Downing v. Commissioner
| Decision Date | 29 December 2003 |
| Docket Number | Docket No. 12108-98. |
| Citation | 86 T.C.M. 738 |
| Parties | Michael J. Downing and Sandra M. Downing v. Commissioner. |
| Court | U.S. Tax Court |
John S. Ponseti, for the petitioners.
Susan S. Canavello, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
By separate notices of deficiency, respondent determined deficiencies in individual income tax and penalties under section 66631 (fraud) against petitioners as follows:
Penalties
Year Deficiency1 Sec. 6663
Michael J. Downing 1994 $7,396 $5,444
1995 29,557 22,088
Sandra M. Downing 1994 $2,545 $2,012
1995 20,432 15,404
1 Of these totals for Michael J. Downing (hereinafter sometimes
referred to as Michael), for 1994, $2,773 is income tax
under ch. 1 and $4,623 is self-employment tax under ch. 2; for 1995, $19,065 is income tax
under ch. 1 and $10,492 is
self-employment tax under ch. 2. For Sandra M. Downing (hereinafter sometimes
referred to as Sandra), all the
amounts are income tax under ch. 1
Both sides apparently view the facts in the instant case as leading to Michael's being solely liable for self-employment tax on any additional net earnings from self-employment, regardless of the disposition of the community property issue. That is, neither side views Sandra's involvement in the business as resulting in a partnership. See sec. 1402(a)(5)(A). Petitioners did not file joint returns for either of the years in issue (infra note 4), and so Sandra does not have joint and several liability for Michael's self-employment tax. See sec. 1.6017-1(b), Income Tax Regs.; see also Johnson v. Commissioner [Dec. 37, 142], 74 T.C. 1057, 1062 (1980), affd. [81-2 USTC ¶ 9771] 661 F.2d 53 (5th Cir. 1981).
In each notice of deficiency, respondent determined in the alternative to the fraud penalty that "the addition prescribed by Section 6662(a)" applies (in an unspecified amount) for each year. In the answer, respondent narrows this determination to the negligence penalty, section 6662(b)(1), but the amount remains unspecified.
At trial and on brief respondent conceded that if petitioners' marriage contract was effective to take petitioners out of Louisiana's usual community property matrimonial regime, then decision should be entered for Sandra that she has no deficiency and no addition to tax for any year in issue. By amendment to answer, respondent asserts in the alternative to the deficiencies and additions to tax determined in the notices of deficiency that, if the Court determines that petitioners' marriage contract has this effect and Sandra does not have any liability, then Michael is liable for deficiencies and penalties as follows:
Penalties
Year Deficiency Sec. 6663
1994 $8,966 $6,725
1995 30,872 23,154
See sec. 6214(a). Respondent also asserts, in the alternative to section 6663, additions to tax under section 6662(a). See sec. 6214(a).
After concessions by both sides,2 the issues for decision3 are as follows:
(1) Whether each petitioner omitted from gross income his or her respective community property law one-half interest in the spouse's earnings.
(2) Whether petitioners had unreported Schedule C gross receipts for the years in issue, and, if so, then in what amounts.
(3)(a) Whether petitioners are liable for the civil fraud additions to tax under section 6663, or (b) in the alternative, if petitioners' underpayments (if any) are not due to fraud, then whether petitioners are liable for the negligence additions to tax under section 6662(a).
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petition was filed in the instant case, petitioners resided in Metairie, Louisiana. Metairie is in Jefferson Parish.
Petitioners filed timely calendar year tax returns for the years in issue, using the filing status "married filing separate".4
Michael was born in 1963. He began working when he was 12. His jobs included cutting lawns and washing cars; he initially charged $5 per lawn and about $10 per car. Michael worked after school, on week-ends, and throughout the summers. During high school, Michael continued to cut lawns; he also worked at Fasullo's Drug Store. In addition, as part of his schooling, Michael worked half time at JEDCO for 1 year, where he received training in plumbing and auto mechanics. Michael saved the money that he earned from these jobs; he did not deposit this money into a bank because he believed that was inconvenient. Indeed, he did not open a bank account until March of 1989.
In 1982, Michael was graduated from high school. His first job thereafter was as a courier for Suburban Coastal Corporation. After he left Suburban Coastal Corporation, he worked at Nature Tubs and Spas, where he installed and plumbed spas and installed gas lines. Toward the end of 1982 and beginning of 1983, Michael went to work at Lenny's Plumbing, where he worked until the end of 1987.
At the end of 1987, Michael began working at Milliken & Michaels, Inc., a company owned by his brother-in-law, Michael Sanderson (hereinafter sometimes referred to as Sanderson). Before then, Michael had been living at his parents' house. When he began working for Sanderson, he moved into Sanderson's guest house.
At the end of 1989, Michael began operating his own plumbing business, doing business as Michael Downing Plumbing Co., hereinafter sometimes referred to as the plumbing business. Michael continued to conduct the plumbing business as a sole proprietor during the years in issue.
Michael first had Social Security earnings in 1979, in the amount of $913. This dropped to $287 in 1980, and zero in 1981. In 1982 when he was graduated from high school, he had Social Security earnings of $5,246. His Social Security earnings increased each year until 1989, when they reached $21,778. His 1990 and 1991 Social Security earnings were $1,660 and $5,759, respectively. Michael's Social Security earnings from 1979 through 1991 totaled $114,358.
Sandra was born in 1960; she was graduated from high school in 1978. At some point, she completed a semester of college. In 1979, Sandra married Gary Rucker, hereinafter sometimes referred to as Rucker. They had two children: Rachel, born in 1983, and Sean, born in 1985. Sandra and Rucker separated in 1987; their divorce became final in 1989. Rucker paid to Sandra $4,200 of child support in cash in each year in issue.5
During the years in issue, Sandra worked as a clerk at LCR Corporation, a plumbing supply house, where she earned $17,877 in 1994 and $17,700 in 1995.
Sandra had Social Security earnings at least as far back as 1976. Her Social Security earnings increased from $781 in 1976 and $434 in 1977, to $8,700 in 1982. Her Social Security earnings then declined, reaching zero in 1987. Thereafter, Sandra's Social Security earnings varied greatly from one year to the next. Sandra's Social Security earnings for 1976 through 1995 totaled $142,902.
Sandra and Michael met in December 1988. On July 14, 1989, they were married in St. Tammany Parish, Louisiana. Louisiana is a community property State.
Before their marriage, Sandra and Michael entered into a marriage contract (see infra note 16), which made them "separate in property". One of the reasons they did so was, on the advice of Sandra's divorce attorney, to prevent Rucker from aggregating Sandra and Michael's income in an attempt to reduce or eliminate Rucker's child support payment obligations. Petitioners executed the marriage contract on July 12, 1989; on July 14, 1989, the marriage contract was "filed for registry" in the conveyance records of St. Tammany Parish, where petitioners then resided.
The marriage contract provides as follows:
I.
The intended husband and wife shall be separate in property, therefore, neither of them shall be liable for the debts contracted by the other, either before or during their marriage;
The intended wife shall have the free and exclusive enjoyment of her separate property, and the full administration thereof, without the assistance of her husband.
II.
All property and effects of the said husband and wife, whether owned by him or her at the time of the celebration of said intended marriage, or acquired during said marriage, are hereby declared to be separate property, and that of the wife, separate and paraphernal property, and they and each of them do hereby expressly reserve to themselves individually the entire administration of their respective particular movable and immovable property, and the respective free enjoyment of each of their revenues.
On February 2, 2000, the marriage contract was "filed for registry" in the conveyance records of Jefferson Parish, Louisiana.
Michael generally worked alone in the plumbing business. If he needed help, then he hired independent contractors. Sandra handled all the bookkeeping for the plumbing business. She wrote out the invoices and mailed them to customers, paid the bills, organized the records, did the banking, and submitted figures to petitioners' C.P.A. for use in preparing petitioners' tax returns. The plumbing business was on the cash basis for 1994 and 1995. Sandra computed gross income for the years in issue by adding the invoices for the work that Michael had completed each month, and then adding the monthly totals. The invoices totaled $68,757 for 1994 and $88,502 for 1995.
On the Schedules C for the plumbing business, Michael reported 1994 gross receipts of $68,758 and 1995 gross receipts of $82,721. On answering brief, petitioners concede that Michael should have reported 1995 gross receipts of $88,502—$5,781 more than Michael in fact reported. Supra note 3.
Table 1 sets forth the...
To continue reading
Request your trial