McGee v. C.I.R., 92-4031

• Citation: 979 F.2d 66
• Decision Date: 15 December 1992
• Docket Number: No. 92-4031,92-4031
• Parties: -530, 93-1 USTC P 50,015 Dorothy D. McGEE, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 66

979 F.2d 66

71 A.F.T.R.2d 93-530, 93-1 USTC P 50,015

Dorothy D. McGEE, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 92-4031.

United States Court of Appeals, Fifth Circuit.

Dec. 15, 1992.

Rehearing Denied Jan. 13, 1993.

John A. Townsend, Houston, Tex., for petitioner-appellant.

Abraham N.M. Shashy, Jr., Chief Counsel, I.R.S., Charles Bricken, Atty., Gary R. Allen, Chief Asst. Atty. Gen., Appellate Section, Regina S. Moriarty, Kenneth L. Greene, Attys., and Shirley D. Peterson, Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from a Decision of the United States Tax Court.

Before KING, WILLIAMS and SMITH, Circuit Judges.

PER CURIAM:

Dorothy McGee appeals the decision of the tax court, McGee v. Commissioner, 62 T.C.M. (CCH) 976 (1991), denying her relief under I.R.C. § 66(c), and finding her liable for additions to tax under I.R.C. §§ 6651(a)(1), 6653(a)(1) & (2), and 6654. Finding that the tax court's findings of fact were not clearly erroneous, we affirm.

I.

Taxpayer is a college graduate and a nurse by training. In 1977, she married Dr. Daniel Tache, a dentist. From 1977 to 1980, Tache had little income from dentistry ¹ and taxpayer worked as a clinical nurse. They filed joint federal income tax returns during this period.

In 1981 and the years that followed, Dr. Tache's practice became quite profitable. Taxpayer quit working so that she could stay at home to raise her children. During 1982 and 1983, Tache provided taxpayer with $3,300 monthly for household expenses. The income from the practice was substantially the sole source of support for the family. Taxpayer knew that Tache's dentistry practice was the source of the family's income during these years.

Tache hired an accountant, Jay Epstein, to prepare and file the family's income tax returns. Taxpayer would sign the prepared tax forms without reviewing their contents. Tache generally did not share financial information concerning his dental practice with taxpayer, but taxpayer was aware that the books maintained for her husband's practice were not kept in an orderly fashion. Epstein would occasionally express concern to taxpayer regarding Tache's less than diligent attitude toward tax management. Although taxpayer knew that Tache was disorganized and frequently procrastinated in handling tax and other financial matters, ² she relied on him and Epstein to attend to the tax returns. Taxpayer did not know at the time that Tache failed to file federal income tax returns for the taxable years 1981, 1982, and 1983.

Taxpayer believed from an early point in their marriage that Tache was involved in extramarital affairs. During 1982 and 1983, Tache spent many nights away from home. Tache commenced divorce proceedings in May 1984, and the divorce became final in June 1985. ³

In October 1985, taxpayer and Tache filed a joint federal income tax return for 1984, reflecting a net income from Tache's dentistry practice of $105,490. In 1986, taxpayer was advised that tax returns had not been filed for 1981 through 1983. Epstein prepared joint returns for the years in issue, which were presented to taxpayer for her signature. Taxpayer refused to sign the joint returns, and requested instead that Epstein prepare separate returns. The separate returns for the years in issue reflected taxpayer's one-half share of the taxable community income from Tache's dentistry practice. Because she could not immediately verify the income from Tache's practice, she did not execute or file the separate returns. ⁴

In April 1989, the Commissioner sent taxpayer a statutory notice of deficiency proposing deficiencies in federal income tax of $16,733 for 1982 and $12,260 for 1983, together with additions to the tax for failure to file tax returns or pay tax, for negligence or intentional disregard of rules and regulations, and for failure to pay estimated income tax under I.R.C. §§ 6651(a)(1), 6653(a)(1) & (2), and 6654, respectively. Taxpayer petitioned the tax court for a redetermination of the deficiencies, contending that she qualified as an "innocent spouse" under I.R.C. § 66(c) ⁵ and thus should be relieved from the obligation to pay tax on her community share of the income from Tache's dental practice for 1982 and 1983, as well as any liability for the additions to the tax. At the time of trial, taxpayer still had not filed returns for the years in issue.

The tax court held that taxpayer did not qualify for innocent spouse relief because she did not meet the requirement of I.R.C. § 66(c)(3). See note 5, supra. The tax court also held that taxpayer did not have reasonable cause for reliance on Tache and Epstein to attend properly to tax matters and was therefore subject to penalties for late filing, negligence, and underpayment of estimated taxes. Taxpayer appeals to this court alleging that the tax court erred in concluding that she failed to satisfy I.R.C. § 66(c)(3). She also contends on appeal that the tax court erred in concluding that she did not have reasonable cause for failing to file timely returns, and that she was negligent in her underpayment of taxes. ⁶

II.

In deciding whether to uphold the decision of the tax court regarding both the failure of taxpayer to qualify for innocent spouse relief under I.R.C. § 66(c) and the propriety of the various additions to tax, we must review the findings of the tax court under the clearly erroneous standard. ⁷ Fed.R.Civ.Pro. 52(a); see Anderson v. Bessemer City, 470 U.S. 564, 572, 105 S.Ct. 1504, 1510, 84 L.Ed.2d 518 (1985); Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1199, 4 L.Ed.2d 1218 (1960); Roberts v. Commissioner, 860 F.2d 1235, 1239 (5th Cir.1988); Sanders v. United States, 509 F.2d 162, 165-66 (5th Cir.1975). A finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. Rutter v. Commissioner, 853 F.2d 1267, 1272 (5th Cir.1988) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948)).

A. Section 66(c) Relief

Taxpayer contends that for purposes of procuring innocent spouse relief, her knowledge of community income should be limited to the amount of income of which she knew or had reason to know through the cash flow that she observed. ⁸ The tax court, noting that it has repeatedly denied relief under § 66(c) in cases where the taxpayer/spouse was aware of the source of community income but was unaware only of the specific amount of his or her spouse's community income, found that taxpayer did not qualify for innocent spouse relief because she knew or had reason to know of the community income from Dr. Tache's dental practice. 62 T.C.M. (CCH) at 979. We cannot conclude that this finding is clearly erroneous.

The tax court has consistently held that a spouse's unawareness of the exact amount of an item of community income is not determinative of knowledge for purposes of § 66(c); knowledge of an "item of community income" is determined with reference to knowledge of a particular income-producing activity. McPherson v. Commissioner, 62 T.C.M. (CCH) 1039, 1042 (1991); Costa v. Commissioner, 60 T.C.M. (CCH) 1178, 1191 (1990); see also Abrams v. Commissioner, 57 T.C.M. (CCH) 1433, 1435 (1989) (section 66(c)(3) not satisfied because taxpayer knew her husband was an attorney and knew he earned community income during the year in question); Thatcher v. Commissioner, 56 T.C.M. (CCH) 707, 710 (1988) (fact that taxpayer was unable to determine specific amount of community income from her husband's business does not satisfy § 66(c)(3)); Roberts v. Commissioner, 54 T.C.M. (CCH) 94, 97 (1987) (section 66(c)(3) not satisfied because taxpayer knew her husband was involved in real estate transactions which generated income, though she did not know the exact amount), aff'd, 860 F.2d 1235 (5th Cir.1988); Baldwin v. Commissioner, 52 T.C.M. (CCH) 22, 24 (1986) (section 66(c)(3) not satisfied because taxpayer knew her husband taught at a university and earned a salary during the years in question). We have affirmed this view when it has presented itself on appeal. See Roberts, 860 F.2d at 1239-40 (knowledge of exact amount of compensation from a known income-producing activity not required in order to have knowledge of an item of community income under § 66(c)), aff'g 54 T.C.M. (CCH) 94 (1987).

Taxpayer was aware that her husband earned income from his dental practice, although she did not know the exact amount. She was aware of Tache's irresponsible behavior in financial matters, yet never questioned him regarding the amounts he earned from his dental practice or whether tax returns were being timely filed. She made no effort to review tax documents before signing them. Furthermore, taxpayer testified at trial that she could have determined Tache's income for the years at issue by asking Epstein. On the whole, she did not act as a reasonably prudent person with an equal level of knowledge would under the surrounding circumstances with regard to determining the amount of Dr. Tache's income for the years in question. See Sanders, 509 F.2d at 166-67; cf. Erdahl v. Commissioner, 930 F.2d 585 (8th Cir.1991) (innocent spouse relief is "designed to protect the innocent, not the intentionally ignorant") (quoting Cohen v. Commissioner, 54 T.C.M. (CCH) 944, 947 (1987)). Accordingly, we find that the tax court did not commit clear error when it found that taxpayer knew or should have known of the item of community income, and was, therefore, not entitled to relief as an innocent spouse under § 66(c).

B. Additions to Tax

1. Section 6651(a)(1)

The tax court found taxpayer liable for additions to tax under I.R.C. § 6651(a)(1) which imposes a civil penalty for failure to file a timely return, unless it is shown that the failure to file...