T.C. Memo. 1995-465
UNITED STATES TAX COURT
BARBARA A. VRINER, A.K.A. BARBARA A. COYNE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8635-94. Filed September 28, 1995.
Arthur M. Lerner, for petitioner.
John W. Duncan, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CLAPP, Judge: Respondent determined a deficiency in
petitioner's 1987 Federal income tax in the amount of $36,417.
After concessions by the parties, the sole issue for decision is
whether petitioner is entitled to relief as an innocent spouse
for the taxable year 1987. We hold that she is so entitled.
All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
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Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. We
incorporate by reference the stipulation of facts and attached
exhibits.
Petitioner resided in Champaign, Illinois, when she filed
the petition in this case. Petitioner married William S. Vriner
(Mr. Vriner) in 1980, and they obtained a divorce in 1993. From
1984 through 1987, petitioner and Mr. Vriner (the Vriners) filed
joint Federal income tax returns, and they reported no taxable
income during those years. The Vriners lived in a house acquired
by Mr. Vriner prior to their marriage. The home was located in
an older neighborhood with moderate- to low-priced homes. They
received residential services including telephone, cable TV,
garbage pickup, water, and electricity. During 1987, petitioner
had credit accounts with Amoco Oil Co., J.C. Penney, and
Bergners, and a Visa account with Chemical Bank.
Mr. Vriner, along with his parents and siblings, worked at a
restaurant owned by his parents (the Vriner restaurant). When
they first met, Mr. Vriner told petitioner that he worked at the
Vriner restaurant for a living, and he later told her that the
arrangement between him and his family's restaurant was none of
her business. Petitioner never saw a paycheck of Mr. Vriner's
from the restaurant, but she assumed that he was being paid. Mr.
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Vriner would bring money home from the Vriner restaurant, and
occasionally he would bring home groceries such as eggs, milk, or
lettuce. Petitioner was employed as a dental receptionist.
On their 1987 joint return, the Vriners reported on Schedule
E rental income and expenses from real estate. Mr. Vriner told
petitioner that he owned the rental property with his brother,
but petitioner knew little else about the property.
By 1987, the Vriners had closed their joint checking account
because, when Mr. Vriner would take the checkbook to the Vriner
restaurant, members of the Vriner family would write checks on
the account. After closing the checking account, petitioner paid
their bills either in cash or with a money order.
Mr. Vriner leased a car and told petitioner that he would
take care of the payments in the amount of $266.84 per month. In
June 1987, petitioner's father gave petitioner a 1977 Pontiac
Bonneville. The Vriners had one child, and once or twice during
their marriage they traveled to California to visit petitioner's
parents. They rarely traveled on weekends or went out to dinner.
Mr. Vriner purchased no expensive items for the home.
In 1988, Federal agents conducted a search of the Vriners'
home. During the search, petitioner learned that her husband was
under investigation for narcotics activities. No narcotics were
found during the search, and petitioner had no knowledge of her
husband's narcotics activities prior to the search. Although Mr.
Vriner had prior arrests for driving under the influence, those
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arrests all involved alcohol and not narcotics. Petitioner had
never seen any narcotics in their home.
Mr. Vriner subsequently was arrested, but he did not discuss
his arrest with petitioner. After reading the newspaper and
attending her husband's court appearances, petitioner learned
that Mr. Vriner and his brother had been trafficking in
narcotics, and they stored the narcotics in a warehouse located
in Urbana, Illinois. The deficiency in this case stems from the
proceeds of the Vriner brothers' drug activities.
OPINION
Spouses filing a joint return are jointly and severally
liable for the tax arising therefrom. Sec. 6013(d)(3). The
innocent spouse rule permits a spouse to avoid joint and several
liability in certain cases. Sec. 6013(e). For petitioner to
qualify as an innocent spouse, it must be established: (1) That
a joint return was filed for the year in issue; (2) that there
was a substantial understatement of tax attributable to grossly
erroneous items of Mr. Vriner; (3) that, in signing the return,
she did not know or have reason to know of the substantial
understatement; and (4) that taking into account all the facts
and circumstances, it would be inequitable to hold her liable for
the deficiency. Sec. 6013(e)(1)(A)-(D). Petitioner has the
burden of proving each requirement of section 6013(e). Rule
142(a); Russo v. Commissioner, 98 T.C. 28, 31-32 (1992). A
failure to meet any one of the requirements will preclude the
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spouse from relief. Stevens v. Commissioner, 872 F.2d 1499, 1504
(11th Cir. 1989), affg. T.C. Memo. 1988-63; Bokum v.
Commissioner, 94 T.C. 126, 138 (1990), affd. 992 F.2d 1132 (11th
Cir. 1993). It is undisputed that the Vriners filed a joint
return and that the return contained a substantial understatement
of tax attributable to grossly erroneous items of Mr. Vriner.
Respondent argues, however, that petitioner knew or had reason to
know of the substantial understatements, and that it would not be
inequitable to hold her liable for the deficiency.
Petitioner testified that she signed the 1987 Federal income
tax return after being directed to do so by Mr. Vriner, and we
are convinced that petitioner was not familiar with the contents
of the return. We find that petitioner had no actual knowledge
of the substantial understatement of tax and, indeed, had no
knowledge of her husband's alleged narcotics activities prior to
the search of their home in 1988. Thus, we must ascertain
whether she had reason to know of the substantial understatement
of tax.
A taxpayer has reason to know of a substantial
understatement of tax if a reasonably prudent taxpayer in his or
her position could be expected to know that the stated tax
liability was erroneous or that further investigation was
warranted. Kistner v. Commissioner, 18 F.3d 1521, 1525 (11th
Cir. 1994), revg. and remanding T.C. Memo. 1991-463; Stevens v.
Commissioner, supra at 1505; Bokum v. Commissioner, supra at 153.
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If the substantial understatement of tax is attributable to an
omission of income, the spouse seeking relief has reason to know
of the understatement if he or she has reason to know of the
transaction that gave rise to the understatement. Guth v.
Commissioner, 897 F.2d 441, 444 (9th Cir. 1990), affg. T.C. Memo.
1987-522; Smith v. Commissioner, 70 T.C. 651, 673 (1978). We may
impute to the spouse seeking relief constructive knowledge of the
transaction if he or she turned a blind eye to facts within his
or her reach that would have put a reasonably prudent taxpayer on
notice to inquire further. McCoy v. Commissioner, 57 T.C 732,
734 (1972).
In determining whether the spouse seeking relief had reason
to know of the substantial understatement of tax, courts
generally consider, among other factors, the spouse's level of
education and involvement in the financial and business
activities of the family. There is no information in the record
concerning petitioner's educational background. Petitioner did
not participate in the family's financial affairs other than
paying assorted bills, and there is evidence that petitioner was
not privy to any aspect of the Vriner family restaurant. Nor did
petitioner have any knowledge of her husband's alleged drug
activities prior to 1988 when Federal agents searched their home.
Respondent argues that petitioner had reason to know because
the income reported on the Vriners' 1987 return was inadequate to
meet the family expenses. Petitioner testified that she thought
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the Vriner family was paying some of their expenses such as the
house payment. Petitioner's belief is reasonable in light of Mr.
Vriner's close ties with his family and the family business,
coupled with the fact that she was privy to no financial
information. Mr. Vriner reported income from rental property and
also received money from the Vriner restaurant, and petitioner
reasonably could conclude that Mr. Vriner used those funds to
satisfy their monthly expenditures. There were no unusual or
lavish expenditures. Thus, we conclude that petitioner did not
know or have reason to know of the substantial understatements.
In determining whether it would be inequitable to hold
petitioner jointly liable for the deficiency in tax for 1987, we
consider whether she significantly benefited from the
underpayments of tax. Estate of Krock v. Commissioner, 93 T.C.
672, 677 (1989). Any benefit received by petitioner must be
considered in the totality of the circumstances. Busse v. United
States, 542 F.2d 421, 427 (7th Cir. 1976). Petitioner received
very little, if any, benefit from the funds that gave rise to the
deficiency in this case. Petitioner lived a modest lifestyle and
made no extravagant expenditures. Any benefit she received was
in the form of necessities and normal support, with the possible
exception of the two trips to California to visit her parents.
Normal support is not considered a significant benefit. Belk v.
Commissioner, 93 T.C. 434, 440 (1989). We conclude that it would
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be inequitable to hold petitioner liable for the deficiencies.
We hold that petitioner qualifies as an innocent spouse.
Decision will be entered
for petitioner.