Cheshire v. Comm'r of Internal Revenue
| Decision Date | 30 August 2000 |
| Docket Number | No. 3483–99.,3483–99. |
| Parties | Kathryn CHESHIRE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Taxpayer petitioned for redetermination of deficiencies arising from husband's unreported retirement plan distribution and interest income. The Tax Court, Jacobs, J., held that: (1) taxpayer was not entitled to innocent spouse relief for omitted items of income; (2) required knowledge of item of income to disallow innocent spouse relief was not knowledge of tax consequences of item; and (3) taxpayer was entitled to equitable innocent spouse relief from accuracy-related penalty assessed on omitted retirement distribution proceeds.
Decision for IRS in part, and for taxpayer in part.
Thornton, J., filed concurring opinion, in which Whalen, Halpern, Laro, Foley, and Vasquez, JJ., joined.
Judgment affirmed, 282 F.3d 326.
John Edward Leeper, for petitioner.
Sheila R. Pattison and Gerald L. Brantley, for respondent.
P and H filed a joint 1992 Federal income tax return on which a portion of retirement distribution proceeds H received and interest received from a joint bank account were omitted from gross income. Although P acknowledges that when she signed the joint return she had actual knowledge of the omitted retirement distribution proceeds, she posits that, relying on H's false statements, she had reason to believe that the omitted retirement distribution proceeds were not taxable and that she should be entitled to relief under sec. 6015(b), (c), and/or (f), I.R.C., with respect thereto. Further, P seeks innocent spouse relief with respect to the sec. 6662(a), I.R.C ., accuracy-related penalty.
1. Held: P is not entitled to innocent spouse relief with respect to the omitted items of income.
2. Held, further, knowledge of the “item giving rise to a deficiency” for purposes of sec. 6015(c)(3)(C), I.R.C., does not mean knowledge of the tax consequences of the item or that the entry on the return is incorrect.
3. Held, further, after taking into account all the facts and circumstances presented in this case, R's denial of equitable relief to P under sec. 6015(f), I.R.C., as it relates to the sec. 6662(a), I.R.C., penalty applicable to the omitted retirement distribution proceeds, constitutes an abuse of his discretion.
Respondent determined a $66,069 deficiency in Kathryn and David Cheshires' 1992 Federal income tax, a $16,518 section 6651(a)(1) addition to tax, and a $13,214 section 6662(a) accuracy-related penalty. Only Kathryn Cheshire has contested this determination; she does so claiming innocent spouse relief under section 6015(b), (c), and/or (f).
After concessions by respondent, see infra, the issue to be resolved is whether Mrs. Cheshire is entitled to innocent spouse relief with respect to: (1) The taxation of an omitted portion of the distributions Mr. Cheshire received upon his retirement from Southwestern Bell Telephone Co., and omitted interest income from a joint bank account, and (2) the section 6662(a) accuracy-related penalty.
All section references are to the Internal Revenue Code as in effect for the year under consideration. All Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference.
Background
Petitioner resided in Cedar Creek, Texas, at the time she filed her petition.
Petitioner and Mr. Cheshire were married on June 20, 1970; they permanently separated on July 13, 1993, and were divorced on December 5, 1994. For 1992, petitioner and Mr. Cheshire (collectively, the Cheshires) filed a joint Federal income tax return.
Petitioner received a bachelor of science degree in secondary education. Upon graduating from college in 1970, she worked approximately 3 years as an elementary school teacher, then stayed home for approximately 10 years (1974–84) in order to raise her 2 children. She returned to teaching in 1984.
In September 1985, the Cheshires purchased property located at 24A Simpson Avenue, Cedar Creek, Texas, for use as the family residence. The Cheshires borrowed $99,000 to purchase the property.
David Cheshire's Retirement and Compensation Package
Mr. Cheshire took early retirement from Southwestern Bell Telephone Co. (Southwestern Bell), effective January 1, 1992. As a result, Mr. Cheshire received the following distributions (the retirement distributions) in 1992:
+-------------------------------------------------------------------+
¦ ¦Amount ¦
+----------------------------------------------------------+--------¦
¦ ¦ ¦
+----------------------------------------------------------+--------¦
¦Nations Bank of Texas, Trustee, for “SBNCNPP EMP LUMP SUM”¦$199,771¦
+----------------------------------------------------------+--------¦
¦Southwestern Bell LESOP for salaried employees ¦5,919 ¦
+----------------------------------------------------------+--------¦
¦Southwestern Bell savings plan for salaried employees ¦23,263 ¦
+----------------------------------------------------------+--------¦
¦Southwestern Bell ESOP ¦971 ¦
+----------------------------------------------------------+--------¦
¦ ¦ ¦
+----------------------------------------------------------+--------¦
¦Total ¦229,924 ¦
+-------------------------------------------------------------------+
Of the $229,924, $42,183 was rolled over into a qualified account.
On January 31, 1992, Mr. Cheshire deposited $184,377 of the retirement distributions into an account (account No. 9633–09) in the name of “David D. Cheshire and Kathy Cheshire” at the Austin Telco Federal Credit Union (the Austin Telco account).1 In 1992, the funds in this account earned $1,168 in interest.
Petitioner was aware of Mr. Cheshire's receipt of the retirement distributions and the amount thereof, as well as the interest earned on the Austin Telco account.
The Cheshires' Use of the Retirement Distributions
The Cheshires made several large disbursements out of the Austin Telco account in 1992. Specifically, $99,425 was withdrawn to pay off the mortgage on the family residence, and $20,189 was withdrawn to purchase a 1992 Ford Explorer.
The retirement distributions were also used to pay family expenses, provide startup capital for Mr. Cheshire's newly formed sole proprietorship, Academic Resources Management Systems (ARMS), and for investments.2 In addition, the retirement distributions were used to satisfy loans taken out to acquire a family truck and a car for one of their children as well as to open a college bank account for their daughter. The Cheshires retained joint ownership of this account.
On September 22, 1992, Mr. Cheshire opened a second account (account No. 25239–87) at the Austin Telco Federal Credit Union and transferred the remaining proceeds of the retirement distributions from account No. 9633–09 into this account. On November 12, 1992, Mr. Cheshire wrote a check from this second account in the amount of $6,300 payable to “A.R.M.S.”; this amount was subsequently deposited into ARMS' bank account. In 1992, the funds in account No. 25239–87 earned $26 in interest.
Petitioner's Separation and Divorce
Mr. Cheshire was arrested several times for driving while intoxicated (DWI). In June 1993, he was involved in an alcohol-related automobile accident. Approximately a month later, petitioner and Mr. Cheshire permanently separated; they divorced 17 months after their separation.
Pursuant to a divorce decree, Mr. Cheshire transferred to petitioner his interest in the property constituting the family residence and title to the 1992 Ford Explorer. At the time of transfer, the family residence and the Ford Explorer were unencumbered.
The Cheshires' 1992 Federal Income Tax Return
Mr. Cheshire prepared and filed his and Mrs. Cheshire's joint income tax returns. Mr. Cheshire prepared the Cheshires' 1992 joint Federal income tax return (the 1992 return) in March 1993, prior to beginning a jail sentence for a DWI conviction. Before signing the return, petitioner questioned her husband about the potential tax ramifications of the retirement distributions. Mr. Cheshire falsely told petitioner he had consulted with a local certified public accountant, J.D. Mican (Mr. Mican), and had been advised that proceeds used to pay off the mortgage on their home would reduce the taxable amount of the retirement distributions. Accepting her husband's answer, petitioner did not inquire further and signed the 1992 return on March 14, 1993. Petitioner assumed that the 1992 return would be timely filed. On the 1992 return, the Cheshires reported that they had received a $199,771 retirement distribution and that $56,150 of that amount constituted taxable income. In addition, they reported $477 in interest income, as well as a $12,349 loss on their Schedule C, Profit or Loss From Business.
In August 1994, petitioner received a letter from the Internal Revenue Service (IRS) stating that it had not received the Cheshires' 1992 return. In searching for a copy of the 1992 return, petitioner discovered in a desk drawer the original 1992 return as well as a check for the amount of tax shown to be owing ($23.86). Petitioner immediately contacted Mr. Mican; he advised her to file the 1992 return and enclose payment for the tax liability reflected on the return as soon as possible. Petitioner filed the 1992 return along with...
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