Wiksell v. C.I.R.

• Decision Date: 25 July 1996
• Docket Number: No. 94-70509,94-70509
• Citation: 90 F.3d 1459
• Parties: -5697, 96-2 USTC P 50,398, 96 Cal. Daily Op. Serv. 5481, 96 Daily Journal D.A.R. 8961 Margaret WIKSELL, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1459

90 F.3d 1459

78 A.F.T.R.2d 96-5697, 96-2 USTC P 50,398,

96 Cal. Daily Op. Serv. 5481,

96 Daily Journal D.A.R. 8961

Margaret WIKSELL, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 94-70509.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 8, 1996.

Decided July 25, 1996.

Bruce I. Hochman, Charles P. Rettig, and Joanna Tulio, Hochman, Salkin & DeRoy, Beverly Hills, California, for petitioner-appellant.

Sara S. Holderness, Tax Division, United States Department of Justice, Washington, D.C., for respondent-appellee.

Appeal from the United States Tax Court, Arthur L. Nims III, Judge, Presiding. T.C. No. 11752-91-ALN.

Before: WALLACE and T.G. NELSON, Circuit Judges, and WILLIAM D. BROWNING, ¹ District Judge.

WILLIAM D. BROWNING, District Judge:

I.

In 1987, Margaret Wiksell signed two joint tax returns for the years 1984 and 1985, both of which omitted substantial ill-gotten income generated by her (now ex) husband's illicit business. Margaret Wiksell claims to have known nothing about most of the money taken nor anything about the scam that generated the funds. On March 7, 1991, a notice of deficiency was issued to the Wiksells for tax years 1984 and 1985. The couple challenged the deficiency and, following a trial at which only Margaret attended, the tax court denied both taxpayers relief. Wiksell v. Commissioner, 67 T.C.M. 2360 (1994). This timely appeal followed and concerns only Margaret Wiksell ("Appellant") in which she challenges the tax court's determination that she was not an "innocent spouse" pursuant to 26 U.S.C. § 6013(e).

We have jurisdiction pursuant to 26 U.S.C. § 7482 and remand so that the tax court can apply innocent spouse relief to that portion of the deficiency so deserving. The pertinent facts, most of which were stipulated, follow.

II.

Appellant was married in 1960, legally separated in 1988, and divorced in 1992. The couple had three children, although the middle daughter unexpectedly died in 1984. The marriage was anything but harmonious. Evidence adduced at trial showed that Appellant's husband was domineering and abusive and, because of the relationship, Appellant would "go along" with anything that her husband expected.

During the course of their marriage, Appellant's husband was engaged in several occupations, most of which were not lucrative. Indeed, in his pursuit of money, Appellant's husband had gotten into trouble with the law. Thus, the record shows that the family often had a difficult time making ends meet. In the early 1980s, however, things changed. In 1983, Appellant's husband started his own company "High Tech Recovery Systems" and, in 1984, he began working at Comstock Financial as an investment advisor later becoming an officer and vice president at that firm. It was clear to Appellant that at least Comstock was "doing very good business."

Appellant had nothing to do with her husband's actual business affairs. Although her husband at various times worked out of their home, he opened his own mail and kept any business documents in a locked file cabinet unaccessible to Appellant. Any attempts by Appellant to pry into the particulars of business matters risked her husband "flying into a rage." Appellant nevertheless received large sums of money which she deposited in her own checking accounts. Specifically, in 1984, Appellant deposited approximately $54,500 and, in 1985, approximately $140,500.

Appellant testified that at least part of the money received and deposited was used to pay past business debts, although some the family's living expenses were paid from these funds as well. Despite the fact that the account was in Appellant's name, most check-writing was directed and controlled by her husband. Apparently, out of the money deposited in Appellant's account, over $25,000 was given to various charities, some $2800 was donated to a political campaign, and over $20,000 was spent on home repairs and furniture. Additionally, certain real property interests were acquired.

Sometime in 1985 an investigation of Mr. Wiksell's business was initiated. Appellant learned that a temporary restraining order prevented her husband from soliciting further investments and her husband's deposition was taken as well. Appellant also read an article that purportedly explained the scam in which her husband was involved and also noted that two million dollars were at issue. Eventually, Appellant's husband was arrested, pled guilty to criminal charges, and imprisoned.

Appellant's 1984 joint tax return stated that the couple earned $10,525 and her 1985 joint tax return stated that they earned only $4,298. In reality, as a result of her husband's misdeeds, over two million dollars were earned in 1984 and 1985. Although both returns were prepared by a third party, the circumstances surrounding their preparation and their signing are unclear. The tax deficiencies assessed as a result of the unreported income, the amounts of which are not disputed, are $221,294 for 1984 and $789,919 for 1985.

III.

A. Standard of Review.

The Court of Appeals reviews the tax court's decision to grant relief pursuant 26 U.S.C. 6013(e) under a clear error standard. Guth v. C.I.R., 897 F.2d 441, 443 (9th Cir.1990).

B. Analysis.

Generally, marital partners who file a joint return are jointly and severally liable for its accuracy and any assessments due. See Guth, 897 F.2d at 442, 26 U.S.C. § 6013(d)(3). There is, however, an exception for an "innocent spouse." Guth, 897 F.2d at 442-43, 26 U.S.C. § 6013(e) To qualify, the spouse seeking relief must show: (1) that a joint return was made; (2) that on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse; (3) that in signing the return the innocent spouse did not know, and had no reason to know, that there was such substantial understatement; and (4) 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. 26 U.S.C. § 6013(e)(1). When these four elements have been demonstrated, the innocent spouse is "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." Id.

At issue here are elements three and four. As to the third, the tax court found that Appellant had actual knowledge of the substantial understatement and had reason to know of it as well; and as to the fourth, the tax court found that it was not inequitable to hold her responsible for the taxes due. Because the tax court did not clearly err in finding that Appellant at least had reason to know of a substantial understatement, and because Appellant has the burden of proving all four elements of the section, Price v. C.I.R., 887 F.2d 959, 962 (9th Cir.1989), we need not go further than the tax court's finding on constructive knowledge.

1. Constructive Knowledge. In assessing whether Appellant had "reason to know" of a substantial understatement, a court must determine whether "a reasonably prudent taxpayer in [Appellant's] position at the time she signed the return could be expected to know that the return contained the substantial understatement." Guth, 897 F.2d at 443-44 (quotations omitted). The test ultimately is subjective and looks at such factors as Appellant's education, involvement in financial affairs, the evasiveness or deceit of the culpable spouse, and unusual or lavish expenditures inconsistent with the family's ordinary standard of living. Id. at 444; see also Pietromonaco v. C.I.R., 3 F.3d 1342, 1345 (9th Cir.1993).

Here, even assuming Appellant's lack of involvement and lack of financial proficiency, the evasiveness and questionable background of Appellant's husband together with the substantial cash on hand, the small sums reported, and the unusual expenditures for the years at issue, support the tax court's conclusion. Although Appellant argues that their standard of living was not lavish, she admitted that the large cash donations during the years in question were "odd to say the least."

Appellant contends, nevertheless, that because the money given to her was being used, at least in part, for business expenses, the presence of such money was not necessarily linked to the family's income. This ignores that Appellant also spent substantial sums of money on non-business related matters. Additionally, unlike the years prior to 1984, there was no need for Appellant to work a great deal and there were no problems paying the bills. Appellant also knew the company for which her husband was working was successful and that her husband, who was rewarded with an Hawaiian vacation, likewise was doing well. Finally, there was no adequate explanation of how the couple acquired the real property interests, assuming they were acquired during the relevant period.

Appellant also argues that duress in the couple's relationship and her personal problems (e.g. her daughter's death) account for her lack of perception. See, e.g., Sanders v. United States, 509 F.2d 162, 169 (5th Cir.1975). We do not understand Appellant's argument to be that her will was overcome at the time she signed the returns, see Furnish v. Commissioner, 262 F.2d 727 (9th Cir.1958), but rather that the duress explains why she had no opportunity to gain knowledge about her husband's business affairs and why she had no reason to know of the unreported income. We reject this argument.

Whatever tragedy and duress Appellant faced, they did not significantly cloud her perception. When asked whether she questioned her husband "as to why there was no income on the returns reflecting the money that [Appellant] had been living off of and money that [Appellant] had been given," she testified:

Yeah, I think I did ask him what about the...