Court Opinion

ID: 9488259
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:40:36.136196+00
Date Added: 2024-06-11T17:52:47.423142
License: Public Domain

OAKES, Senior Circuit Judge,
dissenting:
I dissent. I think the tax court was unduly restrictive in construing the “innocent spouse” statute and that it drew erroneous inferences regarding the knowledge that Janet Bliss in particular, and persons in the midst of divorce in general, are likely to have regarding the finances of their about-to-be-ex-spouse.
In my view, the evidence showed that Janet Bliss did not, and reasonably could not, focus on the tax consequences of Harold Bliss’s arrangements with his law firm as the final arrangements for the divorce were underway. Tax Court Judge Whelan stated on the record that even if he did “believe that Mrs. Bliss was perfectly innocent and trusting” and “that that continued fully throughout the year 1982 while the divorce proceedings were ensuing on the fond hope that they would get back together,” he “would also have to believe that her lawyers didn’t say, ‘Now we’re going to get that loan account,’ and, you know, clearly that’s income and that her lawyers, either by — you know, either they didn’t know or they goofed up and they didn’t tell her.” Trial Transcript at 294-95.
The judge went on to add, I think quite improperly, that, “It’s very difficult to believe that somebody would have exhibited this much lack of interest in — or curiosity about the' financial affairs of somebody who was obviously not a very nice person, at least from their vantage point.” Id. at 296. I had thought that when Congress enacted the Innocent Spouse Statute it was to correct unfair prior caselaw that held innocent spouses liable for the tax consequences of their partners’ misdeeds, and “to bring government tax collection practices into accord with basic principles of equity and fairness.” H.R.Rep. *381No. 1734, 91st Cong.2d Sess. 2 (1970). See Price v. Commissioner, 887 F.2d 959, 963 n. 9 (9th Cir.1989); see also Sanders v. U.S., 509 F.2d 162, 169 n. 14 (5th Cir.1975).
In my view, Janet Bliss showed that she did not know of the understatement of tax on the joint return filed for 1982, that she had no reason to know of such understatement, and that it would be inequitable to hold her liable for her husband’s conversion of loan accounts into salary by virtue of failing to repay the loan. The majority opinion here, in my view, compounds the tax court’s problem by not facing the question “whether her lawyer’s knowledge and understanding should be imputed to the petitioner,” supra at 379 n. 2, and resting on a supposed conclusion of the tax court that she knew or should have known that her obligation to pay up to $5,500 toward the couple’s future tax liability had to do with the fact that Harold Bliss had received money from his law firm that had not been reported as income to the I.R.S. and from which taxes had yet to be withheld. Id. at 379.
The most that could be said, it seems to me, is that she knew of the loans, but it was not the loans which gave rise to the understatement of income; rather, it was the conversion of the loans into income by determining not to repay them that is the taxable transaction in this case. There is nothing in this record which shows that Mrs. Bliss had knowledge of the conversion.
Beyond this, Janet Bliss’s uncontradieted testimony was that she did not see any documents indicating the existence of the loan accounts themselves. Even though there were letters indicating the existence of the loan account that were mailed to her, she certainly did not, and had no reason to, examine the ledger sheet purporting to evidence the account because, like most people in her situation, she relied on her divorce lawyer in connection with financial matters. Beyond that, the documents that were delivered to her attorney were much too complicated to give her knowledge of anything and, indeed, the documents overall showed that Harold Bliss’s income for 1982 was probably going to be significantly less than it had been for 1981. Moreover, Exhibits 8H and 10J,
which were divorce-case documents and consist of the spouse’s affidavit of income and expenses on order to show cause prepared by Harold Bliss and a joint pretrial statement in the matter, tried on the 8th day of December, 1982, bear handwritten notations “cc 1-12-83,” indicating that they were delivered to petitioner, if at all, after the court hearing in December.
Not only did she say that she did not read these documents and did not understand financial matters so as to rely on her attorney, most of the financial information was received by her after the terms of the divorce had been agreed upon. I find it unreasonable to assume that she would have looked at the papers at that time or until, in fact, her ex-husband failed .to pay support some three years later, long after the 1982 tax return had been filed.
Petitioner as of 1982-83 was a woman of limited educational background, with next to no experience in financial matters, who let her husband run things in the marriage and particularly financial matters. Yet, the tax court held, and the majority sustains its position, that such a housewife should have determined that the loan entries later might represent taxable income. Her entire burden, however, is only to prove that she had no knowledge of the transaction underlying the understatement of tax. Hayman v. Commissioner, 992 F.2d 1256, 1261 (2d Cir.1993); Price, 887 F.2d at 963 n. 9. She testified, without contradiction, that she was not apprised even of the existence of the loan account by her divorce attorney, and the attorney himself could not recall if he had ever spoken to her concerning the loans, and testified that he did not spend any significant time with her, and did not recall going over any of the financial documents with her at any time until they went back to court in connection with a modification of the decree some three years after the divorce.
Because she had to pay up to one-half of 1982 income taxes, not to exceed $5,500 by virtue of clause 24 of the separation agreement, and the returns as filed showed tax liability of $12,620 on the federal return or slightly more than the $11,000 tax liability threshold referred to in the separation agree-*382merit, nothing would alert her to-any “funny business” when she signed the returns. When in fact she received half of the refund, this must have been a happy event, not one calling for a further look.
In' short, there is simply nothing in this record to show that petitioner had reason to know of the understatement of tax: Janet Bliss was totally uninvolved in her husband’s business, there was no indication that family expenditures exceeded reported income,, nor were there lavish or unusual expenditures (at least any known or visible to her). It seems to me that this is the classic case of an “innocent spouse.” The panel majority’s definition of an innocent spouse is one “vis-a-vis a guilty spouse whose income is concealed from the innocent and spent outside the family.” That is exactly what Harold Bliss did: concealed in part his law firm income from the government and his spouse by a phony loan account, and then spent the money thereby “saved” outside the family.
Accordingly, I dissent.