                         T.C. Memo. 2003-109



                       UNITED STATES TAX COURT



DALE A. RINEHART AND JEANA L. YEAGER, f.k.a. JEANA L. RINEHART,
                     ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20185-98, 15968-99,      Filed April 18, 2003.
                 15969-99, 7007-00.


     Frank C. Hider, for petitioners.

     Abbey B. Garber, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    This case is before the Court on

petitioners’ motion for leave to file out of time a motion for


     1
        Cases of the following petitioners are consolidated
herewith: Jeana L. Yeager, docket No. 15968-99; Dale A.
Rinehart, docket No. 15969-99; Jeana L. Yeager, docket No. 7007-
00.
                                - 2 -

reconsideration of opinion (motion for leave) and petitioners’

motion for reconsideration of opinion and memorandum brief in

support thereof (motion for reconsideration) regarding our

opinion in Rinehart v. Commissioner, T.C. Memo. 2002-71 (Rinehart

II).

       Respondent determined deficiencies in and penalties on

petitioners’ Federal income taxes as follows:

                                                 Penalty
       Docket No.     Year      Deficiency      Sec. 6662

           20185-98   1994       $46,894         $9,379
           15968-99   1995        29,264          5,853
           15969-99   1995        28,765          5,753
           15969-99   1996        53,869         10,774
            7007-00   1996        27,032          5,406

In Rinehart v. Commissioner, T.C. Memo. 2002-9 (Rinehart I), we

addressed the issue of whether Dale A. Rinehart’s (Mr. Rinehart)

horse breeding activity was an activity not engaged in for profit

for 1994, 1995, and 1996.    In Rinehart II, we addressed the

issues of whether petitioners had cancellation of indebtedness

income (COD income) for 1995 and whether petitioners were liable

for penalties pursuant to section 6662(a).2   In Rinehart I and

Rinehart II, we made no findings and reached no conclusions

regarding petitioners’ marital status for Federal income tax

purposes.


       2
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 3 -

     In the motion for leave and the motion for reconsideration,

petitioners argue that the Court needs to address petitioners’

marital status in order to resolve computational adjustments and

the section 6662 penalties contained in the notices of

deficiencies.3   Petitioners contend they will be harmed absent a

ruling on these issues.   Accordingly, even though they seek to

file the motion for reconsideration considerably more than 30

days after our written opinion in Rinehart II was served, they

argue that in the interest of justice we should permit them leave

to file the motion for reconsideration and reconsider our

opinion.   Respondent does not object to granting petitioners

leave to file the motion for reconsideration.

     We agree that it is in the interest of justice to permit

petitioners to file the motion for reconsideration.   Accordingly,

we shall grant the motion for leave, and we shall grant the

motion for reconsideration in order to address the following

issues:    (1) The marital status of Mr. Rinehart and petitioner

Jeana L. Yeager (Ms. Yeager)4 for Federal income tax purposes for

1994, 1995 and 1996, and (2) whether petitioners are liable for

penalties pursuant to section 6662(a) related to claiming a



     3
        Petitioners do not seek reconsideration of any of our
other findings or conclusions in Rinehart II.
     4
        We use the term “Ms. Yeager” for convenience only. The
use of this term is not a finding regarding petitioners’ marital
status during the years in issue.
                                - 4 -

filing status of single on their 1995 and 1996 tax returns.     Rule

161.

                           FINDINGS OF FACT

       We incorporate our findings in Rinehart I and Rinehart II

herein by this reference.

Marriage, Divorce, and Annulment

       In 1992, Ms. Yeager married William Z. Williams in the State

of Washington.    Sometime thereafter, Mr. Williams filed for

divorce.    In August 1994, the Superior Court of Washington issued

a Decree of Dissolution dissolving Ms. Yeager and Mr. Williams’

marriage (Decree of Dissolution).    The court decreed that Ms.

Yeager’s name was changed to “Jeana Lee Yeager”.     Ms. Yeager did

not contest the divorce.

       In October 1994, petitioners married in Texas.   Ms. Yeager

received a copy of the Decree of Dissolution before she married

Mr. Rinehart.

       Shortly after his marriage to Ms. Yeager, Mr. Rinehart filed

a Life Event Change Form with his employer, American Airlines, to

notify it of his marriage to Ms. Yeager.      Mr. Rinehart filed this

form so that Ms. Yeager would be afforded spousal benefits from

American Airlines.    In November 1994, Mr. Rinehart filed forms

with American Airlines designating Ms. Yeager the beneficiary of

his retirement benefits program.
                                - 5 -

     In or about November 1994, Ms. Yeager filed a Complaint for

Declaratory Judgment against Mr. Williams in the State of

Washington.   As a result of the divorce, Ms. Yeager wanted to be

released from a management contract between Mr. Williams and

herself.   In this complaint, Ms. Yeager acknowledged that she was

divorced from Mr. Williams and referred to Mr. Williams as her

ex-husband.

     In January 1995, Richard G. Rutan and the trustee for

Voyager Aircraft Inc. (Voyager) filed a Complaint for Money

Damages listing Ms. Yeager as a defendant (Rutan lawsuit).5

     On January 12, 1996, in the District Court, 336th Judicial

District, Grayson County, Texas (the Texas State court), Mr.

Rinehart sought an uncontested annulment from Ms. Yeager pursuant

to section 2.226 of the Texas Family Code.   Mr. Rinehart claimed

that Ms. Yeager’s marriage to Mr. Williams was never dissolved by

divorce, annulment, or death.

     On the same day, Ms. Yeager filed a Waiver of Service,

Appearance, and Admission of Facts (the Waiver).   In the Waiver,


     5
        The Rutan lawsuit arose from Ms. Yeager’s involvement
with Mr. Rutan and Voyager in an attempt to fly an airplane
around the world without stopping or refueling. In December
1986, Mr. Rutan and Ms. Yeager accomplished this feat, an
aviation milestone, and as a result the airplane used to
accomplish it hangs in the Smithsonian Air and Space Museum. In
the Rutan lawsuit, Mr. Rutan alleged that Ms. Yeager
misappropriated memorabilia and funds from Voyager.
     6
        In 1997, sec. 2.22 of the Texas Family Code was
renumbered sec. 6.202. Tex. Fam. Code sec. 6.202 (Vernon 1998).
                               - 6 -

Ms. Yeager indicated that she did not contest the annulment.     In

the Waiver, Ms. Yeager swore that when she married Mr. Rinehart

the divorce action between her and Mr. Williams was not final and

was still pending before the court in Washington State.

     Also that same day, the Texas State court issued a Decree of

Annulment declaring petitioners’ marriage null and void.    At Ms.

Yeager’s request, the Texas State court ordered and decreed that

Ms. Yeager’s legal name was Jeana Lee Williams.

     The reason petitioners obtained the annulment was to

insulate Mr. Rinehart’s assets from Ms. Yeager’s creditors.    Even

though the Texas State court annulled petitioners’ marriage, Ms.

Yeager considered herself divorced from Mr. Williams because Mr.

Williams had not taken any legal action to set aside the divorce.

     In February 1996, 1 month after the Decree of Annulment was

issued, Ms. Yeager filed for bankruptcy.   In the bankruptcy

petition, Ms. Yeager stated that she was divorced and that Mr.

Williams was her ex-husband.   On the bankruptcy petition, Ms.

Yeager listed her last name as “Yeager”, and not “Williams”.     Ms.

Yeager filed the bankruptcy petition 2 days before the final

settlement conference, and approximately 1 week before the trial,

in the Rutan lawsuit.

     Sometime after the filing of the bankruptcy petition, the

Rutan lawsuit was settled.   Mr. Rutan dropped the Rutan lawsuit

after learning that Ms. Yeager had filed for bankruptcy, was

divorced, and was earning only $400 a month as a ranch hand.
                                - 7 -

     In October 1996 and October 1997, Mr. Rinehart signed health

insurance benefit forms that listed Ms. Yeager as his wife.7

Sometime after March 26, 1997, Mr. Rinehart mailed a letter to

American Airlines discussing the surgical health benefits for his

wife, Ms. Yeager.

     Around April 1997, Mr. Williams died.

     In June 1999, Mr. Rinehart initialed a Pension Benefit

Election Form that listed Ms. Yeager as his wife.

     In February 2000, respondent served a set of interrogatories

on Ms. Yeager.   In March 2000, Ms. Yeager responded to these

interrogatories.    In her responses, Ms. Yeager admitted that (1)

she had received documents from the court in Washington State

that the divorce from Mr. Williams was final and (2) she was

finally divorced from Mr. Williams in August 1994.

     From the date of their marriage through the time of trial,

petitioners lived together.   During this time, petitioners held

themselves out as husband and wife.     During and subsequent to the

years in issue, people referred to Mr. Rinehart as “Mr. Yeager”

and to Ms. Yeager as “Mrs. Rinehart”.




     7
        Ms. Yeager was eligible for spousal benefits, including
health insurance coverage, from American Airlines only if she and
Mr. Rinehart were married.
                                 - 8 -

Tax Returns

     Petitioners timely filed their tax returns for 1994, 1995,

and 1996.     Petitioners filed a joint return for 1994 and filed

separate returns claiming a filing status of single for 1995 and

1996.     Ms. Yeager listed her last name as “Yeager”, and not

“Williams”, on her 1995 and 1996 returns.

     Petitioners filed a joint Federal income tax return for

1999.     On this return, Ms. Yeager listed her last name as

“Rinehart”.

     In January 2001, 1 month prior to the trial in this case,

Mr. Rinehart filed a Form 1040X, Amended U.S. Individual Income

Tax Return, for 1999 changing his filing status from Married

filing joint return to Single.     Ms. Yeager also filed an amended

return for 1999 claiming single status.     On the amended return,

Ms. Yeager listed her last name as “Yeager”.

                                OPINION

I.   Marital Status

     A.      Burden of Proof

     As a preliminary matter, petitioners argued that respondent

raised a new issue in the answer by asserting that petitioners

should be treated as married for their Federal income tax filing

status, and consequently respondent bears the burden of proof on

the issue of whether petitioners should be treated as married

during the years in issue.
                               - 9 -

     Generally, petitioners bear the burden of proof.8    Rule

142(a).   Respondent, however, bears the burden of proof with

respect to any new matter pleaded in the answer.   Id.    An

assertion in the answer is treated as a new matter when it either

increases the original deficiency or requires the presentation of

different evidence.   Shea v. Commissioner, 112 T.C. 183, 197

(1999); Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507

(1989).   A new theory that merely clarifies or develops the

original determination is not a new matter in respect of which

respondent bears the burden of proof.   Shea v. Commissioner,

supra at 191; Wayne Bolt & Nut Co. v. Commissioner, supra at 507.

     In notices of deficiency for 1994, 1995, and 1996 issued to

petitioners, respondent determined that petitioners were married

and that petitioners’ correct filing status for 1995 and 1996 was

married filing separate.   The explanation of adjustments

contained in petitioners’ notices of deficiency states “Since you

were married and domiciled in a community property state, we have

computed your tax liability in accordance with community property

laws.”

     In their separate petitions, petitioners claimed that they

were not married during the years in issue because the Texas

State court had annulled their marriage.   In reply to



     8
        Sec. 7491(a) is not applicable to this case.     Rinehart v.
Commissioner, T.C. Memo. 2002-9.
                                - 10 -

petitioners’ allegation, respondent responded in his answers that

petitioners should be treated as married during the years in

issue for purposes of their Federal income tax filing status even

though their marriage was annulled in 1996.

     Respondent’s clarification of the basis of his determination

that petitioners should be treated as married did not increase

the original deficiency or require the presentation of different

evidence.9    Accordingly, we conclude that petitioners bear the

burden of proof on this issue.10

     B.      Effect of the Annulment

     Petitioners were married in October 1994.     In January 1996,

Mr. Rinehart sought an annulment of petitioners’ marriage, and

the Texas State court issued a Decree of Annulment declaring

petitioners’ marriage null and void.     On their 1995 and 1996

Federal income tax returns, petitioners designated their filing

status as “single”.     Petitioners argue that the effect of the

Decree of Annulment was to render the marriage void from its

inception and that their filing status of “single” for 1995 and

1996 was correct, and they were also entitled to claim a filing

status of “single” for 1994.


     9
        The evidence regarding the annulment of petitioners’
marriage was directly related to respondent’s determination that
petitioners were married and that Texas community property laws
applied.
     10
        We note, however, that our resolution of this issue does
not depend on which party bears the burden of proof.
                              - 11 -

     The determination of whether an individual is married shall

be made as of the close of the taxable year.   Sec. 7703(a)(1).

Marital status for Federal tax purposes is defined by State law.

Lee v. Commissioner, 64 T.C. 552, 556-559 (1975), affd. 550 F.2d

1201 (9th Cir. 1977).

     In general, we give full faith and credit to a determination

of marital status by a State court possessed of jurisdiction over

the subject matter and parties.   E.g., Stark v. Commissioner,

T.C. Memo. 2003-47.   We are, however, only bound to follow

interpretations of State law as announced by the highest court of

that State.   Commissioner v. Estate of Bosch, 387 U.S. 456, 465

(1967).   Accordingly, we conclude that in the unusual

circumstances of this case we are not bound by the decision of

the Texas State court regarding petitioners’ marital status.

Id.; Graham v. Commissioner, 79 T.C. 415, 419-421 (1982).

Indeed, petitioners’ actions perpetrated a fraud on the Texas

State court, and we believe that the Texas Supreme Court would

not enforce such a decree against third parties (such as

respondent in this case).

     Ms. Yeager’s marriage to Mr. Williams was dissolved in 1994.

As of the close of 1994, 1995, and 1996, and through the time of

trial, petitioners lived together as husband and wife and

represented themselves to others as being married.   Petitioners

never intended to and never did physically separate from each
                               - 12 -

other before or after the annulment.    Petitioners supplied

information to the Texas State court that conflicted with

information Ms. Yeager provided to the Bankruptcy court, Mr.

Rinehart provided to his employer, and Ms. Yeager provided to a

Washington State court in her Complaint for Declaratory Judgment.

     Petitioners’ annulment was grounded on their collusive

falsehoods.    Mr. Rinehart was wrong when, in seeking an annulment

from the Texas State court, he stated that Ms. Yeager’s marriage

to Mr. Williams had not been dissolved by divorce.    Likewise, Ms.

Yeager was wrong when, in acceding to the annulment, she

represented to the Texas State court that her divorce action with

Mr. Williams was not final and was still pending in Washington

State.    These were not honest mistakes.

     Based on the foregoing,11 we sustain respondent’s


     11
        We note that there is an additional reason for
disregarding the annulment for tax purposes. In general, an
annulment has the effect of declaring a marriage void ab initio
under Texas law. Home of the Holy Infancy v. Kaska, 397 S.W.2d
208, 212 (Tex. 1966). It thus “relates back” to erase the
marriage from the outset. Id. The doctrine of relation back,
however, is not absolute in Texas. Harris v. R.R. Ret. Bd., 3
F.3d 131, 134 (5th Cir. 1993). Courts have recognized that
annulment is a legal fiction and the relation back doctrine is a
limited concept. Id.; Home of the Holy Infancy v. Kaska, supra
at 212. “(I)n cases involving the rights of third parties,
courts have been especially wary lest the logical appeal of the
fiction should obscure fundamental problems and lead to unjust or
ill-advised results respecting a third party’s rights.” Home of
the Holy Infancy v. Kaska, supra at 212 (quoting Sefton v.
Sefton, 291 P.2d 439, 441 (Cal. 1955)).

     In the present case, Mr. Rinehart filed his petition for an
                                                   (continued...)
                               - 13 -

determination regarding petitioners’ filing status for the years

in issue.12

II.   Section 6662 Penalties

      Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

due to negligence or disregard of rules or regulations.13    Sec.

6662(b).   Section 6664(c)(1) provides that no accuracy-related

penalty shall be imposed with respect to any portion of an

underpayment if it is shown that there was reasonable cause for

such portion and that the taxpayer acted in good faith with

respect to such portion.   The decision as to whether the taxpayer

acted with reasonable cause and in good faith depends upon all



      11
      (...continued)
annulment only 1 month before Ms. Yeager filed her bankruptcy
petition. Up until that time, and since that time, petitioners
held themselves out as being married. Furthermore, as we
previously stated, in order to obtain the annulment petitioners
supplied incorrect information to the Texas State court. Their
attempt to claim that they were not married as a result of the
Decree of Annulment does not promote the purposes for which the
relation back doctrine was intended.
      12
        Petitioners also argue that respondent ignores his own
rulings, i.e., Rev. Rul. 76-255, 1976-2 C.B. 40, regarding the
effect of their annulment. We disagree. Petitioners’ situation
is factually similar to situation 2 in the revenue ruling--
applying the sham transaction doctrine to taxpayers who divorced
because it would be advantageous for them to be unmarried at the
end of the calendar year, but who never intended to remain
unmarried and did not remain unmarried. See Boyter v.
Commissioner, 668 F.2d 1382, 1387 (4th Cir. 1981).
      13
        Sec. 7491(c) is not applicable to these cases.   See
supra note 8.
                              - 14 -

the pertinent facts and circumstances.   Sec. 1.6664-4(b)(1),

Income Tax Regs.

      With regard to claiming a filing status of single on their

tax returns for 1995 and 1996, we do not believe that petitioners

acted with reasonable cause and in good faith.   See supra pp. 11-

12.   Accordingly, we hold that petitioners are liable for the

accuracy-related penalties related to their claiming a filing

status of single on their tax returns for 1995 and 1996.

      To reflect the foregoing,

                                         An appropriate order will

                                    be issued.
