Court Opinion

ID: 9489394
Source: CourtListenerOpinion
Date Created: 2023-08-05 13:14:40.06437+00
Date Added: 2024-06-11T17:53:30.443563
License: Public Domain

WALLACE, Circuit Judge,
concurring and dissenting:
Although I agree with the majority that the tax court did not abuse its discretion in finding that Mrs. Wiksell had reason to know of the substantial understatements of income, I cannot agree with its decision to remand this case to the tax court for further findings concerning apportionment.
The majority states that it is unclear whether Mrs. Wiksell argued before the tax court that she should not be held liable for the entirety of the tax deficiency resulting from the substantial understatements in taxable income. Maj. op. at 1463. I do not see the lack of clarity. It was her responsibility to show she raised the issue; she failed to do so. That should end the matter.
Undaunted, the majority proceeds to consider de novo whether there is sufficient evidence to indicate that Mrs. Wiksell did not have reason to know of “the magnitude of the understatement generated by her husband’s activities.” Id. Regardless whether Mrs. Wiksell presented the apportionment argument below, the tax court found that she had reason to know of the substantial understatements. This finding applies to all of the understatements and is not clearly erroneous. As she had reason to know of all substantial underpayments, there could be no lesser amount for which she should receive relief. Mrs. Wiksell has not come close to carrying her burden of proving that she did not have reason to know of a portion of the understatements. The majority’s analysis is completely inconsistent with the tax court’s *1465explicit finding, which was not clearly erroneous, that it was not inequitable to hold her responsible for all the taxes due. Clearly, the majority is attempting to find some reason to remand, but the route chosen leads only to a door already closed by the tax court’s findings.
Although the cases cited by the majority support the proposition that apportionment may be appropriate in some cases, the majority does not support apportionment under the circumstances presented here. In Ratana v. Commissioner, 662 F.2d 220 (4th Cir.1981), the court allowed apportionment of tax liability resulting from unreported income related to drug trafficking and tax fraud. Id. at 224-25. The court found that although Mrs. Ratana had actual knowledge of omitted income resulting from her husband’s drug trafficking, she had no knowledge and no reason to know that her husband fraudulently underreported his salary earnings. See id. at 223-25. Thus, the court applied the innocent spouse exception only to the understated salary income.
The majority also cites Bell v. Commissioner, 56 T.C.M. (CCH) 1467 (1989), which recognizes only that a court may refuse to impose liability resulting from “innocent” understatements. In Bell, a spouse asserted immunity under 26 U.S.C. § 6013(e) as to specific items of income and specific deductions; however, she stipulated that she was not innocent as to other improper deductions and omitted income. The tax court found Mrs. Bell qualified for innocent spouse relief as to the former, but held her accountable for tax deficiencies resulting from the admittedly-known errors.
Neither Bell nor Ratana is applicable here because the understatements at issue are not attributable to various fraudulent activities of which Mrs. Wiksell had knowledge of some, but not others. The finding that binds us refers to all the fraudulent activities.
Finally, Ballard v. Commissioner, 740 F.2d 659 (8th Cir.1984) (Ballard), and Jenkins v. Commissioner, 55 T.C.M. (CCH) 1354 (1988), also cited by the majority, do not support apportionment in this case. Ballard held that Mrs. Ballard did not know and had no reason to know of her husband’s omissions in tax returns. Ballard, 740 F.2d at 665. In dicta, the court stated that even if Mrs. Ballard’s endorsement of several checks to her husband’s business put her on notice of omitted income, “that notice would be limited to the amount of those checks” because Mrs. Ballard had no reason to suspect additional unreported income. Id. at 665 n. 2. Jenkins never discussed apportionment with respect to section 6013(e). Rather, that decision addressed whether an innocent spouse was negligent with respect to any part of the underpayment of tax pursuant to 26 U.S.C. § 6653(a).
Considered together, the above cases suggest that where an understatement results from unreported income derived from illicit activities, apportionment turns on whether the allegedly innocent spouse had reason to know of the income-producing activity underlying the omitted income. Here, Mrs. Wik-sell had reason to know of all such activity, and, therefore, apportionment is not available. See McGee v. Commissioner, 979 F.2d 66, 70 (5th Cir.1992) (under 26 U.S.C. § 66(c), knowledge of omitted income determined with reference to knowledge of income-producing activity, not the amount of income produced); Price v. Commissioner, 887 F.2d 959, 963 n. 9 (9th Cir.1989) (spouse must show that she “did not know of the transaction underlying the [omission]” to qualify as “innocent spouse”) (emphasis omitted); Krause v. Commissioner, 61 T.C.M. (CCH) 1670 (1991) (as long as spouse knew that husband embezzled some amount, she had reason to know that tax return contained substantial understatement). If a portion of the understatement had resulted from activities of which Mrs. Wiksell had no knowledge and no reason to know, it may be that section 6013(e) would not preclude her from claiming innocent spouse protection before the tax court as to the understatement resulting from that activity. But that is not the case before us.
As the majority recognizes, overwhelming evidence supports the tax court’s finding that Mrs. Wiksell had reason to know of her husband’s fraud. See maj. op. at 1462-63; id. at 1463 (summarizing evidence of constructive knowledge of understatement as *1466“overwhelming” and stating that “Appellant cannot hide from its importance or its magnitude”). Most telling is Mrs. Wiksell’s confession that before she executed the tax returns, she read a Los Angeles Times article identifying her husband as a primary architect of an investment scam that defrauded unsuspecting investors out of millions of dollars. See James Bates, Southland Financiers Quoted Bible, Engaged in Scams, SEC Claims, L.A. Times, Mar. 3, 1986. The article states in part: “[T]he SEC alleges!] Comstock Financial placed at least $2 million of investors’ funds in an oil firm run by Wiksell, its vice president of finance, out of his Van Nuys home.” Id. When viewed in light of Mr. Wiksell’s prior arrest for illegal trading and the fact that he had been arrested and was in jail for this scam at the time Mrs. Wiksell read the article, the article reveals more than “hyperbole,” as the majority suggests. See maj. op. at 1464. Rather, this evidence indicates the magnitude of Mr. Wiksell’s fraud and supports the tax court’s factual finding that Mrs. Wiksell had reason to know of both her husband’s illicit activity and the substantial understatements on their tax returns for 1984 and 1985. At the very least, this evidence demonstrates that the tax court’s finding was not clearly erroneous.
I therefore conclude that there is no reason for a remand in this case. There is no showing that the apportionment issue was raised in the tax court — and it is easy to see why it would not be. Even if our law allowed such an apportionment, an issue I do not reach, the record is clear that it could not apply in this case.