Read the case and answer the question at the end. Include an outside similar case and relate it to your research. Only one page single space is required
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RP Chapter 6
In January 2008, Hamad and Liu Spartan (husband and wife) purchased 330 acres of prime Florida citrus
and farmland property just east of Winter Haven, Florida. The Spartans put down cash of $100,000 and
financed the remaining $900,000 purchase price through a loan from the seller of the property. The
Spartans live in Tampa, Florida. The property included a 1920’s era mansion retreat that was once the
winter home of Joe DiMaggio (of baseball fame) and his bride- for a short time – (Marilyn Monroe). The
farmland has been leased for cattle grazing, citrus production and truck farming continuously for the
past eight years. Different tenants have leased various parcels of the property over that time period.
The mansion retreat at the center of the property has been less successful as an income generator –
despite various listing arrangements with real estate agents and listings on VRBO.com, the mansion
retreat has only garnered (at most) $10,000 in any one year in rental income. The mansion and its
related structures (garage, sheds) have been remodeled twice by the Spartans yet no long-term tenants
or corporate retreat tenants have yet rented the property. Some of Liu’s relatives have lived in the
property from time to time but have never paid rent. Hamad believes the mansion is haunted (he has
been on the ride at Magic Kingdom) and has never spent a full night at the mansion.
On their tax return the Spartans have reported all of the revenue from the farm (land rental of more
than $100,000 per year) and all of the expenses (interest, property taxes, insurance, utilities for the
farmland and mansion which is heated and air conditioned year round, maintenance on the 12,000
square foot mansion, lawn service for the grounds of the mansion, road repair for the mansion driveway
and expenses for remodeling the mansion) as ordinary and necessary expenses deductible from the
rental revenue garnered from renting out the land.
The IRS has selected the return for examination and disallowed expenses relating to the mansion but
not expenses relating to the farmland (principally interest, property taxes and a small amount of liability
insurance). The IRS claims that the expenses of the mansion are not ordinary and necessary expenses
related to rental of the land and, since there is no rental income from the mansion, the other expenses
for utilities, property taxes, insurance, lawn service, road repair and remodeling, etc. are non-deductible
personal expenses. The IRS further claims that rental of the land and rental of the mansion are two
different businesses and cannot be combined for tax purposes despite the fact that the mansion and
farmland are part of a single contiguous parcel of land.
What result?
Facts: The Keating family is composed of Bart, Arlene and their four adult children. Bart and Arlene are
married and file a joint tax return. Arlene has regularly been embezzling from her job. Arlene also
prepared the couple’s tax returns, which are signed by both Arlene and Bart. Arlene spends all of the
embezzled funds to provide an extravagant lifestyle for her adult children, while Arlene and Bart live a
more modest lifestyle in line with their reported income. Bart believes that the lifestyle of the children is
derived from prosperity. Arlene’s embezzlement is discovered and she is prosecuted and jailed. Bart and
Arlene divorce. The IRS files a deficiency against Bart for taxes levied against the embezzlement funds
not reported on returns filed during their marriage.
Issue: Is Bart liable for the taxes? Answer: No, Bart is not liable.
Rationale: While according to IRC Sec. 6013(d)(3) married persons become jointly liable for all taxes due,
IRC Sec. 6015 was enacted for situations like Bart’s. According IRC Sec. 6015 an innocent spouse must
not have knowledge of the understatement. In the case above, Bart had no awareness of Arlene’s
embezzlement. In the case of Kathryn Cheshire vs. Commissioner, a spouse is eligible for innocent
spouse relief if a joint return is filed, there is a gross understatement related to the other spouse, and if
the spouse had no knowledge. Furthermore, the burden of proof is on the IRS to provide that the spouse
had knowledge, as is seen in Evelyn M. Martin vs. Commissioner.
Authority:
IRC Sec. 6013(d)(3)
IRC Sec. 6015
Kathryn Cheshire, 115 T.C. 183 (2000)
Evelyn M. Martin, 80 TCM 670, TC Memo. 2000-347
…
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