ON APPEAL FROM THE DECISIONS OF THE UNITED STATES TAX COURT (Tax Court Nos. 86-40369 and 86-40447).
Before: Becker, Alito, and Roth, Circuit Judges.
This is an appeal from a decision of the United States Tax Court holding that Marie and Catherine Purificato are not entitled to relief under the so-called "innocent spouse" provision of the income tax laws, 26 U.S.C. § 6013(e), and that therefore each is jointly and severally liable with her husband for amounts due as a result of the understatement of taxes on their joint returns for 1981, 1982, and 1983. We affirm.
Marie Purificato is married to John Purificato, and Catherine Purificato is married to John's brother William. John and William owned and operated Apollo Caterers, Inc., a Subchapter S corporation. For the years in question, each couple filed joint income tax returns claiming a share of operating losses that they claimed Apollo had experienced.*fn1 William and Marie's returns reported adjusted gross income for 1981, 1982, and 1983 in the amounts of $18,670, $19,838, and $14,694 respectively. For these same years, John and Catherine's returns reported adjusted gross income of $23,880, $25,064, and $27,396. After an audit, the Commissioner of Internal Revenue determined that, contrary to the couples' returns, Apollo had actually made a profit in each of the years at issue, and that its total profit during the three-year period exceeded two million dollars. The Commissioner issued notices of deficiency asserting that both couples owed more than $500,000 in taxes, as well as additions to tax. Each couple subsequently petitioned the tax court for redetermination of the deficiencies. After negotiation, partial settlements were reached. For purposes of the pending cases, the amount of taxes and additions owed for each year was stipulated. The parties could not, however, come to an agreement on whether Marie and Catherine Purificato were jointly liable with their husbands or whether they were entitled to relief under the "innocent spouse" provision, 26 U.S.C. § 6013(e). The cases were then consolidated, and the tax court conducted a trial on the issue of "innocent spouse" relief.
After the trial, the tax court held that Marie and Catherine were not entitled to such relief. The court first stated that Marie and Catherine bore the burden of proving that all four of the elements set out in § 6013(e)(1)(A)(D) were satisfied. The court found that two of these elements (those contained in §§ 6013(e)(1)(A) and (B)) were met, and it declined to rule on another element (that contained in § 6013(e)(1)(C)). The tax court held, however, that neither Marie nor Catherine had satisfied the element set out in § 6013(e)(1)(D), which requires proof that "taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax . . . ." According to the court, one of the facts and circumstances that should be considered under this subsection is "whether a spouse significantly benefitted from the erroneous items." Purificato v. Commissioner, 1992 Tax Ct. Memo LEXIS 614, 64 T.C.M. (CCH) 942, 946, 1992 T.C. Memo 580 (1992). Based on the Purificatos' answers to interrogatories, the court found that both couples had acquired substantial joint assets during the years in question. The court also noted that neither couple had made a full disclosure of assets. In light of these facts, the court held that neither Marie nor Catherine had proven that she did not receive a significant benefit from the income omitted from the returns.
After the tax court entered its judgment, the Purificatos filed a notice of appeal.
Under 26 U.S.C. § 6013(d)(3), a husband and wife who make a joint income tax return are jointly and severally liable for the full amount owed. See also Stevens v. Commissioner, 872 F.2d 1499, 1503 (11th Cir. 1989). The so-called "innocent spouse" provision, 26 U.S.C. § 6013(e), creates a limited exception to this rule. This provision states in pertinent part:
Under regulations prescribed by the Secretary, if --
(A) a joint return has been made under this section for a taxable year,
(B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse,
(C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and
(D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,
then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement.*fn2
26 U.S.C. § 6013(e)(1). In order to qualify for relief under this provision, the claimant bears the burden of proving all four of the elements set out in subsections (A) to (D). See, e.g., Stevens v. Commissioner, 872 F.2d at 1504; Purcell v. Commissioner, 826 F.2d 470, 473 (6th Cir. 1987); Ballard v. Commissioner, 740 F.2d 659, 663 (8th Cir. 1984).
Subsection (D), the focus of the current appeal, does not expressly mention the importance of whether a claimant "significantly benefitted" from the understatement of tax, but the history of the "innocent spouse" provision supports the tax court's Conclusion that this question should be considered in determining whether joint and several liability would be inequitable.*fn3 As originally enacted in 1971, the "innocent spouse" provision ...