In re Michaud, Bankruptcy No. 94-10783-MWV. Adv. No. 95-1070-MWV.

• Decision Date: 26 April 1996
• Docket Number: Bankruptcy No. 94-10783-MWV. Adv. No. 95-1070-MWV.
• Citation: 199 BR 248
• Parties: In re Gloria MICHAUD, Debtor. Gloria MICHAUD, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. Bankruptcy Court — District of New Hampshire

199 B.R. 248 (1996)

In re Gloria MICHAUD, Debtor Gloria MICHAUD, Plaintiff, v. UNITED STATES of America, Defendant.

Bankruptcy No. 94-10783-MWV. Adv. No. 95-1070-MWV.

United States Bankruptcy Court, D. New Hampshire.

April 26, 1996.

Stephen C. Chute, Ian M. Bennie, Chute & Associates, Portland, ME, for Plaintiff.

Scott H. Harris, Trial Attorney, Tax Division, U.S. Dept. of Justice, Washington, DC, David L. Broderick, U.S. Attorney's Office, Concord, NH, for Defendant.

Gerri Karonis, Manchester, NH, for United States Trustee.

MEMORANDUM OPINION

MARK W. VAUGHN, Bankruptcy Judge.

The Court has before it the complaint of Gloria Michaud ("Plaintiff") against the United States of America Internal Revenue Service ("IRS" or "government") seeking the determination of the Plaintiff's tax liability for the tax years 1980 and 1981. The IRS has filed a proof of claim in the amount of $491,383.17. The Plaintiff alleges that she is entitled to the protection of the "innocent spouse" provision of the Internal Revenue Code, 26 U.S.C. § 6013(e), and thus her liability for the above referenced years is zero. The IRS on the other hand denies that the Plaintiff is an "innocent spouse" and consequently asserts that she is liable for the tax.

The matter was tried before the Court on November 29, 1995. The Plaintiff and her daughter, Darlene Tripp, testified for the Plaintiff. The sole witness for the IRS was Jamie Schiffer, a special agent for the IRS. Post-trial memorandum were filed by both parties in early February of 1996. For the reasons set out below, the Court finds that the Plaintiff is an innocent spouse pursuant to section 6013(e) of the Internal Revenue Code and the Plaintiff's tax liability for the years 1980 and 1981 is zero.

This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).

INTRODUCTION

Gloria Michaud ("Plaintiff") filed a Chapter 11 bankruptcy petition on April 5, 1994. She filed the above-captioned adversary proceeding on April 24, 1995, after the United States' Internal Revenue Service ("IRS" or "government") filed a proof of claim in the amount of $491,383.17. (Claim No. 1.) The IRS claim consists of a secured claim in the amount of $226,034.14 for tax year 1980, which includes $56,114.00 for taxes, $17,583.23 for penalties, and $152,336.91 for interest, a secured claim in the amount of $264,949.03 for tax year 1981, which includes $47,809.50 for taxes, $9,775.42 for penalties, and $207,364.11 for interest, and an unsecured priority claim in the amount of $400.00, which is the estimated liability of the Debtor for tax year 1993.

FACTS

The Plaintiff married Hubert Michaud on December 30, 1969. (Transcript at 21.) In 1982 and 1983, income tax returns were filed for the years 1980 and 1981, respectively. (Ex. 103 and 104.) The returns for 1980 and 1981 contain what purport to be the signatures of Hubert and Gloria Michaud. The Plaintiff testified at trial that she did not sign either return. (Transcript at 42-43, 80.)

In 1980, the Michauds reported adjusted gross income of $172,605, which included wages, salaries and tips of $306,080, interest income of $1,208, a business loss of $127,456, a capital loss of $3,000, and a partnership loss of $4,227. (Ex. 103.) The Michauds' 1980 return contained deductions in the amount of $89,140, which included a deduction in the amount of $86,302 for a charitable contribution to the Life Science Church of real property described as the Five Seasons Campground, located in Mount Vernon, Maine. (Ex. 103.)

In 1981, the Michauds reported gross income of $212,454, which included wages, salaries and tips of $303,200, interest income of $1,772, a business loss of $96,074, a capital loss of $3,000, and rents of $6,556. (Ex. 104.) The rental income was attributable to rent received by the Plaintiff from the lease of a small house purchased by the Plaintiff for use by her daughter and nephews. (Ex. 101 at 2; Transcript at 50-51, 83-84.) The Michauds' 1981 return contained deductions in the amount of $111,069, which included a deduction in the amount of $103,227 for a charitable contribution based on the purported donation of the campground to the Life Science Church.

After auditing the 1980 and 1981 tax returns, the IRS disallowed in full the Michauds' charitable deductions to the Life Science Church because the Life Science Church was not a charitable entity and because Mr. Michaud retained possession and control of the campground despite his "contribution" to the church. (United States' Post-Trial Brief at 4, citing United States v. Michaud, 860 F.2d 495 (1st Cir.1988).) The IRS "also determined that the Michauds had unreported income in 1980 and 1981 of $21,454.00 and $10,056, respectively. The unreported income took the form of expenditures made for the benefit of the Michauds by a company owned by Mr. Michaud. For example, Mr. Michaud's corporation paid, inter alia, the Michauds' personal attorney fees, landscaping fees, and home construction expenses." (United States' Post-Trial Brief at 4.) According to the IRS, however, the basis for the additional tax asserted against the Plaintiff is "almost exclusively due to the assertion of improper deductions." (United States' Amended Answer at ¶ 8.)

During the trial Plaintiff testified that she did not graduate from high school. (Transcript at 22.) She dropped out in the eleventh grade and married Roy Tripp, her first husband, and started a family. (Transcript at 22.) She received her GED two and half years later. (Transcript at 22.) The Plaintiff admitted that she never prepared a tax return during the course of her marriage to Hubert Michaud. (Transcript at 39.) She stated that her husband "always had an accountant" who prepared income tax returns. (Transcript at 40.) She testified that she remembered being asked a few times to give them the interest figures on the house and charge cards and the expense figures for other minor things. (Transcript at 40, 88.) The Plaintiff stated that she signed tax returns when the accountant came to the house and asked her to sign. (Transcript at 40.) According to the Plaintiff, she did not discuss matters pertaining to tax returns with her husband. (Transcript 40-41.) She testified that her husband was controlling. (Transcript at 38). This testimony was supported by the testimony of the Plaintiff's daughter who testified that her stepfather was verbally abusive to her mother. (Transcript at 159.) The Plaintiff and Hubert Michaud divorced in 1991. (Transcript at 21.) The Plaintiff testified that during the couple's twenty-two year marriage Bert Michaud kept his business dealings completely separate from those of the household. (Transcript at 38.) The Plaintiff was given a moderate allowance from which she was to make all household purchases. (Transcript at 29-30.)

DISCUSSION

The Plaintiff has objected to the claim of the IRS on the basis that she is entitled to innocent spouse relief. Under 26 U.S.C. § 6013(d)(3), a husband and wife who make a joint income tax return are jointly and severally liable for the full amount owed. Congress has created a limited exception to this rule called the innocent spouse provision and it provides:

Under regulations prescribed by the Secretary, if —

(A) a joint return has been made under this section for a taxable year,

(B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse,

(C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and

(D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,

then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement.

26 U.S.C. § 6013(e)(1).

The Plaintiff has the burden of rebutting the IRS's prima facie evidence that it is owed the amount stated in its proof of claim, see Burger v. Level End Dairy Investors (In re Burger), 125 B.R. 894, 902 (Bankr.D.Del. 1991); In re Beverages Int'l Ltd., 50 B.R. 273, 280 (Bankr.D.Mass.1985), as well as the burden of proving that she is entitled to the innocent spouse relief provided by section 6013(e), see Purificato v. Commissioner, 9 F.3d 290, 293 (3d Cir.1993), cert. denied, ___ U.S. ___, 114 S.Ct. 1398, 128 L.Ed.2d 71 (1994) (citing Stevens v. Commissioner, 872 F.2d 1499, 1504 (11th Cir.1989); Purcell v. Commissioner, 826 F.2d 470, 473 (6th Cir. 1987), cert. denied, 485 U.S. 987, 108 S.Ct. 1290, 99 L.Ed.2d 500 (1988); Ballard v. Commissioner, 740 F.2d 659, 663 (8th Cir.1984)).

Joint Return Requirement — 26 U.S.C. § 6013(e)(1)(A)

The first element of the innocent spouse provision the Plaintiff must prove is that a joint return was filed for tax years 1980 and 1981. The Plaintiff testified at trial that she did not sign the 1980 and 1981 returns. (Transcript at 42-43, 80.) She also indicated that she did not have any specific recollection of having reviewed any tax returns for 1980 and 1981. (Transcript at 44.) The Plaintiff testified, "I was led to believe that I always signed them, so I don't know if I signed dummies or what. I just don't know." (Transcript at 44.) The Plaintiff also indicated that she never authorized anyone else to sign these returns. (Transcript at 116.)

The question of whether a return is a joint return is primarily one of intent, and the question of the spouses' intentions is one of fact. See Sharwell...