Attorney-at-Law

HIS AND HERS

In Uncategorized on 03/26/2014 at 00:16

No, not the Neiman-Marcus helicopters and similar spousal toys of yore, but rather the tax items of spouses on joint returns, and how to put these asunder.

It’s a small-claimer, Stephen D. Bowerman and Jani A. Bowerman, 2014 T. C. Sum. Op. 26, filed 3/25/14, from the desk of Judge Goeke.

Steve has some dodgy deductions and costs of good sold in his construction business, and Jani hasn’t reported some income, so the combined Bowerman outlook isn’t too bright. But Steve finds some documentation for some of what he claims.

And Jani wants to bail on Steve’s shenanigans. They’re still married, but Section 6015(b) is there to help.

Jani is out of luck as regards her own items (interest and dividends paid to her) and some unemployment comp to Steve, because Jani can’t prove she had no way of knowing about this.

But she does get lucky about Steve’s business stuff, and that’s the moral of this story, how to use Section 6015(b) to help the unknowing spouse. You can’t cite the case, but you can sure use the reasoning and the cases Judge Goeke does cite. And I won’t omit them from this excerpt, so as to save you the trouble of reading Judge Goeke’s opinion to find them.

“When the understatement of tax liability results from improper deductions, courts have applied a reasonably prudent person standard to evaluate knowledge. Courts have generally found that a taxpayer knew or had reason to know of an understatement if a reasonably prudent person in the taxpayer’s position would have known the return contained a substantial understatement. Reser v. Commissioner, 112 F.3d 1258, 1267 (5th Cir. 1997), aff’g in part, rev’g in part T.C. Memo. 1995-572; Resser v. Commissioner, 74 F.3d 1528, 1536 (7th Cir. 1996), rev’g T.C. Memo. 1994-241; Kistner v. Commissioner, 18 F.3d 1521, 1527 (11th Cir. 1994), rev’g T.C. Memo. 1991-463; Hayman v. Commissioner, 992 F.2d 1256, 1261 (2d Cir. 1993), aff’g T.C. Memo. 1992-228; Erdahl v. Commissioner, 930 F.2d 585, 589 (8th Cir. 1991), rev’g T.C. Memo. 1990-101. In applying this standard, we consider four factors: (1) the taxpayer’s education, (2) the taxpayer’s involvement in the family’s financial affairs, (3) the presence of unusual or lavish expenses beyond the family’s norm, and (4) the other spouse’s evasiveness or deceitfulness concerning the family’s finances. Price v. Commissioner, 887 F.2d at 965.” 2014 T. C. Sum. Op. 26, at p.16.

And here’s how this works out in realtime. “On the basis of the four factors of the Price test, we hold that Mrs. Bowerman did not know or have reason to know of the understatement. First, although there is no specific evidence in the record of Mrs. Bowerman’s education, her employment as an administrative assistant for UPS does not indicate any specialized knowledge of finance, business, or taxation. Second, we find credible Mr. Bowerman’s testimony that Mrs. Bowerman was entirely unaware of the details of Mr. Bowerman’s business. Third, nothing in the record indicates changes in family income or spending, but petitioners bear the burden of proving that no changes occurred. Because petitioners have presented no evidence on the matter, this factor weighs in respondent’s favor. See Rule 142(a). Finally, we do not find that Mr. Bowerman consciously deceived Mrs. Bowerman or hid his erroneous deductions from her. However, the record demonstrates that he did not involve Mrs. Bowerman in managing his business or maintaining his records. Considering these factors, we hold Mrs. Bowerman had no reason to know of her husband’s erroneous deductions.” 2014 T. C. Sum. Op. 26, at p. 17.

While the Bowermans, pro se of course, didn’t have the best case, it was good enough for Jani to win on Steve’s business items.

Takeaway- Read and heed.

 

 

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