Huelsman v. CIR

• Decision Date: 03 October 1969
• Docket Number: No. 19077.,19077.
• Citation: 416 F.2d 477
• Parties: Betty Bell HUELSMAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

416 F.2d 477 (1969)

Betty Bell HUELSMAN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 19077.

United States Court of Appeals Sixth Circuit.

October 3, 1969.

Henry J. Burt, Jr., Louisville, Ky., for petitioner.

Paul M. Ginsburg, Department of Justice, Washington, D. C., Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, William A. Friedlander, Attorneys, Department of Justice, Washington, D. C., on brief, for respondent.

Before McCREE and COMBS, Circuit Judges, and HOGAN, District Judge.^*

COMBS, Circuit Judge.

This appeal presents a petition to review a decision of the Tax Court holding petitioner, Betty Bell Huelsman, liable for $25,189.67 in income tax deficiencies for the years 1963-1965. The deficiencies arose out of the Commissioner's determination that income had been fraudulently omitted by the husband from joint income tax returns filed by petitioner and her then husband for those years. It was conceded before the Tax Court that petitioner was not subject to fraud penalties of $12,594.84 originally assessed against her pursuant to 26 U.S.C. § 6653(d).

During most of their married years, 1951-1965, Betty Bell Huelsman and Alfred J. Huelsman filed joint income tax returns. For the years 1963-1965, the joint returns filed by them failed to report income in the form of funds illegally obtained by Alfred J. Huelsman from his business associates. His activities in obtaining these funds led to his conviction in November, 1965, in a Kentucky state court upon an indictment charging that he had obtained substantial sums of money under false pretenses. Shortly thereafter, petitioner filed suit for divorce which was granted in February, 1967.

The Tax Court found that petitioner took no part in and had no knowledge of her former husband's criminal actions. She obtained no benefit, directly or indirectly, from the illegally obtained funds. Her standard of living was not changed in any way. Nevertheless, by virtue of 26 U.S.C. § 6013(d) (3), petitioner was held liable for income tax on the funds illegally obtained by her former husband. Implicit in the Tax Court's ruling is the legal fiction that embezzled money is income to the wrongful taker. This was held by a divided Court in James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246 (1961). It is interesting background, although perhaps not legally significant here, that the Court in James overruled Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752 (1946), which had held that embezzled money was not income to the embezzler because title remained in the rightful owner. We have found no Supreme Court case on the specific question whether money embezzled by one spouse will be considered as income to the innocent spouse who has signed a joint tax return.

Section 6013(d) (3) provides that if a joint return is filed "the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several." It has been held by this and other circuits that, under this section, a wife's joint and several liability arising out of the filing of a fraudulent joint return may remain despite the fact that she had no knowledge of the unreported income which gave rise to the liability. See Horn v. Commissioner of Internal Revenue, 387 F.2d 621 (5th Cir. 1967); Moore v. United States, 360 F.2d 353 (4th Cir. 1966); Spanos v. United States, 323 F. 2d 108 (4th Cir. 1963); Cirillo v. Commissioner of Internal Revenue, 314 F.2d 478 (3rd Cir. 1963); Furnish v. Commissioner of Internal Revenue, 262 F.2d 727 (9th Cir. 1958); Howell v. Commissioner of Internal Revenue, 175 F.2d 240 (6th Cir. 1949). However, under certain circumstances, a wife may avoid such liability even though a joint return has been filed. For example, where a wife's signature to a joint return is procured by duress, that defense may be validly interposed to avoid the liability created by Section 6013(d) (3). Furnish v. Commissioner of Internal Revenue, supra. In addition, the liability imposed by Section 6013(d) (3) is not binding on a spouse who mistakenly signs a joint return since, in that case, the necessary intent to file such a return is not present. Payne v. United States, 247 F.2d 481 (8th Cir. 1957). The Tax Court has also intimated that, in certain other narrowly defined situations, a victimized spouse will be absolved of paying the tax. It was said in Scudder v. Commissioner of Internal Revenue, 48 T.C. 36, 40 (1967), that "although we agree that fraud may void a person's signature for purposes of liability on a purported joint return, * * * the signature must be the product of fraud." In Davenport v. Commissioner of Internal Revenue, 48 T.C. 921 (1967), the Tax Court observed that the evidence there did not show that the wife's signature was the product of "duress or that it was forged or was obtained by trickery, nor * * * any deliberate deception by the husband to induce his wife to sign a joint return with him." See also Stanley v. Commissioner of Internal Revenue, 45 T.C. 555 (1966); Federbush v. Commissioner of Internal Revenue, 34 T.C. 740 (1960); Aylesworth v. Commissioner of Internal Revenue, 24 T.C. 134 (1955).

Whether any of these several defenses will exonerate an innocent spouse from liability under Section 6013(d) (3) in a particular case necessarily depends upon all the circumstances leading up to and surrounding the signing of the joint return. Here, although the Tax Court's memorandum opinion states, without elaboration, that petitioner signed the returns voluntarily, a careful examination of the record reveals that evidence as to the conditions existing when these returns were signed, so crucial to the determination of liability under Section 6013(d) (3), was not developed before the Tax Court.

The Tax Court had before it only an abbreviated stipulation and answers by petitioner to a few perfunctory questions propounded to her on the witness stand. The stipulation merely recited that petitioner had filed joint returns with her then husband for the years in question; that her husband had been convicted of obtaining money under false pretenses; that she was not a party to the criminal actions of her husband; and that she had obtained a divorce from him in 1967.

In her brief appearance on the witness stand, petitioner added very little to the stipulation. She reiterated her lack of knowledge of her husband's criminal activities; testified that she had custody of her fifteen-year-old son, that she is unemployed, and last worked as an office clerk at $2.00 an hour. She admitted on cross-examination that she had signed the joint returns, and to the specific question, "Those are not forged, that is a voluntary signature by you?" she answered, "Yes, sir, that's right."

Copies of the indictments filed with the stipulation reveal that Alfred J. Huelsman was charged with obtaining under false pretenses a little more than $100,000. Copy of the judgment of conviction shows that he pleaded guilty, was sentenced to a year in jail, and sentence was suspended on condition that he make restitution and remain on good behavior for five years. The present whereabouts of Alfred J. Huelsman is not revealed by the record and we can only infer that the Government's tax claim can not be collected from him.

The Tax Court held that its hands were tied by the statute and by its decision in Scudder v. Commissioner of Internal Revenue, 48 T.C. 36 (1967). It said in its opinion:

"We have no equitable power to grant relief to petitioner, however distasteful the result herein may appear. De La Garza, 46 T.C. 446 (1966), affirmed per curiam 378 F.2d 32 (C.A. 5, 1967). All we can do is emphasize what we said in Scudder, 48 T.C. at p. 41:

Although we have much sympathy for petitioner\'s unhappy situation and are appalled at the harshness of this result in the instant case, the inflexible statute leaves no room for amelioration. It would seem that only remedial legislation can soften the impact of the rule of strict individual liability for income taxes on the many married women who are unknowingly subjected to its provisions by filing joint returns."

The judge who heard the case stated from the bench:

"The Court is constrained most reluctantly to decide this case from the bench against the taxpayer on the grounds of the Scudder case and on the grounds that he\'s left with no alternative, and in so doing I apologize or I express by sympathies to Mrs. Huelsman. I wish I could do otherwise but I can\'t, and I might say that if you can get me reversed on appeal, Mr. Burt, God bless you. I\'d love to be reversed."

The Scudder case relied on by the Tax Court was subsequently reversed by this Court on grounds not applicable here, Scudder v. Commissioner of Internal Revenue, 405 F.2d 222 (1968), but excerpts from the opinion in Scudder have particular relevance. The Court, speaking through Judge O'Sullivan, said:

"We consider that the Tax Court was overly modest in measuring its own prerogatives and powers when it concluded that `the inflexible statute leaves no room for amelioration.\'

* * * * * *

"The holding of the Tax Court, and other courts, that duress, trickery and fraud practiced upon a wife will, in certain factual contexts, prevent her from being subjected to liability of the kind here involved, derives not from language of relevant tax statutes but from the general rules of law and equity. We just cannot persuade ourselves that the executions of the joint returns here were not the product of conduct equivalent in wrong to the fraud, trickery and, indeed, the duress which the Tax Court appears to concede will insulate its victim from liabilities which would otherwise accrue. Running through the cases relied upon by the United States here is also the indication that there the wife had enjoyed the use of the embezzled funds through some spending of them for her benefit."

We are not prepared on...