Source: https://law.justia.com/cases/federal/appellate-courts/F2/740/659/233601/
Timestamp: 2017-11-25 09:38:08
Document Index: 399623283

Matched Legal Cases: ['§ 7206', '§ 6653', '§ 6501', '§ 6501', '§ 6653', '§ 6501', '§ 6013', '§ 6013', '§ 6501', '§ 6013', '§ 6013']

Jack Ballard and Mary Ballard, Appellants, v. Commissioner of Internal Revenue, Appellee, 740 F.2d 659 (8th Cir. 1984) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Eighth Circuit › 1984 › Jack Ballard and Mary Ballard, Appellants, v. Commissioner of Internal Revenue, Appellee
Jack Ballard and Mary Ballard, Appellants, v. Commissioner of Internal Revenue, Appellee, 740 F.2d 659 (8th Cir. 1984)
U.S. Court of Appeals for the Eighth Circuit - 740 F.2d 659 (8th Cir. 1984)
Submitted May 15, 1984. Decided Aug. 13, 1984
Based on these returns, the 1968 tax liability was shown as $1,432.53, that of 1969 as $1,403.031 , and that of 1970 as $3,873.58.
The Internal Revenue Service conducted a detailed investigation into Jack Ballard's business dealings in the early 1970s. In 1975, a jury convicted him on two counts of willfully making and subscribing false income tax returns for 1969 and 1970. See 26 U.S.C. § 7206(1) (1982). The falsity alleged in the indictment for each of the counts was his failure to report substantial amounts of gross income received from his various businesses. We affirmed the conviction as to his 1969 return, but reversed with regard to the 1970 return because of the trial court's failure to fully instruct the jury on the calculation of gross income from receipts in a merchandising business. United States v. Ballard, 535 F.2d 400, 405-406 (8th Cir.), cert. denied, 429 U.S. 918, 97 S. Ct. 310, 50 L. Ed. 2d 283 (1976).
In March of 1976, the Commissioner of Internal Revenue (Commissioner) issued statutory notices of deficiencies to Jack Ballard individually for his 1968 return and to the Ballards jointly for their 1967, 1969, and 1970 returns. The notices assessed deficiencies in reported tax liability for each of these years and stated that the Commissioner attributed all underpayments to fraud, thereby also asserting additions to the tax assessments under 26 U.S.C. § 6653(b) (1982). The Ballards petitioned for a redetermination of the assessments and additions in the United States Tax Court. The Commissioner has since conceded that the Ballards are not liable for any deficiencies or additions for 1967 and that Mary Ballard is not liable for any additions to tax based on fraud for 1969 and 1970. See id. Sec. 6653(b) (4).
The Tax Court held that the Commissioner's determinations of the Ballards' incomes for the years 1968 through 1970 were supported in the record and that the petitioners failed to prove any error in those determinations. It also found that the Commissioner established fraud in Mr. Ballard's failure to report such incomes by clear and convincing evidence. It dismissed the Ballards' statute of limitations defense because section 6501(c) (1) of the Internal Revenue Code lifts the normal three-year bar on civil actions in the case of such "false or fraudulent return [s] with the intent to evade tax." 26 U.S.C. § 6501(c) (1) (1982). Finally, the court held that Mary Ballard did not carry her burden of proving that she was an innocent spouse relieved of liability for tax deficiencies on the 1969 and 1970 returns under section 6013(e) (1). See id. Sec. 6013(e) (1). It thus found a deficiency of $3,907.72 and an addition of $2,670.13, to be assessed against Jack Ballard, for 1968; a deficiency of $17,164.89, to be assessed against the Ballards jointly, and an addition of $9,300.38, to be assessed against Jack Ballard, for 1969; and a deficiency of $531.21, to be assessed against the Ballards jointly, and an addition of $2,202.40, to be assessed against Jack Ballard, for 1970.
Initially, we have no trouble affirming the decision below with respect to Jack Ballard. The Commissioner submitted abundant evidence of Mr. Ballard's receipt of substantial amounts of income during the years in issue which he failed to report. The record also contains clear and convincing evidence that the failure to report these amounts was due to a fraudulent intent on his part. This evidence included his pattern of underreporting income, his failure to report any business activities by Ballard Iron & Metal in 1969 or 1970, his statements to his tax preparer falsely denying his business activities in certain years, and his failure to maintain adequate records of his business transactions. He alleges that the Tax Court erroneously gave collateral estoppel effect on the fraud issue to his previous conviction for willfully making a false income tax return for 1969. The court relied on the collateral estoppel doctrine as an alternative basis for its 1969 fraud finding. We affirm on the ground that the independent evidence supports the court's decision on this question, and thus need not discuss its alternative reliance on the collateral estoppel theory. The proof of fraud also answers Mr. Ballard's statute of limitations defense: section 6501(c) (1) allows the Commissioner to assess deficiencies on fraudulent returns "at any time." See 26 U.S.C. § 6501(c) (1) (1982). Finally, the related contention that the Commissioner's delay of more than three years between completing the investigation and seeking assessments from the Ballards should bar the present action has been answered in the Commissioner's favor by this Court in Estate of Gryder v. Commissioner, 705 F.2d 336, 339 (8th Cir.), cert. denied, --- U.S. ----, 104 S. Ct. 525, 78 L. Ed. 2d 709 (1983).
Mary Ballard was only found liable for the deficiencies assessed for 1969 and 1970. The Tax Court correctly held that there was no evidence of fraud on her part and that she thus was not liable for additions to these tax deficiencies. See 26 U.S.C. § 6653(b) (4) (1982). She raises many of the same arguments as her husband with regard to the 1969 and 1970 tax deficiencies. We reject these common claims for the reasons previously discussed and those in the decision of the Tax Court. Two of her arguments, however, do not overlap with those of her husband. We deal with them separately.
First, she asserts, although somewhat tangentially, that Jack Ballard's fraud in filing the 1969 and 1970 returns cannot be used under section 6501(c) (1) to lift the normal three-year statute of limitations with regard to the notices sent to her. We disagree. Section 6501(c) (1) lifts the limitations bar " [i]n the case of a false or fraudulent return with the intent to evade tax." 26 U.S.C. § 6501(c) (1) (1982) (emphasis added). The section does not require fraudulent intent on the part of both spouses who file a joint return, even though such a distinction is explicitly recognized with regard to the assessment of additions to tax because of the fraud of one spouse. See id. Sec. 6653(b) (1), (2), and (4). The lifting of the normal statute of limitations addresses the difficulties which sometimes arise in the discovery of deficiencies by virtue of taxpayer fraud; the source of the fraud does not alleviate such difficulties in the case of a joint-filing spouse who did not personally intend to deceive the government. We therefore join those courts which have held that section 6501(c) (1) lifts the statute of limitations on tax assessments against both spouses when they file jointly and one has defrauded the government in the process. E.g., Walsh v. United States, 507 F. Supp. 808, 813 (D. Minn. 1981), and cases cited therein; Vannaman v. Commissioner, 54 T.C. 1011, 1018 (1970).
Mary Ballard's second assertion apart from the Ballards' common arguments is that she is not liable for the 1969 and 1970 deficiencies because she is an "innocent spouse." Section 6013(e) (1) of the Internal Revenue Code provides:
26 U.S.C. § 6013(e) (1) (1982).
The Tax Court held that Mrs. Ballard bore the burden of proof on each of the elements in section 6013(e) (1) and that she failed to carry her burden. We agree that the taxpayer bears this burden. See Ratana v. Commissioner, 662 F.2d 220, 224 (4th Cir. 1981); Sonnenborn v. Commissioner, 57 T.C. 373, 381-383 (1971). Cf. Estate of Gryder v. Commissioner, supra, 705 F.2d at 339 (recognizing taxpayer's burden to prove that she had no reason to know of omitted income); 26 U.S.C. § 6013(e) (1) (B) (1982) (expressly placing burden to prove second element on taxpayer). We hold on this record, however, that Mary Ballard carried the burden.
There is no real dispute concerning the first element of section 6013(e) (1): Mary Ballard asserts that her husband omitted over twenty-five percent of their reported gross income for purposes of the innocent spouse exception, and the Commissioner asserts the same for purposes of claiming a six-year statute of limitations should we find no fraud in the filing of the returns in issue. See 26 U.S.C. § 6501(e) (1) (A) (1982). We therefore find that Mary Ballard met the requirements in subsection 6013(e) (1) (A).
The Tax Court held that she failed to prove that she did not know and had no reason to know that her husband omitted gross income from their 1969 and 1970 joint returns, however, as required by subsection 6013(e) (1) (B). The court rested its holding upon Mrs. Ballard's testimony that she knew her husband was in the scrap iron and auto parts business during 1969 and 1970, even though Ballard Iron & Metal was not mentioned on their returns or attachments for these years. In addition, the court noted that Mrs. Ballard endorsed some checks in 1969 made out to Ballard Iron & Metal, corroborating her awareness of that business. We cannot agree that these factors gave Mary Ballard knowledge or a reason to know that Jack Ballard omitted gross income from their joint 1969 and 1970 returns.
The Fifth Circuit has correctly recognized that section 6013(e) is a remedial statute: "Congress intended the [innocent spouse] exception to remedy a perceived injustice, and we should not hinder that praiseworthy intent by giving the exception an unduly narrow or restrictive reading." Sanders v. United States, 509 F.2d 162, 166-167 (5th Cir. 1975) (footnote omitted). In the instant case, Mary Ballard gave uncontradicted testimony that she had no involvement in the preparation of the 1969 and 1970 tax returns; she merely signed them at her husband's behest without any substantive review. Although such a practice might have been unwise, her testimony establishes that she did not in fact know of any omissions of gross income on the returns.
Nor did she have reason to know of any omissions. The record contains no evidence of unusual expenditures by the Ballards, of participation in Jack Ballard's business affairs or bookkeeping by Mary Ballard, or of any evasiveness in explaining his income to his wife, factors which in the past have been held to put a taxpayer on notice that her or his spouse was concealing income from the government. See Sanders v. United States, supra, 509 F.2d at 167-168 & nn. 9-11, and cases cited therein; Sonnenborn v. Commissioner, supra, 57 T.C. at 374, 381-383. Mary Ballard testified that, although she had taken less than five short trips to Las Vegas with her husband in 1969 and 1970, her husband transferred no cash or property to her in excess of one hundred dollars during this same period. In our view, the record could only support a finding that Jack Ballard gave his wife ordinary marital support during the years in question and little, if anything, more; ordinary support within the income figures reported does not put a spouse on notice of omitted gross income for purposes of subsection 6013(e) (1) (B). See Sanders v. United States, supra, 509 F.2d at 168 n. 12. See also Ratana v. Commissioner, supra, 662 F.2d at 225 (spouse's actual knowledge of expenditures in excess of reported income).
Mrs. Ballard's related knowledge that Jack Ballard operated a scrap iron and auto parts business during this period also gave her no reason to suspect that he omitted gross income from their tax returns, especially since the business address for Ballard Iron & Metal reported on Jack Ballard's 1968 Schedule C was the same as that given on his 1969 W-2 form from City Leasing. The Ballards did report substantial income from City Leasing for both 1969 and 1970. Considering all this evidence, we hold that Mary Ballard did not know and had no reason to know of her husband's omissions on their 1969 and 1970 income tax returns, thus meeting the requirements of subsection 6013(e) (1) (B).2
The final element necessary for innocent spouse relief in this case is a favorable balancing of the equities under subsection 6013(e) (1) (C). A key factor to this balance is "whether or not the other spouse [i.e., the innocent spouse] significantly benefited directly or indirectly from the items omitted from gross income." 26 U.S.C. § 6013(e) (1) (C) (1982). The record in the instant case can only be read to establish that Mary Ballard did not receive any significant direct or indirect benefit from the income which her husband failed to report to the Internal Revenue Service. The actual incomes of the Ballards for 1969 and 1970, Mrs. Ballard's uncontroverted testimony that she never received over one hundred dollars in cash or property as a transfer or gift from her husband during these years, and even the Ballards' need to cash Ballard Iron & Metal checks to pay household bills indicate that the Ballard family did not live extravagantly at the expense of the government and that, to the extent that Mr. Ballard concealed income, Mrs. Ballard was not significantly benefited by his fraudulent conduct. Under these circumstances, we hold that it would be inequitable to hold Mrs. Ballard liable for the tax deficiencies in the petitioners' 1969 and 1970 returns. Thus, the requirements of subsection 6013(e) (1) (C) were also met in this case.
We therefore affirm the decision of the Tax Court insofar as Jack Ballard is concerned, but reverse its assessments of deficiencies against Mary Ballard for 1969 and 1970 because she was an innocent spouse protected by section 6013(e) (1).
Even if Mary Ballard's endorsement of checks made out to Ballard Iron & Metal in 1969 did put her on notice of some omissions on the 1969 return, we think that notice would be limited to the amount of those checks. Thus, as far as the requirements of 26 U.S.C. § 6013(e) (1) (B) (1982) are concerned, we would not hold her liable on this record for any deficiencies in excess of the checks she endorsed in 1969 nor for any deficiencies in 1970. See Ratana v. Commissioner, 662 F.2d 220, 224-225 (4th Cir. 1981). Because we hold that the checks did not put her on notice of any omissions under the particular circumstances of this case, we need not thus define the bounds of the alleged notice