Sanders v. United States, Civ. A. No. 73-263.

• Decision Date: 06 December 1973
• Docket Number: Civ. A. No. 73-263.
• Citation: Sanders v. United States, 369 F.Supp. 160 (N.D. Ala. 1973)
• Parties: Bettye A. SANDERS, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Northern District of Alabama

369 F. Supp. 160

Bettye A. SANDERS, Plaintiff, v.UNITED STATES of America, Defendant.

Civ. A. No. 73-263.

United States District Court, N. D. Alabama, S. D.

December 6, 1973.

Richard J. Cohn, Sirote, Permutt, Friend & Friedman, Birmingham, Ala., for plaintiff.

Wayman G. Sherrer, U. S. Atty., Charles D. Stewart, Asst. U. S. Atty., Benton Burroughs, Jr., Atty., Tax Div., Dept. of Justice, Washington D.C., for defendant.

OPINION

GUIN, District Judge.

This is an action for the refund of federal income taxes and penalties paid by the plaintiff with respect to the calendar years 1968 and 1969, plus interest thereon.PlaintiffBettye A. Sanders("Bettye") was during these years the wife of Charles J. Sanders("Charles"), who died on November 2, 1970.Bettye and Charles signed joint federal income tax returns for the years 1968 and 1969.For 1968, Charles reported gross income of $63,523.89; for 1969, he reported gross income of $36,087.38.All gross income for 1968 and 1969 was earned by Charles, with the exception of $2,058.75, which was earned by Bettye as a secretary employed by the Homewood, Alabama, Church of Christ.

Charles died unexpectedly in November, 1970.On July 19, 1971, the District Director of Internal Revenue for the State of Alabama notified Bettye, and Charles' Estate, of income tax deficiencies for 1968 of $7,327.93, and for 1969 of $20,120.79, plus 5% negligence penalties.Charles' estate was insolvent.Bettye paid the asserted deficiencies and penalties, plus interest.

She then filed suit, to recover from the defendant those deficiency amounts paid which were attributable to asserted omissions by Charles of gross income from his and Bettye's joint federal income tax returns.The notice of deficiency asserted omissions for 1968 of $18,800.97 of gross income, from unknown sources; for 1969, $6,316.73 from unknown sources and $71,000.00 of capital gain resulting from the sale of 25 shares of stock of Continental Marketing Associates, Inc.("CMA"), a company for which Charles worked during these years.

Plaintiff is basing her action entirely upon the provisions of Section 6013(e) of the Internal Revenue Code of 1954, which provides that — despite the general rule that a spouse executing a joint income tax return is jointly and severally liable for taxes — she may avoid liability if she can establish that

(1) there was omitted from gross income an amount properly includable therein which was attributable to her husband and which is in excess of 25% of the amount of gross income stated in the return,

(2)she did not know of, and did not have reason to know of, such omission or omissions, and

(3) taking into account whether or not she significantly benefited directly or indirectly from the omissions from gross income, and taking into account all other facts and circumstances, it is inequitable to hold her liable for the deficiency in tax attributable to such omissions.

This statute, enacted on January 12, 1971, is commonly referred to as the "innocent spouse statute".

FINDINGS OF FACT

1.Bettye and Charles were husband and wife during the years 1968 and 1969, and for those years filed and signed joint federal income tax returns.

2.Subsequently, in a federal income tax audit, agents of the Internal Revenue Service reconstructed Charles' gross income for 1968 and 1969 by using the "bank-deposits-plus-expenditures" method of accounting, permitted under Section 446(b) of the Internal Revenue Code of 1954.This is one of several methods of accounting which the Government is entitled to impose upon a taxpayer with either no regular method of accounting, or a method of accounting that does not clearly reflect his income.It consists essentially of a beginning assumption that all bank deposits, and provable expenditures, reflect gross income to the taxpayer.The taxpayer is however given credit for bank deposits which can be shown to represent transfers of funds from other bank accounts, or other items which the taxpayer can demonstrate did not represent gross income, and for cash expenditures that can similarly be traced to sources other than gross income.Gross income ascertained under this method of accounting by the Internal Revenue Service amounted to an additional $18,800.97 for 1968 and $6,316.73 for 1969.

4.In 1969 Charles sold certain shares of stock in CMA for a capital gain of $71,000.00.He was unable to transfer the stock in 1969, being legally restricted in that respect because of certain stockholder agreements, and consulted with an accountant, Hollis Dickey, as to whether or not to report the capital gain in 1969.The accountant, according to his testimony, in turn consulted with the Internal Revenue Service and was advised that the gain was not reportable in 1969.Accordingly, Charles and his accountant decided not to report it.

5.As the testimony of the Internal Revenue Service agent who conducted the audit of Charles and Bettye's 1968 and 1969 tax returns, Mr. Vincent Alfano, demonstrated clearly, the bank deposits plus expenditures method of accounting is an exceedingly complex accounting function.The Sanders through this period had a total of some eight bank accounts, with considerable transfers among them; that Charles' business affairs were unusually complex in 1968 and 1969, covering as they did a period of his life when he left practice as a chiropractic physician in order to engage in various marketing enterprises; that he worked during this period for at least three different companies, sometimes for more than one at a time, one of which companies he founded himself; that during 1968 and 1969he made extensive borrowings, many of which probably resulted in large bank deposits that should not have been required to be included in gross income, though in fact they were; that for approximately a year during the period of time in question, most of these activities were carried on from Montgomery, Alabama, while Charles' home remained in Birmingham, maintained by his wife; that some of these companies reimbursed Charles for expenses, which again would result in deposits — not, at this date, precisely identifiable — which should not have been required to be included as gross income, although in fact they were.

6.At irregular intervals, Bettye at Charles' insistence balanced checkbooks for most of the bank accounts they had during 1968 and 1969.She also, on occasion, typed letters for her husband, again at his insistence.Among them were some letters in the Spring of 1969 to CMA, from the sale of whose stock Charles derived the omitted capital gain, which fulfilled Charles' legal obligation to inform CMA of his intention to sell his shares of stock and to tender that stock first to CMA.

7.Bettye is a housewife, with a high school education.She is an experienced secretary and typist, and types without comprehension.She had, during the years in question, emotional problems involving serious depression and anxiety, which resulted in her later consulting a psychiatrist, Dr. William D. King, who testified on her behalf.She had at the time a severe drinking problem, and the evidence at trial showed that she was drinking during 1968 and 1969 approximately a quart of whiskey per day.In the Spring of 1969, her mental and emotional condition was extremely aggravated by several unwelcomed events.At Charles' insistence Bettye and Charles adopted a child, at the time against Bettye's wishes.Charles, again against Bettye's wishes, purchased a new residence.Finally at that time, Charles left Montgomery and resumed residence in Birmingham, disconcerting Bettye, who had grown accustomed to living alone and whose drinking problems were thereby made more obvious and more difficult to conceal.

8.Charles' and Bettye's tax returns were prepared by an accountant, Hollis Dickey, who was an acquaintance of Bettye's at a previous place of employment, upon whom she put considerable confidence and reliance, and in fact whom Charles had employed at her recommendation.Mr. Dickey's behavior towards Bettye at all times was such as to assure her as to the propriety of her and Charles' joint federal income tax returns, and in fact, Mr. Dickey himself, until the time of the aforementioned Internal Revenue Service audit, was himself of the opinion that the income tax returns he had prepared fully and fairly reflected Charles' and Bettye's gross income.The only omission of which he was aware was the capital gain omitted at the advice of the Internal Revenue Service.

9.The omissions from gross income properly includable for both 1968 and 1969 were in excess of 25% of the amount of gross incomes stated in the returns.They should properly include and reflect a cash expenditure of $4,000 in 1968 to one Ned Oliver for an oil well investment.

10.Charles did not confide financial matters to his wife and indicated, at several times, to friends that it was his policy not to do so.Bettye did not know, or have reason to know, of the omissions of gross income attributable to Charles from their 1968 and 1969 joint income tax returns.

11.Taking into account all facts and circumstances, including whether or not Bettye significantly benefited directly or indirectly from the omissions from gross income, it would be inequitable to hold her liable for the assessed deficiencies, together with penalties and interest, attributable to the omissions of gross income with respect to the years 1968 and 1969.

CONCLUSIONS OF LAW

The defendant has taken issue with the plaintiff with respect to all three of the elements she must establish under § 6013(e), the "innocent spouse statute," in order to avoid liability for the above mentioned taxes for 1968 and 1969.

The parties stipulated that there was an omission of gross income in excess of 25% of that required to be stated in the return for 1969; whether there was such an omission in 1968 is the preliminary issue in the case for that year.Although the...