Court Opinion

ID: 764964
Source: CourtListenerOpinion
Date Created: 2012-04-18 07:31:43+00
Date Added: 2024-06-11T17:55:12.341614
License: Public Domain

181 F.3d 1002 (9th Cir. 1999)
CATHY MILLER HARDY, Petitioner-Appellant,v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
No. 97-71097
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
Argued and Submitted November 5, 1998--San Francisco, CaliforniaSubmission Vacated November 9, 1998Resubmitted June 10, 1999Filed July 2, 1999

COUNSEL:  William P. Koontz, Cottage Grove, Oregon, for the petitioner-appellant.
Robert L. Baker, Tax Division, United States Department of  Justice, Washington, D.C., for the respondent-appellee.
Appeal from a Decision of the United States Tax Court  Carolyn P. Chiechi, Presiding. Tax Ct. No. 17013-95.
Before: Mary M. Schroeder and Sidney R. Thomas,  Circuit Judges, and Barry T. Moskowitz,1 District Judge.
THOMAS, Circuit Judge:

1
Cathy Hardy appeals a decision of the United States Tax  Court, which affirmed the Internal Revenue Service's ("IRS")  assessment of tax deficiency against her. On appeal, Hardy  challenges the Tax Court's allocation and application of the  burden of proof as well as the Tax Court's application of the  so-called innocent spouse provisions of the Internal Revenue  Code. We affirm.

2
* In 1981, Cathy Miller married Ray Hardy, and they have  resided in Nevada, a community property state, for the duration of their marriage. Cathy and Ray Hardy both had been  previously married to other people and both had children from  their previous marriages. In 1995, the IRS sent Hardy a notice  of income tax deficiency for 1981, 1982, 1983, 1984, 1985,  and 1986 as set forth in the following table:

3
 Year   Tax             26 U.S.C.       26 U.S.C.
        Deficiency      S 6651(a)(1)    S 6654 
                        Penalty         Penalty

4
1981    10,369.00       2,592.00        794.00 
1982    10,090.00       2,523.00        982.00 
1983     9,580.00       2,395.00        586.00 
1984     2,064.00         516.00        130.00 
1985     2,059.00         515.00        118.00 
1986     2,245.00         561.00        100.00

5
The IRS based the notice of tax deficiency on Hardy's earnings, as well as one-half of Mr. Hardy's earnings, which it considered Hardy's community property.

6
In August 1995, Hardy brought suit against the Commissioner of the IRS in the United States Tax Court challenging  the assessment. Before trial, the Commissioner stipulated that  Hardy did not owe any taxes for 1981, 1982, or 1986 and that  she did not owe any taxes based on her own earnings. Hardy  stipulated that she had married Mr. Hardy in 1981 and that  they had lived in Nevada together for the majority of their  marriage. The parties stipulated that the IRS received income  statements for Mr. Hardy for the years 1983, 1984, 1985, and  1986, although Hardy did not stipulate that the amounts  reported were correct. The parties also agreed that the IRS  had no record of Hardy filing a tax return for the years at  issue. The amounts that were at issue at trial, based on  Hardy's community property share of Mr. Hardy's income,  are represented in the following table:

7
 Year    Tax             26 U.S.C.       26 U.S.C.
        Deficiency       S 6651(a)(1)   S 6654
                        Penalty         Penalty

8
1983    5,277.00        641.00          114.00
1984    1,331.00        100.00          3.00
1985    2,059.00        515.00          118.00

9
At trial, the Hardys testified that they had an oral contract  to keep their respective property separate. The Tax Court  found the testimony to be uncredible and, after making findings of fact and conclusions of law, approved the following  tax deficiency assessments against Hardy:

10
 Year   Tax             26 U.S.C.       26 U.S.C.
        Deficiency      S 6651(a)(1)    S 6654
                        Penalty         Penalty

11
 1983   5,257.00        636.00          114.00
 1984   1,331.00        100.00          3.00
 1985   2,059.00        575.00          118.00

12
We have jurisdiction pursuant to 26 U.S.C. S 7482, and  review the Tax Court's findings of fact for clear error and  conclusions of law de novo. See Estate of Rapp v.  Commissioner, 140 F.3d 1211, 1215 (9th Cir. 1998) (as  amended).

II

13
Under the facts of this case, the Tax Court correctly allocated the burden of proof regarding Hardy's deficiency to the  Commissioner for tax year 1983 and to Hardy for tax years  1984 and 1985. The Commissioner does not challenge the Tax Court's determination that the IRS had the burden of  proof for 1983. At issue in this appeal is the burden of proof  for tax years 1984 and 1985.

14
Generally, a presumption of correctness attaches to  notices of deficiency in the Tax Court. See Palmer v. United  States Internal Revenue Serv., 116 F.3d 1309, 1312 (9th Cir.  1997); Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir.  1985); Delaney v. Commissioner, 743 F.2d 670, 671 (9th Cir.  1984). For the presumption to apply, however, the Commissioner must base the deficiency on some substantive evidence  that the taxpayer received unreported income. See id.; see also  United States v. Janis, 428 U.S. 433, 442 (1976) (holding that  the presumption does not apply when the IRS makes a naked  assessment without foundation). If the Commissioner introduces some evidence that the taxpayer received unreported  income, the burden shifts to the taxpayer to show by a preponderance of the evidence that the deficiency was arbitrary or  erroneous. See Rapp, 774 F.2d at 935. If the petitioner succeeds in showing that the deficiency was arbitrary or erroneous, the burden shifts back to the Commissioner to show that  the assessment was correct. See Palmer, 116 F.3d at 1312;  Keogh v. Commissioner, 713 F.2d 496, 501 (9th Cir. 1983).

15
Thus, the Commissioner only needed to present some  substantive evidence that Hardy received income in 1984 and  1985 in order to shift the burden to Hardy. To that end, the  Commissioner introduced worksheets calculating the amount  of tax owed by Hardy based on income statements that the  IRS had received from Mr. Hardy's employer and his bank.  Further, Hardy stipulated before trial that the IRS had  received income statements regarding Mr. Hardy's income  from his employer during the years in question, therefore  relieving the Commissioner of the necessity to introduce the  income statements at trial. Finally, Hardy stipulated that she  had been married to Mr. Hardy during the years in question  and that they had lived in Nevada. Based on these stipulations, the fact that Nevada is a community property state, and  the fact that spouses in community property states generally  are responsible for one-half of their spouses' earnings, the  notice of tax deficiency for the years 1984 and 1985 was presumptively correct.2 Thus, Hardy's argument that the Commissioner failed to sufficiently link her to the unreported  income fails.

16
Hardy argues that the presumption of correctness should  not apply because this case involves unreported income, relying on Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir.  1979), Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.  1991), and Anastasato v. Commissioner, 794 F.2d 884 (3d  Cir. 1986). First, we note that Weimerskirch involved unreported "illegal" income. See 596 F.2d at 361-62. But even if  we were to extend Weimerskirch to all unreported income  cases as the Third and Fifth Circuits have done, the exception  only applies when the Commissioner has failed to provide any  evidentiary foundation for the deficiency notice. See id. at 362  ("A deficiency determination which is not supported by the  proper foundation of substantive evidence is clearly arbitrary  and erroneous."). Here, because Mr. Hardy's employer reported his income to the IRS, the Commissioner satisfied  the foundational requirements.

17
Hardy also contends that because the Commissioner  stipulated before trial that its assessments were incorrect for  1981, 1982, and 1986, the Commissioner should lose the presumption as to its assessments for 1983, 1984, and 1985. A  concession that assessments were incorrect for some years  does not bind the Commissioner concerning disputed assessments in other years. See United States Holding Co. v.  Commissioner, 44 T.C. 323, 328 (1965); Mensik v.  Commissioner, 37 T.C. 703, 725 (1962) (holding that it would  contravene "justice and common sense" to rule that if the  Commissioner conceded or stipulated to certain facts, it  would do so "at the jeopardy of having the burden of the  opposing party as to remaining matters shift to himself");  Gobins v. Commissioner, 18 T.C. 1159, 1168-69 (1952)  (same), aff'd, 217 F.2d 952 (9th Cir. 1954); see also Keogh  v. Commissioner, 713 F.2d 496, 502 (9th Cir. 1983) (stating that a reduction in deficiency by the court did not deprive the  remaining assessment of a rational basis). If we were to hold  otherwise, the Commissioner would have a disincentive to  stipulate to certain issues before trial, a result that we do not  endorse.3

III

18
At trial, Hardy's primary argument was that the deficiency  was erroneous because it included taxes based on income purportedly earned by Mr. Hardy, income she alleges that she did  not receive. She argued that she and Mr. Hardy agreed upon  marriage to manage their finances separately.

19
This argument is unavailing because Nevada is a com- munity property state. See Nev. Rev. Stat.S 123.220 (1997).  In United States v. Mitchell, the Supreme Court stated that a  spouse in a community property state is liable for tax on onehalf of all income received by the other spouse during the  marriage. See 403 U.S. 190, 196 (1971). The Court reasoned  that because tax liability is a matter of ownership and ownership is determined by state law, spouses in community property states have a vested interest in one-half of all income  earned during the marriage. See id. at 195; see also Edwards  v. Commissioner, 680 F.2d 1268, 1271 (9th Cir. 1982) (citing  Mitchell and stating that "[a] married individual is taxable on  the earnings of his or her spouse to the extent that the laws of  the state of residence grants the individual a vested property  or ownership interest in the spouse's earnings").

20
A Nevada spouse's interest in community property is  "present, existing, and equal." Nev. Rev. Stat. S 123.225  (1997). Under Nevada law, property acquired during marriage  is presumed to be community property, and the presumption  can be rebutted only by clear and convincing evidence. See  Breliant v. Preferred Equities Corp., 918 P.2d 314, 318 (Nev.  1996); Pryor v. Pryor, 734 P.2d 718, 719 (Nev. 1987). Further, "the opinion of the spouses as to whether the property  was separate is of "no weight whatever." Peters v. Peters, 557  P.2d 713, 716 (Nev. 1976).

21
The Hardys were married in Nevada, and Mr. Hardy  worked and earned income during their marriage in Nevada.  Therefore, under Mitchell, Hardy is liable for federal income  tax on one-half of Mr. Hardy's income unless she can show that one of Nevada's exceptions apply by clear and convincing evidence.

22
Nevada recognizes four exceptions to the presumption  of community property, which are: (1) an agreement in writing between the spouses, which is effective only between  them, (2) a decree of separate maintenance issued by a court  of competent jurisdiction; (3) a written agreement from one  spouse to another to permit that spouse to maintain his or her  own earnings; (4) a court decree or an agreement to divide  property when one spouse is institutionalized. See Nev. Rev.  Stat. S 123.220 (1997).

23
None of the exceptions is at issue here. Hardy only  presented evidence that she and Mr. Hardy had an oral agreement and kept their property separate. These facts, even if  proven, are legally insufficient under Nevada law.4 Because  Hardy failed to show that the 1984 and 1985 notices of tax  deficiency were arbitrary or erroneous, we affirm the deficiencies as determined by the Tax Court.

24
For similar reasons, the Tax Court's findings as to the  1983 tax deficiencies were correct. The Commissioner met its  burden of proving the 1983 tax deficiency by introducing evidence of the IRS's calculations based on income statements  received from Mr. Hardy's employer and his bank, along with  Hardy's stipulation that the IRS had received income statements regarding Mr. Hardy's earnings. Because the only evidence Hardy introduced was evidence of an oral agreement, the Tax Court correctly held that Hardy owed taxes in the  amount assessed by the IRS for tax year 1983.

IV

25
Hardy does not qualify for the "innocent spouse  provisions" enacted to protect spouses in community property  states. See 26 U.S.C. S 66. Section 66 of the Internal Revenue Code contains three provisions by which a spouse living in a  community property state may be able to avoid paying  income tax on the other spouse's income or earnings if that  spouse did not receive the benefit of the community income.5

26
Subsection (b) allows the Secretary of the Treasury to  charge a community state taxpayer the tax on his or her entire  income if he or she "acted as if solely entitled to such income  and failed to notify [his or her] spouse" of the income prior  to the due date for filing taxes for that tax year. See id.  S 66(b). Section 66(b) is applicable to taxable years after  December 31, 1984. See The Deficit Reduction Act of 1984,  Pub. L. No. 98-369, S 424(c) (1984). Therefore, Hardy cannot  qualify for innocent spouse protection for tax years 1983 and  1984 under S e66(b). In addition, by its plain language, subsection (b) is not a relief provision, but one that gives the Secretary the discretion to disallow a community property  taxpayer from taking advantage of community property laws  to the detriment of the taxpayer's spouse. Thus, subsection (b)  does not afford Hardy an "innocent spouse" remedy for tax  year 1985.

27
Subsection (c) of S 66 provides tax relief for an innocent spouse if the following criteria are met:

28
(1) an individual does not file a joint return for any taxable year, (2) such individual does not include in gross income for such taxable year an item of community income properly includible therein . . . , (3) the individual establishes that he or she did not know of, and had no reason to know of, such item of community income, and (4) taking into account all facts and circumstances, it is inequitable to include such item of community income in such individual's gross income . . . .

29
26 U.S.C. S 66(c).

30
The Tax Court held that subsection (c) was inapplicable because Hardy knew or "had reason to know " of the  income earned by Mr. Hardy. "[A] spouse's unawareness of  the exact amount of an item of community income is not  determinative of knowledge for purposes of S 66(c); knowledge of an `item of community income' is determined with  reference to knowledge of a particular income-producing  activity." McGee v. Commissioner, 979 F.2d 66, 70 (5th Cir.  1992). Because Hardy was aware that Mr. Hardy was  employed and earning income, she had reason to know of the taxable income. See id.; Roberts v. Commissioner, 860 F.2d  1235, 1239-40 (5th Cir. 1988). Thus, the Tax Court properly  concluded that she did not qualify for innocent spouse treatment under S 66(c).

V

31
The Tax Court properly allocated the burden of proof and  applied the presumption of correctness to the IRS's notices of  tax deficiencies. The Tax Court also correctly held that (1)  Hardy had failed to prove she was entitled to an exception  from Nevada's community property laws, and (2) she was not  entitled to innocent spouse protection.

32
AFFIRMED.

Notes:

1
 The Honorable Barry T. Moskowitz, United States District Judge for the Southern District of California, sitting by designation.

2
 Recently, Congress made two substantive statutory changes concerning  the presumption of correctness accorded notices of tax deficiencies: the  addition of 26 U.S.C. S 6201(d) in 1996 and the addition of 26 U.S.C.  S 7491 in 1998. However, neither is relevant to this appeal.

3
 Hardy also argues that the burden was on the Commissioner and cites  to Tax Court Rule 142(d). Rule 142(d) states that the Commissioner has  the burden to show that a petitioner is liable for taxes as a transferee of  property. See Tax Court R. 142(d). This provision does not apply because  Nevada's community property laws grant each spouse a one-half vested  interest in the other spouse's income upon receipt. See Nev. Rev. Stat.  SS 123.220, 123.225 (1997). Thus, Mr. Hardy did not "transfer" his  income to Hardy, she owned it upon receipt by Mr. Hardy.

4
 Under Nevada law, agreements between spouses regarding property  are not effective against third party creditors unless recorded. See Nev.  Rev. Stat. SS 123.220, 123.280, 123.290, 123.300 (1997). Moreover, the  Tax Court found that Hardy failed to prove the existence of an oral contract by the requisite clear and convincing evidence. Indeed, the Tax Court  found that Hardy and her witnesses were uncredible, presented contradicting evidence, and that the testimony did not establish the existence of an  oral agreement. The court specifically referenced: (1) Mr. Hardy's testimony at a deposition that there was no agreement between he and Hardy  to maintain their property separately, (2) Hardy's testimony that she knew  Mr. Hardy had income during the years in question, and (3) the Hardys  testimony that Mr. Hardy used at least some of his income for joint household expenses.

5
 Subsection (a) of S 66 applies when the spouses have been living apart.  See 26 U.S.C. S 66(a). Because there is no evidence in the record that the  Hardys lived apart, 26 U.S.C. S 66(a) does not apply.