Price v. C.I.R.

• Citation: 887 F.2d 959
• Decision Date: 18 October 1989
• Docket Number: No. 88-7124,88-7124
• Parties: -5822, 89-2 USTC P 9598 Patricia A. PRICE, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 959

887 F.2d 959

64 A.F.T.R.2d 89-5822, 89-2 USTC P 9598

Patricia A. PRICE, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 88-7124.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 9, 1988.

Decided Oct. 18, 1989.

Kevin G. Staker, Gregory R. Gose, Staker & Gose, Camarillo, Cal., for petitioner-appellant.

William S. Rose, Asst. U.S. Atty. Gen., Gary R. Allen, Robert S. Pomerance, Barbara I. Hodges, Attys., Tax Div., U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from the United States Tax Court.

Before REINHARDT and O'SCANNLAIN, Circuit Judges, and COYLE, ^* District Judge.

O'SCANNLAIN, Circuit Judge:

This appeal turns on interpretation of the defense to joint federal income tax liability known as the "innocent spouse" provision of the Internal Revenue Code. The wife-taxpayer asserts that the tax court erred by applying an incorrect standard in determining that she was ineligible for relief under this provision. She claims that she was "innocent" within the meaning of the provision at the time she signed the return, and thus should be shielded from liability as to the tax deficiency arising from a deduction as to which her husband-taxpayer had superior knowledge. We agree and reverse the judgment of the tax court. ¹

I

Patricia Price ("Patricia") married Charles Price ("Charles") in 1969. During the marriage, which ended in divorce in 1986, Charles handled all of the family's investment decisions and maintained a separate checking account for investments. Patricia and Charles also held a joint account that consisted primarily of Patricia's earnings and was used to pay for household expenses as well as the mortgage on the Prices' home. Patricia had to ask Charles for money when she needed to cover expenses exceeding her earnings and the amount in their joint checking account.

In 1976, Patricia, who had studied as a sociology major at a junior college for two years, became part of the "office staff" at Commuter Transportation Services, a car pooling agency. Within five years, she had become a branch manager with the agency. Around the same time, Charles, who had been a stockbroker when the couple wed, was working as an investment broker, and he began to sell shares in a venture known as Cal-Colombian Mines, Ltd. ("CCM"), a Colombian gold mining operation. Patricia was aware of Charles's involvement in the venture. More specifically, Charles informed her that he had acquired several shares of CCM, that he had flown to Colombia to check on the mine's development, that the mining operation was a viable investment, and that two persons Patricia knew, a pharmacy owner and a local developer, had invested in CCM. Patricia also saw photos that Charles stated were taken on the mining operation site which showed heavy equipment.

Other than the above details, Patricia knew virtually nothing else about CCM. For example, she had not seen a CCM offering circular or any other CCM document, and did not know the purchase price of a CCM share or of the existence or the value of any mineral interest. Nevertheless, she stated that she trusted Charles in financial matters, including the CCM investment, because of what she perceived to be his "excellent" business reputation and experience.

Patricia and Charles filed a joint federal income tax return for 1981 which was prepared by a local CPA firm familiar to Patricia. Patricia's only participation in the execution of the return was to provide Charles with her W-2 form, which indicated that Patricia earned approximately $23,000 during 1981. The return reported this income and also recorded Charles's net income as approximately $80,000. On one of the schedules attached to the return, the Prices claimed a $90,000 deduction for the exploration and development expenses allegedly incurred while mining ore in the CCM mine. The Prices offset this deduction against their income from other sources to lessen their total federal income tax liability for 1981 to $391 in self-employment tax.

On the filing deadline day, Charles presented the completed 1981 joint return to Patricia for her signature. Patricia reviewed the return "cursorily," and noticed the $90,000 deduction taken for the mining expenses, which she testified she "thought ... was a bit much." When she asked Charles about the deduction, she testified that he assured her that "if there had been any problems [the CPA] would ... never have drawn the papers for us and put his name on them." After Charles's assurances, Patricia signed the return.

Several years later, the Commissioner issued a joint notice of deficiency to Patricia and Charles, asserting an original deficiency of $40,120 on their 1981 return and assessing an additional five percent fee under Internal Revenue Code Sec. 6653(a)(1) for the Prices' negligent disregard of tax rules and regulations. ² The Commissioner bases the deficiency claim on his assertion that the $90,000 deduction for the CCM exploration and development expenses is invalid. In support of this assertion, he alleges that the Prices failed to establish that they had paid or incurred any bona fide mine development expenses, that the alleged CCM mining activity had any economic substance, or that the mining was pursued for profit.

In June 1985, Charles filed a joint petition in the tax court seeking redeterminations of the deficiency and the additions to tax. See 26 U.S.C. Sec. 6213 (1982 & Supp.V 1987). Although Charles included Patricia's name on the petition, she did not learn of the notice of deficiency and the petition until sometime later. She eventually obtained her own counsel and filed an amended petition in the tax court asserting that she is not liable for the tax deficiency because she is an "innocent spouse" under the Internal Revenue Code. See 26 U.S.C. Sec. 6013(e) (Supp.V 1987).

The "innocent spouse provision" exempts a spouse from joint federal income tax liability ³ if she can establish for the taxable year in question that: (1) she and her spouse filed a joint return, 26 U.S.C. Sec. 6013(e)(1)(A); (2) the return contained a "substantial understatement of tax" attributable to errors the other spouse committed, 26 U.S.C. Sec. 6013(e)(1)(B); (3) in signing the return she did not know or have reason to know of the substantial understatement, 26 U.S.C. Sec. 6013(e)(1)(C); and (4) it would be inequitable to hold her liable for the deficiency in question, 26 U.S.C. Sec. 6013(e)(1)(D). ⁴ The person seeking relief from liability carries the burden of proving each element of section 6013(e)(1). Shea v. Commissioner, 780 F.2d 561, 565 (6th Cir.1986); Sonnenborn v. Commissioner, 57 T.C. 373, 381 (1971).

The tax court denied Patricia innocent spouse protection based on its specific ruling that she failed to carry her burden as to the third element of section 6013(e)(1), ⁵ which requires a spouse to establish that "in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement...." 26 U.S.C. Sec. 6013(e)(1)(C). ⁶ The court read this subsection as requiring a taxpayer seeking innocent spouse protection to establish that she did not know of the transaction underlying the deduction. Because it found that Patricia knew about the CCM investment, the court rejected her defense and ruled that both she and Charles were liable for the deficiency arising from the CCM deduction.

In accordance with this ruling, the court entered a final judgment upholding both the Commissioner's assessment of income tax deficiency and his determination that the Prices should be subjected to an additional interest penalty on the deficiency under 26 U.S.C. Sec. 6621(c) (Supp. V 1987). ⁷ Patricia appeals, ⁸ alleging that the tax court erroneously interpreted section 6013(e)(1)(C) in ruling that she does not qualify as an innocent spouse under the Code.

II

In construing a statute, we look first to its plain meaning. United States v. 594,464 Pounds of Salmon, 871 F.2d 824, 825-26 (9th Cir.1989). Section 6013(e)(1)(C) states that to qualify for the shield of innocent spouse protection, a spouse must establish that "in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement...." 26 U.S.C. Sec. 6013(e)(1)(C). The plain meaning of the section is clear. It requires a spouse seeking relief to establish that she did not know and did not have reason to know that the deduction would give rise to a substantial understatement. ⁹ See Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir.1989).

If the statutory language is unambiguous, its plain meaning controls unless Congress has "clearly expressed" a contrary legislative intention. 594,464 Pounds of Salmon, 871 F.2d at 826. Here, far from conflicting with congressional intent, the plain meaning squares with one of the few glimpses the sparse legislative history of the 1984 Amendments provides. In discussing the 1984 Amendments, the House Ways and Means Committee stated that it:

believes 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 a phony business deduction 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.

Supplemental Report of Comm. on Ways & Means, H.R.Rep. 98-432 (Pt. 2), on Tax Reform Act of 1984, H.R. 4170, at 1502 (1984), 1984 U.S.Code Cong. & Admin.News 1143 (emphasis supplied).

Initially, we note that the tax court correctly found that Patricia did not know the legal consequences of the deduction, which, while not sufficient, is obviously necessary to entitle her to relief. Moreover, the record...