Anthony v. Commissioner

(A) any item of gross income attributable to such spouse which is omitted from gross income, and

(B) any claim of a deduction, credit, or basis by such spouse in an amount for which there is no basis in fact or law.Petitioner has the burden of proving that she is entitled to relief under that section. Rule 142(a).

Initially, petitioner must show, for each year for which she requests relief under section 6013(e), "a substantial understatement of tax attributable to grossly erroneous items of one spouse". Sec. 6013(e)(1)(B). *159 Unless she overcomes that obstacle, we cannot grant the relief she requests, no matter how "innocent" her conduct has been.

Petitioner has not presented any evidence from which we can conclude that the disallowed Paragon Leasing losses were "grossly erroneous items". ² We cannot reach that conclusion merely because those losses were disallowed by respondent. Respondent's statutory notice explains the disallowance of the Paragon Leasing losses as follows:

It is determined that expenses reported on Schedule C in tax years 1981 and 1982 in connection with your computer leasing activity through Paragon Leasing were not incurred in an activity entered into for profit. Therefore, under Section 183 of the Internal Revenue Code, expenses are deductible only to the extent of income. The losses reported on your returns in 1981 and 1982 in the amount of $ 65,235 and $ 42,987, respectively, are not allowable, and your taxable income is increased accordingly.

*160 We cannot conclude from that explanation that the Paragon Leasing deductions were grossly erroneous. The legislative history of section 6013(e)(2)(B), which defines grossly erroneous items as including any claim of a deduction for which there is no basis in fact or law, indicates that a deduction has no basis in law when the expense, even if incurred, does not qualify as a deductible expense under well-settled legal principles or when no substantial legal argument can be made to support its deductibility. Douglas v. Commissioner, 86 T.C. 758, 762-763 (1986) (citing H. Rept. 98-432 (Part 2), at 1502 (1984)). In Douglas, we stated: "Ordinarily, a deduction having no basis in fact or in law can be described as frivolous, fraudulent, or, to use the word of the committee report, phoney." Douglas v. Commissioner, supra at 763. Moreover, in Douglas, we concluded that "it simply does not follow that because deductions lacking in a factual or legal basis will be disallowed, all deductions which are disallowed lack a factual or legal basis. Petitioner may not rely on the disallowance * * * to prove a lack of basis in fact or law." *161 Id. (citations omitted). See also Russo v. Commissioner, 98 T.C.     (1992).

Simply put, petitioner has provided nothing that would allow us to conclude that she has carried her burden of proof. Indeed, respondent's offer of a compromise settlement to investors in Paragon Leasing suggests that the deductions in question were less than grossly erroneous. See Neary v. Commissioner, T.C. Memo. 1985-261. Moreover, petitioner has not provided us with any details of the settlement, and we thus cannot draw any inferences from that settlement concerning whether the deductions at issue were grossly erroneous. Also, respondent's determination of an increased rate of interest under section 6621(c) does not necessarily indicate that the deductions claimed are grossly erroneous. Also, respondent's determination of an increased rate of interest under section 6621(c) does not necessarily indicate that the deductions claimed are grossly erroneous. Petitioner has not addressed respondent's grounds for determining an increased rate. From respondent's deficiency notice, however, we can deduce that the deductions were disallowed under section 183. See sec. 6621(c)(3)(B)*162 (regulatory authority to specify additional transactions subject to section 6621(c)); sec. 301.6621-2T, Q. & A.4, Temporary Proced. & Admin. Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984) (transactions for which deductions disallowed under section 183 subject to section 6621(c)). We see no basis for concluding that a disallowance of deductions under section 183, because a transaction is not engaged in for profit, necessarily leads to the conclusion that the deductions in question had no basis in fact or law. See Russo v. Commissioner, supra; Douglas v. Commissioner, supra.

At trial, petitioner cited several cases. Each, however, is distinguishable. See Shapiro v. Commissioner, T.C. Memo. 1988-350 (only issue considered is whether petitioner knew or had reason to know of the substantial understatement of tax); Bouskos v. Commissioner, T.C. Memo. 1987-574 (the facts giving rise to the losses at issue had been the subject of a previous, detailed analysis by the Court and, on the basis of that analysis, the deductions were found to be grossly erroneous); Guth v. Commissioner, T.C. Memo. 1987-522*163 (respondent conceded that deductions in question were grossly erroneous), affd. 897 F.2d 441 (9th Cir. 1990).

In conclusion, we repeat below our words from Neary v. Commissioner, supra, a case involving somewhat similar facts, as to petitioner's obligation to satisfy her burden of proof:

We recognize that it may be difficult for a spouse who did not actively participate in the original transaction and who subsequently separated from the investor spouse to obtain information concerning an investment. Opportunities for discovery are available under our Rules, however, and under these circumstances informal discovery should have been available from respondent. See Rules 70 through 75, Tax Court Rules of Practice and Procedure; Branerton Corp. v. Commissioner, 61 T.C. 691 (1974).

Certainly taxpayers seeking to be relieved of liability must do more than was done here. Nothing in the Tax Reform Act of 1984 changes the principle that: