Tuesday, January 18, 2022

Wife Granted Relief From Taxes Attributable to Ex-Husband

Him A Louisiana doctors' ex-wife isn't on the hook for a deficiency on taxes she and her then-husband filed for 2015, the U.S. Tax Court said in Bradley M. Blappert and Catherine M. Blappert v Commissioner, docket number 10417-18, on January 8, 2022.

Catherine Blappert met Bradley Blappert, a physician, when she was working as a medical sales representative. The Blapperts married in 2005 and had four children during their marriage. In early 2013, Dr. Blappert opened a medical practice, Peak Medical Partners LLC (Peak Medical).

Throughout 2015, the Blapperts were married, and each of them earned income. Dr. Blappert was the primary income earner, and he had income from multiple sources. His medical practice received payments from insurance companies, which was the principal source of income. The practice also received patient copayments by credit card, which were processed using Square, a payment processing service. Dr. Blappert also received nonemployee compensation for providing contract medical services in settings outside his own practice. Ms. Blappert worked part-time as a sales representative for Peak Medical and a surgical center in the same building as Peak Medical for part of 2015. For her work with Peak Medical, she earned wages of $36,479.

Peak Medical employed professionals to handle its bookkeeping and finances. From the outset, Peak Medical employed an office manager to help with finances. The office manager handled both insurance payments and credit card payments. Dr. Blappert also hired a certified public accountant (CPA) for both the medical practice and the preparation of the Blapperts' personal tax return. Ms. Blappert delivered documents to the CPA if Dr. Blappert requested, but she was not otherwise involved with Peak Medical's bookkeeping, finances, or taxes. She did not participate in Dr. Blappert's meetings with the office manager or the CPA.

The Blapperts' have conflicting views of Ms. Blappert's role in Peak Medical's finances. Ms. Blappert characterized herself as having no meaningful role in the finances of Peak Medical, whereas Dr. Blappert characterized Ms. Blappert as "a partner" in the business, as having transacted with and accessed Peak Medical's bank accounts, and as having received a significant portion of Peak Medical's earnings as her wages.

Dr. Blappert's testimony in this regard was not credible. There is no evidence that Ms. Blappert was a partner in the business. Although Peak Medical has the word "partners" in its name, the Blapperts' tax return identifies Peak Medical as a sole proprietorship and Dr. Blappert as the proprietor. Likewise, there is no evidence of Ms. Blappert accessing Peak Medical's accounts while the business was in operation. The only record of Ms. Blappert transacting on behalf of Peak Medical is three withdrawals that she made from Peak Medical's bank accounts after it had wound down its operations. Lastly, at trial, Dr. Blappert characterized Ms. Blappert's approximately $36,000 of wages as a sales representative for Peak Medical as constituting a substantial portion of the business's profit. But the Schedule C, Profit or Loss from Business, shows gross receipts of nearly $650,000, and a net profit of approximately $276,000, after deducting for wages and other expenses. In sum, the documentary record conflicts with Dr. Blappert's testimony; there is no evidence of Ms. Blappert having any role in Peak Medical's finances.

Ms. Blappert's main role in 2015 was in the home. Because Dr. Blappert worked long hours, Ms. Blappert managed the household and served as the primary caregiver for the children, one of whom had special needs. The Blapperts maintained a household account that Ms. Blappert used to pay household expenses. She also made expenditures related to the children, including their Catholic school tuition.

Dr. Blappert began winding down his medical practice the fall of 2015. Peak Medical ceased operations in December 2015, and Dr. Blappert started a new job with Prime Healthcare in January 2016. In December 2016, Ms. Blappert made a total of three withdrawals from Peak Medical's two accounts, which were separate from the Blapperts' household account. She believed that she and Dr. Blappert were closing out the Peak Medical accounts because the business was no longer in operation.

The Blapperts filed a joint tax return for 2015. When Ms. Blappert signed the return, she believed that she and Dr. Blappert reported all of their income, and nothing gave her reason to believe otherwise. She knew Dr. Blappert had income from Peak Medical and contracts for his medical services, but she did not know the amounts. Ms. Blappert signed the return after reviewing the first page. She did not scrutinize the entire return because she did not know about the finances of Peak Medical and because the Blapperts had hired a CPA to prepare the return.

The Blapperts led a lifestyle in 2015 that was commensurate with their reported income. Their largest expenditure was for their children's Catholic school tuition.

According to information reported to the Commissioner by third parties, the Blapperts underreported Peak Medical's income by $108,318. The Commissioner mailed the Blapperts a notice of deficiency determining an income tax deficiency of $41,204. The Commissioner also determined a substantial understatement penalty under section 6662 and an addition to tax under section 6651(a)(1). The Blapperts resided in Louisiana when they timely filed a petition for redetermination.

After filing the petition, the Blapperts separated. They began living apart in January 2019. In June 2020, they divorced. While this deficiency case has been pending, Ms. Blappert submitted to the Commissioner a Form 8857, Request for Innocent Spouse Relief.

Catherine Blappert neither knew nor had reason to know that her ex-husband had underreported income from the medical practice he owned in 2015, so she is eligible for innocent spouse relief, the Tax Court said. The court said it was reasonable for Blappert to be unaware of the underreporting because she wasn't involved in the practice's bookkeeping or finances, and the couple lived a life commensurate with the reported income.

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