Hardy v. Comm'r of Internal Revenue

• Decision Date: 05 November 1998
• Docket Number: No. 97-71097,97-71097
• Citation: 181 F.3d 1002
• Parties: (9th Cir. 1999) CATHY MILLER HARDY, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1002

181 F.3d 1002 (9th Cir. 1999)

CATHY MILLER HARDY, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 97-71097

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted November 5, 1998--San Francisco, California

Submission Vacated November 9, 1998

Resubmitted June 10, 1999

Filed July 2, 1999

COUNSEL: William P. Koontz, Cottage Grove, Oregon, for the petitioner-appellant.

Robert L. Baker, Tax Division, United States Department of Justice, Washington, D.C., for the respondent-appellee.

Appeal from a Decision of the United States Tax Court Carolyn P. Chiechi, Presiding. Tax Ct. No. 17013-95.

Before: Mary M. Schroeder and Sidney R. Thomas, Circuit Judges, and Barry T. Moskowitz, ¹ District Judge.

THOMAS, Circuit Judge:

Cathy Hardy appeals a decision of the United States Tax Court, which affirmed the Internal Revenue Service's ("IRS") assessment of tax deficiency against her. On appeal, Hardy challenges the Tax Court's allocation and application of the burden of proof as well as the Tax Court's application of the so-called innocent spouse provisions of the Internal Revenue Code. We affirm.

I

In 1981, Cathy Miller married Ray Hardy, and they have resided in Nevada, a community property state, for the duration of their marriage. Cathy and Ray Hardy both had been previously married to other people and both had children from their previous marriages. In 1995, the IRS sent Hardy a notice of income tax deficiency for 1981, 1982, 1983, 1984, 1985, and 1986 as set forth in the following table:

                 Year   Tax             26 U.S.C.       26 U.S.C
                        Deficiency      S 6651(a)(1)    S 6654 
                                        Penalty         Penalty
                

                1981    10,369.00       2,592.00        794.00 
                1982    10,090.00       2,523.00        982.00 
                1983     9,580.00       2,395.00        586.00 
                1984     2,064.00         516.00        130.00 
                1985     2,059.00         515.00        118.00 
                1986     2,245.00         561.00        100.00 
                

The IRS based the notice of tax deficiency on Hardy's earnings, as well as one-half of Mr. Hardy's earnings, which it considered Hardy's community property.

In August 1995, Hardy brought suit against the Commissioner of the IRS in the United States Tax Court challenging the assessment. Before trial, the Commissioner stipulated that Hardy did not owe any taxes for 1981, 1982, or 1986 and that she did not owe any taxes based on her own earnings. Hardy stipulated that she had married Mr. Hardy in 1981 and that they had lived in Nevada together for the majority of their marriage. The parties stipulated that the IRS received income statements for Mr. Hardy for the years 1983, 1984, 1985, and 1986, although Hardy did not stipulate that the amounts reported were correct. The parties also agreed that the IRS had no record of Hardy filing a tax return for the years at issue. The amounts that were at issue at trial, based on Hardy's community property share of Mr. Hardy's income, are represented in the following table:

                 Year    Tax             26 U.S.C.       26 U.S.C
                        Deficiency       S 6651(a)(1)   S 6654
                                        Penalty         Penalty
                

                1983    5,277.00        641.00          114.00
                1984    1,331.00        100.00          3.00
                1985    2,059.00        515.00          118.00 
                

At trial, the Hardys testified that they had an oral contract to keep their respective property separate. The Tax Court found the testimony to be uncredible and, after making findings of fact and conclusions of law, approved the following tax deficiency assessments against Hardy:

                 Year   Tax             26 U.S.C.       26 U.S.C
                        Deficiency      S 6651(a)(1)    S 6654
                                        Penalty         Penalty
                

                 1983   5,257.00        636.00          114.00
                 1984   1,331.00        100.00          3.00
                 1985   2,059.00        575.00          118.00 
                

We have jurisdiction pursuant to 26 U.S.C. S 7482, and review the Tax Court's findings of fact for clear error and conclusions of law de novo. See Estate of Rapp v. Commissioner, 140 F.3d 1211, 1215 (9th Cir. 1998) (as amended).

II

Under the facts of this case, the Tax Court correctly allocated the burden of proof regarding Hardy's deficiency to the Commissioner for tax year 1983 and to Hardy for tax years 1984 and 1985. The Commissioner does not challenge the Tax Court's determination that the IRS had the burden of proof for 1983. At issue in this appeal is the burden of proof for tax years 1984 and 1985.

Generally, a presumption of correctness attaches to notices of deficiency in the Tax Court. See Palmer v. United States Internal Revenue Serv., 116 F.3d 1309, 1312 (9th Cir. 1997); Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985); Delaney v. Commissioner, 743 F.2d 670, 671 (9th Cir. 1984). For the presumption to apply, however, the Commissioner must base the deficiency on some substantive evidence that the taxpayer received unreported income. See id.; see also United States v. Janis, 428 U.S. 433, 442 (1976) (holding that the presumption does not apply when the IRS makes a naked assessment without foundation). If the Commissioner introduces some evidence that the taxpayer received unreported income, the burden shifts to the taxpayer to show by a preponderance of the evidence that the deficiency was arbitrary or erroneous. See Rapp, 774 F.2d at 935. If the petitioner succeeds in showing that the deficiency was arbitrary or erroneous, the burden shifts back to the Commissioner to show that the assessment was correct. See Palmer, 116 F.3d at 1312; Keogh v. Commissioner, 713 F.2d 496, 501 (9th Cir. 1983).

Thus, the Commissioner only needed to present some substantive evidence that Hardy received income in 1984 and 1985 in order to shift the burden to Hardy. To that end, the Commissioner introduced worksheets calculating the amount of tax owed by Hardy based on income statements that the IRS had received from Mr. Hardy's employer and his bank. Further, Hardy stipulated before trial that the IRS had received income statements regarding Mr. Hardy's income from his employer during the years in question, therefore relieving the Commissioner of the necessity to introduce the income statements at trial. Finally, Hardy stipulated that she had been married to Mr. Hardy during the years in question and that they had lived in Nevada. Based on these stipulations, the fact that Nevada is a community property state, and the fact that spouses in community property states generally are responsible for one-half of their spouses' earnings, the notice of tax deficiency for the years 1984 and 1985 was presumptively correct.² Thus, Hardy's argument that the Commissioner failed to sufficiently link her to the unreported income fails.

Hardy argues that the presumption of correctness should not apply because this case involves unreported income, relying on Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991), and Anastasato v. Commissioner, 794 F.2d 884 (3d Cir. 1986). First, we note that Weimerskirch involved unreported "illegal" income. See 596 F.2d at 361-62. But even if we were to extend Weimerskirch to all unreported income cases as the Third and Fifth Circuits have done, the exception only applies when the Commissioner has failed to provide any evidentiary foundation for the deficiency notice. See id. at 362 ("A deficiency determination which is not supported by the proper foundation of substantive evidence is clearly arbitrary and erroneous."). Here, because Mr. Hardy's employer reported his income to the IRS, the Commissioner satisfied the foundational requirements.

Hardy also contends that because the Commissioner stipulated before trial that its assessments were incorrect for 1981, 1982, and 1986, the Commissioner should lose the presumption as to its assessments for 1983, 1984, and 1985. A concession that assessments were incorrect for some years does not bind the Commissioner concerning disputed assessments in other years. See United States Holding Co. v. Commissioner, 44 T.C. 323, 328 (1965); Mensik v. Commissioner, 37 T.C. 703, 725 (1962) (holding that it would contravene "justice and common sense" to rule that if the Commissioner conceded or stipulated to certain facts, it would do so "at the jeopardy of having the burden of the opposing party as to remaining matters shift to himself"); Gobins v. Commissioner, 18 T.C. 1159, 1168-69 (1952) (same), aff'd, 217 F.2d 952 (9th Cir. 1954); see also Keogh v. Commissioner, 713 F.2d 496, 502 (9th Cir. 1983) (stating that a reduction in deficiency by the court did not deprive the remaining assessment of a rational basis). If we were to hold otherwise, the Commissioner would have a disincentive to stipulate to certain issues before trial, a result that we do not endorse.³

III

At trial, Hardy's primary argument was that the deficiency was erroneous because it included taxes based on income purportedly earned by Mr. Hardy, income she alleges that she did not receive. She argued that she and Mr. Hardy agreed upon marriage to manage their finances separately.

This argument is unavailing because Nevada is a com- munity property state. See Nev. Rev. Stat.S 123.220 (1997). In United States v. Mitchell, the Supreme Court stated that a spouse in a community property state is liable for tax on onehalf of all income received by the other spouse during the marriage. See 403 U.S. 190, 196 (1971). The Court reasoned that because tax liability is a matter of ownership and ownership is determined by state law, spouses in community property states have a vested interest in one-half of all income earned during the marriage. See id. at 195; see also Edwards v. Commissioner, 680 F.2d 1268, 1271 (9th Cir. 1982) (citing Mitchell and stating that "[a] married individual is taxable on the earnings of his or her spouse to the extent that the laws of the state of residence grants the individual a vested...