Guth v. C.I.R.

• Decision Date: 01 March 1990
• Docket Number: No. 88-7034,88-7034
• Parties: -657, 90-1 USTC P 50,133 James A. GUTH, Petitioner, and Arlys M. Guth, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 441

897 F.2d 441

65 A.F.T.R.2d 90-657, 90-1 USTC P 50,133

James A. GUTH, Petitioner and Arlys M. Guth, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

No. 88-7034.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 6, 1989.

Decided March 1, 1990.

Teresa E. McLaughlin, Dept. of Justice, Washington, D.C., for appellant.

Peter R. Stromer, Los Gatos, Cal., for appellee.

Appeal from the United States Tax Court.

Before WALLACE, PREGERSON and ALARCON, Circuit Judges.

PREGERSON, Circuit Judge:

The government challenges the Tax Court's determination that Arlys Guth was entitled to relief from tax liability under the tax code's "innocent spouse" provision, 26 U.S.C. Sec. 6013(e) (1989). We affirm the Tax Court's decision.

FACTS

Arlys Guth has only limited knowledge of financial matters. Arlys married James Guth in 1977. They were separated in 1982, and divorced in 1983. During the six years of their marriage, James Guth handled all the family's finances. He controlled the joint checking account, paid all the bills, handled the credit cards, and prepared their joint income tax returns for the years at issue. Arlys never participated in the preparation of the returns or questioned their content; she signed the joint return because James told her to do so. James did not permit Arlys access to their money, did not give her an allowance, and required her to ask his permission before she made any purchase. Arlys only signed one check on their personal joint checking account during her entire marriage to James, and this occurred following their separation.

Shortly after his marriage to Arlys, James became active in the Universal Life Church, forming his own congregation (the Carlmont ULC) and naming himself pastor. ¹ James formed the congregation for perceived tax advantages, yet he was careful not to discuss this motive with Arlys. He told her only that he formed the church to practice his religion as he saw fit.

Though James named Arlys treasurer of the congregational bank account, her involvement with church activities was minimal. Her sole function as treasurer was to sign documents and checks which her husband prepared and told her to sign. She complied with his orders apparently without question. James engineered transactions between the couple's personal account and that of the church for which he claimed charitable contribution deductions on their joint tax returns for the years 1979 through 1981. He alone prepared and signed all checks to the Carlmont ULC from the couple's joint checking account. He then prepared checks from the Carlmont ULC bank account, payable to himself, and told Arlys to sign them without explaining their purpose to her. Arlys testified at trial that

[James] would write out checks, and since I was treasurer, the only ones who could sign on that checking account was him and myself. And he said it wouldn't be legal for him to sign a check himself, it was the treasurer's job. He would make out the checks, and say "sign them."

Although Arlys knew that there were checks to and from the Carlmont ULC account, she believed the transactions were made in furtherance of her husband's religious activities.

In 1987, the Commissioner of Internal Revenue determined deficiencies in and additions to the Guths' federal income tax for the years 1979 to 1981 due to the erroneous deductions claimed for the charitable contributions to the Carlmont ULC. The Guths conceded the deficiency determinations and the additions. Only the issue of Arlys Guth's liability for these deficiencies and additions remains.

"INNOCENT SPOUSE" RELIEF

As a general rule, marital partners are jointly and severally liable for income tax owed when they sign a joint return. 26 U.S.C.A. Sec. 6013(d)(3) (1989). Prior to 1971, a spouse was held strictly liable for tax deficiencies resulting from omissions and deductions attributable solely to the other The 1971 legislation only applied to omissions in gross income. See Allen v. Commissioner, 514 F.2d 908, 915 (5th Cir.1975). In 1984, Congress revisited the innocent spouse provision out of a concern that the earlier legislation "was not sufficiently broad to encompass many cases where the innocent spouse deserve[d] relief." H.R.Rep. No. 432, 98th Cong., 2d Sess. at 1502, reprinted in 1984 U.S.Code Cong. & Admin.News 697, 1143. In line with this concern, Congress extended section 6013(e) protection to "substantial understatement[s] of tax ... attributable to grossly erroneous items ... including claims for deductions or credits, as well as omitted income." Id.

                spouse, even if the "innocent spouse" knew nothing of the erroneous items.  In response to the inequity of a "rule of strict liability for income taxes [imposed] on the many married women who are unknowingly subjected to its provisions by filing joint returns," Louise M. Scudder, 48 T.C. 36, 41 (1967) (finding the innocent spouse liable for taxes under the joint return, but deploring the law which required that result), Congress passed legislation "to bring government tax collection practices into accord with basic principles of equity and fairness."    S.Rep. No. 1537, 91st Cong., 2d Sess., reprinted in 1970 U.S.Code Cong. & Admin.News 6089, 6091
                

The requirement that relief be granted "only where it would be inequitable to hold the innocent spouse liable" lies at the heart of the section's history, id., and the statute specifically requires this inequity as precedent to relief (26 U.S.C. Sec. 6013(e)(1)(D)). In addition to this equitable determination (based on a consideration of the totality of the circumstances), the taxpayer seeking to avoid joint liability must establish several particular factual points. The taxpayer must show that the couple filed a joint return, that the return contained a substantial tax understatement attributable to the other spouse's errors, and that in signing the return, the "innocent spouse" did not know or have reason to know of the substantial understatement. Price v. Commissioner, 887 F.2d 959, 961-62 (9th Cir.1989).

In the present case, the parties dispute the nature of the test which should be applied to establish lack of knowledge of an understatement of income tax and the standard under which we should review a Tax Court's determination of section 6013(e) relief.

STANDARD OF REVIEW

While section 6013(e) is anomolous as a tax code provision with its frank focus on the equities of tax liability, determination of relief under the section is nonetheless squarely based on the Tax Court's consideration of the facts of an individual taxpayer's case. As we discuss below, facts are central to a Tax Court's determination of whether an innocent spouse had actual or constructive knowledge of an understatement. Fact-findings also dominate the court's equity determination under a totality of the circumstances test.

We review Tax Court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." 26 U.S.C. Sec. 7482(a)(1) (1989). The Federal Rules mandate use of a clearly erroneous standard in review of district court fact-finding. Fed.R.Civ.P. 52(a). In light of the domination of factual considerations in section 6013(e) determinations, it is hard to see how a Tax Court's rule in this context can be, as the government argues, "fully reviewable" by this court. We will review a Tax Court's determination of relief under section 6013(e) for clear error. See Stone v. Commissioner, 275 U.S.App.D.C. 123, 865 F.2d 342, 344 (1989) ("Our review of the Tax Court undoubtedly proceeds under the clearly erroneous standard."); see also Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir.1989); Roberts v. Commissioner, 860 F.2d 1235, 1239 (5th Cir.1988).

THE TEST TO ESTABLISH LACK OF KNOWLEDGE

"A spouse has 'reason to know' of the substantial understatement if a reasonably prudent taxpayer in her position at the Prior to the 1984 amendments, which extended innocent spouse relief from understatements attributable to omissions in income to include those involving deduction errors, courts administered the "reason to know" test strictly. Courts required that a spouse establish she had no knowledge of the transactions leading to the understatement, not simply that she had no knowledge of the understatement itself. Even if a spouse could show that she had no knowledge of the tax consequences of a transaction, if she was aware that the underlying transaction had occurred, courts held her responsible for constructive knowledge of the...