T.C. Memo. 1996-165
UNITED STATES TAX COURT
ANNE C. SOMERVILL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14222-93. Filed April 1, 1996.
A. Kelly Williams, for petitioner.
Wanda M. Cohen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FAY, Judge: Respondent determined deficiencies in Federal
individual income tax against petitioner as follows:
Additions to Tax and Increased Interest
Sec. Sec.
Year Deficiency 6621(c) 6659
1
1976 $1,682 --
1
1977 37,851 --
1
1978 36,933 --
1
1979 31,606 --
1
1980 21,615 --
1
1981 25,967 $7,790
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1
1982 34,128 10,255
1
To be determined.
All section references are to the Internal Revenue Code in
effect for the taxable years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure, unless
otherwise indicated.
After concessions, the issue for decision is whether
petitioner qualifies as an innocent spouse with respect to any
portion of the income tax deficiencies.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation and the attached exhibits are incorporated herein
by this reference.
Petitioner resided in Harlingen, Texas, at the time the
petition was filed. Petitioner and her then husband, Robert C.
Somervill,1 filed joint Federal income tax returns for all of the
years in issue. Respondent issued a notice of deficiency on
April 2, 1993, for the tax years 1976 through 1982. Respondent's
notice of deficiency disallowed in full the ordinary losses from
an investment in Oxnard Properties, a partnership, claimed by
petitioner and Robert Somervill on their joint Federal income tax
returns for certain of the years in issue. Additionally, the
notice disallowed an investment tax credit carryback from 1979 to
1
Petitioner and Robert C. Somervill divorced in 1985 but
were married throughout the years in issue.
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1976 in the amount of $1,682. Furthermore, the notice disallowed
the ordinary losses claimed from an investment in Progressive
Properties, a partnership, in the years 1980, 1981, and 1982.
Petitioner was raised in a small town of 1,500 people. She
completed high school and continued on to junior college for 2
years. Petitioner then attended Northwestern University in
Evanston, Illinois, and was awarded a bachelor of arts degree in
psychology. Immediately after completing college, petitioner
worked at Northwestern University's medical school answering
phones in the registrar's office.
Petitioner met and married Robert Somervill, a medical
student at Northwestern University, in 1957. Their first child
was born 13 months thereafter, in 1959, their second in 1962,
their third in 1964, and twins in 1965. Petitioner and her
family moved to San Benito, Texas, in 1967 and remained there for
all of the years in issue.
In 1977, petitioner received her real estate license and
began working in a real estate office as an agent. Petitioner
testified that she was not a successful agent, and that her first
sale took place in 1983. However, a joint Federal income tax
return filed for the 1977 tax year reflects a net profit from
petitioner's real estate activity. In 1983, petitioner became a
real estate broker, the requirements for which are more
burdensome than those for a real estate agent.
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Petitioner's husband worked as a physician during the years
in issue. Petitioner had very little involvement in her
husband's medical practice. She testified that her involvement
was limited to picking up a bank bag from her husband's office
and delivering it to the bank.
Petitioner maintained her own checking account during the
years in issue. Petitioner would pay for food, the family's
clothing, and gas for her car from her checking account. She
would also pay the family's utility bills out of her checking
account. When petitioner needed money to deposit in her checking
account, she would ask Pamela Mitchell, her husband's secretary,
to write her a check.
Petitioner did not live a lavish lifestyle during the years
in issue. She and her family lived in an old farmhouse that was
simply furnished. Petitioner maintained a social membership at
the Harlingen Country Club, but the record is unclear as to what
year the membership began. Petitioner was active in a garden
club during the years in issue. She even held the position of
secretary and president for 1 year.
Petitioner and her husband acquired several properties in
San Benito during the years in issue. During 1978 they acquired
the "East Jackson" property, the 1602 Sunshine Strip property,
the 1801 Sunshine property, and the 1045 South Commerce property.
In 1979, petitioner and her husband acquired property on West
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Jackson. In 1981, they acquired property at 1616 South Carolina
and, in 1982, property at 2501 North 25th Street.
During the years in issue, Tim Radder, a certified public
accountant (C.P.A.), prepared petitioner and her husband's
returns. Petitioner's husband's secretary would compile the
information needed by the C.P.A. to complete the tax returns.
Petitioner would compile the information relating to the expenses
associated with her own real estate activities and any charitable
contributions that she made. Petitioner would sign the return
when her husband's secretary called to tell her the completed
return was available. Petitioner testified that no one ever
explained to her the different deductions or schedules on her tax
return, nor did she ask anyone to explain the return or the
deductions on it. Petitioner further testified, however, that no
one prevented her from examining the returns in issue; instead,
she simply chose not to examine them.
Petitioner testified at trial that she had no knowledge of
her husband's investments in either the Oxnard Properties or
Progressive Properties partnerships. However, Sol Finkelman or a
member of his accounting firm, petitioner, and Robert Somervill
met for lunch or dinner, during which there was some discussion
of the Oxnard Properties and Progressive Properties. Petitioner
testified that she did not understand what was being discussed as
to Oxnard Properties and Progressive Properties. Nonetheless,
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petitioner testified that, while she had the opportunity to ask
questions during these meetings, she did not do so.
On July 12, 1988, a Form 906, Closing Agreement On Final
Determination Covering Specific Matters, relating to Progressive
Properties was executed. Pursuant to that agreement petitioner
agreed to be bound by the final decision in Finkelman v. Commis-
sioner, T.C. Memo 1989-72, affd. without published opinion 937
F.2d 612 (9th Cir. 1991). Also on July 12, 1988, another Form
906 was executed, this one relating to Oxnard Properties.
Pursuant to this Form 906, petitioner agreed to be bound by the
final decision in Finkelman v. Commissioner, supra. Amongst
other issues, Finkelman had at issue the deductibility of losses
from investment in Oxnard Properties and Progressive Properties.
Once again, petitioner testified that she signed the Form 906
simply because she was instructed by her husband's secretary to
do so. On February 16, 1989, this Court filed an opinion holding
that the losses generated by certain partnerships, including
Oxnard Properties and Progressive Properties, were disallowed.
Id.
OPINION
When a husband and wife file a joint Federal income tax
return, liability for the tax due is joint and several. Sec.
6013(d)(3). However, an "innocent spouse" can find relief under
the provisions of section 6013(e). In order to invoke the
provisions of section 6013(e), the spouse seeking relief must
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satisfy the following requirements: (1) That a joint return was
filed; (2) that, on the return, there is a substantial under-
statement of tax; (3) that the understatement is attributable to
grossly erroneous items of the other spouse; (4) that the spouse
seeking relief did not know, and had no reason to know, of the
substantial understatements of tax; and (5) considering all the
facts and circumstances, it would be inequitable to hold the
spouse liable for the deficiencies in income tax. Sec. 6013(e).
Failure to meet any one of the statutory requirements will
prevent petitioner from qualifying for relief under section
6013(e). Bokum v. Commissioner, 992 F.2d 1132 (11th Cir. 1993),
affg. 94 T.C. 126, 138 (1990); Purcell v. Commissioner, 826 F.2d
470, 473 (6th Cir. 1987), affg. 86 T.C. 228 (1986).
Petitioner bears the burden of proving that she is entitled
to relief as an innocent spouse under section 6013(e). Rule
142(a). The parties agree that petitioner and her then husband
filed joint Federal income tax returns for the years in issue and
that there was on each return a substantial understatement of tax
attributable to items of his. Respondent contends, however, that
petitioner is not entitled to innocent spouse relief for the
taxable years in issue because the understatements of tax on the
subject returns are not attributable to grossly erroneous items,
petitioner knew or had reason to know of the understatements, and
it is not inequitable to hold petitioner liable for the deficien-
cies in tax.
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For purposes of section 6013(e), grossly erroneous items are
defined as "any item of gross income attributable to such spouse
which is omitted from gross income," and "any claim of a deduc-
tion, credit, or basis by such spouse in an amount for which
there is no basis in fact or law." Sec. 6013(e)(2)(A) and (B);
Purcell v. Commissioner, supra at 474. Ordinarily, a deduction
has no basis in law or fact if it is "'fraudulent,' 'frivolous,'
'phony,' or 'groundless.'" Bokum v. Commissioner, supra at 1142
(quoting Stevens v. Commissioner, 872 F.2d 1499, 1504 n.6 (11th
Cir. 1989), affg. T.C. Memo. 1988-63); see Ness v. Commissioner,
954 F.2d 1495 (9th Cir. 1992), revg. 94 T.C. 784 (1990). A
deduction has no basis in fact when the expense for which it is
claimed was never, in fact, made. Douglas v. Commissioner, 86
T.C. 758, 762 (1986). A deduction has no basis in law when the
expense, even if made, does not qualify as deductible expense
under well-settled legal principles or when no substantial legal
argument can be made in support of its deductibility. Id. The
fact that the deduction has been disallowed does not, however,
dictate a finding that the deduction is "grossly erroneous".
Ness v. Commissioner, supra at 1498.
The deductions in question arose from petitioner's husband's
investment in Progressive Properties and Oxnard Properties, part-
nerships formed and managed by Sol Finkelman. The losses claimed
by Progressive and Oxnard for the years in issue, and the dis-
tributive shares of those losses claimed by one of the partners,
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were among the deductions whose deductibility was decided in a
test case. Finkelman v. Commissioner, T.C. Memo. 1989-72.
The major issue considered in Finkelman involved the tax
consequences of leveraged real estate transactions. The focus of
the Court's inquiry was whether the transactions should be
disregarded for Federal income tax purposes because they lacked
economic substance and/or were primarily tax motivated. The
Court determined that the transactions were lacking in economic
substance and profit objective and, accordingly, were not to be
respected for tax purposes. Although the deductions were not
allowed, the Court declined to sustain the section 6653(a)
negligence additions to tax against the promoter. In so holding,
the Court explained that the taxpayer's favorable financing
argument was not an "untenable" theory, that it had "some support
in the case law", and that "the claimed losses were supported by
a credible and unprecedented (albeit erroneous) theory".
Petitioner claims that the holding in Finkelman that the
transactions lacked economic substance and that there was no
profit objective mandates the conclusion that the deductions can
have no basis in law. We cannot agree with petitioner.
The Court in Finkelman acknowledged that, although the
transactions were not reasonable, "That does not, however, render
petitioner's theory untenable." Finkelman v. Commissioner,
supra. Despite the Court's rejection of the taxpayer's arguments
in that case, they were "not without some support in the case
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law." Id. Moreover, the Court stated that "the claimed losses
were supported by a credible and unprecedented (albeit erroneous)
theory". Our opinion in Finkelman makes clear that the deduc-
tions, while disallowed, were not frivolous, fraudulent, or
phony.
We find that, under the circumstances presented herein, the
deductions are not attributable to grossly erroneous items within
the meaning of section 6013(e)(2)(B). Petitioner is, therefore,
not relieved of joint liability with respect to any part of the
income tax deficiencies.
Decision will be entered for
respondent.