Source: https://casetext.com/case/shea-v-cir
Timestamp: 2020-02-25 06:51:44
Document Index: 270601718

Matched Legal Cases: ['§ 6013', '§ 6013', '§ 6653', '§ 6013', '§ 6013', '§ 6013', '§ 6013', '§ 6013', '§ 6013', '§ 6013', '§ 6013', '§ 7482', '§ 9', '§ 1304', '§ 6013', '§ 1', '§ 1', '§ 1']

Shea v. C.I.R, 780 F.2d 561 | Casetext
Shea v. C.I.R
When evaluating whether the taxpayer had reason to know, the circuits agree that a court must follow an…
The taxpayer bears the burden of proving each of these elements by a preponderance of the evidence. See…
Full title:SALLY A. SHEA, PETITIONER-APPELLANT, v. COMMISSIONER OF INTERNAL REVENUE,…
holding that since the amended version of the former § 6013(e) was similar to the original version, the burden of proof allocation did not change
Argued November 13, 1985.
Decided January 8, 1986.
William F. Snyder (argued), Robert A. Lesco, Glenn Waggoner, Marshman, Snyder Corrigan, Cleveland, Ohio, for petitioner-appellant.
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. § 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.
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 Kenneth and Sally Shea signed the tax return. This return was prepared by their attorney and tax preparer, James Hogle. 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 testified 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.
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 § 6653(a) 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. § 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.
Section 6653 imposes a penalty on underpayments resulting from "negligence or intentional disregard of rules or regulations" and is equal to five percent of the underpayment.
When a joint return is filed, the parties are jointly and severally liable for the amount of tax due. 26 U.S.C. § 6013(d)(3). One exception to this is the "innocent spouse" provision. 26 U.S.C. § 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 primary changes are: (1) protection extends not only to omissions from gross income but also to erroneous claims of a deduction, credit or basis which exceed $500, 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. 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.
This comes from the definition of "grossly erroneous items" found at § 6013(e)(2) (1984).
A "substantial understatement" exceeds $500 as defined by § 6013(e)(3) (1984).
The only other changes in the amendment relate to substituting "substantial understatements" for "omissions" throughout the section.
Under the old version of the statute, the petitioner, as taxpayer, carried the burden of proving she satisfies each element of § 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 § 6013(e)(1) must be met to qualify as an "innocent spouse."
The first requirement of § 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 petitioner next must establish that she did not know, and had no reason to know, of the substantial understatements. The Tax Court concluded that petitioner had no actual knowledge of the understatement. Factual conclusions are to be accepted unless clearly erroneous. 26 U.S.C. § 7482(a) (1966) and Fed.R.Civ.P. 52(a). See also Busch v. Commissioner, 728 F.2d 945, 949 (7th Cir. 1984); Sanders v. United States, 509 F.2d 162, 166 (5th Cir. 1975). Since the Commissioner does not contest this issue and nothing in the record suggests this conclusion is incorrect, we accept this finding as true. Thus, the determination of whether petitioner satisfies this requirement of the test hinges on whether she had "reason to know" of the substantial understatements made by her husband.
A Tax Court's decision that an individual had reason to know of omissions or substantial understatements is generally regarded as a factual determination subject to the clearly erroneous standard. Estate of Gryder v. Commissioner, 705 F.2d 336 (8th Cir.), cert. denied, 464 U.S. 1008, 104 S.Ct. 525, 78 L.Ed.2d 709 (1983); Ratana v. Commissioner, 662 F.2d 220, 224 (4th Cir. 1981). In Sanders v. United States, 509 F.2d 162 (5th Cir. 1975), the court reasoned that if the trial court directly articulated the "reason to know" standard, then the court's determination of whether an individual satisfied that standard is a factual question and the reviewing court's scope of review is limited by the clearly erroneous standard. Id. at 166 n. 4.
The test adopted by the Sanders court is the same test advanced by Restatement (Second) of Agency § 9, comment d (1958), which reads as follows:
As can be seen in comparison, the Tax Court and petitioner focused on entirely different facts to analyze whether petitioner had "reason to know" of the understatements. Essentially, petitioner asserts that the Tax Court was clearly erroneous by determining that the factors she refers to do not satisfy her burden of proof. However, being a homemaker and preparing for weddings, graduations and reunions certainly cannot relieve a taxpayer of joint and several tax liability. The petitioner does not make a showing that her husband's financial affairs were unreasonably complex, see, e.g., Sanders, 509 F.2d at 166, 169-70, nor does she provide the court with convincing reasons for not reviewing her own bank statements, which is certainly her statutory duty as bank customer. Ohio Rev. Code § 1304.29. Further, as the Tax Court correctly noted, a minimal involvement in a family's financial affairs can satisfy the "reason to know" standard. Sanders, 509 F.2d at 167-68.
The last requirement under § 6013(e)(1) requires the petitioner to show that it would be inequitable, under all the facts and circumstances, to hold her liable for these tax deficiencies. However, since we hold that petitioner did not satisfy the "no reason to know" requirement, we need not address this final requirement.
Petitioner next argues that she should be relieved of tax liability for the 1977 tax deficiencies because neither she nor her husband signed the return. Petitioner relies on 26 C.F.R. § 1.6013-1(a)(2), which states in part "[a] joint return of a husband and wife (if not made by an agent of one or both spouses) shall be signed by both spouses." She asserts that a tax attorney and preparer should not be able to bind a party when that party has neither seen, approved, nor authorized the preparer to sign the tax return form for her. Although petitioner admits that the case law recognizes that one spouse may sign for both spouses, she argues that this exception to § 1.6013-1(a)(2) should not be extended.
In the case at bar, petitioner admittedly delegated much of the tax return responsibility to her husband, and she had authorized him to sign for her. However, he did not sign her name and she was denied the opportunity to review the form before it was signed. Rather, the attorney and tax preparer signed her name without her consent. Although the tax code regulations provide that one spouse may sign for another spouse in the case of injury or disease when oral consent has been given, 26 C.F.R. § 1.6012-1(a)(5), an agent can prepare a tax return for one or both spouses only when a power of attorney has been executed. Id. No power of attorney was executed in this case, and the tax preparer lacked petitioner's authorization to sign for her. Petitioner cannot be found to have tacitly consented to adopting this return merely because she did not file a separate return as in Howell v. Commissioner, 175 F.2d 240, 241 (6th Cir. 1949), because neither spouse signed the return in the instant case. Further, in 1976 the petitioner had at least been present when the forms were being completed, whereas she was not present and totally uninformed when the 1977 tax return was prepared. Petitioner had no independent income of her own which would have required that she file a separate return.
In Shea v. Commissioner, 780 F.2d 561 (6th Cir. 1986), we applied a context-specific test under which a taxpayer's reason to know of an understatement depends on "(1) the circumstances which face the [taxpayer]; and (2) whether a reasonable person in the same position would infer that omissions or erroneous deductions had been made."
In Shea, the plaintiff was an officer of the spouse's business and in that capacity she was authorized to and did draw checks on the corporate bank account.