T.C. Memo. 1997-288
UNITED STATES TAX COURT
DENNIS E. PEWITT and KATHLEEN M. PEWITT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24188-88. Filed June 25, 1997.
Kathleen M. Pewitt, pro se.
Michelle K. Loesch, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: Respondent determined the following
deficiencies in, additions to, and increased interest on
petitioners' Federal income taxes:
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Additions to Tax
Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6621(c) Sec. 6659
1980 $ 480 $ 24 --- --- ---
1
1981 931 47 --- ---
1
1982 543 27 --- ---
1 2
1983 4,357 218 $1,121
1 2
1984 4,889 244 1,467
1
50 percent of the interest due on $931 for 1981, $543 for 1982, $3,735
for 1983, and $4,889 for 1984.
2
120 percent of the interest due on $3,735 for 1983, and $4,889 for 1984.
Pursuant to the Tax Reform Act of 1986, sec. 1151(c)(1), Pub. L. 99-514, 100
Stat. 2744, former sec. 6621(d) was redesignated as sec. 6621(c).
The deficiencies in this case arise from the disallowance of
Schedule E losses and investment tax credits claimed by petitioners
with respect to their investment in two partnerships--Media
Marketers Limited Partnership (Media Marketers) and Assured
Communications Limited Partnership (Assured Communications)--both
of which engaged in so-called jingle transactions that this Court
determined lacked economic substance. See Pacific Sound Prod. Ltd.
Partnership v. Commissioner, T.C. Memo. 1993-253. Petitioners
concede the deficiencies. Moreover, the parties have reached a
settlement with respect to the additions to tax. Petitioner
Kathleen M. Pewitt (Mrs. Pewitt), however, contests her liability
for tax, claiming that she is an innocent spouse. Thus, the sole
issue to be resolved herein is whether Mrs. Pewitt is entitled to
tax relief as an innocent spouse pursuant to section 6013(e). For
the reasons discussed, we hold she is not.
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All section references are to the Internal Revenue Code as in
effect for the years under consideration. All Rule references are
to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts and attached exhibits are incorporated herein
by this reference.
Petitioners were married in December 1971 and divorced in
October 1986. They timely filed joint Federal income tax returns
for 1980, 1981, 1982, 1983, and 1984, the years under
consideration. They resided in Escondido, California, at the time
the petition in this case was filed.
Mrs. Pewitt (hereinafter sometimes referred to as petitioner)
has a high school education; she did not attend college. Upon
graduating from high school in 1967, she worked as a dental
assistant. She married Dennis Pewitt (Mr. Pewitt) when she was 22
years of age. She continued working as a dental assistant for 4
years following her marriage and then attended John Mycut School of
Real Estate, where she obtained a real estate license. Thereafter,
she sold residential real estate for approximately 2 years. She
stopped working when she had her first child in 1978.
Mr. Pewitt's education was similar to that of Mrs. Pewitt
except he took several courses at Everett Community College. He
began employment as a dispatcher for the police department, where
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he worked for approximately 8 years. He also obtained a real
estate license, and in 1980 left the police department and began
selling real estate.
Petitioner's role in the marriage was to care for the home and
children. She took responsibility for the household finances, and
Mr. Pewitt was responsible for the family's financial support.
Throughout their marriage, petitioners' bank accounts were in joint
names.
Financially, the early years of petitioners' marriage were
lean and worrisome. Their financial situation improved when, in
1981, Mr. Pewitt went to work for Transamerica Title Insurance Co.
as a branch manager. In 1982, Continental Mortgage offered Mr.
Pewitt employment at double his Transamerica Title salary; Mr.
Pewitt accepted the offer.
Because of the dramatic increase in his salary, Mr. Pewitt
believed petitioners needed tax "write-offs"; thus, he consulted
Ron W. Colwill, a certified financial planner. Messrs. Pewitt and
Colwill met twice. The first meeting was a "get acquainted
meeting", at which Messrs. Pewitt and Colwill discussed Media
Marketers. Mr. Colwill clarified certain erroneous information
given to Mr. Pewitt by one of Media Marketers' general partners.
(Mr. Colwill was the other general partner of Media Marketers.)
Mr. Colwill advised Mr. Pewitt to discuss with Mrs. Pewitt the
possibility of petitioners' making an investment in Media Marketers
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and told him that if the Pewitts wished to make such an investment,
they should jointly meet with him.
At the second meeting, Mr. Colwill discussed with Mr. and Mrs.
Pewitt the risks and rewards of an investment in Media Marketers,
including tax ramifications. Mr. Colwill gave the Pewitts a
prospectus; both Mr. and Mrs. Pewitt "looked" at the prospectus but
did not understand its content. As Mr. Pewitt testified: "It was
way over our heads at that point."
Mr. and Mrs. Pewitt jointly became limited partners of Media
Marketers in 1983 and partners of Assured Communications in 1984.
(Although the record is scant with respect to Assured
Communications, it appears that petitioners' investment in that
partnership was made through Mr. Colwill, who followed the same
procedures with regard to Mr. and Mrs. Pewitts' investment in
Assured Communications as he had done with their investment in
Media Marketers.)
Mrs. Pewitt signed the initial investment documents relating
to both Media Marketers and Assured Communications. She was listed
on the Forms K-1 issued by the partnerships as a partner.
Subsequent to petitioners' divorce in 1987, and prior to the filing
of the petition in this case, she wrote Mr. Colwill requesting
then-current information about Media Marketers and Assured
Communications.
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During 1983 and 1984, petitioners constructed a home costing
approximately $400,000; petitioner assumed responsibility (as
between the Pewitts) for the project.
Petitioners' investment in Media Marketers and Assured
Communications resulted in their receiving joint tax refunds for
years 1980 through 1984, totaling more than $12,000. Additionally,
petitioners were able to shield approximately 50 percent of their
gross wages in 1984 and 1985 with the losses attributable to their
investments in the two partnerships.
In 1986, Mr. Pewitt purchased for petitioner a Corvette
automobile and a $6,000 diamond ring. Upon the Pewitts' divorce,
neither took assets of any substance from the marriage, and in fact
both subsequently declared bankruptcy.
OPINION
Spouses who file a joint return generally are jointly and
severally liable for its accuracy and the tax due, including any
additional taxes, interest, or penalties determined on audit of the
return. Sec. 6013(d)(3). However, pursuant to section 6013(e), a
spouse (commonly referred to as an innocent spouse) can be relieved
of tax liability if that spouse proves: (1) A joint return was
filed; (2) the return contained a substantial understatement of tax
attributable to grossly erroneous items of the other spouse; (3) in
signing the return, the spouse seeking relief did not know, and had
no reason to know, of the substantial understatement; and (4) it
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would be inequitable to hold the relief-seeking spouse liable for
the deficiency attributable to the understatement. Sec.
6013(e)(1). The spouse seeking relief bears the burden of proving
that each of the four requirements has been satisfied. In other
words, failure to prove any one of the statutory requirements will
prevent innocent spouse relief. Bokum v. Commissioner, 94 T.C.
126, 138-139 (1990), affd. 992 F.2d 1132 (11th Cir. 1993).
The parties stipulated that petitioner and Mr. Pewitt filed
joint returns for 1980 through 1984 and that petitioners' 1981,
1982, 1983, and 1984 returns contained a substantial understatement
of tax due to a grossly erroneous item.
With respect to tax year 1980, the deficiency in income tax is
$480. This amount ($480) does not constitute a "substantial
understatement". A substantial understatement is an
understatement, as defined in section 6662(d)(2)(A), which exceeds
$500. Sec. 6013(e)(3). Section 6662(d)(2)(A) defines an
"understatement" as the excess of the amount of tax required to be
shown on the return over the amount of tax imposed which is shown
on the return, reduced by any rebate. Consequently, because there
is no substantial understatement involved for 1980, petitioner is
precluded from obtaining relief as an innocent spouse under section
6013(e) for that year.
We also hold that petitioner is not entitled to innocent
spouse relief for the other years under consideration, namely 1981
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through 1984. The evidence establishes that petitioner was a
limited partner in both Media Marketers and Assured Communications.
She signed documents authorizing the investments, and Forms K-1
were issued naming both petitioner and her husband as partners in
the limited partnerships. Petitioner attended a meeting in which
she was informed about the tax risks and rewards of making an
investment in the limited partnerships, and she acquiesced in
becoming a partner with her husband. See Hayman v. Commissioner,
992 F.2d 1256 (2d Cir. 1993), affg. T.C. Memo. 1992-228; Feldman v.
Commissioner, 20 F.3d 1128 (11th Cir. 1994), affg. T.C. Memo. 1993-
17.
Although petitioner may not have understood the technical tax
nuances involved in petitioners' investment in the two limited
partnerships, we believe she knew (1) that such investments would
enable petitioners to claim substantial deductions and tax credits
that would result in the reduction of the amount of taxes
petitioners otherwise would owe, and (2) that the Internal Revenue
Service might disallow these deductions and tax credits upon audit
of petitioners' returns.
Petitioner asserts she is an "ignorant spouse". But as the
United States Court of Appeals for the Ninth Circuit (where an
appeal of this case would lie) has said: "Of itself, ignorance of
the attendant legal or tax consequences of an item which gives rise
to a deficiency is no defense for one seeking to obtain innocent
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spouse relief." Price v. Commissioner, 887 F.2d 959, 964 (9th Cir.
1989). Further, there is no apparent difference between
petitioner's and Mr. Pewitt's knowledge of the investment. Suffice
it to say, neither petitioner nor Mr. Pewitt fully grasped the
nature and risks of the investments. See McCoy v. Commissioner, 57
T.C. 732 (1972). But they both attended a meeting with Mr. Colwill
where he explained the potential tax benefits and risks of the
investments. Moreover, petitioner and Mr. Pewitt discussed the tax
returns involved and the refunds they were to receive.
Additionally, we do not believe it would be inequitable to
hold petitioner liable because she shared with her husband the tax
benefits resulting from the claimed deductions and credits.
To conclude, we hold that petitioner is not entitled to
innocent spouse relief for any of the years under consideration.
To reflect the foregoing and the parties' settlement with respect
to the additions to tax,
An appropriate Decision
will be entered.