TIMOTHY LEE RICHARD, Petitioner, AND SUSAN LYNN ELLIS, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Code Sec(s): 6015
Docket: Docket No. 29797-08.
Date Issued: 06/27/2011
Judge: Opinion by COLVIN
Reference(s): Code Sec. 6015
Official Tax Court Syllabus
Adria Vondra, Scott Schumacher, and John Clynch, for petitioner.
Susan Lynn Ellis, pro se.
Patsy Clarke, for respondent.
Opinion by COLVIN
MEMORANDUM FINDINGS OF FACT AND OPINION
Pursuant to section 7443A and Rules 180 and 183, 1 this case was assigned to and heard by SpecialTrial Judge John F. Dean. His recommended findings of fact and conclusions of law were filed and served upon the parties on July 15, 2010. Petitioner and respondent filed no objection to the Special Trial Judge's recommended findings of fact and conclusions of law.
Intervenor filed an objection thereto and attached a document for our consideration. The record was closed at the conclusion of the trial. We decline to reopen the record at this time for purposes of admitting this document into evidence.
After reviewing the record in this case and the report of the Special Trial Judge, we adopt the recommended findings of fact and conclusions of law of Special Trial Judge Dean as the report of the Court.
For 2004 respondent determined a deficiency of $23,483 in Timothy Lee Richard (petitioner) and Susan Lynn Ellis'
(intervenor) Federal income tax and an accuracy-related penalty of $4,697 under section 6662(a). The issue for decision is whether petitioner is entitled to relief from joint and several liability pursuant to section 6015(c). 2
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by reference. When petitioner filed his petition, he resided in the State of Washington.
For 2004 petitioner and intervenor filed a joint Federal income tax return. 3 On the joint return they reported total income of $305,510, $275,821 of which was attributable solely to intervenor. On Schedule C, Profit or Loss From Business, petitioner reported net profit of $13,569 from his investment broker business.
Petitioner and intervenor married on September 18, 1985. During their marriage they maintained separate and joint bank accounts. Bank statements for their joint account were addressed in both of their names and were delivered to their home address. Both petitioner and intervenor had access to the mail.
In the years leading up to 2004 petitioner encountered a series of unfortunate medical events. He suffered a heart attack and had open heart surgery and was later diagnosed with prostate cancer. He was then forced to discontinue his work as an investment broker because of his persistent health concerns. The series of medical events caused a downward financial spiral for both petitioner and intervenor. They began to experience considerable financial difficulty because of credit card debt and an overrun of home construction costs.
Petitioner and intervenor discussed possible solutions to address their financial situation. One possible solution they discussed was borrowing from intervenor's section 401(k) retirement account (retirement account). Following their discussion, intervenor made an Internet request for a distribution of $50,000 from her retirement account. On March 24, 2004, the distribution was deposited into petitioner and intervenor's joint account and the bank statement 4 labeled the deposit “Fidelity Investm Pension; Susan L. Ellis-Richard”. Intervenor intended to withdraw the portion as a loan; however, she never received the paperwork or otherwise satisfied the statutory requirements to process the distribution as a loan. Deposits into the joint account for the month of March totaled $68,172. 5
Over the course of the next month, petitioner wrote several checks totaling $16,740.61 drawn on the joint bank account. 6 Intervenor and petitioner also paid their mortgage and other miscellaneous bills from their joint account in March 2004.
Petitioner and intervenor did not report the distribution on their 2004 joint Federal income tax return.
Petitioner and intervenor divorced on July 14, 2006. In late 2006 petitioner and intervenor received a notice of deficiency for their failure to report as income the $50,000 7 distribution. On June 18, 2007, petitioner filed Form 8857, Request for Innocent Spouse Relief, requesting relief pursuant to section 6015(b), (c), and (f). Respondent sent to petitioner a final Appeals determination denying his request for innocent spouse relief.
Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). After making the election, each spouse is jointly and severally liable for the entire tax due. Sec. 6013(d)(3); Cheshire v. Commissioner, 115 T.C. 183, 188 (2000), affd. 282 F.3d 326 [89 AFTR 2d 2002-900] (5th Cir. 2002).
Relief from joint and several liability is available to certain taxpayers under section 6015. Under section 6015(c), an individual who is eligible and so elects may limit his or her liability to the portion of a deficiency that is properly allocable to that individual as provided in section 6015(d). Sec. 6015(c)(1). Under section 6015(d)(3)(A), generally, any item that gives rise to a deficiency on a joint return, e.g., the unreported early distribution from intervenor's retirement account, shall be allocated to the individual filing the return in the same manner as it would have been allocated if the individual had filed a separate return for the taxable year.
A taxpayer is eligible to elect the application of section 6015(c) if, at the time the election is filed, the taxpayer is no longer married to or is legally separated from the individual with whom the taxpayer filed the joint return to which the election relates. Sec. 6015(c)(3)(A)(i)(I). The election under section 6015(c) may be made at any time after a deficiency for such year is asserted and no later than 2 years after the date on which the Commissioner has begun collection activities with respect to the taxpayer making the election. Sec. 6015(c)(3)(B).
Relief under section 6015(c) is not available to petitioner if respondent demonstrates that petitioner had actual knowledge of the item giving rise to the deficiency. See sec. 6015(c)(3)(C); King v. Commissioner, 116 T.C. 198, 203 (2001). Section 6015(c) does not require that the requesting spouse know the tax consequences arising from the item giving rise to the Cheshire v. Commissioner, supra at 194. In the case deficiency. of omitted income, however, the requesting spouse “must have an Id. at 195. actual and clear awareness of the omitted income.” We have observed that the applicable standard under section 6015(c) is the requesting spouse's “actual subjective knowledge”. Culver v. Commissioner, 116 T.C. 189, 197 (2001). The Commissioner must show, by a preponderance of the evidence, that the requesting spouse had actual knowledge of the item giving rise to a deficiency. See sec. 6015(c)(3)(C); Culver v. Commissioner, supra at 196.
The item petitioner contests that gives rise to the deficiency and is not allocable to petitioner is intervenor's retirement distribution. There is no dispute that petitioner satisfies section 6015(c)(3)(A) and (B) because he and intervenor were no longer married when petitioner filed his petition and the petition was filed timely. The question remains whether petitioner had actual knowledge at the time the joint return was signed of “any item giving rise to a deficiency (or portion thereof)”. See sec. 6015(c)(3)(C).
Intervenor testified that petitioner was aware of the distribution; they had discussed it before she requested the funds, he was present when she initiated the request for the distribution, and after the distribution she told him that they had received the funds. Intervenor further alleged that in early 2004 petitioner and intervenor fell several months behind on the mortgage and began receiving phone calls from their mortgage company requesting payment. After the distribution intervenor testified that they were able to make their mortgage payments, an expense of almost $15,000. 8 She further testified that after making their mortgage payments they no longer received phone calls from their mortgage company.
Intervenor admitted that before drawing large checks on the joint account petitioner would first inquire of her whether sufficient funds were available in the account and she would say “yes, we do. You can do that.” She alleged, however, that with other checks, presumably those for inconsequential amounts, petitioner would not seek prior approval because “he assumed that there was a couple of hundred dollars in there to cover it.” Given intervenor's substantial earnings during 2004 it would not have been unreasonable for petitioner to assume that the joint account would contain sufficient funds to cover those inconsequential expenses.
Respondent alleges that the foregoing testimony and petitioner's own testimony show that petitioner had actual knowledge of the retirement distribution. Petitioner and intervenor shared a joint bank account, petitioner had access to and opened the mail, and the joint bank account statement clearly labeled the deposit of the $50,000 retirement distribution. Respondent also notes that before the $50,000 deposit the balance of the joint account was $3,692.75 but that within 7 days of the $50,000 deposit, petitioner wrote checks totaling over $6,500 and within 1 month of the distribution he drew an additional $10,000 9 on the account. Respondent concludes that petitioner knew the funds from the retirement account had been deposited into their joint account because he used those funds.
Although petitioner may have had “reason to know” of the distribution as a result of his status as a joint signatory on the joint account, the Court is not convinced that this fact alone indicates that petitioner had “actual knowledge” of the distribution. Petitioner testified that he did not review the joint bank account statements and that intervenor primarily handled the finances and balanced the joint checking account, an assertion uncontested by intervenor. Furthermore, petitioner's expenditures following the distribution were not so extraordinary as to signal that he was aware of the availability of additional funds beyond intervenor's usual earnings. During March 2004, deposits into petitioner and intervenor's joint account, excluding the $50,000 distribution, totaled $18,172. The checks petitioner drew on the account in March 2004 accounted for only $6,740.61 of that amount. Attempting to circumvent this fact, respondent notes that the balance of the joint account immediately before the $50,000 deposit was less than $4,000, and that petitioner was aware of the $50,000 deposit because after the deposit he made draws on the joint account in excess of $4,000. But on March 26, 2004, 2 days after the $50,000 deposit, an additional amount of $6,602 was deposited into the joint account. Therefore, when petitioner's checks were presented for payment, the joint account contained sufficient funds to cover the checks, even without the $50,000 distribution.
Petitioner credibly testified that he was unaware of intervenor's request for and receipt of the $50,000 distribution. Petitioner admits that he and intervenor discussed the possibility of obtaining a loan from her retirement account but states that he was unaware that she had actually obtained a distribution from her retirement account. He alleges that although he maintained a joint checking account with intervenor, she primarily wrote the checks drawn on the joint account and that he wrote checks drawn on the joint account only when he was instructed to do so by intervenor. He also admitted that he opened the mail sent to their home but would put the bank statements aside for intervenor to “deal with”. Petitioner cites Culver v. Commissioner, 116 T.C. 189 (2001), claiming that his situation is analogous to that of the taxpayer in that case.
In Culver, the taxpayer's ex-wife embezzled money from her employer for a number of years while they were married and deposited the funds into their joint account in amounts ranging from $200 to $800. The embezzled income was commingled with the funds in the account, and the funds from that account were used to pay family expenses and debts. Although the taxpayer and his ex-wife maintained a joint account throughout their marriage, his ex-wife managed all of the finances; she paid the bills, wrote the checks, and maintained the bank accounts. Occasionally, he would write and sign checks drawn on the joint account, although he did not review their account or manage any of the finances during the marriage. The taxpayer and his ex-wife's joint income for the first year at issue was $63,567, and the embezzled funds constituted an additional $44,152. In the second year at issue their joint income was $76,412 and the embezzled funds constituted an additional $59,128. In the years at issue the embezzled funds constituted an increase of more than 60 percent of the taxpayer and his ex-wife's combined annual income.
In concluding that the taxpayer lacked actual knowledge of the embezzled funds, the Court found it relevant that the taxpayer and his ex-wife's expenses were well within their resources based on their combined annual wages. Furthermore, most of their major purchases were either completely or largely financed. Therefore, the taxpayer was unlikely to have actual knowledge of the embezzled funds, even if he did have reason to know of them. 10
Respondent alleges that the facts in Culver are distinguishable from those of this case. In Culver the taxpayer's ex-wife deposited funds in small amounts throughout the entire year, making the amounts undetectable to the taxpayer. Here, however, a one-time significant amount, $50,000, was deposited into petitioner and intervenor's joint bank account. Respondent asserts that it is unlikely that petitioner lacked actual knowledge of such a large one-time deposit.
As respondent suggests, $50,000 is a significant one-time deposit. When analyzed with respect to intervenor's income, however, the $50,000 distribution represented less than a 20- percent increase over her annual earnings for 2004. 11
Circumstantial evidence may indicate that petitioner had reason to know of the distribution; however, actual knowledge cannot be inferred from reason to know. See sec. 1.6015- 3(c)(2)(iii), Income Tax Regs. Although petitioner had access to the bank statements, occasionally drew checks on the joint bank account, and admitted that he “for the most part *** would open the mail”, he alleged that he did not review the mail and that intervenor was the one who paid the bills and reconciled their joint bank account.
Respondent has failed to persuade us by a preponderance of the evidence that petitioner had actual knowledge of the $50,000 distribution, and he is therefore entitled to relief from joint and several liability pursuant to section 6015(c).
Other arguments made by the parties and not discussed herein were considered and rejected as irrelevant, without merit, or moot. 11
In Culver the embezzled funds represented more than a 60- percent increase over the taxpayer and his ex-wife's combined wages in the years at issue. To reflect the foregoing,
Decision will be entered for petitioner.
Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
At trial petitioner abandoned his request for relief pursuant to sec. 6015(b) and (f). Accordingly, the Court limits its discussion to sec. 6015(c).
Respondent notified intervenor of petitioner's request for relief, and intervenor filed a notice of intervention on Mar. 5, 2009.
The joint account statement was dated Mar. 4 through Apr. 5, 2004, with an opening balance of $829.39 and a closing balance of $42,760.12.
During 2004 intervenor's earnings were direct deposited into intervenor and petitioner's joint bank account.
Three checks totaling $6,740.61 were presented for payment in the month of March. The final check at issue for $10,000 was presented for payment in mid-April.
In the notice of deficiency respondent determined that petitioner and intervenor received and failed to report a $50,728 distribution from a retirement account. The notice of deficiency also addressed additional unreported de minimis amounts attributable to petitioner.
The joint bank account statement intervenor provided shows a payment of only $8,421.66 made in favor of their mortgage lender on Mar. 26, 2004. See Urban Redev. Corp. v. Commissioner, 294 F.2d 328, 332 [8 AFTR 2d 5503] (4th Cir. 1961) (the Court may reject a taxpayer's uncorroborated, self-serving testimony), affg. 34 T.C. 845 (1960).
The record does not contain the joint bank account statement for the month of April; therefore, petitioner's acknowledgment of the $10,000 check he drew on the joint account in April 2004 does not conclusively show that he had actual knowledge of the $50,000 distribution. The Court is unable to conclude that a check in that amount was disproportionate as to petitioner and intervenor's income for April 2004.
In Culver v. Commissioner, 116 T.C. 189 (2001), the Court also found it relevant that the taxpayer's ex-wife corroborated her husband's testimony, affirming that she carried out the embezzlement activity without her husband's participation or knowledge.
Here, on the other hand, we note that with respect to petitioner and intervenor's testimony, we are faced with the situation of “he said, she said”; accordingly, our analysis is based primarily on what could be reliably drawn from the totality of the evidence.
Kenneth P. Shanks, et ux. v. Commissioner, TC Summary Opinion 2009-78 , Code Sec(s) 6015.
KENNETH P. SHANKS, Petitioner, AND LYDIA L. SHANKS, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Code Sec(s): 6015
Docket: Docket No. 24592-09S.
Date Issued: 06/29/2011
Judge: Opinion by Thornton, J.
Reference(s): Code Sec. 6015
1. Reference(s): Code Sec. 6015
Official Tax Court Syllabus
Kenneth P. Shanks, pro se.Lydia L. Shanks, pro se.Horace Crump, for respondent.THORNTON, JudgeThis case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended.The issue for decision is whether for 2007 petitioner is entitled to relief from joint and several liability under section 6015.
Kenneth P. Shanks (petitioner) and Lydia L. Shanks(intervenor) (collectively, the Shankses) married in 2000 and separated in 2008. They have two children.During 2007 petitioner worked as a produce clerk for Kroger Limited (Kroger), earning $31,077 of wages. During 2007 intervenor worked for Staffers, Inc. (Staffers), earning $2,778 of wages. In addition, during 2007 intervenor received $6,776 of nonemployee compensation from ExamOne World Wide, Inc. (ExamOne), and $1,386 of unemployment benefits from the Mississippi Department of Employment Security. Intervenor deposited her ExamOne earnings and her unemployment benefits in the Shankses' joint checking account, but petitioner did not review the bank records; he relied upon intervenor to keep the bank balances. Although petitioner knew that intervenor performed services for ExamOne and received unemployment benefits, he did not know the amounts of these items that intervenor received in 2007.The Shankses filed a joint Federal income tax return for taxable year 2007. Jackson Hewitt Tax Service prepared the return using information the Shankses provided. Petitioner signed the return without reviewing it. On their joint return the Shankses reported their combined wages from Kroger and Staffers, but they did not report intervenor's nonemployee compensation from ExamOne or her unemployment benefits. On their joint return the Shankses claimed a $5,926 refund, attributable in part to an earned income credit and additional child tax credit. 1 The Shankses used the refund to obtain $5,552 in proceeds from a tax refund anticipation loan. The Shankses shared these proceeds.Respondent determined a $3,057 deficiency in the Shankses' 2007 Federal income tax. The deficiency was attributable in part to $957 of self-employment tax on intervenor's unreported nonemployee compensation. The remaining $2,100 of deficiency represented reductions to the Shankses' earned income credit and additional child tax credit. These last-mentioned computational adjustments resulted from respondent's increasing the Shankses' income to include intervenor's unreported nonemployee compensation and unemployment benefits. 21More particularly, on their 2007 joint return the Shankses reported zero total tax, $3,469 of income tax withholding (of which $3,411 represented petitioner's withholding on his wage income and $58 represented intervenor's withholding on her own wage income), a $1,244 earned income credit, and a $1,213 additional child tax credit. 2Because of an offsetting increase in the Shankses' child(continued...)
Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). After making the election, each spouse is jointly and severally liable for the entire tax due on their aggregate income. Sec. 6013(d)(3). An individual may seek relief from joint and several liability under section 6015, which offers three avenues of possible relief under subsections (b), (c), and (f). In general, section 6015(b) provides full or apportioned relief from joint and several liability with respect to an understatement; section 6015(c) provides proportionate tax relief to divorced or separated taxpayers with respect to a deficiency; and in certain circumstances section 6015(f) provides equitable relief if relief is unavailable under section 6015(b) or (c). An individual against whom a deficiency has been asserted may petition this Court to determine the appropriate relief under section 6015. Sec. 6015(e)(1)(A). 3 In determining the appropriate relief 2 (...continued) tax credit resulting from the inclusion of the unreported income in the Shankses' income, the deficiency reflects no additional tax liability, apart from the items described above. 3The parties have stipulated that petitioner made an administrative request for relief under sec. 6015 at the same time that he filed his petition. Cf. Cheshire v. Commissioner, 115 T.C. 183, 192 n.4 (2000) (in the absence of any objection from the Commissioner, treating the raising of sec. 6015 relief in the petition as a timely filed election), affd. 282 F.3d 326 [89 AFTR 2d 2002-900] (5th Cir. 2002). available under section 6015, we apply a de novo scope and standard of review. See Porter v. Commissioner, 132 T.C. 203, 210 (2009).I. Section 6015(b) Relief Under section 6015(b), if certain requirements are met, a requesting spouse may be relieved of joint and several liability from a tax understatement that is attributable to the nonrequesting spouse if, among other requirements, the requesting spouse establishes that he or she "did not know, and had no reason to know" that the other spouse understated that spouse's tax liability on the return. ,Sec. 6015(b)(1)(C), (2). No relief is available under this provision if the requesting spouse has "actual knowledge of the underlying transaction that produced the omitted income". Cheshire v. Commissioner, 115 T.C. 183, 192-193 (2000), affd. 282 F.3d 326 [89 AFTR 2d 2002-900] (5th Cir. 2002).Because petitioner knew that intervenor performed services for ExamOne and received unemployment benefits, he is not entitled to relief under section 6015(b).II. Section 6015(c) Relief A. Eligibility--the Knowledge Requirement If various requirements are met, an election under section 6015(c) treats the former spouses as if they had filed separate returns, and each spouse's liability is limited to the portion of the deficiency properly allocable to the electing spouse, as determined under the rules contained in section 6015(d). See ,sec. 6015(c)(1), (d)(3). Such an election is generally not valid if the Secretary demonstrates that the individual making the election had "actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof) which is not allocable to such individual under subsection (d)". Sec. 6015(c)(3)(C).In his pretrial memorandum and again at the commencement of trial respondent's counsel conceded that petitioner was entitled to elect relief under section 6015(c) with respect to the $957 of self-employment tax attributable to intervenor's nonemployee compensation. In his opening remarks at trial respondent's counsel explained this concession as being based on a determination by respondent's Appeals Office that "it could not be shown that Mr. Shanks had knowledge of the unemployment benefits *** and the income from Exam One." But at the conclusion of trial respondent's counsel sought to retract this concession on the ground that petitioner's testimony established that he had actual knowledge of these omitted items so as to invalidate his election under section 6015(c). 44Respondent does not contend that petitioner fails the requirements for electing relief under sec. 6015(c) in any respect other than allegedly having actual knowledge of the omitted income. 1. ExamOne Earnings Because petitioner knew that intervenor performed services for ExamOne, he should have known of this omitted income. But that does not mean he had actual knowledge of it. See Charlton v. Commissioner, 114 T.C. 333, 340-341 (2000) (finding that the requesting spouse lacked actual knowledge of the omitted income from his ex-wife's business even though he knew of the business and had access to her business records but never checked them to determine whether she had accounted for all her income). Petitioner testified credibly that although intervenor deposited her ExamOne earnings in their joint checking account, he did not know the amounts of these deposits because he never reviewed the bank accounts, entrusting that task to her. Intervenor did not directly contradict this testimony; she testified merely that petitioner had "access" to the joint checking account and "was aware of what was going on." Respondent, who introduced no evidence on this point, has failed to carry his burden of proving that petitioner had actual knowledge of intervenor's omitted earnings from ExamOne. Cf. sec. 1.6015-3(c)(4), Example (4)(iii), Income Tax Regs. (where the requesting spouse knew that the nonrequesting spouse had income from his business but did not know the exact amount, her section 6015(c) election was valid except insofar as she knew the minimum amount of his earnings from the business). Consequently, we disagree with respondent that petitioner's section 6015(c) election is invalid because petitioner had actual knowledge of intervenor's ExamOne earnings. 2. Unemployment Benefits Petitioner testified that he was aware that intervenor was receiving unemployment benefits in 2007 but did not know the amount. Intervenor, by contrast, testified that petitioner "wasn't aware of the unemployment". Respondent introduced no evidence on this point. On the basis of this sparse record, we conclude that petitioner had at least reason to know of the unemployment benefits. But we need not decide whether petitioner had actual knowledge of the unemployment benefits because, as discussed below, even if he lacked actual knowledge, petitioner has not shown that the portion of the deficiency attributable to the unemployment benefits is not properly allocable to him. 5 B. Allocation of Deficiency Generally, a spouse who is eligible for relief under section 6015(c) is allocated a portion of the joint return deficiency in proportion to the net amount of items taken into account in computing the deficiency that is allocable to the electing spouse. Sec. 6015(d)(1). As an exception to this general rule, two types of items are treated separately in making this 5Furthermore, as discussed infra, for purposes of our analysis of whether petitioner is entitled to equitable relief under sec. 6015(f), it is not determinative whether petitioner had actual knowledge or only reason to know of the unemployment benefits. allocation, rather than being aggregated with all other items to which the deficiency is attributable: (1) Disallowed credits; and (2) any tax (other than income tax imposed by section 1 or alternative minimum tax imposed by section 55) that is required to be included with the joint return. Sec. 6015(d)(2). Consequently, pursuant to this rule, the disallowed credits and the self-employment tax that make up the Shankses' deficiency are treated separately in allocating the deficiency.Items giving rise to a deficiency on a joint return are generally allocated as if the spouses had filed separate returns. Sec. 6015(d)(3)(A). Erroneously omitted items of income are allocated to the spouse who was the source of the income. Sec. 1.6015-3(d)(2)(iii), Income Tax Regs. But an erroneous item that otherwise would be allocated to the nonrequesting spouse is allocated to the requesting spouse to the extent that the requesting spouse received a "tax benefit" on the joint return. Sec. 6015(d)(3)(B); sec. 1.6015-3(d)(2)(i), Income Tax Regs. 1. Self-Employment Tax on Intervenor's ExamOne Earnings The omitted income from intervenor's ExamOne earnings is allocated to her; consequently, the $957 of self-employment tax on these earnings is also attributable to her and not to petitioner. Respondent does not contend that petitioner realized any tax benefit on the joint return as relates to this unreported self-employment tax liability. We conclude and hold, consistent with respondent's original concession, that the $957 of the deficiency that is attributable to intervenor's self-employment tax liability is properly allocable to her and not to petitioner. 2. Disallowed Tax Credits The regulations provide that if a disallowed credit is attributable in whole or part to both spouses, "then the IRS will determine on a case by case basis how such item will be allocated." Sec. 1.6015-3(d)(4)(ii), Income Tax Regs. Respondent has effectively determined that the disallowed credits are to be allocated to both spouses, declining to relieve petitioner of joint and several liability with respect to the disallowed credits.On the basis of our review of all the facts and circumstances, we conclude that the disallowed credits are properly allocable to both petitioner and intervenor. After all, it was the combination of petitioner's income and intervenor's income (her reported wage income plus her omitted ExamOne earnings and unemployment benefits) that caused their total income to exceed allowable income limits for the earned income credit and additional child tax credit shown on their joint return. Moreover, the Shankses' tax refund was attributable in significant part to the earned income credit and additional child tax credit that respondent has disallowed. Insofar as the record shows, the Shankses shared equally the benefit of the tax refund, in the form of a tax refund anticipation loan.Petitioner, as the requesting spouse, bears the burden of proving the portion of the deficiency that is properly allocable to him. See sec. 6015(c)(2); sec. 1.6015-3(d)(3), Income Tax Regs. He has not shown that the portion of the deficiency attributable to the disallowed credits is not properly allocable to him.III. Section 6015(f) Relief Because we have held that petitioner is not entitled to relief under section 6015(b) and is entitled to only partial relief under section 6015(c), we finally consider whether he may be eligible for additional relief under section 6015(f). See sec. 6015(f)(2). Section 6015(f)(1) provides that a taxpayer may be relieved from joint and several liability if it is determined, after considering all the facts and circumstances, that it is inequitable to hold the taxpayer liable for the unpaid tax or deficiency.Rev. Proc. 2003-61, sec. 4.01(1)-(7), 2003-2 C.B. 296, 297, sets out seven threshold conditions that a requesting spouse must meet before the Commissioner will consider a request for relief under section 6015(f). Respondent does not dispute that petitioner meets these threshold conditions.Rev. Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298, sets forth a nonexclusive list of factors to be evaluated in requests for relief under section 6015 for spouses who have met the threshold conditions. The factors are: (1) Marital status, (2) economic hardship that would result absent relief, (3) knowledge or reason to know of the item giving rise to the deficiency, 6 (4) any legal obligation of the nonrequesting spouse to pay the tax liability pursuant to a divorce decree or agreement, (5) significant benefit received by the requesting spouse, (6) the requesting spouse's compliance with income tax laws following the year for which relief is requested, (7) spousal abuse, and (8) the requesting spouse's mental or physical health at the time the return was filed or relief was requested.Petitioner and intervenor are separated. This factor weighs See id. sec. 4.03(2)(a)(i), in support of equitable relief. 2003-2 C.B. at 298. But, as discussed below, petitioner has failed to establish that any of the other enumerated factors weigh in favor of relief. 6Under these guidelines, the requesting spouse's actual knowledge of the income giving rise to the deficiency weighs strongly against granting relief. See Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(B), 2003-2 C.B. 296, 298. Such knowledge may be overcome only if the factors in favor of equitable relief are "particularly compelling." Id. By contrast, reason to know of the item giving rise to the deficiency is weighted no more heavily than other factors. Id.At a minimum, petitioner had reason to know of intervenor's ExamOne earnings and unemployment benefits. This factor weighs against equitable relief. See id. sec. 4.03(2)(a)(iii)(B), 2003- 2 C.B. at 298.The omission of part of intervenor's income from the Shankses' joint return resulted in a higher tax refund, which petitioner and intervenor shared. Petitioner has not established that he received no significant benefit (beyond normal support) from the understatement. See sec. 1.6015-2(d), Income Tax Regs. (stating that the fact that the spouse received a benefit from the understatement on the return is a factor that may be taken into account in determining whether the spouse significantly benefited from an understatement); Rev. Proc. 2003-61, sec. 4.03(2)(v), 2003-2 C.B. at 299. This factor also weighs against relief.Petitioner claims he will suffer economic hardship if he is not granted relief because he is caring for his two children. Generally, economic hardship exists if collection of the tax liability will render the taxpayer unable to pay reasonable basic living expenses. See sec. 301.6343-1(b)(4), Proced. & Admin. Regs. Petitioner has made no such showing. This factor weighs against relief. See Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii), 2003-2 C.B. at 298.Petitioner does not contend and the record does not suggest that intervenor had a legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. Nor does the record suggest that petitioner was subject to abuse or was in poor mental or physical health either when he signed the 2007 joint return or when he requested relief. See Rev. Proc. 2003-61, sec. 4.03(2)(a)(iv), (b)(i) and (ii), 2003-2 C.B. at 298-299. Finally, the record does not show whether petitioner has been in compliance with the income tax laws for years after 2007.The totality of the factors discussed above convinces us that it is not inequitable to hold petitioner liable for the part of the deficiency attributable to items other than intervenor's $957 of self-employment tax. Consequently, we hold that petitioner is not entitled to equitable relief under section 6015(f).To reflect the foregoing,An appropriate decision will be entered.
Laura E. Mercado v. Commissioner, TC Summary Opinion 2011-77
LAURA E. MERCADO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Docket: Docket No. 10578-10S.
Date Issued: 06/29/2011
Judge: Opinion by GERBER
Reference(s): Code Sec. 6015
Official Tax Court Syllabus
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Laura E. Mercado, pro se.James C. Hughes, for respondent.Opinion by GERBERThis case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. 1 Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.This proceeding was commenced under section 6015(e) for review of respondent's determination that petitioner is not entitled to relief from joint and several liability with respect to underpayments of Federal income tax reported on joint Federal income tax returns filed for 1997 and 2000. 2
Petitioner resided in California at the time her petition was filed. She married David Schoenbrun (Mr. Schoenbrun) on August 25, 1991, and they were divorced on May 4, 2004. For the years 1991 through 1996 petitioner and Mr. Schoenbrun filed separate Federal income tax returns. During 1997, however, petitioner stopped working, had no income, and was attending graduate school. She paid her tuition by means of student loans and financial assistance but relied on Mr. Schoenbrun for household living expenses, including food, rent, utilities, etc. During 1998 petitioner received a master's degree in social welfare.Mr. Schoenbrun's income tax returns were prepared by a professional tax preparer. Regarding the 1997 income tax return, the tax preparer advised Mr. Schoenbrun to request that petitioner file a joint income tax return with Mr. Schoenbrun in order to decrease his tax liability. He asked petitioner to file jointly for 1997, and she was reluctant because she had no source of income and was a student at the time. Out of caution, petitioner had filed separate returns before 1997 even during years that she had income because of her wish not to be liable for Mr. Schoenbrun's obligations. Mr. Schoenbrun assured petitioner that he would pay the tax liability on the 1997 income tax return.The 1997 joint Federal income tax return (1997 joint return) reflected a $7,181 income tax liability and wage withholding of $3,945. Petitioner was aware that there was an unpaid balance on the 1997 joint return. Petitioner ultimately agreed to execute the 1997 joint return with Mr. Schoenbrun on the basis of his representation that he would pay the unpaid tax balance. At the time of signing the 1997 joint return petitioner was aware that Mr. Schoenbrun had a history of financial problems, although she understood that he was paying the household expenses and his income tax liabilities, albeit untimely. Mr. Schoenbrun knew he could not pay the liability, and unbeknownst to petitioner, he lied to her at the time she signed the 1997 joint return. Additionally, and at the time petitioner signed the 1997 joint return, Mr. Schoenbrun did not disclose to her that he had unpaid tax liabilities for his individual 1993, 1994, 1995, and 1996Federal income tax returns.Respondent assessed the unpaid 1997 tax liability, but petitioner did not see any of the notifications of the assessment or collection because Mr. Schoenbrun kept that information from her. For the taxable years 1998, 1999, and 2001 petitioner did not execute a joint income tax return with Mr. Schoenbrun. For the 2000 and 2002 tax years, petitioner did execute joint income tax returns with Mr. Schoenbrun. For 1998 and 1999 petitioner attempted to file Federal income tax returns with single filing status. Because she was married to Mr. Schoenbrun during those years, petitioner was technically not entitled to single filing status. 3Petitioner timely filed her 2007 Federal income tax return seeking a refund, and on April 15, 2008, respondent credited $9,211.69 and $357.86 of that refund to outstanding 1997 and 2000 joint tax liabilities, respectively. On April 28, 2008, respondent notified petitioner of the offsets, and on May 12, 2009 (within 2 years from the notification), petitioner filed a Form 8857, Request for Innocent Spouse Relief. The facts petitioner relied upon in her request for relief are, in all pertinent respects, the same as those in the record. After considering petitioner's request, respondent notified her that her claim for relief was denied. Subsequently, petitioner filed a petition seeking this Court's review of respondent's determination.
Petitioner seeks review of respondent's denial of relief from joint liability for 1997. The matter arose when respondent offset part of petitioner's 2007 tax refund against the unpaid 1997 joint tax liability which was solely attributable to petitioner's Mr. Schoenbrun's income. Respondent agrees that petitioner meets the threshold test for consideration of section 6015(f) relief. However, respondent contends that petitioner is not entitled to relief because she failed to show that she met two principal criteria for relief. 4 Those criteria involve whether petitioner knew or had reason to know that Mr. Schoenbrun would not pay the tax liability and whether she meets the financial hardship test.A married taxpayer who elects to file a joint Federal income tax return is generally jointly and severally liable for the entire tax due for that year. Sec. 6013(a), (d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000). Under section 6015, however, a spouse who filed a joint income tax return may seek relief from joint and several liability. Relief may be sought pursuant to different circumstances provided for in section 6015(a), (b), and (c). If a taxpayer does not qualify for relief under either section 6015(b) or (c), equitable relief may be sought under section 6015(f). The Secretary has discretion to grant equitable relief to a spouse who filed a joint income tax return for which a reported liability remains unpaid or to one who has a deficiency (or any portion of either). Sec. 6015(f); sec. 1.6015-4(a), Income Tax Regs.Petitioner does not qualify for relief under sec. 6015(b) or (c) because the tax liability involved was an underpayment. Petitioner bears the burden of showing that she is entitled to section 6015 (innocent spouse) relief. See Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 [93 AFTR 2d 2004-2561] (6th Cir. 2004). The scope and standard of this Court's review in cases involving requests for equitable relief from joint and several income tax liability are de novo. Porter v. Commissioner, 132 T.C. 203 (2009).The procedures under which the Commissioner determines whether a spouse qualifies for relief are set forth in Rev. Proc. 2003-61, 2003-2 C.B. 296. Under those procedures a requesting spouse must meet seven threshold requirements to be considered for equitable relief. Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297. Respondent concedes that petitioner meets all seven of the threshold requirements.If a requesting spouse satisfies the threshold requirements, the Commissioner then looks to Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298, for the criteria or guidelines of circumstances in which relief will ordinarily be granted under section 6015(f) with respect to an underpayment of a properly reported liability. The principal criteria considered are whether a requesting spouse is no longer married to or legally separated from the nonrequesting spouse on the date of the request for relief; had no knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability; and Even though a requesting will suffer economic hardship. Id. spouse fails to qualify for relief under Rev. Proc. 2003-61, sec. 4.02, the Commissioner may still grant relief under Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298.The two principal criteria in dispute are whether petitioner knew or had reason to know that Mr. Schoenbrun would not pay their 1997 tax liability and whether she will suffer financial hardship if relief is not granted. As to whether petitioner knew or had reason to know that Mr. Schoenbrun would not pay the income tax liability, the relevant knowledge is knowing when the income tax return was signed that the tax would not be paid. Rev. Proc. 2003-61, sec. 4.02(1)(b). The following factors are used in determining whether the requesting spouse had reason to know: (1) The requesting spouse's level of education, (2) any deceit or evasiveness of the nonrequesting spouse, (3) the requesting spouse's degree of involvement in the activity generating the income tax liability, (4) the requesting spouse's involvement in business and household financial matters, (5) the requesting spouse's business or financial expertise, and, (6) any lavish or unusual expenditures compared with past spending levels. See Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(C). A taxpayer who signs a return is generally charged with constructive knowledge of its contents. Hayman v. Commissioner, 992 F.2d 1256, 1262 [71 AFTR 2d 93-1763] (2d Cir. 1993), affg. T.C. Memo. 1992-228 [1992 RIA TC Memo ¶92,228].Petitioner was college educated; however, her degree was in social welfare rather than business or accounting. She was not working and had no income during 1997 and was not involved in Mr. Schoenbrun's work or finances. She was aware that he was having some financial difficulties, but he was paying the household and living expenses, albeit untimely. More specifically, Mr. Schoenbrun intentionally kept information about his tax debts from petitioner and intentionally deceived her into believing that he would pay the 1997 tax liability if she would sign the 1997 joint return.Petitioner did not have any lavish or unusual expenditures and was a student with student loans and was receiving financial assistance during the 1997 tax year. Petitioner was aware that the 1997 joint return had an unpaid balance due to the Government but believed that Mr. Schoenbrun would pay that balance in the same manner as he had been paying the couple's other living expenses.Under these circumstances, petitioner did not know and had no reason to know when the income tax return was filed that the tax liability would not be paid.Economic hardship may exist if collection of the tax liability will cause the taxpayer to be unable to pay reasonable basic living expenses. Rev. Proc. 2003-61, sec. 4.02(1)(c). The Commissioner uses the factors provided in section 301.6343-1(b)(4), Proced. & Admin. Regs. The pertinent factors to be considered here are: (1) Petitioner's age, employment status and history, ability to earn, and number of dependents;(2) the amount reasonably necessary for food, clothing, housing(including utilities, homeowner's insurance, homeowner's association dues, and the like), medical expenses (including health insurance), transportation, and current tax payments (including Federal, State, and local); (3) the cost of living in the geographic area in which petitioner resides; and, (4) any other factor that petitioner claims bears an economic hardship. See sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs.At the time of trial petitioner had three dependents, two preschool children and her mother. Her boyfriend (the father of her children) also lived in her home and shared some of the living expenses. Respondent, following standard guidelines for basic living expenses, determined that petitioner's necessary monthly living expenses should be $4,877. As one of the criteria for denying relief, respondent relied on the fact that petitioner's mortgage, interest, utilities, and property taxes exceeded the “necessary” amount and, additionally, that her boyfriend shared some of the household living costs.Petitioner contends that respondent's reliance on the $4,877 figure is misplaced because respondent used figures for a family of four, whereas petitioner's household comprises five. Respondent's reliance on monthly living expense calculations for a family of four does appear to be misplaced in the light of the fact that respondent acknowledges that petitioner's boyfriend contributed to the household costs. Next, petitioner points out that her salary from the unified school district has decreased precipitously since respondent reviewed and denied her request and that announced cutbacks will cause further reductions in her salary.Under these circumstances, we find respondent's determination that this factor weighs against relief to be of little import and that petitioner's financial circumstances should not have resulted in denial of relief.In summary, all criteria are favorable to her entitlement to equitable relief from joint liability. With respect to her financial circumstances, they do not indicate a standard of living that is much if in any amount in excess of the minimal standards by which respondent measures this criterion. This is especially so where, as here, respondent used the wrong standard by not including the fifth person in the analysis. Although respondent determined that petitioner knew or had reason to know that Mr. Schoenbrun could not pay, petitioner provided ample evidence at trial showing that she did not know and that the information was intentionally kept from her. We hold that petitioner is therefore entitled to equitable relief from the 1997 joint tax liability under section 6015(f).To reflect the foregoing, Decision will be entered for petitioner.
Unless otherwise indicated, all section references are to the Internal Revenue Code as currently in effect, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioner agrees that she is not entitled to relief for the 2000 tax year and petitions solely for review of the 1997 tax year.
The distinction between filing as an “unmarried individual” rather than “separately” is that for purposes of filing status, a married person must file either jointly or married filing separately. Petitioner incorrectly attempted to file as an unmarried individual.
Respondent also argued that petitioner had not been in compliance with her tax filing obligations because she attempted to file income tax returns as an unmarried individual during 1998 and 1999 when she was technically not entitled to do so because she was married at the end of each year. We find respondent's argument to be superficial and not worthy of consideration. Even if we considered that aspect, petitioner's action would not rise to the level of being detrimental to her request for relief. It should also be noted that respondent conceded that all other criteria used to determine whether petitioner is entitled to relief are favorable to her.