Cousins v. Commissioner
| Decision Date | 27 March 1995 |
| Docket Number | Docket No. 26400-87. |
| Parties | William P. and Donna L. Cousins v. Commissioner. |
| Court | U.S. Tax Court |
Sidney A. Soltz, for the petitioner. Kathleen L. Donohue, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in and an addition to petitioners' Federal income tax as follows:
Addition to Tax
---------------
Year Deficiency Sec. 6661
1979 .................. $37,390 -0-
1980 .................. 78,300 -0-
1981 .................. 66,626 -0-
1982 .................. 177,096 $44,274
Respondent determined additions to tax for petitioner William Cousins for fraud as follows:
Additions to Tax
-----------------------------------------------
Year Sec. 6653(b) Sec. 6653(b)(1) Sec. 6653(b)(2)
1979 $18,695 -0- -0-
1980 39,150 -0- -0-
1981 34,493 -0- -0-
1982 -0- $92,452 1
1 Fifty percent of the interest due on $184,904
Petitioners concede that petitioner William Cousins is collaterally estopped from denying liability for the additions to tax for fraud for 1979, 1980, and 1982. Respondent did not determine that petitioner Donna Cousins was liable for fraud.
The issues for decision are:
1. Whether petitioners are liable for: (a) Deficiencies in income tax for 1979 to 1982 as determined by respondent, and (b) the addition to tax for substantial understatement of tax for 1982 under section 6661. We hold that they are.
2. Whether petitioner William Cousins is liable for the addition to tax for fraud for 1981 under section 6653(b). We hold that he is not.
3. Whether petitioner Donna Cousins qualifies as an innocent spouse for 1979 to 1982 under section 6013(e). We hold that she does not.
References to petitioner in the singular are to Donna Cousins. Section references are to the Internal Revenue Code in effect for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found.
Petitioners resided in Gainesville, Florida, when they filed the petition.
In 1964, when she was 16 years old, petitioner quit high school and married William Cousins (Cousins). Petitioners had four children before petitioner was 23 years old.
Petitioner did not work outside of the home from 1964 until 1983. During those years, her primary activity was raising the children. She had no bookkeeping or accounting experience before or during the years in issue. Petitioner received a high school equivalency diploma in 1980 or 1981 and a nursing certificate in 1984. Petitioner was employed as a nurse at the time of trial.
Petitioners remained married during the years at issue. Petitioners separated in late 1985, after 21 years of marriage. Petitioner filed for divorce soon after they separated. Their divorce became final in May 1989.
During the years in issue, Cousins was an officer and shareholder of Charter Air Center, Inc. (Charter Air), and Sunny South Aircraft Service, Inc. (Sunny South), both of which were closely held corporations. Cousins received taxable income from Charter Air and Sunny South during the years in issue.
In 1986 Cousins was charged with conspiracy to import illegal drugs from 1979 to 1984, and intentional evasion of income taxes in 1979, 1980, and 1982. Cousins was convicted of all charges and sentenced to 10 years in prison. Petitioner was not charged with conspiracy to import illegal drugs or tax evasion. The record does not indicate when petitioner learned of Cousins' illegal drug activity.
Petitioners' income was $124,912 in 1979, $243,465 in 1980, $198,299 in 1981, and $508,584 in 1982.
Petitioner had two accounts at the Barnett Bank. Cousins had accounts at the First City Bank of Gainesville, the Atlantic Bank, and the Landmark First National Bank. Petitioners had a joint bank account at the Dania Bank (f.k.a. the Caribank). Checks were written on the Dania Bank account payable to and endorsed by petitioner. Petitioner endorsed and deposited some checks into her accounts, but Cousins or his secretary deposited most of the checks into petitioner's accounts.
Petitioner was named as corporate secretary in the articles of incorporation of Charter Leasing Corp. However, she did not make what is purportedly her signature on the articles of incorporation for Charter Leasing Corp., and she was not employed by it or any of Cousins' other businesses. Petitioner did not sign checks on Cousins' business bank accounts. Petitioner visited Cousins' place of business fewer than five times during their more than 21 years of marriage. Charter Leasing Corp. transferred $6,500 and Sunny South transferred $2,500 to petitioner in 1982. The record does not show whether petitioner and Cousins discussed his business activity.
Petitioner's purported signature appears on a mortgage deed dated February 19, 1980, to John H. Bratley, Jr., although she did not sign it. Similarly, petitioner did not sign a modification of note and mortgage dated July 24, 1980, to George W. English, Jr., although her purported signature appears on it.
Checks totaling the following amounts were written to and endorsed by petitioner during the years in issue:
Year Checks
1979 ......................... $ 5,420.00
1980 ......................... 18,828.88
1981 ......................... 34,350.00
1982 ......................... 40,300.00
3. Petitioners' Tax Returns
Petitioners filed joint tax returns for the years 1977 to 1982. Petitioner signed the 1981 and 1982 returns. Her purported signature appears on the 1979 and 1980 returns although she did not sign them. The record does not indicate whether petitioner saw the 1979 and 1980 returns before they were filed. Tim Kaskey (Kaskey), a certified public accountant, prepared petitioners' returns for the years in issue. Petitioner took no part in preparing those returns. Kaskey signed the returns as the preparer.
Petitioners reported gross income, adjusted gross income, and itemized deductions and claimed refunds totaling $28,838 for 1979 to 1982 as follows:
Adjusted Itemized
Year Gross Income Gross Income Deductions Refund
1979 $39,268 $29,670 $10,567 $10,754
1980 69,068 58,280 45,546 9,945
1981 61,538 57,956 35,412 6,253
1982 69,422 69,422 68,284 1,886
Petitioner did not endorse the 1979 refund check although her name is signed on the back of the check.
Petitioners underreported their income by $85,644 for 1979, $174,397 for 1980, $142,566 for 1981, and $414,990 for 1982.
4. Petitioners' Standard of Living
In 1979, petitioners sold their residence for $160,000, and rolled over the $43,446 gain into a home in Fort Lauderdale, Florida, that they bought for $500,000. They sold that home for $700,000 in 1982, and took back a first mortgage of $475,000 from the buyers. They also owned a rental home and a 10-acre tract of land that they sold for a $59,569 gain in 1982. The mortgage on the home in which petitioners were living when they separated in 1985 was foreclosed.
Petitioners spent more than $81,000 for furniture and household items in 1982. Petitioner bought from $6,155.13 to $12,758.61 of the furniture. Petitioners bought an airplane for $85,000 in November 1982. They financed the purchase of the plane with a loan from the First City Bank of Gainesville.
Petitioners signed a financial statement, dated July 1, 1982, prepared for the First City Bank of Gainesville, which stated that petitioners had an annual income of $125,000 and a net worth of $2,306,749. The financial statement included the following assets: (a) $1,266,749 in stocks and securities in Cousins' businesses; (b) $470,000 in real estate; (c) $75,000 in automobiles; (d) $150,000 in personal property; (e) $485,000 in accounts receivable (including a $475,000 first mortgage on the sale of their Fort Lauderdale home); and (f) $160,000 cash.
Cousins bought a Mercedes-Benz automobile for petitioner at a time not specified in the record. He returned it after several months because he could not pay for it. Petitioners did not have a cash hoard before the years in issue.
OpinionRespondent used the bank deposits and cash expenditures method to determine that petitioners underreported income by $85,644 for 1979, $174,397 for 1980, $142,566 for 1981, and $414,990 for 1982 and that petitioners were liable for deficiencies in income tax. Respondent determined that petitioners are liable for an addition to tax for substantial understatement of income tax under section 6661 for 1982. These determinations are presumed to be correct, and petitioners bear the burden of proving otherwise. Rule 142(a); Coninck v. Commissioner [Dec. 49,074], 100 T.C. 495, 498-499 (1993).
Petitioners offered no evidence to show that respondent's determination was incorrect. Cousins failed to appear for trial. We hold that petitioners are liable for the deficiencies and addition to tax under section 6661.
Respondent determined that Cousins is liable for additions to tax for fraud for 1979 to 1982. Petitioners concede that Cousins is collaterally estopped from contesting fraud for 1979, 1980, and 1982. We must decide whether Cousins is liable for additions to tax for fraud for 1981.
Respondent has the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). Respondent must establish that: (a) An underpayment exists for the...
To continue reading
Request your trial