Park v. C.I.R., 93-5339

• Decision Date: 30 June 1994
• Docket Number: No. 93-5339,93-5339
• Citation: 25 F.3d 1289
• Parties: -5231, 94-2 USTC P 50,320 Harold L. PARK, Deceased, and Alice P. Jones, formerly Alice P. Park, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1289

25 F.3d 1289

74 A.F.T.R.2d 94-5231, 94-2 USTC P 50,320

Harold L. PARK, Deceased, and Alice P. Jones, formerly Alice P. Park, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 93-5339.

United States Court of Appeals Fifth Circuit.

June 30, 1994.

Thomas E. Redding, Charles B. Koerth, Redding, Coselli, Tinsley & Allie, L.L.P., Houston, TX, for appellant.

Abraham N.M. Shashy, Jr., Chief Counsel, IRS, John A. Nolet, Gary R. Allen, Chief, Kenneth L. Greene, Appellate Section, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellee.

Appeal from a Decision of the United States Tax Court.

Before GOLDBERG, KING, and WIENER, Circuit Judges.

KING, Circuit Judge:

Alice P. Jones appeals the decision of the United States Tax Court denying her innocent spouse relief under 26 U.S.C. Sec. 6013(e) and Sec. 6004 of the Technical and Miscellaneous Revenue Act of 1988. Finding no error, we affirm.

I. BACKGROUND

A. FACTUAL BACKGROUND

Harold Park and Alice Jones were married in 1978. Park was a certified public accountant and chief financial officer for Thomas Petroleum Products. Jones is a high school graduate, who completed four or five courses in real estate and is a licensed real estate agent. In 1981, Park left Thomas Petroleum and became the chief financial officer for a large concern known as B.P.M., Ltd.

Park and Jones maintained two joint checking accounts, one at Spring Branch Bank and the other at Town and Country Bank. Although Park referred to the Town and Country account as his business account, funds from that account were sometimes used to pay personal expenses. Jones opened the family mail and paid the family's bills from these two checking accounts, including those in connection with an oil and gas exploration venture (Hadl Oil) in which she and Park were involved. She wrote most of the checks drawn on these accounts, carried the checkbooks with her most of the time, and reconciled the checkbook balances for these accounts on a monthly basis.

In December 1980, Park opened an individual investment account with Financial Securities Corp. (FSC), with an initial investment of $7,500--paid by check from the Town and Country account. Under the terms of the investment agreement, FSC purchased and sold, on Park's behalf, Government National Mortgage Association (GNMA) securities and related forward delivery contracts. FSC then mailed Park monthly statements of account, which listed inter alia the amounts FSC had received from Park, the GNMA contracts FSC bought or sold on Park's behalf, and Park's open trade equity. Jones would see these statements when she opened the family mail and, on occasion, would question Park about them. Park, however, was evasive when responding to Jones' questions and told her that their accountant had recommended the FSC investment as a tax investment, that it should make them money, and that he or their accountant would take care of it. Jones filed these monthly statements in a shoe box with other financial records, which were turned over to an accountant at tax filing time for preparation of their tax return.

In June 1981, Park received a letter from FSC stating that the balance in the margin account was deficient by $13,000 and that payment had to be made by June 15 to prevent the liquidation of the investment and the closing of the account. Because Park was out of town at the time the letter arrived, Jones phoned Park about the letter. He instructed her to mail a check to FSC for $13,000, which she did on June 9, 1981.

Charles Randolph, a certified public accountant, prepared the joint federal income tax return for 1981 at issue in this case for Park and Jones after Jones delivered to Randolph the records needed to prepare the return. On the return, Park and Jones reported losses totaling $107,456 from the FSC investment (an amount that was more than five times their total cash investment of $20,500--i.e., the initial $7,500 investment plus the later $13,000 margin call). They also claimed a total refund of $36,829, which was deposited in the Town and Country account and used to pay off bills incurred in connection with Hadl Oil.

Park and Jones were divorced in April 1986. Park died in August 1991.

B. PROCEDURAL HISTORY

The Commissioner issued a notice of deficiency to Park and Jones on August 22, 1984, disallowing the FSC investment loss deduction claimed for 1981. Park and Jones petitioned the tax court for a redetermination of the deficiency, which the Commissioner had asserted was $266,582. Jones subsequently amended the petition to assert that she was an innocent spouse under either Sec. 6013(e) or, in the alternative, under Sec. 6004 (the transitional rule) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA). The parties then filed a stipulation on September 25, 1989, in which Park and Jones agreed that they were not entitled to the investment loss claimed ($107,456) but that they were instead entitled to a loss deduction of $13,000--their net investment in FSC for 1981. Park further agreed that he was liable for a $40,065 deficiency in 1981 tax, and he waived further restrictions on assessment and collection of the deficiency.

The tax court determined that Jones had "reason to know" of the substantial understatement on the joint 1981 tax return. The court accordingly found that Jones did not qualify for "innocent spouse" relief under either Sec. 6013(e) or the transitional rule. Jones then filed a timely notice of appeal.

II. STANDARD OF REVIEW

We review the decision of the tax court under the same standards that apply to district court decisions. Thus, issues of law are reviewed de novo, and findings of fact are reviewed for clear error. McKnight v. Commissioner, 7 F.3d 447, 450 (5th Cir.1993). The tax court's determination that a spouse is not entitled to relief as an "innocent spouse" is reviewable under the clearly erroneous standard. Buchine v. Commissioner, 20 F.3d 173, 181 (5th Cir.1994); see McGee v. Commissioner, 979 F.2d 66, 69 (5th Cir.1992); Sanders v. United States, 509 F.2d 162, 170-71 (5th Cir.1975).

III. DISCUSSION

Jones contends that the tax court clearly erred in finding that she was not entitled to innocent spouse relief under either Sec. 6013(e) or the transitional rule. She argues that the innocent spouse tests set forth in each of these statutes are substantially different, even though both contain similar language such that the spouse applying for innocent spouse relief must establish that the spouse either did not know or had no reason to know that there was a substantial understatement of income on the joint tax return in question. We discuss each of these statutes in turn.

A. SECTION 6013(E): THE INNOCENT SPOUSE RULE

Spouses who file joint tax returns are generally jointly and severally liable for tax due on their combined incomes, including interest and penalties. See 26 U.S.C. Sec. 6013(d)(3). This general rule is mitigated to some extent by Sec. 6013(e), known as the "innocent spouse rule," which Congress first implemented in 1971. See Act of Jan. 12, 1971, Sec. 1, Pub.L. No. 91-679, 84 Stat. 2063 (1971). The original provision provided relief only to those innocent spouses who were otherwise subject to liability because of an understatement due to an omission of taxable income. ¹ Id. In 1984, Congress expanded the scope of the provision, bringing within its ambit deficiencies arising from invalid deductions or credits. See Tax Reform Act of 1984, Pub.L. No. 98-369, Sec. 424, 98 Stat. 494, 801-03 (1984). In discussing the purpose of the 1984 amendments, the House Ways and Means Committee explained that

the present law rules relieving innocent spouses from liability for tax on a joint return are not sufficiently broad to encompass many cases where the innocent spouse deserves relief. Relief may be desirable, for example, where one spouse claims phony business deductions in order to avoid paying tax and the other spouse has no reason to know that the deductions are phony and may be unaware that there are untaxed profits from the business which the other spouse has squandered.

H.R.REP. NO. 432, 98th Cong., 2d Sess., at 1502, reprinted in 1984 U.S.C.A.A.N. 697, 1143. Congress also determined that this amended version of the provision was to be applied retroactively to all open tax years to which the Internal Revenue Code of 1954 applies. Id. at 1503.

The innocent spouse provision now reads in pertinent part that 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 ... for such taxable year to the extent such liability is attributable to such substantial understatement.

26 U.S.C. Sec. 6013(e)(1); see Buchine, 20 F.3d at 180. Failure to prove any one of the four elements set forth in Sec. 6013(e)(1) prevents a taxpayer from qualifying for relief under the "innocent spouse rule." 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); 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); see Buchine, 20 F.3d at 180.

In the instant case, the parties stipulated that a joint return was filed and that the return contained a substantial understatement attributable to a grossly erroneous deduction of Park's. Jones...