Appeal from the Tax Court of the United States.
Pell and Stevens, Circuit Judges and Perry, Senior District Judge.*fn*
This is an appeal from a decision of the United States Tax Court, 62 T.C. 223 (1974), holding Charlotte J. Quinn and Howard B. Quinn liable for additional tax for their taxable year of 1963. Charlotte alone appeals.
Howard was chairman of the board of directors of Beverly Savings and Loan Association (Beverly); Charlotte was a member of the board of directors and senior vice president. Title to the real estate occupied and leased by Beverly was in a bank as trustee. Howard was the sole beneficiary of the trust.
On March 28, 1963, a meeting of the board of directors was held. Charlotte was present and signed the call and waiver of notice of the meeting. During the meeting, Howard discussed the possibility of advanced payment of rent by Beverly in order to realize a 5% discount. No resolution on the subject was adopted. An April 3, 1963, a check requisition in the amount of $553,166.66 was prepared and a check was issued payable directly to Quinn Management Company, rather than to the trustee, for prepayment of rent expenses. Both Charlotte and Howard were authorized to sign checks on the account of Quinn Management Company into which the check was deposited. A special meeting of the board was held on April 5, 1963. Again Charlotte signed a waiver of notice of the meeting, which indicated that the purpose of the meeting was to consider "the repayment to the Association of rental monies advanced to Quinn Management Company." After noting that action on the advance rental payment had been discussed at the March meeting, the board minutes show that it was "the consensus of the meeting that this action was not advisable and not in the best interests of the Association, notwithstanding the 6% discount allowed." We fail to discern a reference to the fact that the advancement had not been authorized in the first place by the board.
A resolution was adopted requiring the funds to be repaid before April 22, 1963, after Howard "volunteered" to make reimbursement. $53,166.66 was repaid on or about April 22, 1963, but no further payments were made during that year. Repayment of the remaining $500,000.00 was discussed at several meetings of the board. Charlotte was present at these meetings. On July 18, 1963, the board upon recommendation of a law firm, requested and obtained a note from Howard for $500,000.00 and a pledge of his permanent reserve shares in Beverly (subject to a lien held by a bank). Howard was later indicted and convicted of fraud under 18 U.S.C. § 657, as a result of these transactions. United States v. Quinn, 398 F.2d 298 (7th Cir. 1968), cert. denied, 393 U.S. 983, 21 L. Ed. 2d 444, 89 S. Ct. 451.
Howard and Charlotte filed a joint income tax return for the year 1963 on the cash basis. The funds received as advance payment of rent were not included in taxable income, but the return contained the following disclosure:
"During the taxable year the taxpayer, Howard B. Quinn, received the amount of $553,166.66 from the Beverly Savings and Loan Association. Shortly thereafter the amount of $53,166.66 was repaid and a note for the balance of $500,000.00 was given to the Association to evidence said debt. As security for this loan, the taxpayer assigned his interest in a land trust which held title to certain real estate to the Association. In view of these facts the transaction is considered as a loan and, accordingly, is not reported in this return as taxable income."
The notice of deficiency stated that Howard and Charlotte owed tax on $500,000.00 of additional income based on the above transactions. Other assessments were also made, but all issues were settled prior to trial except the issue of whether Charlotte owed tax on the $500,000.00. A stipulation of facts was entered prior to trial which contained the following statement:
"Petitioners concede that the net amount of $500,000.00 received in 1963 ($553,166.66 less $53,166.66) represents taxable income, but petitioner Charlotte J. Quinn contends that she is relieved from any resulting liability by virtue of Int. Rev. Code of 1954, § 6013(e)."
The tax court found in favor of the Commissioner on all issues. On appeal Charlotte argues 1) that the $500,000.00 was not taxable income, 2) that § 6013(e)*fn1 protects her from liability, and 3) that if § 6013(e) does not protect her from liability, it is unconstitutional "as depriving her of property without due process of law in violation of the Fifth Amendment of the United States Constitution."
The sentence in the stipulation of facts quoted above would appear to foreclose Charlotte's argument that the $500,000.00 was not taxable income. Nevertheless, the tax court did not rely on it.
At the beginning of the trial in this case, a colloquy occurred concerning the reasons for which Charlotte should be permitted to deny liability in light of the stipulation and the position taken by Howard, which was inconsistent with hers. Counsel for Charlotte made a statement which was ambiguous as to whether he was challenging the inclusion of the $500,000.00 as taxable income or only Charlotte's liability under the innocent spouse provisions. Counsel for the Government made a statement that Charlotte should only be allowed to make a challenge under the innocent spouse provision. The court then stated:
"Well, it's my understanding from our conversation in Chambers that the stipulation to the effect that Mr. Quinn is liable for the deficiency which has been asserted against him was not intended to prevent Mrs. Quinn from contending that she does not hold [sic; owe?] the amount alleged."
The Commissioner's counsel stated: "That is correct." It is thus unclear whether the court was referring solely to an innocent spouse challenge or whether the court believed the stipulation had been modified in chambers so that Charlotte could make the challenge on any basis. As stated above, the tax court did not rely on the stipulation in its opinion. The court stated:
"First, notwithstanding the stipulation quoted [above], which appears technically to foreclose her argument, Mrs. Quinn contends that the principle of Wilbur Buff, 58 T.C. 224 (1972), rev'd 496 F.2d 847 (C.A. 2, 1974), precludes the inclusion of the $500,000 in petitioners' taxable income for 1963. We do not agree." 62 T.C. at 228.
The court then proceeded to consider if the $500,000.00 was taxable income and found that it was. Although counsel for the Commissioner quotes the stipulation in its statement of facts to this court, it does not argue it as a basis for decision.
Under the confusing circumstances present in this case, fairness requires us to consider ...