Mora v. Comm'r of Internal Revenue, 6154–00.

• Decision Date: 17 December 2001
• Docket Number: No. 6154–00.,6154–00.
• Citation: 117 T.C. 279,117 T.C. No. 23
• Parties: Patricia M. MORA, F.K.A. Patricia Rasberry, Petitioner,andLynn RASBERRY, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

117 T.C. 279

117 T.C. No. 23

Patricia M. MORA, F.K.A. Patricia Rasberry, Petitioner,andLynn RASBERRY, Intervenor

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 6154–00.

United States Tax Court.

Dec. 17, 2001.

Taxpayer filed “stand-alone” petition for review of IRS' denial of relief from joint and several liability. Former spouse intervened. The Tax Court, Beghe, J., held that taxpayer was entitled to relief for portion of deficiency properly allocable to her former spouse.

Decision for IRS in part, and for taxpayer in part. H invested in a tax shelter limited partnership that passed through substantial losses that were claimed on the joint Federal income tax returns H and W filed for the taxable years 1985 and 1986, and disallowed by R. After H and W were divorced W sought relief from joint and several liability. R denied W's request for relief from joint and several liability under sec. 6015(b) and (c), I.R.C., on the ground that W had knowledge of the items giving rise to the deficiencies.Held, W is not entitled to relief from joint and several liability under sec. 6015(b), I.R.C.; W had reason to know of the understatements by reason of the size of the losses in relation to the income of H and W. A reasonable person in W's position would have made inquiries to determine the legitimacy of the losses, and W failed to make any such inquiries.Held further, W is entitled to relief under sec. 6015(c), I.R.C. The items giving rise to the deficiencies (the disallowed partnership losses) are properly attributed to H's activities and partnership interest. W did not have actual knowledge of the items giving rise to the deficiencies at the time she signed the tax returns. Under the standard enunciated by this Court in King v. Commissioner, 116 T.C. 198, 2001 WL 356124 (2001), the test for actual knowledge under sec. 6015(c)(3)(C), I.R.C., is whether the requesting spouse had actual knowledge of the facts resulting in the disallowance of the losses. Contrary to respondent's argument, the King standard should be applied to both active and passive activities. Therefore, petitioner is entitled to relief from joint and several liability under sec. 6015(c), I.R.C.Held further, pursuant to sec. 6015(d)(3)(B), I.R.C., W is not relieved of liability under sec. 6015(c), I.R.C., to the extent that she received a tax benefit from the disallowed partnership losses claimed on the joint returns.Patricia M. Mora, f.k.a. Patricia Rasberry, pro se.

Lynn Rasberry, pro se.

Thomas M. Rohall and Kathryn K. Vetter, for respondent.BEGHE, J.

This case is before us on petitioner's “stand-alone” petition under section 6015(e)(1) ¹ for relief from joint and several liability, following respondent's denial of relief. Intervenor is petitioner's former spouse, who intervened under section 6015(e)(4) and Rule 325. Intervenor and respondent both contend that petitioner is not entitled to relief under either section 6015(b) or (c).

We sustain respondent's determination that petitioner is not entitled to relief under section 6015(b), but hold that petitioner is entitled to partial relief under section 6015(c).

FINDINGS OF FACT

Most of the facts have been stipulated and are so found. The stipulation of facts and the related exhibits are incorporated by this reference. Petitioner and intervenor both resided in California at the time their petition and request for intervention, respectively, were filed with this Court.

Petitioner was born in 1962 and came to the United States from Uruguay in June 1984. Before moving to the United States, petitioner obtained the equivalent of an associate's degree in business administration from a community college in Uruguay. Petitioner is fluent in English.

Intervenor was born in 1955 and is not a college graduate.

Petitioner and intervenor were married on November 30, 1984. In 1985 and 1986, petitioner and intervenor both worked at the California State capitol. Petitioner worked as a clerk for an assemblywoman, and intervenor worked for the California State senate. Petitioner and intervenor filed joint Federal income tax returns for 1985 and 1986.

Sometime before 1985, intervenor was introduced through a coworker to an investment syndicator and tax preparation service known to him as Hoyt Investments. Walter J. Hoyt III and some members of his family were in the business of creating tax shelter limited partnerships for their cattle breeding operations. As part of their services, the Hoyt organization also prepared the investors' tax returns. For a description of the Hoyt organization and its operation, see Bales v. Commissioner, T.C. Memo.1989–568; see also River City Ranches # 4, J.V. v. Commissioner, T.C. Memo.1999–209, affd. without published opinion ––– F.3d –––– (9th Cir., November 26, 2001).

Intervenor attended a meeting organized by the Hoyt organization at which he decided to participate in a tax shelter limited partnership and have the Hoyt organization prepare his and petitioner's joint Federal income tax returns. Intervenor signed all the partnership forms, gave the Hoyt organization a check for $25, and thereby became a limited partner in Shorthorn Genetic Engineering 1983–2, Ltd. (Shorthorn partnership). According to the Shorthorn partnership's records, the partnership interest was held in the names of both petitioner and intervenor, even though petitioner had not signed any of the partnership documents.

Intervenor did not have material discussions with petitioner about his decision to invest in the Shorthorn partnership tax shelter or about his decision to allow the Hoyt organization to prepare his and petitioner's joint tax returns.

Petitioner had little if any involvement with the Hoyt organization. She was new to this country, had no experience with U.S. income tax laws, and trusted intervenor to handle their tax return preparation. However, petitioner was aware that intervenor had made some financial arrangements with the Hoyt organization.

Petitioner and intervenor were both wage earners who did not itemize their deductions. The tax office of W.J. Hoyt & Sons Management Co. prepared their 1985 and 1986 tax returns. Intervenor delivered his and petitioner's financial information (consisting of the wage information from their Forms W–2, Wage and Tax Statement) to the Hoyt office. From that information, the Hoyt office prepared and mailed the final returns to petitioner and intervenor for their signatures.

The joint Federal income tax return of petitioner and intervenor for 1985 showed wages of $30,203 and Shorthorn partnership losses of $20,180. Their joint return for 1986 showed wages of $36,943 and Shorthorn partnership losses of $26,234. On the basis of the filed returns, petitioner and intervenor received income tax refunds of $3,185 for 1985 and $3,947 for 1986.

Hoyt told intervenor to endorse and forward the refund checks when received to the Hoyt office so that Hoyt could calculate and deduct intervenor's required contribution to the Shorthorn partnership. Intervenor delivered the endorsed refund checks to Hoyt .²

Intervenor had invested only $25 in the Shorthorn partnership at the time he and petitioner filed their joint 1985 Federal income tax return, in which they claimed $20,180 in tax losses from the Shorthorn partnership. As a result of the Shorthorn partnership losses, petitioner and intervenor received a tax refund for 1985 of $3,185. Intervenor signed the refund check over to the Shorthorn partnership and received back less than $500. The Shorthorn partnership kept the balance of the income tax refund as intervenor's Shorthorn partnership capital contribution.

At the time petitioner and intervenor filed their 1986 return, intervenor had invested less than $3,000 ³ in the Shorthorn partnership, yet claimed an additional $26,234 of Shorthorn partnership losses (together with the 1985 losses, petitioner and intervenor recognized a total of $46,414 in partnership losses). It appears that most of petitioner and intervenor's 1986 refund was also paid to the Shorthorn partnership.

Respondent examined the Shorthorn partnership's returns, and issued notices of final partnership administrative adjustment (FPAA) to the Shorthorn partnership. Walter J. Hoyt III, as tax matters partner for the Shorthorn partnership, filed a petition with this Court, docket No. 29295–89, which was consolidated with other Hoyt partnership cases.

After the partners' stipulations in Bales v. Commissioner, supra, the tax matters partner for the Shorthorn partnership stipulated most of the issues raised by the Commissioner. The Tax Court issued an opinion affirming the Commissioner's calculations regarding the effect of the stipulation on each of the partnerships, which is reported at Shorthorn Genetic Engineering 1982–2, Ltd. v. Commissioner, T.C. Memo.1996–515. On the basis of the stipulations and opinion, a substantial portion of the Shorthorn partnership losses was disallowed. According to respondent, the losses were disallowed because, among other things, the Shorthorn partnership overstated both the number and value of animals owned by the partnership that formed the basis for the deductions.

On the basis of the stipulated and decided issues at the partnership level, respondent denied a portion of the losses that were passed through to intervenor from the Shorthorn partnership for 1985 and 1986. The denial of the losses resulted in computational adjustments owing by petitioner and intervenor, which were timely assessed as deficiencies on April 13, 1998.

On December 30, 1986, petitioner and intervenor filed a joint petition for summary dissolution of their marriage. In the their dissolution petition, petitioner and intervenor stated that they had no community assets or liabilities. The divorce became final in 1987. The divorce was amicable.

On July 16, 1998, after respondent mailed a notice of computational adjustment to petitioner and offset two of her income tax refunds from later year...