Court Opinion

ID: 4616547
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:34:42.798661+00
Date Added: 2024-06-11T07:55:08.909170
License: Public Domain

FREDIE LYNN CHARLTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent SARAH K. HAWTHORNE, F.K.A. SARAH K. CHARLTON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCharlton v. CommissionerNo. 11412-98; No. 11861-98United States Tax Court114 T.C. 333; 2000 U.S. Tax Ct. LEXIS 29; 114 T.C. No. 22; May 16, 2000, Filed 2000 U.S. Tax Ct. LEXIS 29">*29  Appropriate orders will be issued.  Ps were married in 1989, separated in 1995, and divorced in   1996. In 1994, W operated Medi-Task, a physician's transcription   business. H was employed full time by a large corporation until   September 1994. In the fall of 1994, he moved to a lake and   began to renovate some rental cabins. Ps filed a joint tax   return for 1994 in which they reported that they had self-   employment tax liability for the transcription business and   deducted rental cabin expenses.     R determined a deficiency based in part on adjustments to   Ps' self-employment tax and denial of deductions relating to the   cabins. Ps filed petitions disputing R's determination. Ps also   alleged they each qualified for relief as an innocent spouse.     H contends that he qualifies for relief under sec. 6015(b)   and (c), I.R.C. W contended at trial that she qualifies for   relief under sec. 6015(b), (c), and (f), I.R.C., but now   contends that she qualifies for relief only under sec. 6015(f),   I.R.C. R contends that the Tax Court2000 U.S. Tax Ct. LEXIS 29">*30  lacks jurisdiction to   decide W's claim under sec. 6015(f), I.R.C.     HELD: All transcription-related self-employment income is   allocated to W under secs. 6017 and 1402(a)(5)(A), I.R.C.     HELD, FURTHER, Ps' rental cabin expenses are not deductible   because they are preoperational startup expenses. See sec. 195,   I.R.C.     HELD, FURTHER, H does not qualify for relief under sec.   6015(b), I.R.C., but he qualifies for limitation of liability   under sec. 6015(c), I.R.C., to the extent stated herein.     HELD, FURTHER, We have jurisdiction to review whether   relief is available under sec. 6015(f), I.R.C.Sarah K. Hawthorne, pro se.Deborah H. Delgado, Carl D. Inskeep, and Lewis J. Hubbard, forrespondent.  Colvin, John O.COLVIN114 T.C. 333">*334 COLVIN, JUDGE: Respondent determined that, for 1994, petitioners were liable for a $ 15,192 deficiency in income tax and a $ 1,731 accuracy-related penalty under section 6662(a).Following2000 U.S. Tax Ct. LEXIS 29">*31  concessions, 1 the issues for decision are:     1. Whether all of petitioners' self-employment income from   Medi-Task is allocated to petitioner Sarah K. Hawthorne   (Hawthorne) for purposes of computing self-employment tax for   1994. We hold that it is.     2. Whether petitioners may deduct expenses relating to   their rental cabins in 1994. We hold that they may not.     3. Whether petitioner Fredie Lynn Charlton (Charlton) is   entitled to relief from joint and several liability under   section 6015(b) for the income tax deficiency arising from   petitioners' 1994 joint return. We hold that he is not.     4. Whether petitioner Fredie Lynn Charlton qualifies2000 U.S. Tax Ct. LEXIS 29">*32  for   limitation of liability under section 6015(c) for the income tax   deficiency arising from petitioners' 1994 joint return. We hold   that he does to the extent described below.     5. Whether we have jurisdiction to review whether relief is   available to petitioner Sarah K. Hawthorne under section   6015(f). We hold that we do. Thus, we will delay entry of   decision to permit Hawthorne and respondent to report on the   status of Hawthorne's application for relief under section   6015(f), and if relief is denied, to file a motion as part of   this docketed case requesting our review of the Secretary's   denial.Section references are to the Internal Revenue Code in effect for 1994. Rule references are to the Tax Court Rules of Practice and Procedure.FINDINGS OF FACTSome of the facts have been stipulated and are so found.A. PETITIONERSPetitioner Sarah K. Hawthorne (Hawthorne) lived in Burnet, Texas, when she filed her petition. Petitioner Fredie Lynn Charlton (Charlton) lived in Buchanan Dam, Texas, 114 T.C. 333">*335  when he filed his petition. Petitioners lived in Texas, a community property State, at all times2000 U.S. Tax Ct. LEXIS 29">*33  relevant to this case.Hawthorne has a college degree in English. She completed an accounting class and a marketing class but she did not do well in them. Hawthorne did not take any income tax courses. Petitioners were married in 1989. Before they were married, Charlton hired Hawthorne to be an office manager for a large manufacturing business.Charlton was employed full time in Houston, Texas, until September 1994. He moved his residence to Buchanan Dam, Texas, in the fall of 1994.B. MEDI-TASKMedi-Task was a physician's transcription service. Hawthorne managed Medi-Task and performed most of its day-to-day operations. Medi-Task had one employee in 1994. Independent contractors did most of the transcribing for Medi-Task. Charlton did not devote much time to Medi-Task because he was employed full time until September 1994. He was not involved with Medi-Task's hiring or marketing. He did not type any reports for Medi-Task, but he assisted when there were computer problems. Hawthorne kept Medi-Task's business records in petitioners' home in a file cabinet next to Charlton's records. She deposited Medi-Task's gross receipts in Charter Bank of Houston, and Lake Buchanan State Bank. 2000 U.S. Tax Ct. LEXIS 29">*34  Charlton had access to Medi-Task's records while he prepared petitioners' 1994 return. Hawthorne prepared and gave Charlton lists that included all but $ 22,601 of Medi-Task's income and all but $ 2,050 of Medi-Task's expenses for 1994. She also gave him bank statements for Medi-Task, Forms 1099, Forms W-2, Wages and Tax Statement, and documents showing Medi-Task's expenses.Charlton received unemployment compensation and VA disability payments in the last quarter of 1994. Medi-Task was Charlton's and Hawthorne's only other source of income during that 3- month period.Petitioners signed a personal financial statement on April 15, 1995, which stated that Medi-Task was worth $ 110,000. Hawthorne sold Medi-Task in 1995 without Charlton's consent or participation and kept the proceeds.114 T.C. 333">*336  C. RENTAL CABINSPetitioners bought real property in the spring of 1993 at Charlton Pointe on Lake Buchanan in Llano County, Texas. There were some rental cabins on the property which were built in the 1950's and were rented until 1988 or 1989.Petitioners began to rehabilitate the cabins in the fall of 1994. Charlton spent time in 1994 working on the cabins and other aspects of the Charlton Pointe2000 U.S. Tax Ct. LEXIS 29">*35  property. Petitioners incurred expenses for travel to Charlton Pointe and expenses to rehabilitate the cabins. However, petitioners rented no cabins at Charlton Pointe in 1994. Charlton began renting the cabins in 1998.D. PETITIONERS' INCOME TAX RETURNSCharlton used tax return preparation software to prepare returns for petitioners for 5 years, including 1994.Petitioners filed a joint income tax return for 1994. On it, they reported profits and losses on Schedules C, Profit or Loss From Business, for Medi-Task and the cabins. Charlton used the gross revenue amounts from the lists Hawthorne prepared to prepare the return. He did not review the bank statements. He also used the lists that Hawthorne prepared to report Medi-Task's expenses. He decided how to report the expenses on part II of Schedule C for Medi-Task; e.g., as advertising, legal and professional services, travel and meals, utilities, wages, and other expenses.Petitioners reported that the Medi-Task income was divided equally between themselves for self-employment tax purposes.Petitioners reported that Charlton had $ 62,135 in wages for 1994. They reported that Medi-Task had gross receipts and gross income of $ 147,782, 2000 U.S. Tax Ct. LEXIS 29">*36  total expenses of $ 117,588, and net profit of $ 30,194. Petitioners underreported 1994 gross receipts for Medi-Task by $ 22,601 and did not deduct $ 2,050 of Medi-Task expenses. They reported that they had no income from the cabins and $ 27,724 in expenses. Hawthorne examined parts of the 1994 return, such as the children's names and Social Security numbers and child care credits, but otherwise accepted the return that Charlton prepared.114 T.C. 333">*337  E. THE DIVORCEPetitioners separated in 1995, after they filed their 1994 return, and were divorced in 1996. Under the divorce settlement, Charlton received the rental cabin property and Hawthorne received Medi-Task. As required by the divorce settlement, Charlton deposited petitioners' 1994 refund check for $ 4,453 in a joint bank account at Texas Bank in Burnet, Texas, on June 2, 1995. Charlton used some of the 1994 refund to pay his personal expenses.OPINIONA. WHETHER ALL MEDI-TASK INCOME IS ATTRIBUTABLE TO HAWTHORNE FOR  SELF-EMPLOYMENT TAX PURPOSESCharlton contends that the Medi-Task income should be divided equally between him and Hawthorne for self-employment tax purposes. Respondent and Hawthorne contend that all of2000 U.S. Tax Ct. LEXIS 29">*37  the Medi-Task income is attributable to Hawthorne and that the self-employment tax reported by petitioners for 1994 should be increased by $ 6,962.Self-employment tax for a husband and wife filing a joint return is the sum of the taxes computed on the self-employment income of each spouse. See sec. 6017. All of the gross income and deductions from a trade or business over which one spouse exercises substantially all of the management and control are attributable to that spouse. See sec. 1402(a)(5)(A). For these purposes, "management and control" means actual management and control even if management and control is imputed to the other spouse under community property laws.  Sec. 1.1402(a)-8(a), Income Tax Regs.Charlton contends that he and Hawthorne jointly operated Medi-Task and that Medi-Task was a partnership or should be treated as one. We disagree. Hawthorne managed Medi-Task and performed most of its day-to-day operations. Charlton had a full-time job until September 1994, and he also renovated cabins in 1994. He did not devote much time to Medi-Task. We conclude that all of the Medi-Task income in 1994 is attributable to Hawthorne for self-employment2000 U.S. Tax Ct. LEXIS 29">*38  tax purposes.114 T.C. 333">*338  B. WHETHER PETITIONERS' 1994 EXPENSES FOR THE CABINS WERE  PREOPERATIONAL STARTUP EXPENSESCharlton contends that petitioners may deduct $ 27,724 for supplies, taxes, travel, utilities, legal and professional services, and car and truck expenses for their cabin rental activity for 1994 under section 162. We disagree.Generally, a taxpayer may not deduct startup expenses. See sec. 195(a). A startup expenditure is any amount:   (A) paid or incurred in connection with --     (i) investigating the creation or acquisition of an active     trade or business, or     (ii) creating an active trade or business, or     (iii) any activity engaged in for profit and for the     production of income before the day on which the active     trade or business begins, in anticipation of such activity     becoming an active trade or business, and   (B) which, if paid or incurred in connection with the operation   of an existing active trade or business (in the same field as   the trade or business referred to in subparagraph (A)), would be   allowable2000 U.S. Tax Ct. LEXIS 29">*39  as a deduction for the taxable year in which paid or   incurred. [Sec. 195(c).]Petitioners incurred these expenses before the cabin rental activity became an active trade or business. Charlton renovated the cabins in 1994 but did not rent them or offer them for rent until 1998. The cabin rental activity was not an active trade or business in 1994. Thus, we conclude that the claimed expenses were nondeductible startup expenses.C. INNOCENT SPOUSE ISSUES1. PROCEDURAL STATUS OF INNOCENT SPOUSE ISSUESPetitioners each asserted in their petitions that they qualify for relief as an innocent spouse. The statutory provision providing relief for innocent spouses in effect when the petitions were filed, section 6013(e), was repealed and replaced before trial by section 6015. See Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201, 112 Stat. 685, 734. As a result, neither petitioner referred to section 6015 in the petitions filed in these cases.At trial, the parties consented to treating the petitions as elections by Charlton and Hawthorne for relief under section 6015(b)(1)(E) (procedures for relief from joint liability 114 T.C. 333">*339  applicable to all2000 U.S. Tax Ct. LEXIS 29">*40  joint filers) and section 6015(c)(1) (procedures to limit liability for divorced and separated taxpayers).Respondent contends that we lack jurisdiction to decide whether Hawthorne is entitled to equitable relief under section 6015(f).  2 We deem petitioners to have amended their petitions to claim relief under section 6015(b) and (c), and we treat Hawthorne's request for relief under section 6015(f) as an amendment to her petition, seeking our review of her entitlement to relief under that subsection.   2. WHETHER CHARLTON IS ENTITLED TO RELIEF FROM JOINT AND SEVERAL    LIABILITY FOR INCOME TAX FOR 1994 UNDER SECTION 6015(b)Charlton contends that he is entitled to relief from joint and several liability for income tax for 1994 under section 6015(b).Section 6015(b)(1) provides that if:     (A) a joint2000 U.S. Tax Ct. LEXIS 29">*41  return has been made for a taxable year;     (B) on such return there is an understatement of tax     attributable to erroneous items of one individual filing     the joint return;     (C) the other individual filing the joint return     establishes that in signing the return he or she did not     know, and had no reason to know, that there was such     understatement;     (D) taking into account all the facts and circumstances, it     is inequitable to hold the other individual liable for the     deficiency in tax for such taxable year attributable to     such understatement; and     (E) the other individual elects (in such form as the     Secretary may prescribe) the benefits of this subsection     not later than the date which is 2 years after the date the     Secretary has begun collection activities with respect to     the individual making the election,   then the other individual shall be relieved of liability for tax   (including interest, penalties, and2000 U.S. Tax Ct. LEXIS 29">*42  other amounts) for such   taxable year to the extent such liability is attributable to   such understatement.Respondent concedes that Charlton qualifies under section 6015(b)(1)(A) because he filed a joint Federal income tax return for 1994, and section 6015(b)(1)(E) because he elected to seek relief not later than 2 years after collection activities began.Section 6015(b)(1)(C) requires that in signing the return the individual seeking relief did not know and had no reason 114 T.C. 333">*340  to know of the understatement. Charlton contends that he did not know and had no reason to know of the understatement attributable to Medi-Task because he had no control over Medi-Task's finances and was busy with his other business interests. We disagree.Under prior law (former section 6013(e)(1)(C)), in a case of omitted income, a spouse seeking relief was not permitted to turn a blind eye to facts that were available to him or her to avoid liability as an innocent spouse. See McCoy v. Commissioner, 57 T.C. 732">57 T.C. 732, 57 T.C. 732">734 (1972). Similarly, a taxpayer who prepares a return is not relieved of the duty to prepare an accurate return if the taxpayer relies on summarized information provided2000 U.S. Tax Ct. LEXIS 29">*43  by the taxpayer's spouse when information upon which the summary is based is available to the taxpayer.Charlton was generally familiar with Medi-Task. Hawthorne gave him the bank statements respondent later used in determining Medi-Task's income for 1994, Forms 1099 and W-2, and a computer- generated expense list. Charlton had unfettered access to Medi-Task's financial records. We conclude that Charlton had reason to know of Medi-Task's understatement of income. Thus, Charlton does not qualify for relief as an innocent spouse under section 6015(b)(1).D. WHETHER CHARLTON QUALIFIES FOR LIMITATION OF HIS LIABILITY FOR  PETITIONERS' 1994 INCOME TAX UNDER SECTION 6015(c)Charlton contends that he qualifies for limitation of liability for petitioners' 1994 income tax under section 6015(c)3 for 114 T.C. 333">*341  the portion of the deficiency relating to Medi-Task. Respondent and Hawthorne contend that he does not. Hawthorne makes no arguments that substantially differ from respondent's on this point. We agree with Charlton.2000 U.S. Tax Ct. LEXIS 29">*44 To be eligible for relief under section 6015(c), the individual seeking relief must no longer be married to, or must be legally separated from, the individual with whom he or she filed the joint return and must have elected the applicability of section 6015(c) not later than 2 years after the date on which collection activity began. See sec. 6015(c)(3).An electing spouse bears the burden of proving how much of any deficiency is allocable to him or her. See sec. 6015(c)(2). An election is not valid if respondent shows that the individual making the election had actual knowledge when signing the return of any "item" giving rise to a deficiency (or portion thereof) which is not allocable to the electing individual. See sec. 6015(c)(3)(C). The only Medi-Task item causing a deficiency in this case is omitted income.We have concluded that Charlton should have known of the omitted income because he knew of and had access to correct information about Medi-Task. See par. C-2, above. However, that does not mean that he actually knew of the Medi-Task omitted income. Charlton did not check Medi-Task's bank records against the lists of Medi-Task revenue that Hawthorne prepared and gave him. 2000 U.S. Tax Ct. LEXIS 29">*45  The lists Hawthorne gave Charlton are not in the record. Charlton testified that he did not know of the omitted income. We have no reason not to believe him. We conclude that respondent has not shown that Charlton had actual knowledge of the item causing the deficiency, and that Charlton qualifies for relief under section 6015(c). Thus, the procedures in section 114 T.C. 333">*342  6015(d) to allocate items between Hawthorne and Charlton apply.  42000 U.S. Tax Ct. LEXIS 29">*46 For purposes of section 6015(c), an item giving rise to a deficiency on a joint return is generally allocated as if the individuals had filed separate returns. See sec. 6015(d)(3)(A).Respondent contends that the parties should perform the computations under section 6015(d) as part of the Rule 155 computations. Neither Charlton nor Hawthorne objects to using that procedure. We agree with respondent, and we will so order.E. WHETHER THE TAX COURT HAS JURISDICTION TO REVIEW A TAXPAYER'S  REQUEST FOR EQUITABLE RELIEF UNDER SECTION 6015(f)Respondent contends that we lack jurisdiction to decide whether the Commissioner properly denied relief to a taxpayer under section 6015(f). We disagree, for reasons stated in Butler v. Commissioner, 114 T.C. 276">114 T.C. 276, 114 T.C. No. 19">114 T.C. No. 19,     (2000) (slip op. at 18-26).Hawthorne and respondent have apparently suspended any activity relating to Hawthorne's claim under section 6015(f) while this case is pending. If the Secretary denies her application for relief under section 6015(f), Hawthorne may 114 T.C. 333">*343  file a motion as part of this docketed case to seek our review of the Secretary's denial within a time period to be provided by order of this Court. We will delay entry2000 U.S. Tax Ct. LEXIS 29">*47  of decision until Hawthorne and respondent report the status of the Secretary's action under section 6015(f).To reflect the foregoing,Appropriate orders will be issued.  Footnotes1. Respondent concedes that petitioners are not liable for the accuracy-related penalty under sec. 6662↩ for 1994. Both petitioners and respondent agree that petitioners understated Medi-Task gross receipts for 1994 by $ 22,601 on their 1994 return.2. Hawthorne contended at trial that she was entitled to relief under sec. 6015(b) and (c). She now concedes that relief is not available to her under sec. 6015(b) and (c)↩.3. Sec. 6015(c) provides:     SEC. 6015(c). Procedures to Limit Liability for Taxpayers   No Longer Married or Taxpayers Legally Separated or Not Living   Together. --        (1) In general. -- Except as provided in this     subsection, if an individual who has made a joint return     for any taxable year elects the application of this     subsection, the individual's liability for any deficiency     which is assessed with respect to the return shall not     exceed the portion of such deficiency properly allocable to     the individual under subsection (d).                * * * * * * * *        (3) Election. --          (A) Individuals eligible to make election. --             (i) In general. -- An individual shall only          be eligible to elect the application of this          subsection if --               (I) at the time such election is filed,             such individual is no longer married to, or             is legally separated from, the individual             with whom such individual filed the joint             return to which the election relates; or               (II) such individual was not a member             of the same household as the individual with             whom such joint return was filed at any time             during the 12-month period ending on the             date such election is filed.             (ii) Certain taxpayers ineligible to elect.          -- If the Secretary demonstrates that assets were          transferred between individuals filing a joint          return as part of a fraudulent scheme by such          individuals, an election under this subsection by          either individual shall be invalid (and section          6013(d)(3) shall apply to the joint return).          (B) Time for election. -- An election under this        subsection for any taxable year shall be made not        later than 2 years after the date on which the        Secretary has begun collection activities with respect        to the individual making the election.          (C) Election not valid with respect to certain        deficiencies. -- If the Secretary demonstrates that an        individual making an election under this subsection        had actual knowledge, at the time such individual        signed the return, of any item giving rise to a        deficiency (or portion thereof) which is not allocable        to such individual under subjection (d), such election        shall not apply to such deficiency (or portion). This        subparagraph shall not apply where the individual with        actual knowledge establishes that such individual        signed the return under duress.↩4. Sec. 6015(d) provides in part:     SEC. 6015(d). Allocation of Deficiency. -- For purposes of   subsection (c) --        (1) In general. -- The portion of any deficiency on a     joint return allocated to an individual shall be the amount     which bears the same ratio to such deficiency as the net     amount of items taken into account in computing the     deficiency and allocable to the individual under paragraph     (3) bears to the net amount of all items taken into account     in computing the deficiency.        (2) Separate treatment of certain items. -- If a     deficiency (or portion thereof) is attributable to  --          (A) the disallowance of a credit; or          (B) any tax (other than tax imposed by section 1        or 55) required to be included with the joint return,   and such item is allocated to one individual under paragraph   (3), such deficiency (or portion) shall be allocated to such   individual. Any such item shall not be taken into account under   paragraph (1).        (3) Allocation of items giving rise to the deficiency.     For purposes of this subsection --          (A) In general. Except as provided in paragraphs        (4) and (5), any item giving rise to a deficiency on a        joint return shall be allocated to individuals filing        the return in the same manner as it would have been        allocated if the individuals had filed separate        returns for the taxable year.          (B) Exception where other spouse benefits. Under        rules prescribed by the Secretary, an item otherwise        allocable to an individual under subparagraph (A)        shall be allocated to the other individual filing the        joint return to the extent the item gave rise to a tax        benefit on the joint return to the other individual.          (C) Exception for fraud. The Secretary may        provide for an allocation of any item in a manner not        prescribed by subparagraph (A) if the Secretary        establishes that such allocation is appropriate due to        fraud of one or both individuals.↩