Ray v. Commissioner
| Citation | 61 T.C.M. 2122 |
| Decision Date | 12 March 1991 |
| Docket Number | Docket No. 24444-88.,Docket No. 5180-87. |
| Parties | Harry N. Ray and Joyce M. Ray v. Commissioner. |
| Court | United States Tax Court |
Jay B. Kelly, for petitioner Joyce M. Ray. Ross A. Sussman, for petitioner Harry N. Ray and Harry N. Ray, pro se. Gail K. Gibson, Ellen T. Friberg, and Genelle F. Forsberg, for the respondent.
Memorandum Findings of Fact and Opinion
After concessions, the issues for decision are:
(1) Whether payments to Iona Ray of $4,958, $7,200, $7,200, and $7,200 in 1975, 1976, 1977, and 1979, respectively, were alimony or payments for a property settlement pursuant to the terms of the divorce decree between Iona Ray and Harry Ray. We hold that the payments were part of a property settlement and are not deductible by petitioners as alimony.
(2) Whether petitioners are entitled to a short-term capital loss carryforward of $2,000 relating to Lil' Andy's, Inc., in 1977. We hold that they are not because they failed to prove that the debt was bona fide, or in what year it became worthless.
(3) Whether petitioners are entitled to claim corporate losses from Fun Machines, Inc., of $78,851, $44,379, and $45,549, respectively, in 1982, 1983, and 1984. We hold that they are not because they failed to establish that losses were sustained by Fun Machines in those years.
(4) Whether petitioners are entitled to claim corporate losses from Harry Ray, Ltd., of $15,877.92 and $11,827.84, respectively, in 1976 and 1977. We hold that they may not because they had insufficient basis in Harry Ray, Ltd., in those years.
(5) Whether petitioners received interest income from John Beckman in the amounts of $7,044, $1,500, and $12,663, respectively, for taxable years 1982, 1983, and 1984, which they failed to report. We hold that they did.
(6) Whether petitioners had a capital loss of $3,000 and a capital gain of $4,981 as claimed on their 1982 and 1984 returns, or capital gains of $15,643 and $20,506 as determined in the notice of deficiency. We hold that petitioners had capital gains of $5,726 and $6,837 in 1982 and 1984, respectively.
(7) Whether petitioners are entitled to claim investment tax credits of $9,719, $3,247, and $10,720 in 1982, 1983, and 1984, respectively. We hold that they are not because they failed to establish that the property qualified for an investment tax credit.
(8) Whether petitioners are entitled to a home office deduction on their 1976, 1977, and 1979 returns. We hold that they are not.
(9) Whether petitioners are subject to additions to tax in the amounts of $2,114, $3,440, and $4,282 for taxable years 1982, 1983, and 1984, respectively, for substantial understatement of tax under section 6661.1 We hold that they are not.
(10) Whether Joyce Ray is entitled to relief from liability for the increases in income tax and additions to tax for taxable years 1975, 1976, 1977, 1979, 1982, 1983, and 1984 under section 6013(e) as an innocent spouse. We hold that she is not an innocent spouse within the meaning of section 6013(e).
(11) Whether petitioners are individually and jointly responsible for the filing of false returns with an intent to evade tax for taxable years 1975, 1976, 1977, 1979, 1982, 1983, and 1984 under section 6653(b). We hold that petitioner Harry Ray is liable for the addition to tax for fraud, but that petitioner Joyce Ray is not.
Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows:
Additions to Tax
------------------------------------------
Sec. Sec. Sec. Sec
Year Income Tax 6653(b) 6653(b)(1) 6653(b)(2) 6661
1975 .......................... $ 1,781.00 $6,053.50 -- -- --
1976 .......................... 7,591.44 4,679.72 -- -- --
1977 .......................... 5,679.00 2,839.50 -- -- --
1979 .......................... 4,644.00 2,322.00 -- -- --
1982 .......................... 14,248.00 -- $ 7,124 * $2,114
1983 .......................... 13,761.00 -- 6,881 * 3,440
1984 .......................... 24,388.00 -- 12,194 * 4,282
* 50% of the interest due on $14,248, $6,881, and $21,515 for 1982, 1983, and 1984, respectively
Respondent concedes that petitioners had sufficient basis in Harry Ray, Ltd., to deduct losses in taxable years 1982 and 1984. Respondent further concedes that if we decide that petitioners are not liable for the addition to tax under section 6653(b) for 1975, 1976, 1977, and 1979, the deficiency determinations for those years are barred by the statute of limitations pursuant to section 6501(a). Finally, respondent failed to make any argument at trial or on brief with respect to the section 6661(a) addition to tax for substantial understatement of tax, which is therefore deemed abandoned. We find for petitioners on this issue.
Some of the facts have been stipulated and are so found.
Petitioners resided in Bloomington, Minnesota, at the time they filed the petitions in this case.
Petitioners filed joint Federal income tax returns for 1975, 1976, 1977, 1979, 1982, 1983, and 1984. Petitioners reported their income and expenses on a cash basis.
Petitioner Harry N. Ray (hereafter petitioner) was admitted to the practice of law in Minnesota in 1953. During the mid-1950's, petitioner began preparing a few tax returns a year and continued to do so every year thereafter. During the years in dispute, his practice included representing clients in Federal income tax matters.
Petitioner Joyce M. Ray was employed as a secretary in petitioner's law practice during the years in dispute. She had been so employed since 1960. She is a high school graduate, and has worked solely as a secretary since her graduation.
During the years 1979, 1982, 1983, and 1984, petitioner conducted his law practice as an employee of his wholly owned corporation, Harry N. Ray, Ltd. (hereafter Harry Ray, Ltd.). During the same years Joyce was also employed by Harry Ray, Ltd.
On December 31, 1973, petitioner filed a complaint seeking a decree of divorce from Iona Ray, to whom he had been married since 1942. Petitioner represented himself in the divorce proceedings. Iona Ray was represented by an attorney, D. Patrick McCullough (hereafter McCullough). Petitioner was divorced from Iona Ray by virtue of a judgment and decree dated July 2, 1974, which was filed with the Dakota County Court. The judgment and decree provided at paragraph 10 that Iona Ray "is awarded no alimony and waives her rights to any past, present or future alimony." Paragraph six of the judgment and decree awarded Iona Ray child support for the three minor children then living at home.
On November 9, 1973, petitioner sent a letter to McCullough prior to filing the divorce complaint, which included the following language: "Mrs. [Iona] Ray would have to waive her right to past, present and future alimony."
In a letter to petitioner dated November 21, 1973, McCullough discussed the terms of the divorce as proposed in petitioner's letter of November 9, 1973. McCullough assumed that the $600 a month stipend in lieu of a 50-percent property split was in addition to one-half of the equity in the homestead. He also assumed that petitioner's reluctance to pay alimony included a reluctance to pay alimony in the future.
In a letter dated November 29, 1973, petitioner told McCullough that he did not anticipate any tax consequences to Iona Ray unless the $600 monthly payments to her were considered alimony. He also stated that he did not want to pay alimony and would not allow the decree to reserve the right to alimony in the future.
The stipulation filed with the Dakota County Court on May 26, 1974, was signed by petitioner, Iona Ray, and McCullough. It provided that Iona Ray would be awarded no alimony and waived her rights to any past, present, or future alimony.
Paragraph 11 of the judgment and decree dissolving the marriage between petitioner and Iona Ray awarded their interest in four properties to petitioner. Iona Ray was to execute a quitclaim deed to the four properties, and petitioner was to release her from all obligations with respect to the properties.
Paragraph 12 of the judgment and decree2 awarded to petitioner four other parcels of real estate and provided that net proceeds after income taxes, encumbrances, and costs of sale would be placed in an interest-bearing investment for the life of Iona Ray or such other period as she was paid $600 a month. Interest from the account could be used to pay the $600 a month due from petitioner. This monthly amount was designated as a settlement in lieu of Iona Ray's interest in said properties and subject to her option of accepting in lieu of the payment 50 percent of the net proceeds after income taxes, encumbrances, and costs of sale. The provision further stated that if Iona Ray remarried, her monthly allotment would cease and she would receive one-half of the net proceeds of the interest of the parties after income taxes, encumbrances, and costs of sale due thereon on the described real estate, less any amounts already paid.
Paragraph 15 of the judgment and decree3 provided that during the time Iona Ray and the minor children occupied the family homestead, Iona Ray would receive as support a maximum of $1,350 per month. In addition, it provided that petitioner could claim a personal exemption for Iona Ray unless she had taxable income in excess of $600 per month.
Iona Ray could not have supported herself if she had received half of the property that she and petitioner owned at the time of the divorce since much of...
To continue reading
Request your trial