In 1987 and 1988, DRPC reported losses of $257,354 and $333,581, respectively; the Resers filed joint income tax returns and claimed these losses.
In 1991, the IRS issued a notice of deficiency, disallowing all of the DRPC deductions the Resers had claimed for 1987 and 1988.
The Tax Court upheld the IRS determination that the loan was made to DRPC and that Don Reser did not have enough basis to claim the deductions, assessing penalties on both Resers for negligent, substantial understatements of tax and or failure to file on time.
Result: On appeal, the Fifth Circuit Court of Appeals upheld the Tax Court decision that Don did not have enough basis in DRPC to claim the deductions but found Rebecca was eligible for innocent spouse relief.
Rebecca was not personally involved with DRPC's business and financial affairs to any significant degree; instead, she was occupied full-time in her law practice and was the family's sole financial support.
While the Resers were married, Rebecca advanced significant amounts of her personal funds for DRPC's operating expenses and knew her husband had obtained a line of credit from the bank.