Shea v. C.I.R.

• Decision Date: 08 January 1986
• Docket Number: No. 85-1087,85-1087
• Citation: 780 F.2d 561
• Parties: -625, 86-1 USTC P 9150 Sally A. SHEA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 561

780 F.2d 561

57 A.F.T.R.2d 86-625, 86-1 USTC P 9150

Sally A. SHEA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 85-1087.

United States Court of Appeals, Sixth Circuit.

Argued Nov. 13, 1985.

Decided Jan. 8, 1986.

William F. Snyder (argued), Robert A. Lesco, Glenn Waggoner, Marshman, Snyder & Corrigan, Cleveland, Ohio, for petitioner-appellant.

Michael L. Paup, Chief, Appellate Section, Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Dept. of Justice, Carleton D. Powell, William P. Wang (argued), Washington, D.C., for respondent-appellee.

Before MARTIN, CONTIE and WELLFORD, Circuit Judges.

CONTIE, Circuit Judge.

Sally Shea appeals from the Tax Court's decision holding her liable for tax deficiencies and additions for the tax years 1976 and 1977. On June 20, 1984 the Tax Court held that petitioner did not qualify as an "innocent spouse" under 26 U.S.C. Sec. 6013(e)(1) for either tax year, and that she was liable for the 1977 tax deficiencies even though she had not personally signed the tax return.

I.

Sally Shea was married to Kenneth Shea from 1952 until his death on December 22, 1978. For every year preceding 1976, and 1977, and the year following Kenneth Shea's death, Sally Shea had filed joint tax returns. In 1976, both Kennth and Sally Shea signed the tax return. This return was prepared by their attorney and tax preparer, James Hogel. Kenneth Shea supplied the information to Hogle, and both Kenneth and Sally were present while the tax return documents were prepared.

In 1977, neither party personally signed the tax return. Instead, Kenneth and Sally's names had been signed by James Hogle who testifed that he had been authorized to sign the return by one of the parties, although he could not recall which one. Petitioner was not present when this return was being prepared, and all the information for this return had been supplied by Kenneth. Petitioner testified that she did not see the 1977 tax return until January 1983. No power of attorney was attached to the tax return and Sally Shea denies having given Hogle permission to sign for her although she had given her husband permission to sign the joint return.

Prior to July 1976, Kenneth Shea had operated his manufacturer's representative business as a sole proprietorship. In 1976, he incorporated this business under the name Shea Sales Company, Inc. (Shea Sales). Checks for Shea Sales' checking account were imprinted with both Kenneth's and Sally's names. Sally Shea was the secretary-treasurer and a shareholder of Shea Sales. She was authorized to write checks on, and make deposits to, this account and did so at Kenneth's direction, although Kenneth was the only person to examine the corporation's financial statements. She also answered the phone and took messages.

During 1976, Shea Sales issued checks drawn to Kenneth Shea, Sally Shea and "cash" in the amount of $22,501.27, and to payees for payment of the Sheas' personal expenses in the total of $23,880.93. In 1977, such amounts equaled $29,509.00 and $34,927.58 respectively. Sally Shea was unable to establish these checks were written for business purposes.

Petitioner also had a personal checking account in her name. During 1976 and 1977, deposits of $94,622.99 and $47,032.62, respectively, were made to her account. Kenneth Shea used her account regularly, signing Sally's name. The bank notified Sally of his use, requested his use cease and Sally made some unsuccessful efforts to have Kenneth discontinue this practice. When bank statements for her account arrived, Kenneth examined them rather than Sally.

Petitioner has a college education. In 1976, her daughter was married, her son graduated from high school, her father had a 75th birthday, an addition to the house was built, and her husband began drinking more heavily. When the 1977 tax return was prepared, petitioner was staying with her mother because her father had suffered from a massive cerebral hemorrhage from which he later died. Kenneth Shea died in 1978 from cirrhosis of the liver brought on by his alcoholism.

The deficiencies claimed by the Commissioner relate to amounts paid by manufacturers which Shea represented as well as the amounts paid from the Shea Sales' checking account to Kenneth, Shea, and "cash" for personal expenses. The totals were $28,941.70 for 1976 and $5,729.50 for 1977. Additions under Sec. 6653(a) ¹ were calculated pursuant to the statute, totaling $1,447.09 for 1976 and $286.48 for 1977. On this appeal, petitioner does not challenge the amount of these deficiencies or additions, but only whether she should be liable to pay them. First, she argues that she qualifies as an "innocent spouse" under 26 U.S.C. Sec. 6013(e)(1) for both years. In the alternative, appellant asserts that she cannot be held liable for the 1977 tax deficiencies because neither she nor her husband signed the return and she never adopted it as her own.

II.

When a joint return is filed, the parties are jointly and severally liable for the amount of tax due. 26 U.S.C. Sec. 6013(d)(3). One exception to this is the "innocent spouse" provision. 26 U.S.C. Sec. 6013(e)(1). This provision was adopted to prevent hardships which resulted when one spouse did not report income, thereby leaving the "innocent spouse" to pay the deficiencies. Sanders v. United States, 509 F.2d 162 (5th Cir.1975). In 1984, subsequent to the Tax Court's decision in this case, the innocent spouse provision was amended.

The provision which was in effect when the Tax Court decided this case reads:

(1) In general.--Under regulations prescribed by the Secretary, if--

(A) a joint return has been made under this section for a taxable year and on such return there was omitted from gross income an amount properly includable therein which is attributable to one spouse and which is in excess of 25 percent of the amount of gross income stated in the return,

(B) the other spouse establishes that in signing the return he or she did not know of, and had no reason to know of, such omission, and

(C) 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,

then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent that such liability is attributable to such omission from gross income.

The statute as it was amended reads:

(1) In general.--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.

The primary changes are: (1) protection extends not only to omissions from gross income but also to erroneous claims of a deduction, credit or basis ² which exceed $500, ³ rather than just an omission equaling 25% of gross income; and (2) there is no longer an inquiry into whether the innocent spouse benefited from the omission, since the focus is solely on whether imposing the tax would be inequitable under all the facts and circumstances. ⁴ Both of these changes would seem to expand the coverage of this exception. The petitioner asserts that the amended version applies to this case. Since the Commissioner does not refute this claim, arguing instead that the appellant fails to satisfy either version of the innocent spouse exception, we will primarily focus on the new provision to determine whether the petitioner qualifies for innocent spouse protection.

Under the old version of the statute, the petitioner, as taxpayer, carried the burden of proving she satisfies each element of Sec. 6013(e)(1). Ratana v. Commissioner, 662 F.2d 220 (4th Cir.1981); Ballard v. Commissioner, 740 F.2d 659 (8th Cir.1984). Since the new version continues to be written in the conjunctive, this rule applies and each of the four requirements of Sec. 6013(e)(1) must be met to qualify as an "innocent spouse."

The first requirement of Sec. 6013(e)(1) is that the tax return in question must be a joint return. Petitioner does not specially address this element, limiting her discussion to those elements that the Tax Court claims she did not satisfy. For the 1976 tax year, both parties agree that petitioner filed a joint return. However, for the 1977 tax year, petitioner asserts that she is entitled to innocent spouse protection simply because she did not see or sign the return and does not acknowledge the 1977 tax return as her own. This significantly confuses the issue because to qualify for innocent spouse protection the return must be a joint return. Since we conclude in Part III of this opinion that petitioner did not file a joint return in 1977, she therefore cannot qualify for innocent spouse protection for the 1977 tax year for failure to satisfy this requirement.

The second requirement to qualify for innocent spouse protection is that the tax return must contain substantial understatements attributable to grossly erroneous items. This prong is likewise not contested by the parties, and since the Tax Court concluded that petitioner satisfied this...