouse who turns a blind eye to facts readily available to her. Charlton v. Commissioner, 114 T.C. 333, 340 (2000); Bokum v. Commissioner, supra. In such instances, we may impute the requisite knowledge to the putative innocent spouse unless ......
  • Estate of Kanter v. C.I.R., No. 01-4316.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • 24 Julio 2003
    ...Page 872 defense was asserted in the original petition to the Tax Court. Id. at 274. Likewise, both spouses in Charlton v. Comm'r, 114 T.C. 333, 2000 WL 626760 (2000), asserted in their original petitions that they qualified for innocent-spouse relief. Id. at 338. In King v. Comm'r, 116 T.C......
  • Sowards v. Commissioner, Docket No. 10025-99.
    • United States
    • United States Tax Court
    • 19 Junio 2003
    ...USTC ¶ 50.631], 182 F.3d 275, 278 (4th Cir. 1999), affg. [Dec. 51,589(M)] T.C. Memo. 1996-452; Charlton v. Commissioner [Dec. 53,879], 114 T.C. 333, 342 (2000); Rowe v. Commissioner [Dec. 54,582(M)], T.C. Memo. 2001-325. The allocation, however, is not permitted if the Secretary shows by a ......
  • Request a trial to view additional results
43 cases
  • Holman v. Comm'r of Internal Revenue, No. 13558–06.
    • United States
    • United States Tax Court
    • 23 Abril 2009
    ...(6th Cir.1987). Section 6015 does not protect a spouse who turns a blind eye to facts readily available to her. Charlton v. Commissioner, 114 T .C. 333, 340, 2000 WL 626760 (2000); Bokum v. Commissioner, supra. In such instances, we may impute the requisite knowledge to the putative innocen......
  • Porter v. Commissioner of Internal Revenue, 132 T.C. No. 11 (U.S.T.C. 4/23/2009), No. 13558-06.
    • United States
    • United States Tax Court
    • 23 Abril 2009
    ...(6th Cir. 1987). Section 6015 does not protect a spouse who turns a blind eye to facts readily available to her. Charlton v. Commissioner, 114 T.C. 333, 340 (2000); Bokum v. Commissioner, supra. In such instances, we may impute the requisite knowledge to the putative innocent spouse unless ......
  • Estate of Kanter v. C.I.R., No. 01-4316.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • 24 Julio 2003
    ...Page 872 defense was asserted in the original petition to the Tax Court. Id. at 274. Likewise, both spouses in Charlton v. Comm'r, 114 T.C. 333, 2000 WL 626760 (2000), asserted in their original petitions that they qualified for innocent-spouse relief. Id. at 338. In King v. Comm'r, 116 T.C......
  • Sowards v. Commissioner, Docket No. 10025-99.
    • United States
    • United States Tax Court
    • 19 Junio 2003
    ...USTC ¶ 50.631], 182 F.3d 275, 278 (4th Cir. 1999), affg. [Dec. 51,589(M)] T.C. Memo. 1996-452; Charlton v. Commissioner [Dec. 53,879], 114 T.C. 333, 342 (2000); Rowe v. Commissioner [Dec. 54,582(M)], T.C. Memo. 2001-325. The allocation, however, is not permitted if the Secretary shows by a ......
  • Request a trial to view additional results
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