Stevens v. C.I.R., 88-3422
| Decision Date | 17 May 1989 |
| Docket Number | No. 88-3422,88-3422 |
| Citation | 872 F.2d 1499 |
| Parties | -5589, 89-1 USTC P 9330 Madeline M. STEVENS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Joe R. Wolfe, Clearwater, Fla., for petitioner-appellant.
William S. Rose, Jr., Asst. Atty. Gen., Gary R. Allen, Chief Robert S. Pomerance, Barbara I. Hodges, Tax Div., U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.
Appeal from a Decision of the United States Tax Court.
Before JOHNSON and COX, Circuit Judges, and TUTTLE, Senior Circuit Judge.
Madeline M. Stevens appeals from a decision of the tax court denying her relief under the "innocent spouse" provision of the Internal Revenue Code (the "Code"), 26 U.S.C. Sec. 6013(e) (1982 & Supp. III 1985). The court held her jointly liable with her ex-husband, Robert L. Stevens, for personal income tax deficiencies totaling $346,301.21 for the tax years 1976 through 1979. We affirm.
The protagonists in this case, Madeline and Robert Stevens, married in 1965 after Mrs. Stevens had attended two years of college and while Mr. Stevens was in the United States Navy. At the time of marriage, Mrs. Stevens had one child from a previous marriage, and, in 1969, she and Mr. Stevens had a second child. Upon his discharge from the Navy and for several years thereafter, Mr. Stevens worked in Pennsylvania as a computer specialist designing software and payroll systems. Subsequently, he sold insurance and, eventually, became a licensed securities dealer.
In May, 1974, Mr. Stevens formed his own securities firm, R.L. Stevens and Company Inc. (RLSC), which specialized in the marketing and sales of life insurance annuities and tax shelters. Mr. Stevens served as president and treasurer of the corporation, and Mrs. Stevens served as secretary. Occasionally, Mrs. Stevens performed clerical services for the firm.
During the early days of RLSC, the Stevens' lives were fraught with financial worries. Ordinary household expenses became increasingly difficult to meet, and, by 1976, one of the Stevens' cars was repossessed for the Stevens' failure to make payments. By late 1976, however, the hard-luck spell had broken, and the Stevens' standard of living improved dramatically as Mr. Stevens began to earn substantial sums of money from his sales of, and investments in, tax shelters.
In early 1977, the Stevens moved to Sarasota, Florida, where Mr. Stevens located the RLSC headquarters and formed a second corporation, R.L. Stevens Investment Corporation (RLSIC), which specialized in selling and promoting tax shelters. Mr. Stevens was sole shareholder, president, and treasurer of the corporation, and Mrs. Stevens served as the corporate secretary. Occasionally, Mrs. Stevens performed part-time clerical services for the corporation.
When the Stevens moved to Florida, they purchased a waterfront home which had a swimming pool. The purchase was financed with a $50,000 down-payment and a $100,000 mortgage. In 1979, the Stevens moved to a larger, more expensive waterfront home in Siesta Key, Florida. This home had two docks, a jacuzzi, a swimming pool, and, on an adjacent lot, a paddle tennis court. The home was purchased for $200,000 and, subsequently, was sold for $600,000. While they owned this home, Mr. Stevens purchased a second home, at Riegels Landing, for $300,000; that home was used to entertain business guests and became the Stevens' primary residence sometime in 1983.
In 1978, Mr. Stevens relocated the headquarters of RLSC and RLSIC from an office building in Sarasota to a houseboat at the Sarasota City Marina. After the offices were moved, Mrs. Stevens worked for both corporations on a regular basis for several months. Her employment responsibilities included record-keeping in relation to the sale of tax shelters, compiling monthly reports to be sent to the Securities Exchange Commission, and typing business letters. For her services, Mrs. Stevens received nominal compensation.
In 1979, Mr. Stevens moved the RLSC and RLSIC offices from the houseboat to the home in Siesta Key. While the business was located in that home, syndicators of tax shelters frequently visited Mr. Stevens to discuss the pros and cons of the shelters they promoted. Occasionally, the discussions were held in the presence of Mrs. Stevens. Periodically, the Stevens entertained promoters of and investors in tax shelters at large, formal parties and seminars in their home. At those functions, business discussions regularly occurred in the presence of Mrs. Stevens.
As Mr. Stevens' business began to flourish, the Stevens' personal lifestyle became increasingly opulent. In addition to owning two luxurious homes at one time, the Stevens owned several boats (including three Excaliburs, which cost an average of $45,000 each) and numerous cars, including Cadillacs and twin XKE Jaguar convertibles. Mr. Stevens showered Mrs. Stevens with jewelry, including diamonds and gold ranging in price from a few thousand dollars up to $10,000 per item. During the years of abundance, all of the Stevens' business and personal bank accounts were in joint names or were accounts on which both Mr. and Mrs. Stevens had signatory authority. The Stevens' household expenses, which were as high as $6,000 per month, typically were paid with funds drawn from those accounts.
The Stevens' marriage declined during the prosperous years. By November 1983, the Stevens had legally separated; divorce followed shortly thereafter.
The Stevens filed joint federal income tax returns for the years 1976, 1977, 1978, and 1979. Those returns showed that the Stevens owed a total of $2,240 in taxes for the years in question. The returns were prepared by accountants who met with the Stevens in the Stevens' homes to discuss them. Total yearly income, deductions, and net losses were reported on those returns in the following amounts:
Year Income Deductions 1 Net Loss
1976 $101,253 $(316,911) $(215,658)
1977 145,073 (335,908) (190,835)
1978 276,567 (427,009) (150,442)
1979 201,129 (185,181) ( 15,948)
1. The deductions shown reflect only deductions attributable to losses
incurredd on Mr. Stevens' tax shelter investments; they do not reflect
itemizedd deductions for 1976, 1977, and 1978 in the respective amounts of
$7,669, $12,583, and $14,432.
The deductions claimed by the Stevens in 1976 were attributable to asserted losses of $316,911 that flowed to them from three tax shelter partnerships in which Mr. Stevens personally had invested. The deduction claimed in 1977 was attributable to a carry forward of the unused portion of the 1976 loss and to a claimed loss of $120,250 from another of Mr. Stevens' tax shelter investments. The Stevens carried forward the unconsumed portion of those losses to 1978 and claimed an additional $236,000 loss from yet another of Mr. Stevens' investments. The unused portion of their claimed losses from those sources then was carried forward to 1979.
Following an audit of the returns for 1976 through 1979, the IRS issued a notice of deficiency to the Stevens asserting the following deficiencies in their joint income tax liability:
Year Deficiency
1976 $39,350.40
1977 65,950.87
1978 151,481.00
1979 89,519.00
The deficiencies were based on the IRS' disallowance of deductions claimed for losses relating to the tax shelters and disallowance of the resulting loss carry forwards. The notice of deficiency stated that the Stevens had failed to establish that deductible losses had been sustained.
In October 1983, the Stevens filed a joint petition in the tax court for a redetermination of the deficiencies, alleging that the losses claimed on their returns for 1976 through 1979 were allowable. In a separate petition, filed in February 1984, the Stevens additionally asserted that they had incurred a loss of $711,837 for 1980 and were entitled to have that loss carried back to reduce or eliminate any deficiencies otherwise owed for the years 1977, 1978, and 1979. 2 The Stevens, in March 1984, entered into a stipulation conceding the deficiency for 1976. Following the Stevens' divorce, Mrs. Stevens filed a motion to vacate the stipulation, which motion was granted.
Subsequently, Mrs. Stevens filed an amended petition, challenging the deficiency determinations as to her on the basis that she was entitled to relief from joint liability for the tax under the "innocent spouse" provision of the Code, 26 U.S.C. Sec. 6013(e) (1982 & Supp. III 1985). After Mrs. Stevens filed her amended petition, she and Mr. Stevens entered into a new stipulation conceding deficiencies for 1976 through 1979 and reserving the right to carry back to 1977, 1978 and 1979 the claimed net operating loss for 1980. At trial, the sole issue presented was whether Mrs. Stevens was entitled to relief from the joint tax liability as an "innocent spouse." As noted, the tax court rejected that defense and assessed joint liability against the Stevens.
Mrs. Stevens raises three issues on appeal, only two of which merit discussion. 3 First, she contends that the tax court failed as a matter of law to apply the correct legal standard in determining that she did not qualify for innocent spouse relief. Second, she asserts that even if the tax court did apply the correct legal standard, the court clearly erred in concluding that she had failed to satisfy the elements necessary for such relief. The issues are discussed seriatim.
The rate of tax applied against a given amount of income generally is lower when the income is reported on a joint return than when a husband and wife file separate returns. The price which the law exacts for this privilege is that...
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