The US Tax Court gave relief to the ex-wife not involved in a business decision during the husband’s affair, from the couple’s joint tax debts.
The court opined that the Commissioner’s determinations set forth in a notice of deficiency are presumed correct, and taxpayers bear the burden of showing the determinations are erroneous.
It was further opined that deductions are a matter of legislative grace, and a taxpayer must prove his or her entitlement to a deduction.
The court stated that Section 172 permits a deduction for the full amount of allowable NOL carrybacks from subsequent years and carryovers from previous years, as long as taxable income for the current year is not less than zero.
Petitioner husband contended that petitioner wife had knowledge of the items that give rise to the deficiency, including the disallowance of deductions for rental expenses and depreciation for the New York condominium, and depreciation deductions relating to the Range Rover.
It was observed by the court that the Petitioner wife attended college and was a trained nutritionist, but she did work SEI during the years at issue. During this time, however, she was the wellness coordinator. She signed checks but was not responsible for any other accounting function.
“Petitioner wife was involved in household financial matters, but there is no evidence linking her to SEI’s business decision making. There is also no evidence showing that petitioner wife was aware of her husband’s lease with SEI regarding the condominium. Petitioner wife traveled to New York infrequently compared to her husband. She went to New York for some family holidays. She had no reason to question that her husband was staying in the condominium because of business in New York”, the court observed.
The court observed that Petitioner’s husband was deceitful in his relationship with his wife. He hid his affair and opened a secret credit card to hide spending associated with it. He funded the affair by diverting marital assets unbeknownst to the petitioner wife. Considering all the facts and circumstances, petitioner wife did not have reason to know of the understatements.
The court held that the Petitioner wife did not benefit at all from the Range Rover, and she rarely stayed in the New York condominium. She received only a minimal benefit from the condominium, and she would likely have received the same benefit when visiting petitioner husband in New York if he had continued staying in hotels. There is no evidence that the petitioner wife made large expenditures or received lavish benefits.
Facts
Petitioners were married on May 25, 1985, and filed joint federal income tax returns for the years at issue. On July 27, 2016, petitioner wife filed a complaint for dissolution of marriage with the district court of Douglas County, Nebraska. That court issued an amended decree of dissolution of marriage on March 30, 2018.
On December 6, 2006, petitioner husband completed the purchase of a penthouse condominium in New York for $3,250,000. Only petitioner husband was listed as a purchaser of the condominium. Petitioner wife toured the condominium before purchase but played no other part in the decision to purchase it.
SEI agreed to pay $28,000 per month in rent to petitioner husband for the New York condominium. The rent was calculated to cover petitioner husband’s cost of ownership of the condominium. Neither petitioner husband nor petitioner wife consulted a real estate expert to determine the fair market rent. The initial lease agreement expired on December 31, 2009, but this arrangement continued under the terms originally agreed upon throughout the years at issue. The fair market monthly rental values for the New York condominium during the relevant periods were as follows: $22,500 for 2011, $21,500 for 2012, $23,000 for 2013, and $25,000 for 2014.
The determined accuracy-related penalties for years 2012 and 2014 were approved on December 17, 2015, when the examining revenue agent’s supervisor signed a Civil Penalty Approval Form.
Case Information
Case Name: Gregory R. Schnackel And Laura B. Schnackel V/S Commissioner Of Internal Revenue
Citation: T.C. Memo. 2024-76
Jurisdiction: US Tax Court
Judges: Kerrigan, Chief Judge
