IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 17, 2008
No. 07-20592
Charles R. Fulbruge III
Clerk
GINA E. GRAY,
Plaintiff-Appellant,
v.
UNITED STATES OF AMERICA, DEPARTMENT OF TREASURY,
INTERNAL REVENUE SERVICE
Defendant-Appellee.
Appeal from the United States District Court for
the Southern District of Texas, Houston Division
Before GARZA and ELROD, Circuit Judges, and HICKS, District Judge.*
JENNIFER W. ELROD, Circuit Judge:
Plaintiff-Appellant Gina Gray (“Gray”) appeals the district court’s
summary judgment in her “innocent spouse” action to recover portions of tax
overpayments applied to her husband’s separate tax liability. Finding no error,
we affirm.
I. Facts and Proceedings
Gray and her husband filed joint personal federal income tax returns for
the tax years 1994 through 1997. They litigated their tax liability for those
years in the United States Tax Court, resulting in a series of stipulated decisions
*
District Judge of the Western District of Louisiana, sitting by
designation.
No. 07-20592
in which Gray’s husband was deemed liable for certain tax deficiencies but Gray
was held to be an “innocent spouse” pursuant to 26 U.S.C. § 6015. The
stipulated decision for tax year 1994 found a deficiency of more than $200,000.
Because of the operation of section 6015, Gray’s husband was solely liable for
this deficiency.
Gray and her husband continued to file joint tax returns and reported
overpayments for the 1998, 1999, 2001, 2002, and 2003 tax years. The IRS
applied all of these overpayments, totaling more than $20,000, to the 1994
deficiency. In 2005, Gray filed a claim with the IRS seeking a refund of her
interest in the overpayments. The IRS conceded that it should not have applied
Gray’s interest in the overpayments to the 1994 deficiency, for which Gray’s
husband was solely liable, and refunded a portion of the overpayments to Gray.
She nonetheless sued the IRS, alleging that its calculation of her interest in the
overpayments failed to account properly for Texas community property law.
Specifically, Gray claimed that in determining her sole management community
property interest in the overpayments, the IRS should have made the “separate
tax formula allocation . . . upon the basis of the spouse who earned the income
and not upon the basis of a community property split.” She sought actual
damages of $4,280.
Gray and the IRS filed cross-motions for summary judgment. Gray
conceded that under Texas law the IRS was entitled to offset the following
against her husband’s separate tax liability: (1) all joint management community
property; (2) all of his sole management community property; and (3) half of
Gray’s sole management community property. She further agreed with the IRS
that to determine her sole management community property interest in the
overpayments, the IRS had to calculate her hypothetical separate tax liability
for each year at issue. The single disputed issue before the district court was
how Gray’s separate tax liability should be calculated—Gray argued that it
should be calculated based on the wages she personally earned, and the IRS
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argued that it should be calculated based on fifty percent of all community
income. The district court, in a thorough and well-reasoned order, agreed with
the IRS:
[Gray] proposes an alternative method, under which she is
responsible for paying tax on the income she personally generated,
i.e., her sole management community property. Because [Gray]
earned less than her husband over the relevant period, her approach
thus minimizes her share of the tax liability in the disputed years.
As a result, she contends, she substantially overpaid her share of
the taxes due and thus claims larger portions of the overpayments
as her sole management community property. . . . [Gray’s] proposed
method of calculation is not supported by the IRS’s revenue rulings
or any other legal authority.
The court accordingly entered judgment for Gray in the amount of $401.84 plus
prejudgment and post-judgment interest. Gray appeals the district court’s
decision.
II. Standard of Review
We review de novo the district court’s summary judgment determination
of Gray’s sole management community property interest in the tax
overpayments at issue. See Ragan v. Comm’r, 135 F.3d 329, 333 (5th Cir. 1998)
(citing Vinson & Elkins v. Comm’r, 7 F.3d 1235, 1237 (5th Cir. 1993)).
III. Discussion
A. The Issue on Appeal
In Texas, marital property consists of all property that a spouse brings to
the marriage or acquires during the marriage. Marital property can be
characterized as separate, community, or mixed. See Hilley v. Hilley, 342 S.W.2d
565, 567 (Tex. 1961); Gleich v. Bongio, 99 S.W.2d 881, 883 (Tex. Comm’n App.
1937). Community property in turn can be characterized as joint management
community property or sole management community property. A spouse’s sole
management community property includes his or her “(1) personal earnings; (2)
revenue from separate property; (3) recoveries from personal injuries; and (4) the
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No. 07-20592
increase and mutations of, and the revenue from, all property subject to the
spouse’s sole management, control and disposition.” Tex. Fam. Code Ann.
§ 3.102 (Vernon 2006). Community property not subject to the sole
management, control, and disposition of one spouse is joint management
community property.
The tax overpayments at issue in this case were withheld from wages that
Gray and her husband earned during their marriage and are thus community
property. See id. §§ 3.001, 3.002. More specifically, a portion of each
overpayment is Gray’s sole management community property, and a portion is
her husband’s sole management community property. See id. § 3.102. As Gray
acknowledges, the IRS is entitled to offset against her husband’s separate tax
liability (1) all joint management community property; (2) all of his sole
management community property; and (3) half of Gray’s sole management
community property. See id. § 3.202(c) (providing that a creditor may satisfy a
debt from all community property subject to the liable spouse’s sole or joint
management, control, and disposition); Medaris v. United States, 884 F.2d 832,
833–34 (5th Cir. 1989) (holding that the IRS may reach half of a non-liable
spouse’s sole management community property to satisfy a liable spouse’s tax
debt). The only issue the parties dispute is how to determine the portion of each
overpayment that is Gray’s sole management community property.
Revenue Ruling 2004-74 sets out a five-step process for determining how
much of an overpayment reported on a joint tax return the IRS may apply
against one spouse’s separate tax liability if the spouses are domiciled in Texas.1
As the government explains in its brief, those steps are as follows: (1) determine
1
Although not binding precedent, courts “generally accord significant
weight to the determinations of the IRS in its revenue rulings.” St. David’s
Health Care Sys. v. United States, 349 F.3d 232, 239 n.9 (5th Cir. 2003). But cf.
Mercantile Bank & Trust Co. v. United States, 441 F.2d 364, 368 (8th Cir. 1971)
(holding that conflicts between a revenue ruling and a statute must be resolved
by the statute).
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No. 07-20592
the underlying source of the overpayment, such as withholding and estimated
tax payments or other credits; (2) characterize the underlying source of the
overpayment as either separate or community property, because the
overpayment will be characterized in the same manner as its source; (3) offset
the liable spouse’s share of the overpayment from a community property source
against the liable spouse’s separate tax liability; (4) determine whether, under
Texas law, the IRS can reach any additional portion of the overpayment from a
community property source; and (5) determine whether, under Texas law, the
IRS can reach any portion of the overpayment from a separate property source
of the liable or non-liable spouse. The application of steps 1, 2, and 3 in the
present case is undisputed: the overpayments at issue are community property,
and the IRS is entitled to offset at least fifty percent of the overpayments against
the separate tax liability of Gray’s husband. Step 5 is inapplicable, as none of
the overpayments was made from a separate property source. The parties’
disagreement relates only to step 4—determining what portion of each
overpayment in excess of fifty percent, if any, the IRS can offset against the
separate tax liability of Gray’s husband.2
B. The District Court’s Decision
Revenue Ruling 2004-74 provides that “[t]he amount of the spouse’s
interest in the overpayment is calculated by subtracting the spouse’s share of the
joint tax liability, determined under a separate tax formula, from the spouse’s
contribution towards the joint tax liability.” The revenue ruling further provides
that a spouse’s share of the joint tax liability is calculated as follows:
Spouse’s Separate Tax
--------------------------------------------------- x Joint Tax Liability Reported on Return
Total of Both Spouses’ Separate Tax
2
Gray’s appeal addresses only this narrow issue. We neither approve nor
disapprove any other aspect of Revenue Ruling 2004-74.
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No. 07-20592
The hypothetical “spouse’s separate tax” in this formula is the tax the spouse
would have owed had she filed a separate return, rather than a joint return.
Because Texas is a community property state, the district court assumed
in its calculations that if Gray had filed separate tax returns for the relevant tax
years, she would have had to pay taxes on fifty percent of the community’s
income in each year. This hypothetical assumption is consistent with firmly
established legal precedent: “Under the laws of Texas each spouse has a vested
interest and is owner of half of the community property and is therefore liable
for federal income taxes on such a share. There is therefore the obligation, not
merely the right, to report half the community income.” Bowling v. United
States, 510 F.2d 112, 113 (5th Cir. 1975) (citations and internal quotation marks
omitted). Nevertheless, Gray argues that the court erred in calculating her
hypothetical separate tax liability based on fifty percent of community income.
Relying on Ragan v. Commissioner, 135 F.3d 329 (5th Cir. 1998), and Reed v.
Lummus (In re Lummus), 90 A.F.T.R.2d 2002-5440 (Bankr. N.D. Tex. Nov. 21,
2000), Gray asserts that the court should instead have calculated her separate
tax liability based only on the income she personally received.
Ragan provides no support for Gray’s position. In that case, Jackie and
David Ragan filed a joint return for the 1980 tax year. 135 F.2d at 331. All of
the income reported on the return derived from Mr. Ragan’s employment. Id.
After Mr. Ragan filed for bankruptcy, the trustee of his bankruptcy estate
asserted a claim against the IRS for approximately $109,000, the full amount of
the refund Mr. and Mrs. Ragan sought for 1980; after litigation, the IRS paid the
claim. Id. at 332. Mrs. Ragan subsequently filed a claim against the IRS in the
United States Tax Court for fifty percent of the refund the IRS had paid to the
bankruptcy trustee. Id. The tax court held that Mrs. Ragan was not entitled to
any portion of the refund. Id.
On appeal, we affirmed the tax court’s decision, noting that “the 1980
refund derived solely from the excess withholding of [Mr. Ragan’s] personal
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No. 07-20592
earnings.” Id. at 333. Applying the rule that “overpayments by married couples
are apportionable to each spouse to the extent that he or she contributed to the
overpaid amount,” we held that this fact foreclosed Mrs. Ragan’s claim. Id.
(citation and internal quotation marks omitted). Because Mr. Ragan’s personal
earnings comprised all of the couple’s income during the relevant tax year,
however, Ragan did not require resolution of the question presently before the
court—how to calculate an innocent spouse’s share of a joint tax liability for a
tax year in which both spouses have income. Ragan thus has no bearing on the
proper resolution of Gray’s appeal.
Lummus, however, does provide some support for Gray’s position. After
Lucky Lummus filed for bankruptcy, the trustee of his bankruptcy estate filed
an adversary proceeding against him and his wife, Teresa Lummus, seeking
turnover of a refund check they had received for the 1998 tax year. 90
A.F.T.R.2d at 2002-5440. In calculating Mrs. Lummus’s interest in the refund,
the bankruptcy court relied on Ragan for the proposition that her share of the
couple’s joint tax liability was directly proportional to her personal earnings:
The [Lummuses’] tax liability for 1998 was $5,534.00. As Mrs.
Lummus’ earnings accounted for 84.68% of the total earnings, she
was responsible for 84.68% of the total taxes owed for 1998, or
approximately $4,686.00, while the Debtor was responsible for the
remaining 15.32% of the taxes owed, or approximately $848.00.
Id. at 2002-5441. This analysis, however, is unsupported by Ragan and
inconsistent with Bowling’s holding that a spouse domiciled in Texas has “the
obligation, not merely the right, to report half the community income.” 510 F.2d
at 113. The district court’s analysis in the present case, by contrast, is
consistent with our precedent and Revenue Ruling 2004-74. We therefore hold
that the district court did not err in calculating Gray’s share of her and her
husband’s joint tax liability.
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No. 07-20592
IV. Conclusion
For the reasons set forth above, we AFFIRM the judgment of the district
court.
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