Purificato v. C.I.R.

• Decision Date: 10 November 1993
• Docket Number: No. 92-7659,92-7659
• Parties: -6559, 93-2 USTC P 50,607 William and Marie PURIFICATO v. COMMISSIONER OF INTERNAL REVENUE SERVICE. John and Catherine PURIFICATO v. COMMISSIONER OF INTERNAL REVENUE SERVICE. William and Marie Purificato; John and Catherine Purificato, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

Page 290

9 F.3d 290

72 A.F.T.R.2d 93-6559, 93-2 USTC P 50,607

William and Marie PURIFICATO v. COMMISSIONER OF INTERNAL REVENUE SERVICE.

John and Catherine PURIFICATO v. COMMISSIONER OF INTERNAL REVENUE SERVICE.

William and Marie Purificato; John and Catherine

Purificato, Appellants.

No. 92-7659

United States Court of Appeals, Third Circuit.

Argued June 24, 1993.

Decided Nov. 10, 1993.

Thomas W. Ostrander, Joshua Sarner (argued), Duane, Morris & Heckscher, Philadelphia, PA, for appellants.

James A. Bruton, Acting Asst. Atty. Gen., Gary R. Allen, Gilbert S. Rothenberg, Curtis C. Pett (argued), Attys., Tax Div., Department of Justice, Washington, DC, for appellee.

Before: BECKER, ALITO, and ROTH, Circuit Judges.

OPINION OF THE COURT

ALITO, Circuit Judge:

This is an appeal from a decision of the United States Tax Court holding that Marie and Catherine Purificato are not entitled to relief under the so-called "innocent spouse" provision of the income tax laws, 26 U.S.C. Sec. 6013(e), and that therefore each is jointly and severally liable with her husband for amounts due as a result of the understatement of taxes on their joint returns for 1981, 1982, and 1983. We affirm.

I.

Marie Purificato is married to William Purificato, and Catherine Purificato is married to William's brother John. William and John owned and operated Apollo Caterers, Inc., a Subchapter S corporation. For the years in question, each couple filed joint income tax returns claiming a share of operating losses that they claimed Apollo had experienced. ¹ William and Marie's returns reported adjusted gross income for 1981, 1982, and 1983 in the amounts of $18,670, $19,838, and $14,694 respectively. For these same years, John and Catherine's returns reported adjusted gross income of $23,880, $25,064, and $27,396.

After an audit, the Commissioner of Internal Revenue determined that, contrary to the couples' returns, Apollo had actually made a profit in each of the years at issue, and that its total profit during the three-year period exceeded two million dollars. The Commissioner issued notices of deficiency asserting that both couples owed more than $500,000 in taxes, as well as additions to tax. Each couple subsequently petitioned the tax court for redetermination of the deficiencies. After negotiation, partial settlements were reached. For purposes of the pending cases, the amount of taxes and additions owed for each year was stipulated. The parties could not, however, come to an agreement on whether Marie and Catherine Purificato were jointly liable with their husbands or whether they were entitled to relief under the "innocent spouse" provision, 26 U.S.C. Sec. 6013(e). The cases were then consolidated, and the tax court conducted a trial on the issue of "innocent spouse" relief.

After the trial, the tax court held that Marie and Catherine were not entitled to such relief. The court first stated that Marie and Catherine bore the burden of proving that all four of the elements set out in Secs. 6013(e)(1)(A)-(D) were satisfied. The court found that two of these elements (those contained in Secs. 6013(e)(1)(A) and (B)) were met, and it declined to rule on another element (that contained in Sec. 6013(e)(1)(C)). The tax court held, however, that neither Marie nor Catherine had satisfied the element set out in Sec. 6013(e)(1)(D), which requires proof that "taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax...." According to the court, one of the facts and circumstances that should be considered under this subsection is "whether a spouse significantly benefitted from the erroneous items." Purificato v. Commissioner, 64 T.C.M. (CCH) 942, 946, 1992 WL 238769 (1992). Based on the Purificatos' answers to interrogatories, the court found that both couples had acquired substantial joint assets during the years in question. The court also noted that neither couple had made a full disclosure of assets. In light of these facts, the court held that neither Marie nor Catherine had proven that she did not receive a significant benefit from the income omitted from the returns.

After the tax court entered its judgment, the Purificatos filed a notice of appeal.

II.

Under 26 U.S.C. Sec. 6013(d)(3), a husband and wife who make a joint income tax return are jointly and severally liable for the full amount owed. See also Stevens v. Commissioner, 872 F.2d 1499, 1503 (11th Cir.1989). The so-called "innocent spouse" provision, 26 U.S.C. Sec. 6013(e), creates a limited exception to this rule. This provision states in pertinent part:

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. ²

26 U.S.C. Sec. 6013(e)(1). In order to qualify for relief under this provision, the claimant bears the burden of proving all four of the elements set out in subsections (A) to (D). See, e.g., Stevens, 872 F.2d at 1504; Purcell v. Commissioner, 826 F.2d 470, 473 (6th Cir.1987); Ballard v. Commissioner, 740 F.2d 659, 663 (8th Cir.1984).

Subsection (D), the focus of the current appeal, does not expressly mention the importance of whether a claimant "significantly benefitted" from the understatement of tax, but the history of the "innocent spouse" provision supports the tax court's conclusion that this question should be considered in determining whether joint and several liability would be inequitable. ³ As originally enacted in 1971, the "innocent spouse" provision expressly required consideration of this question. The predecessor of what is now subsection (D) required proof that:

taking into account whether or not the other spouse significantly benefited directly or indirectly from the items omitted from gross income and taking into account all other facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such omission.

Pub.L. No. 91-679, Sec. 1, 84 Stat. 2063 (1971) (emphasis added). The relevant portion of the Senate Report stated, however, that a spouse's benefit or lack of benefit was not necessarily determinative, and the report added the following:

Other factors which could also be taken into account, in appropriate situations, in determining whether it is inequitable to hold the spouse liable for the deficiency include the fact of whether the spouse in question is deserted or is divorced or separated.

S.Rep. No. 91-1537, 91st Cong., 2d Sess., 3, reprinted in 1970 U.S.C.C.A.N. 6089, 6092.

In 1984, the "innocent spouse" provision was amended to take its present form. Among other things, this amendment substituted the more general language that now appears in Sec. 6013(e)(1)(D) ("taking into account all the facts and circumstances") for the more specific language that appeared in the 1971 version ("whether or not the other spouse significantly benefitted directly or indirectly from the items omitted from gross income and taking into account all other facts and circumstances"). The House Report explained:

The bill does not specifically require that the determination of whether it would be inequitable to hold the innocent spouse liable include the consideration of whether such spouse benefitted from the erroneous item, but that factor should continue to be taken into account.

H.R.Rep. No. 98-432, Part II, 98th Cong., 2d Sess., 1502, reprinted in 1984 U.S.C.C.A.N. 697, 1143-44 (emphasis added).

III.

With this background in mind, we address the specific arguments raised in this appeal. We turn first to the appellants' contention that the tax court erred in finding that Marie and Catherine Purificato "significantly benefitted" from the omitted income.

A. As part of this argument, the appellants first suggest that the tax court erred as a matter of law in concluding that acquiring savings or other investment assets may constitute a significant benefit. The appellants seem to suggest that only present consumption can constitute such a benefit. We quickly reject this argument. It is inconsistent with the ordinary meaning of the term "significant benefit"; it is not supported by case law or any other authority of which we are aware; and, in relation to the income tax laws (which of course tax income not consumption), it simply does not make sense.

B. The appellants next contend that the tax court erred in calculating the value of the joint assets that they acquired. Since this argument is purely factual, we must apply the clearly erroneous standard of review. 26 U.S.C. Sec. 7482(a)(1); Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 1199, 4 L.Ed.2d 1218 (1960); Demkowicz v. Commissioner, 551 F.2d 929, 931 n. 4 (3d Cir.1977). The appellants fall far short of satisfying this standard.

1. We turn first to the evidence concerning Marie Purificato. The tax court found that William and Marie Purificato, as joint tenants, acquired $50,092.83 in certificates of deposit in 1981 and a $10,000 certificate of deposit in 1982. The tax court also found that they deposited $40,320 in a joint savings account in 1982 and $73,452 in another joint bank account in 1983. If these figures are added up, the joint assets acquired by William and Marie were...