Thursday, January 26, 2012

Innocent Spouse standards

Notice 2012-8, 2012-4 IRB 309, 01/05/2012, IRC Sec(s). 6015






Relief from joint and several liability on joint return.

Headnote:

IRS issued proposed rev proc that is intended to update guidance on equitable relief from tax liability that was last expressed in Rev. Proc. 2003-61,2003-2 CB 296. Based on experience, IRS will take greater account of abuse and financial control by nonrequesting spouse that may mitigate other factors otherwise weighing against granting equitable relief under Code Sec. 6015(f); . Until finalized, IRS will apply proposed guidance, rather than established guidance, unless requesting spouse concludes that previous guidance will yield more favorable result. Public comment is invited and should be submitted by 2/21/2012.



Reference(s): ¶ 60,155.01(5); ¶ 665.01(3); Code Sec. 6015; Code Sec. 66;



Full Text:

This notice provides a proposed revenue procedure that would update Rev. Proc. 2003-61, 2003-2 C.B. 296, which provides guidance regarding equitable relief from income tax liability under section 66(c) and section 6015(f) of the Internal Revenue Code. Since the issuance of Rev. Proc. 2003-61 in August 2003, the Internal Revenue Service's experience in working section 6015(f) equitable relief cases has grown significantly. This proposed update to Rev. Proc. 2003-61 addresses the criteria used in making innocent spouse relief determinations for section 6015(f) equitable relief cases and revises the factors for granting equitable relief. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process.



Significantly, this proposed revenue procedure expands how the IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted. Review of the innocent spouse program demonstrated that when a requesting spouse has been abused by the nonrequesting spouse, the requesting spouse may not have been able to challenge the treatment of any items on the joint return, question the payment of the taxes reported as due on the joint return, or challenge the nonrequesting spouse's assurance regarding the payment of the taxes. Review of the program also highlighted that lack of financial control may have a similar impact on the requesting spouse's ability to satisfy joint tax liabilities. As a result, this proposed revenue procedure provides that abuse or lack of financial control may mitigate other factors that might otherwise weigh against granting equitable relief under section 6015(f).



The proposed revenue procedure also provides for certain streamlined case determinations; new guidance on the potential impact of economic hardship; and the weight to be accorded to certain factual circumstances in determining equitable relief.



The proposed revenue procedure sets forth the background concerning the relief from joint and several liability under section 6015, a summary of the proposed changes to Rev. Proc. 2003-61, and the proposed text of the updated revenue procedure. Before issuing an updated revenue procedure addressing the equitable relief under section 6015(f), the Department of the Treasury and the Internal Revenue Service invite comments from the public regarding the proposed revenue procedure. Treasury and the Service also invite comments related to the administration of the innocent spouse relief program. Because the provisions in the proposed revenue procedure expand the equitable relief analysis by providing additional considerations for taxpayers seeking relief, until the revenue procedure is finalized, the Service will apply the provisions in the proposed revenue procedure instead of Rev. Proc. 2003-61 in evaluating claims for equitable relief under section 6015(f). If taxpayers conclude that they would receive more favorable treatment under one or more of the factors provided in Rev. Proc. 2003-61 they should advise the Service in their application for relief or supplement an already existing application. Then the Service will apply those factors from Rev. Proc. 2003-61, until a new revenue procedure is finalized. Comments also are requested on any factors contained in Rev. Proc. 2003-61 that might be interpreted as being more favorable to requesting spouses than those proposed in this notice.



Comments should be submitted by February 21, 2012 to:



Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2012-8)

Room 5203

P.O. Box 7604

Ben Franklin Station

Washington, D.C. 20044

or hand deliver comments Monday through Friday between the hours of 8 a.m. and 4 p.m. to:



Courier's Desk

Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2012-8)

1111 Constitution Avenue, N.W.

Washington, D.C. 20224

Alternatively, persons may submit comments electronically via e-mail to the following address: Notice.Comments@irscounsel.treas.gov. Persons should include “Notice 2012-8” in the subject line. All comments submitted by the public will be available for public inspection and copying in their entirety.



Proposed Rev. Proc. [XXXX-XX]



SECTION 1. PURPOSE AND SCOPE



.01 Purpose. This revenue procedure provides guidance for a taxpayer seeking equitable relief from income tax liability under section 66(c) or section 6015(f) of the Internal Revenue Code (a “requesting spouse”). Section 4.01 of this revenue procedure provides the threshold requirements for any request for equitable relief. Section 4.02 of this revenue procedure sets forth the conditions under which the Internal Revenue Service will make streamlined relief determinations granting equitable relief under section 6015(f) from an understatement of income tax or an underpayment of income tax reported on a joint return. Section 4.03 of this revenue procedure provides a nonexclusive list of factors for consideration in determining whether relief should be granted under section 6015(f) because it would be inequitable to hold a requesting spouse jointly and severally liable when the conditions of section 4.02 are not met. The factors in section 4.03 also will apply in determining whether to relieve a spouse from income tax liability resulting from the operation of community property law under the equitable relief provision of section 66(c).



.02 Scope. This revenue procedure applies to spouses who request either equitable relief from joint and several liability under section 6015(f), or equitable relief under section 66(c) from income tax liability resulting from the operation of community property law.



SECTION 2. BACKGROUND



.01 Section 6013(d)(3) provides that married taxpayers who file a joint return under section 6013 will be jointly and severally liable for the income tax arising from that joint return. For purposes of section 6013(d)(3) and this revenue procedure, the term “tax” includes penalties, additions to tax, and interest. See sections 6601(e)(1) and 6665(a)(2).



.02 Section 3201(a) of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685, 734 (RRA), enacted section 6015, which provides relief in certain circumstances from the joint and several liability imposed by section 6013(d)(3). Section 6015(b) and (c) specify two sets of circumstances under which relief from joint and several liability is available in cases involving understatements of tax. Section 6015(b) is modeled after former section 6013(e), the prior innocent spouse statute, and section 6015(c) provides for separation of liability. If relief is not available under section 6015(b) or (c), section 6015(f) authorizes the Secretary to grant equitable relief if, taking into account all the facts and circumstances, the Secretary determines that it is inequitable to hold a requesting spouse liable for any unpaid tax or any deficiency (or any portion of either). Section 66(c) provides relief from income tax liability resulting from the operation of community property law to taxpayers domiciled in a community property state who do not file a joint return. Section 3201(b) of RRA amended section 66(c) to add an equitable relief provision similar to section 6015(f).



.03 Section 6015 provides relief only from joint and several liability arising from a joint return. If an individual signs a joint return under duress, the election to file jointly is not valid and there is no valid joint return. The individual is not jointly and severally liable for any income tax liabilities arising from that return. Therefore, section 6015 does not apply and is not necessary for obtaining relief.



.04 Under section 6015(b) and (c), relief is available only from an understatement or a deficiency. Section 6015(b) and (c) do not authorize relief from an underpayment of income tax reported on a joint return. Section 66(c) and section 6015(f) permit equitable relief from an underpayment of income tax or from a deficiency. The legislative history of section 6015 provides that Congress intended for the Secretary to exercise discretion in granting equitable relief from an underpayment of income tax if a requesting spouse “does not know, and had no reason to know, that funds intended for the payment of tax were instead taken by the other spouse for such other spouse's benefit.” H.R. Conf. Rep. No. 105-599, at 254 (1998). Congress also intended for the Secretary to exercise the equitable relief authority under section 6015(f) in other situations if, “taking into account all the facts and circumstances, it is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return.” Id.



SECTION 3. SIGNIFICANT CHANGES



This revenue procedure supersedes Revenue Procedure 2003-61, changing the following:



.01 Section 4.01(3) of this revenue procedure provides that a request for equitable relief under section 6015(f) or section 66(c) must be filed before the expiration of the period of limitation for collection under section 6502, or, if applicable, the period of limitation for credit or refund under section 6511. This is a significant change to the requirement in Revenue Procedure 2003-61, section 4.01(3) and Treas. Reg. § 1.6015-5(b)(1) (TD 9003), that the requesting spouse's claim for equitable relief must be filed no later than two years after the date of the Service's first collection activity. See Notice 2011-70.



.02 Section 4.01(7)(e) of this revenue procedure adds a new exception to the threshold condition in section 4.01(7) that the income tax liability must be attributable to an item of the nonrequesting spouse, when the nonrequesting spouse's fraud gave rise to the understatement of tax or deficiency.



.03 Section 4.02 of this revenue procedure has been revised to apply to understatements of income tax in addition to underpayments. Section 4.02 has also been revised to apply to claims for equitable relief under section 66(c).



.04 Section 4.03(2) is revised to clarify that no one factor or a majority of factors necessarily controls the determination. Therefore, depending on the facts and circumstances of the case, relief may still be appropriate if the number of factors weighing against relief exceeds the number of factors weighing in favor of relief, or a denial of relief may still be appropriate if the number of factors weighing in favor of relief exceeds the number of factors weighing against relief.



.05 Section 4.03(2)(b) of this revenue procedure revises the economic hardship equitable factor to provide minimum standards based on income, expenses, and assets, for determining whether the requesting spouse would suffer economic hardship if relief is not granted. Section 4.03(2)(b) is also revised to provide that the lack of a finding of economic hardship does not weigh against relief.



.06 Section 4.03(2)(c)(i) of this revenue procedure provides that actual knowledge of the item giving rise to an understatement or deficiency will no longer be weighed more heavily than other factors. Further, section 4.03(2)(c)(ii) clarifies that, for purposes of this factor, if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and, therefore, because of the abuse or financial control the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the nonrequesting spouse's retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse had knowledge or reason to know of the items giving rise to the understatement or deficiency.



.07 Section 4.03(2)(c)(ii) of this revenue procedure provides that, in determining whether the requesting spouse had knowledge or reason to know that the nonrequesting spouse would not pay the tax reported as due, the Service will consider whether the requesting spouse reasonably expected that the nonrequesting spouse would pay the tax liability within a reasonably prompt time. Further, section 4.03(2)(c)(ii) clarifies that for purposes of this factor, if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and, therefore, because of the abuse or financial control the requesting spouse was not able to question the payment of the taxes reported as due on the joint return or challenge the nonrequesting spouse's assurance regarding payment of the taxes for fear of the nonrequesting spouse's retaliation, then that abuse or financial control will result in this factor weighing in favor of relief even if the requesting spouse had knowledge or reason to know that the nonrequesting spouse would not pay the tax liability.



.08 Section 4.03(2)(d) of this revenue procedure clarifies that a requesting spouse's legal obligation to pay outstanding tax liabilities is a factor to consider in determining whether equitable relief should be granted, in addition to whether the nonrequesting spouse has a legal obligation to pay the tax liabilities.



.09 Section 4.03(2)(f) of this revenue procedure is revised to provide that the fact that a requesting spouse is subsequently compliant with all Federal income tax laws is a factor that may weigh in favor of relief.



.10 Section 4.04 of this revenue procedure broadens the availability of refunds in cases involving deficiencies by eliminating the rule in section 4.04(1) of Rev. Proc. 2003-61 that limited refunds in cases involving deficiencies to payments made by the requesting spouse pursuant to an installment agreement.



SECTION 4. GENERAL CONDITIONS FOR RELIEF



.01 Eligibility for equitable relief. A requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under section 6015(f). With the exception of conditions (1) and (2), a requesting spouse must satisfy all of the following threshold conditions to be eligible to submit a request for equitable relief under section 66(c). The Service may relieve a requesting spouse who satisfies all the applicable threshold conditions set forth below of all or part of the income tax liability under section 66(c) or section 6015(f) if, taking into account all the facts and circumstances, the Service determines that it would be inequitable to hold the requesting spouse liable for the income tax liability. The threshold conditions are as follows:



(1) The requesting spouse filed a joint return for the taxable year for which he or she seeks relief.

(2) Relief is not available to the requesting spouse under section 6015(b) or (c).

(3) Time for filing claim for relief:

(a) If the requesting spouse is applying for relief from a liability or a portion of a liability that remains unpaid, the request for relief must be made before the expiration of the period of limitation on collection of the income tax liability, as provided in section 6502. Generally, that period expires 10 years after the assessment of tax. Section 6502.

(b) Claims for credit or refund of amounts paid must be made before the expiration of the period of limitation on credit or refund, as provided in section 6511. Generally, that period expires three years from the time the return was filed or two years from the time the tax was paid, whichever is later.

(4) No assets were transferred between the spouses as part of a fraudulent scheme by the spouses.

(5) The nonrequesting spouse did not transfer disqualified assets to the requesting spouse. For this purpose, the term “disqualified asset” has the meaning given the term by section 6015(c)(4)(B). If the nonrequesting spouse transferred disqualified assets to the requesting spouse, relief will be available only to the extent that the income tax liability exceeds the value of the disqualified assets. This condition will not result in the requesting spouse being ineligible for relief if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, or the requesting spouse did not have actual knowledge that disqualified assets were transferred.

(6) The requesting spouse did not knowingly participate in the filing of a fraudulent joint return.

(7) The income tax liability from which the requesting spouse seeks relief is attributable (either in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse's income. If the liability is partially attributable to the requesting spouse, then relief can only be considered for the portion of the liability attributable to the nonrequesting spouse. Nonetheless, the Service will consider granting relief regardless of whether the understatement, deficiency, or underpayment is attributable (in full or in part) to the requesting spouse if any of the following exceptions applies:

(a) Attribution solely due to the operation of community property law. If an item is attributable or partially attributable to the requesting spouse solely due to the operation of community property law, then for purposes of this revenue procedure, that item (or portion thereof) will be considered to be attributable to the nonrequesting spouse.

(b) Nominal ownership. If the item is titled in the name of the requesting spouse, the item is presumptively attributable to the requesting spouse. This presumption is rebuttable. For example, H opens an individual retirement account (IRA) in W's name and forges W's signature on the IRA in 2006. Thereafter, H makes contributions to the IRA and in 2008 takes a taxable distribution from the IRA. H and W file a joint return for the 2008 taxable year, but do not report the taxable distribution on their joint return. The Service later determines a deficiency relating to the taxable IRA distribution. W requests relief from joint and several liability under section 6015. W establishes that W did not contribute to the IRA, sign paperwork relating to the IRA, or otherwise act as if W were the owner of the IRA. W thereby rebutted the presumption that the IRA is attributable to W.

(c) Misappropriation of funds. If the requesting spouse did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by the nonrequesting spouse for the nonrequesting spouse's benefit, the Service will consider granting equitable relief although the underpayment may be attributable in part or in full to an item of the requesting spouse. The Service will consider granting relief in the case only to the extent that the funds intended for the payment of tax were taken by the nonrequesting spouse.

(d) Abuse not amounting to duress. If the requesting spouse establishes that he or she was the victim of abuse prior to the time the return was signed, and that, as a result of the prior abuse, the requesting spouse did not challenge the treatment of any items on the return, or question the payment of any balance due reported on the return, for fear of the nonrequesting spouse's retaliation, the Service will consider granting equitable relief even though the deficiency or underpayment may be attributable in part or in full to an item of the requesting spouse.

(e) Fraud committed by nonrequesting spouse. The Service will consider granting relief notwithstanding that the item giving rise to the understatement or deficiency is attributable to the requesting spouse, if the requesting spouse establishes that the nonrequesting spouse's fraud is the reason for the erroneous item. For example, W fraudulently accesses H's brokerage account to sell stock that H had separately received from an inheritance. W deposits the funds from the sale in a separate bank account to which H does not have access. H and W file a joint Federal income tax return for the year, which does not report the income from the sale of the stock. The Service determines a deficiency based on the omission of the income from the sale of the stock. H requests relief from the deficiency under section 6015(f). The income from the sale of the stock normally would be attributable to H. Because W committed fraud with respect to H, however, and because this fraud was the reason for the erroneous item, the liability is properly attributable to W.

.02. Circumstances under which the Service will make streamlined determinations granting equitable relief under sections 66(c) and 6015(f).



If a requesting spouse who filed a joint return, or a requesting spouse who filed a separate return in a community property state, satisfies the threshold conditions of section 4.01, the Service will consider whether the requesting spouse is entitled to a streamlined determination of equitable relief under section 66(c) or section 6015(f) under section 4.02.



If a requesting spouse is not entitled to a streamlined determination because the requesting spouse does not satisfy all the elements in section 4.02, the requesting spouse is still entitled to be considered for relief under the equitable factors in section 4.03. The Service will make streamlined determinations granting equitable relief under sections 66(c) and 6015(f), in cases in which the requesting spouse establishes that the requesting spouse:



(1) Is no longer married to the nonrequesting spouse as set forth in section 4.03(2)(a);

(2) Would suffer economic hardship if relief were not granted as set forth in section 4.03(2)(b); and

(3) Did not know or have reason to know that there was an understatement or deficiency on the joint return, as set forth in section 4.03(2)(c)(i), or did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return, as set forth in section 4.03(2)(c)(ii). If the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse's access to financial information, and therefore, because of the abuse or financial control the requesting spouse was not able to challenge the treatment of any items on the joint return, or to question the payment of the taxes reported as due on the joint return or challenge the nonrequesting spouse's assurance regarding payment of the taxes, for fear of the nonrequesting spouse's retaliation, then the abuse or financial control will result in this factor being satisfied even if the requesting spouse had knowledge or reason to know of the items giving rise to the understatement or deficiency or had knowledge or reason to know that the nonrequesting spouse would not pay the tax liability.

.03. Factors for determining whether to grant equitable relief.



(1) Applicability. This section 4.03 applies to requesting spouses who request relief under section 66(c) or section 6015(f), and satisfy the threshold conditions of section 4.01, but do not qualify for streamlined determinations granting relief under section 4.02.

(2) Factors. In determining whether it is inequitable to hold the requesting spouse liable for all or part of the unpaid income tax liability or deficiency, and full or partial equitable relief under section 66(c) or section 6015(f) should be granted, all the facts and circumstances of the case are to be taken into account. The degree of importance of each factor varies depending on the circumstances of the requesting spouse and the factual context surrounding the marriage. The factors are designed as guides. It is not intended that only the factors described in this paragraph are to be taken into account in making the determination. No one factor or a majority of factors necessarily determines the outcome.

Factors to consider include the following:



(a) Marital status. Whether the requesting spouse is no longer married to the nonrequesting spouse as of the date the Service makes its determination. If the requesting spouse is still married to the nonrequesting spouse, this factor is neutral. If the requesting spouse is no longer married to the nonrequesting spouse, this factor will weigh in favor of relief. For purposes of this section, a requesting spouse will be treated as being no longer married to the nonrequesting spouse only in the following situations:

(i) The requesting spouse is divorced from the nonrequesting spouse,

(ii) The requesting spouse is legally separated from the nonrequesting spouse under applicable state law,

(iii) The requesting spouse is a widow or widower and is not an heir to the nonrequesting spouse's estate which would have sufficient assets to pay the tax liability, or

(iv) The requesting spouse has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date relief was requested. For these purposes, a temporary absence (e.g., due to incarceration, illness, business, military service, or education) is not considered separation if the absent spouse is expected to return to the household. See Treas. Reg. § 1.6015-3(b)(3)(i). A requesting spouse is a member of the same household as the nonrequesting spouse for any period in which the spouses maintain the same residence.

(b) Economic hardship. Whether the requesting spouse will suffer economic hardship if relief is not granted. For purposes of this factor, an economic hardship exists if satisfaction of the tax liability in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living expenses. Whether the requesting spouse will suffer economic hardship is determined based on rules similar to those provided in §301.6343- 1(b)(4), and will take into consideration a requesting spouse's current income and expenses and the requesting spouse's assets. In determining the requesting spouse's reasonable basic living expenses, the Service will consider whether the requesting spouse shares expenses or has expenses paid by another individual (such as a spouse). If denying relief from the joint and several liability will cause the requesting spouse to suffer economic hardship, this factor will weigh in favor of relief. If denying relief from the joint and several liability will not cause the requesting spouse to suffer economic hardship, this factor will be neutral.

In determining whether the requesting spouse would suffer economic hardship if relief is not granted, the Service will compare the requesting spouse's income to the Federal poverty guidelines (as updated periodically in the Federal Register by the U.S. Department of Health and Human Services under the authority of 42 U.S.C. § 9902(2)) for the requesting spouse's family size and will determine by how much, if at all, the requesting spouse's monthly income exceeds the spouse's reasonable basic monthly living expenses.



If the requesting spouse's income is below 250% of the Federal poverty guidelines, or if the requesting spouse's monthly income exceeds the requesting spouse's reasonable basic monthly living expenses by $300 or less, then this factor will weigh in favor of relief unless the requesting spouse has assets out of which the requesting spouse can make payments towards the tax liability and still adequately meet the requesting spouse's reasonable basic living expenses. If the requesting spouse's income exceeds these standards, the Service will consider all facts and circumstances in determining whether the requesting spouse would suffer economic hardship if relief is not granted. If the requesting spouse is deceased, this factor is neutral.



(c) Knowledge or reason to know.

(i) Understatement cases. Whether the requesting spouse knew or had reason to know of the item giving rise to the understatement or deficiency at the time the requesting spouse signed the joint return (including a joint amended return). In the case of an income tax liability that arose from an understatement or a deficiency, this factor will weigh in favor of relief if the requesting spouse did not know and had no reason to know of the item giving rise to the understatement. If the requesting spouse knew or had reason to know of the item giving rise to the understatement, this factor will weigh against relief. Actual knowledge of the item giving rise to the understatement or deficiency will not be weighed more heavily than any other factor. Depending on the facts and circumstances, if the requesting spouse was abused by the nonrequesting spouse (as described in section 4.03(2)(c)(iv)), or the nonrequesting spouse maintained control of the household finances by restricting the requesting spouse's access to financial information and, therefore, the requesting spouse was not able to challenge the treatment of any items on the joint return for fear of the nonrequesting spouse's retaliation, this factor will weigh in favor of relief even if the requesting spouse had knowledge or reason to know of the items giving rise to the understatement or deficiency.

(ii) Underpayment cases. In the case of an income tax liability that was properly reported on a joint return (including a joint amended return) but not paid, whether the requesting spouse knew or had reason to know at the time the requesting spouse signed the joint return that the nonrequesting spouse would not or could not pay the tax liability at the time the joint return was filed or within a reasonably prompt time after the filing of the joint return.

This factor will weigh in favor of relief if the requesting spouse reasonably expected the nonrequesting spouse to pay the tax liability reported on the joint return. This factor will weigh against relief if, based on the facts and circumstances of the case, it was not reasonable for the requesting spouse to believe that the nonrequesting spouse would or could pay the tax liability shown on the joint return within a reasonably prompt time after filing of the return. For example, if prior to signing the return, the requesting spouse knew of the nonrequesting spouse's prior bankruptcies, financial difficulties, or other issues with the IRS or other creditors, or was otherwise aware of difficulties in timely paying bills, then this factor will generally weigh against relief. Depending on the facts and circumstances, if the requesting spouse was abused by the nonrequesting spouse (as described in section 4.03(2)(c)(iv)), or the nonrequesting spouse maintained control of the household finances by restricting the requesting spouse's access to financial information and, therefore, the requesting spouse was not able to question the payment of the taxes reported as due on the joint return or challenge the nonrequesting spouse's assurance regarding payment of the taxes for fear of the nonrequesting spouse's retaliation, this factor will weigh in favor of relief even if the requesting spouse had knowledge or reason to know regarding the nonrequesting spouse's intent or ability to pay the taxes due.



(iii) Reason to know. The facts and circumstances that are considered in determining whether the requesting spouse had reason to know of an understatement, or reason to know the nonrequesting spouse could not or would pay the reported tax liability, include, but are not limited to, the requesting spouse's level of education, any deceit or evasiveness of the nonrequesting spouse, the requesting spouse's degree of involvement in the activity generating the income tax liability, the requesting spouse's involvement in business and household financial matters, the requesting spouse's business or financial expertise, and any lavish or unusual expenditures compared with past spending levels.

(iv) Abuse by the nonrequesting spouse. For purposes of this revenue procedure, if the requesting spouse establishes that he or she was the victim of abuse (not amounting to duress, see Treas. Reg. § 1.6015-1(b)), then depending on the facts and circumstances of the requesting spouse's situation, the abuse may result in certain factors weighing in favor of relief when otherwise the factor may have weighed against relief. Abuse comes in many forms and can include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate and intimidate the requesting spouse, or to undermine the requesting spouse's ability to reason independently and be able to do what is required under the tax laws. All the facts and circumstances are considered in determining whether a requesting spouse was abused. The impact of a nonrequesting spouse's alcohol or drug abuse is also considered in determining whether a requesting spouse was abused.

(d) Legal obligation. Whether the requesting spouse or the nonrequesting spouse has a legal obligation to pay the outstanding Federal income tax liability. For purposes of this factor, a legal obligation is an obligation arising from a divorce decree or other legally binding agreement. This factor will weigh in favor of relief if the nonrequesting spouse has the sole legal obligation to pay the outstanding income tax liability pursuant to a divorce decree or agreement. This factor, however, will be neutral if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the nonrequesting spouse would not pay the income tax liability. This factor will weigh against relief if the requesting spouse has the sole legal obligation. The fact that the nonrequesting spouse has been relieved of liability for the taxes at issue as a result of a discharge in bankruptcy is disregarded in determining whether the requesting spouse has the sole legal obligation. If, based on an agreement or consent order, both spouses have a legal obligation to pay the outstanding income tax liability, the spouses are not separated or divorced, or the divorce decree or agreement is silent as to any obligation to pay the outstanding income tax liability, this factor is neutral.

(e) Significant benefit. Whether the requesting spouse received significant benefit (beyond normal support) from the unpaid income tax liability or item giving rise to the deficiency. See Treas. Reg. § 1.6015-2(d). If the requesting spouse enjoyed the benefits of a lavish lifestyle, such as owning luxury assets and taking expensive vacations, this factor will weigh against relief. If the nonrequesting spouse controlled the household and business finances or there was abuse (as described in section 4.03(2)(c)(iv)) such that the nonrequesting spouse made the decision on spending funds for a lavish lifestyle, then this mitigates this factor so that it is neutral. If only the nonrequesting spouse significantly benefitted from the unpaid tax or item giving rise to an understatement or deficiency, and the requesting spouse had little or no benefit, or the nonrequesting spouse enjoyed the benefit to the requesting spouse's detriment, this factor will weigh in favor of relief. If the amount of unpaid tax or understated tax was small such that neither spouse received a significant benefit, then this factor is neutral.

(f) Compliance with income tax laws. Whether the requesting spouse has made a good faith effort to comply with the income tax laws in the taxable years following the taxable year or years to which the request for relief relates.

(1) If the requesting spouse is compliant for taxable years after being divorced from the nonrequesting spouse, then this factor will weigh in favor of relief. If the requesting spouse is not compliant, then this factor will weigh against relief. If the requesting spouse made a good faith effort to comply with the tax laws but was unable to fully comply, then this factor will be neutral. For example, if the requesting spouse timely filed an income tax return but was unable to fully pay the tax liability due to spouse's poor financial or economic situation after the divorce, then this factor will be neutral.

(2) If the requesting spouse remains married to the nonrequesting spouse, whether or not legally separated or living apart, and continues to file joint returns with the nonrequesting spouse after requesting relief, then this factor will be neutral if the joint returns are compliant with the tax laws, but will weigh against relief if the returns are not compliant.

(3) If the requesting spouse remains married to the nonrequesting spouse but files separate returns, this factor will weigh in favor of relief if the requesting spouse is compliant with the tax laws and will weigh against relief if the requesting spouse is not compliant with the tax laws. If the requesting spouse made a good faith effort to comply with the tax laws but was unable to fully comply, then this factor will be neutral. For example, if the requesting spouse timely filed an income tax return but was unable to fully pay the tax liability due to the requesting spouse's poor financial or economic situation as a result of being separated or living apart from the nonrequesting spouse, then this factor will be neutral.

(g) Mental or physical health. Whether the requesting spouse was in poor physical or mental health. This factor will weigh in favor of relief if the requesting spouse was in poor mental or physical health at the time the requesting spouse signed the return or returns for which the request for relief relates or at the time the requesting spouse requested relief.

The Service will consider the nature, extent, and duration of the condition. If the requesting spouse was in neither poor physical nor poor mental health, this factor is neutral.



.04. Refunds. In both understatement and underpayment cases, a requesting spouse is eligible for a refund of separate payments made by the requesting spouse after July 22, 1998, and the requesting spouse establishes that the funds used to make the payment for which a refund is sought were provided by the requesting spouse. A requesting spouse is not eligible for refunds of payments made with the joint return, joint payments, or payments that the nonrequesting spouse made. A requesting spouse, however, may be eligible for a refund of the requesting spouse's portion of the requesting and nonrequesting spouse's joint overpayment from another tax year that was applied to the joint income tax liability to the extent that the requesting spouse can establish that the requesting spouse provided the funds for the overpayment. The availability of refunds is subject to the refund limitations of section 6511.



SECTION 5. PROCEDURE



A requesting spouse seeking equitable relief under section 66(c) or section 6015(f) must file Form 8857, Request for Innocent Spouse Relief (and Separation of Liability, and Equitable Relief), or other similar statement signed under penalties of perjury, within the applicable period of limitation as set forth in section 4.01(3) of this revenue procedure.



SECTION 6. EFFECT ON OTHER DOCUMENTS



Revenue Procedure 2003-61, 2003-2 C.B. 296, is superseded.



SECTION 7. EFFECTIVE DATE



This revenue procedure is effective for requests for relief filed on or after [INSERT DATE REVENUE PROCEDURE IS RELEASED TO THE PUBLIC]. In addition, this revenue procedure is effective for requests for equitable relief pending on [INSERT DATE REVENUE PROCEDURE IS RELEASED TO THE PUBLIC], whether with the Service, the Office of Appeals, or in a case docketed with a Federal court.



SECTION 8. DRAFTING INFORMATION



The principal authors of this revenue procedure are Nancy Rose and Sheida Lahabi of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue procedure contact Branches 1 or 2 of Procedure and



Administration on (202) 622-4910 or (202) 622-4940 (not a toll free call).

Sunday, January 22, 2012

Exempt status

Private Letter Ruling 201202038, 1/13/2012, IRC Sec(s). 501






UIL No. 501.03-05; 501.32-00; 501.33-00



Exempt orgs.—exempt status—final adverse determinations.

Headnote:

IRS issued final adverse determination revoking Code Sec. 501(c)(3); org.'s exempt status, effective stated date, where org. failed to file protest to proposed adverse determination within requisite 30 days.



Reference(s): Code Sec. 501;



Full Text:

Number: 201202038



Contact Person:



Release Date: 1/13/2012



Identification Number:



Date: October 6, 2011



Contact Number:



Employer Identification Number:



Form Required To Be Filed: Tax



Years:



UIL: 501.03-05; 501.32-00; 501.33-00



Dear



This is our final determination that you do not qualify for exemption from Federal income tax as an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a letter in response to your application that proposed an adverse determination. The letter explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not receive a protest within the requisite 30 days, the proposed adverse determination is now final.



Since you do not qualify for exemption as an organization described in Code section 501(c)(3), donors may not deduct contributions to you under Code section 170. You must file Federal income tax returns on the form and for the years listed above within 30 days of this letter, unless you request an extension of time to file.



We will make this letter and our proposed adverse determination letter available for public inspection under Code section 6110, after deleting certain identifying information. Please read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, you should follow the instructions in Notice 437. If you agree with our deletions, you do not need to take any further action.



In accordance with Code section 6104(c), we will notify the appropriate State officials of our determination by sending them a copy of this final letter and the proposed adverse letter. You should contact your State officials if you have any questions about how this determination may affect your State responsibilities and requirements.



If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. If you have any questions about your



Federal income tax status and responsibilities, please contact IRS Customer Service at 1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The IRS



Customer Service number for people with hearing impairments is 1-800-829-4059.



Sincerely,



Lois Lerner



Director, Exempt Organizations



Enclosure



Notice 437



Redacted Proposed Adverse Determination Letter



Redacted Final Adverse Determination Letter



Date: August 9, 2011



Contact Person:



Identification Number:



Contact Number:



FAX Number:



Employer Identification Number:



LEGEND: UIL INDEX:



B = President of applicant 501.03.05



G = Contracted for-profit 501.32-00



H = Contracted for-profit 501.33-00



J = Related for-profit company



K = For-profit company



V = State



W = State x = Date



Dear



We have considered your application for recognition of exemption from federal income tax under Internal Revenue Code section 501(a). Based on the information provided, we have concluded that you do not qualify for exemption under Code section 501(c)(3). The basis for our conclusion is set forth below.



Issues:



1. Are you formed to obtain grants primarily benefitting B, through the for- profit company J? Yes, for the resons given below.

2. Will you operate in a commercial, non-exempt manner? Yes, for the reasons given below.

Facts: in state V.



The purpose of for-profit company J is to service and repair all heating, ventilation, and air conditioning (HVAC) equipment.



Company G explained to individual B that grants were available for businesses, but to secure the largest grants, individual B would need to create a nonprofit corporation. Individual B, with company G's assistance, incorporated you on date x in state V. Although you were formed in State V, you are actually operating in State W, and you are registered with state W as a foreign corporation.



You were working with company G regarding your formation, but your account was then taken over by company H. You stated company G "was talking to us about getting loans or grants for our existing company," for-profit J. You paid approximately $2000 to company G. You stated company H "ran some kind of report that got back 250 foundations that would fund a company with programs that we wanted to do for kids."



Company H told you that 98% of grants are given to non-profit companies, and in order to get funding for what you wanted to do, you would have to "open a 501(c)(3) company." You said an individual working for company H "sold" you a package which included setting up the company with the state and filing Form 1023 for tax exemption. You signed a contract with company H and paid them over $7000 to prepare and file your Articles of Incorporation, Bylaws, and your application for exemption, as well as provide paralegal services. The contract had an accompanying statement:



I hereby understand and agree that company H cannot provide me with tax advice. I further agree that I am not applying for non-profit status for the purposes of a tax shelter or tax avoidance purposes. I understand and agree that these services I am purchasing are not consumer purchases regulated under state/federal consumer fraud statutes nor are these services a product/service that can be returned for a refund. Therefore, all sales are final. I also understand and agree that company H is not responsible for any illegal acts, misuse, or abuse of the corporation to be formed on my behalf.



Between all of the contracts signed with companies G and H, you and for-profit J were promised almost $1,000,000.



Initially you did not have Bylaws and stated "the Bylaws are being written by company G."



You later submitted a copy of said Bylaws.



Your governing body initially consisted of four related individuals: Individual B, his wife, his daughter, and his mother. You later added four additional board members and said one of the related board members resigned due to health reasons. the-job training as well as classroom training. The students will create projects from sheet metal fabrication, welding of rod iron, and architecture blueprinting. You will also offer classes for stained glass fabrication, woodwork, floral arrangements, photography, pottery, leather crafts, graphic arts, and tee-shirt design printing for grammar school to junior high school-aged children.



There are 4 specific 6 week, 20 hour training classes. The students must complete all 24 weeks to complete the class. You will pay the trainees minimum wage during the training period. They will receive a Certificate for Completion for the class.



They are then referred to a local placement services for jobs that may be available in the area.



However, as long as you have funding and there is a need, the individual in your program will continue to work for you. You further stated you "need to take for-profit company J to the next level" and to do that you will need 10 full-time employees.



You have a shop and are ready to go. You also said "expectations are that approximately 50% of students completing the training programs will be hired by for-profit company J." You later contradicted your prior statement and said you only expect 50% of the students completing the first class will be hired by for-profit company J, for a total of 3 individuals. You further asserted referrals will be accepted from other businesses for those in need of training, which will be provided by you at no charge to the student.



In B's daily work with for-profit company J, he "comes across many community residents that are in need of services, but who cannot afford them. These people will be referred to you for assistance." You said "all services performed by the [you] will be free of charge to those in need, after an evaluation has been done of their circumstances."



Your projected percent of time and grant funds used for your initial activities are estimated as follows:



Vocational Education Program — Training



Individuals in the field of (HVAC)



Youth Arts and Crafts — Teaching various



Crafting techniques to students



Other Projects — Monthly craft shows and



Festivals 50% of your time and 45.5% of funds 40% of your time and 28.5% of funds 10% of your time and 26% of funds



Company H helped you by typing the answers to our inquiry letters. You communicated by telephone with company H regarding our inquires and they were the ones who actually typed the responses. However, you responded to one of our inquiry letters twice. It appears one of the responses was prepared by company H and one was prepared by you. The response you prepared stated 50% of the grant funding you receive will go back to for-profit company J for equipment, trucks, inventory, certified training, and to hire and train employees. The other response, which appeared to be prepared by company H, indicated there will be no commingling of funds "between our for-profit and non-profit companies."



Your original proposed budgets included about $600,000 per year in gifts, grants and contributions received for each of the first three years of operation. The expenses you included totaled less than $13,000 in the first year and approximately $83,000 for each of the following two years. One version of your two submitted responses included a revised first year budget that showed about $800,000 in revenue from grants. The expenses listed also totaled almost $800,000. The largest expenses were for advertising and marketing, equipment, and salaries for officers, teachers, and trainees.



The revised budget appears to have been prepared by company H. The response which appears to have been prepared by you included, rather than specific budgets, a statement that you "have projects coming up for non-profit in excess of 1.5 million over the next 2 years."



You are in the startup phase and no salaries or expenses are paid to any officer or employee at this time. Once actual funding is received and a "true budget" can be formed, officers will be paid a salary for "running the company." You were told by



G or H that you could take salaries of up to $50,000 per year, but for now everyone is a volunteer. Each of your board members will devote a minimum of 20 hours per week working for you. Although it's not set, pending funding, you will pay each of these directors a fair and reasonable salary for their work. You will start with an annual salary of $20,000 each.



Until a separate facility is secured with grant funding you stated you will use "a portion of the offices we now rent," referring to the offices of for-profit company J. You stated when the programs get under way "[you will] pay a portion of that rent, based on how much room is required for the training classes." You said the for-profit company J currently pays $1428 per month for rent. You later stated the portion of rent you intend to pay is $1200 per month, which is 84% of the total rent.



Law



Section 501(c)(3) of the Internal Revenue Code provides, in part, for the exemption from federal income tax of organizations organized and operated exclusively for charitable, religious or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.



Section 1.501(c)(3)-1(a)1 of the federal Tax Regulations provides that in order for an organization to be exempt under section 501(c)(3) of the Code it must be both organized and operated exclusively for one or more of the purposes specified in such section.



If an organization fails to meet either the organizational or operational test, it is not exempt.



Section 1.501(c)(3)-1(c)(2) of the regulations provides an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.



Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an exempt organization must serve a public rather than a private interest. The organization must demonstrate that it is not organized or operated to benefit private interests such as "designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests." Thus, if an organization is operated to benefit private interests rather than for public purposes, or is operated so that there is prohibited inurement of earnings to the benefit of private shareholders or individuals, it may not retain its exempt status.



Rev. Rul. 73-127, 1973-1 C.B. 221, states that an organization was formed to operate a retail grocery store to sell food to residents of a poverty area at prices substantially lower than those charged by competing grocery stores, to provide free grocery delivery service to residents who need it, and to provide job training for unemployed residents. The store's gross earnings are used principally to pay salaries and other customary operating expenses incurred in the operation of a retail grocery store and to expand the operations of the store. A trainee receives a small salary during the training period.



The organization does not plan for the majority of the trainees to continue as its employees.



Thus, it is concluded that operation of the store and operation of the training program are two distinct purposes and since the former purpose is not a recognized charitable purpose, the organization is not organized and operated exclusively for charitable purposes and the organization does not qualify for recognition of exemption from federal income tax under section 501(c)(3) of the Code.



Rev. Rul. 73-128, 1973-1 C.B. 222, states an organization was formed to provide vocational training and guidance to non-skilled persons who are unable to find employment.



The organization operates a number of community programs including classes in remedial reading and language skills, general counseling services, and job training programs. The organization recruits residents of a particular economically depressed community and who are unemployed or under-employed, and it provides them with new skills through on-the-job training while they are earning a living. Any income resulting from the organization's manufacturing operation is used to finance the organization's other community service activities. Accordingly, it is held that the organization's activities are charitable and educational and, since it otherwise qualifies for exemption, it is held that the organization is exempt from federal income tax under section 501(c)(3) of the Code.



Better Business Bureau of Washington, D.C., Inc v. United States, 326 U. S. 279 [34 AFTR 5] (1945), the Supreme Court of the United States interpreted the requirement in section 501(c)(3) that an organization be "operated exclusively" by indicating that an organization must be devoted to exempt purposes exclusively. This plainly means that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number and importance of truly exempt purposes.



Leon A. Beeghly Fund v. Commissioner, 35 T.C. 490 (1960) held that inurement occurred when an organization entered a transaction to benefit the stockholders of a particular business corporation, not to benefit the charity, even though the corporation suffered no financial loss. Where an exempt organization engages in a transaction with an insider and there is a purpose to benefit the insider rather than the organization, inurement occurs even though the transaction ultimately proves profitable for the exempt organization. The test is not ultimate profit or loss but whether, at every stage of the transaction, those controlling the organization guarded its interests and dealt with related parties at arm's-length.



In B. S. W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), it was stated that free or below cost service is only one of several factors to consider in determining commerciality. Others include the particular manner in which the organization's activities are conducted, the commercial hue of those activities, and the existence and amount of annual or accumulated profits. All of these must be considered, for no single factor alone is determinative. The Court concluded that the petitioner is not an organization described in section 501(c)(3) because its primary purpose is neither educational, scientific, nor charitable, but rather commercial.



In International Postgraduate Medical Foundation v. Commissioner, TCM 1989-36 (1989), the Tax Court considered the qualification for exemption under section 501(c)(3) of the Code of a nonprofit corporation that conducted continuing medical education tours. The petitioner had three trustees. Mr. Helin, who was a shareholder and the president of H & C Tours, a for profit travel agency. Mr. Regan, an attorney, and a third director who was ill and did not participate. Mr. Helin served as executive director. The petitioner used H & C Tours exclusively for all travel arrangements.



There is no evidence that the petitioner ever sought a competitive bid. The Court found that when a for-profit organization benefits substantially from the manner in which the activities of a related organization are carried on, the latter organization is not operated exclusively for exempt purposes within the meaning of section 501(c)(3) even if it furthers other exempt purposes.



In Living Faith Inc. v. Commissioner, 60 T.C.M., 710, 713 (1990), aff'd 950 F. 2d 365 [69 AFTR 2d 92-301] (Cir. 1991) the court said that the activities were conducted as a business and the organization was in direct competition with other restaurants and health food stores; thus it did not qualify for exemption under Section 501(c)(3).



Application of Law



You are not described in section 501(c)(3) of the Code because you are not operated exclusively for religious, charitable, or other purposes specified in the statute, and your net earnings inure to the benefit of private individuals.



Although you meet the organizational test, you do not satisfy the requirements of section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations because you do not meet the operational test.



You are not "operated exclusively for one or more exempt purposes" as set forth in section 1.501(c)(3)-1(c)(2) of the regulations because your net earnings inure to the benefit of for-profit company J and therefore, J's shareholders. The facts show that your president and founder, B, is also the owner of J. As a result of your activities and grant funding, J is receiving substantial private benefit in the form of a percentage of the grant funds intended for you. J will use these funds to increase revenue and grow its business. Thus, as a result of J's relationship with you, J receives the benefit of increased revenue. This situation leads to inurement of earnings accruing to B through J. Although you submitted conflicting information regarding whether or not for-profit company J will receive a percentage of the grant funds, it is evident that the entire reason you were formed was to secure grant funding and otherwise benefit the commercial operations of for-profit company J.



You are not operating exclusively for exempt purposes as described in Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations because you serve private interests, including benefiting the persons who created you. As explained above, the fact that a percentage of the grant funding intended for you will go to J, clearly shows that your activities substantially serve private interests. Moreover, since your president and founder is also the owner of J, your activities directly benefit the person who created you.



Based upon your stated activities, you plan to use grant money to provide facility upgrades and equipment to for-profit company J, which is owned by individual B. Also, you intend to pay a substantial portion of the rent for the facility that you share with for-profit company J.



Payments made for the benefit of a for-profit company through grant moneys constitute inurement of earnings and precludes exemption under Section 501(c)(3) of the Code.



The provision of practical, on-the-job vocational training may constitute an exempt educational activity under Section 501(c)(3) of the Code; however, your operations are similar to the retail grocery store operations carried on by the organization in Rev. Rul. 73-127, supra.



By contrast, your operations are unlike those of the organization in Rev. Rul. 73- 128, supra, whose activities were primarily educational. Your provision of HVAC training to individuals, some of which will become employees of individual B's for-profit company J, does not exclusively further one of the exempt purposes included in section 501(c)(3) of the Code. By training employees that will be hired by J, you are expending funds for training that would otherwise have to be paid by J if it were not for you.



This provides substantial private benefit to J. Since J is owned by your president, this training of J's employees constitutes inurement.



You are similar to the organization in Better Business Bureau of Washington, D.C., Inc v. United States, 326 U. S. 279 [34 AFTR 5] (1945), in that you are not "operated exclusively" for exempt purposes. Although you may have some charitable activities, you are substantially involved in furthering the private interests of your president and founder B, through his for-profit company J. Only a portion of grant funding will be available for your use because a percentage of grant funds will go directly to J. Like the organization in the court case, this single nonexempt purpose destroys your claim for exemption under section 501(c)(3) of the Code.



You are like the organization in Leon A. Beeghly Fund v. Commissioner, 35 T.C. 490 (1960). While it is true that receiving grant funding ultimately proves profitable to you, it is obvious you have a purpose to benefit an insider, B. The fact that a percentage of grant money is forwarded on to the related for-profit company shows that you are not guarding your own interests at every stage of the transaction as described in the above court case. All of this is substantiated by B's statement that "I need to take my company (referring to for-profit J) to the next level."



You have indicated that you plan to provide free HVAC services to low-income individuals. As in the above-cited case of B. S. W. Group, Inc. v. Commissioner, free or below cost service is only one of several factors to consider in making a determination on commerciality. Others include the particular manner in which the organization's activities are conducted and the commercial hue of those activities. As you are operating the exact same program as the current for-profit HVAC business, your primary purpose is not educational, scientific, or charitable, but rather commercial. You serve the same purpose, provide the same educational services, and operate out of the exact same facility as for-profit



J. In fact the two entities are indistinguishable. These factors show you are operating in a commercial manner.



You are similar to the organization in International Postgraduate Medical Foundation v.



Commissioner, TCM 1989-36 (1989) in that you have a substantial purpose of benefiting a related for-profit company. Because you were formed for the substantial purpose of enabling for-profit company J to receive grant funding, J benefits substantially from the manner in which your activities are carried on. Therefore, you are not operated exclusively for exempt purposes as described in section 501(c)(3).



You are planning to cover the cost of HVAC services provided by for-profit company J to individuals that cannot afford them through grants received by you. This simply expands the client base of the related for-profit and provides it with customers that would otherwise not be able to pay. Therefore, you are causing grants to be used for a non-exempt purpose for the direct benefit of the for-profit company owned by your founder, B. As in Living



Faith Inc. v. Commissioner, supra, your activities are in direct competition with other



HVAC businesses, which causes you to be disqualified for exemption under Section 501(c)(3).



Applicant's Position:



You stated your main purpose and activity is not to teach young students about the HVAC industry, but to teach them a *variety of craft projects. You stated your second program is to offer High School students and adults who are interested in learning a trade in the HVAC industry. The program is free of charge to students and you supply all materials needed. You stated that for-profit company J intends to hire 3 individuals from the class and they do not intend to conduct anymore hiring from your training program.



Service's Response to Applicant's Position:



While you are providing some educational activties, your overall purpose is to secure grant funding to further benefit your president and founder, B and his for-profit business J. Any true 501(c)(3) activities are incidental to the excessive private benefit to B. Since



B is an insider, this constitutes inurement, and the presence of any amount of inurement precludes qualification for exemption regardless of any qualifying purposes or activities.



It is also important to note that your president, B, applied for exemption because his for-profit company J was solicited by company G. Company G explained to individual B that grants were available for businesses, but to secure the largest grants, B would need to create a nonprofit corporation. This further solidifies the fact that your purpose of formation was to benefit B and his for-profit company J.



Conclusion:



The facts show that you have a substantial nonexempt purpose and were formed to obtain grants primarily benefitting B, through the for-profit company J. This constitutes substantial private benefit and inurement. Furthermore, a substantial portion of your activities include operating in a commercial manner that is indistinguishable from for-profit J. Accordingly, you are not operated exclusively for purposes described in IRC section 501(c)(3) and you do not qualify for exemption.



You have the right to file a protest if you believe this determination is incorrect. To protest, you must submit a statement of your views and fully explain your reasoning. You must submit the statement, signed by one of your officers, within 30 days from the date of this letter. We will consider your statement and decide if the information affects our determination.



If your statement does not provide a basis to reconsider our determination, we will forward your case to our Appeals Office. You can find more information about the role of the Appeals



Office in Publication 892, Exempt Organization Appeal Procedures for Unagreed



Issues.



An attorney, certified public accountant, or an individual enrolled to practice before the



Internal Revenue Service may represent you during the appeal process. If you want representation during the appeal process, you must file a proper power of attorney, Form 2848, Power of Attorney and Declaration of Representative, if you have not already done so. You can find more information about representation in Publication 947, Practice



Before the IRS and Power of Attorney. All forms and publications mentioned in this letter can be found at www.irs.gov, Forms and Publications.



If you do not file a protest within 30 days, you will not be able to file a suit for declaratory judgment in court because the Internal Revenue Service (IRS) will consider the failure to appeal as a failure to exhaust available administrative remedies. Code section 7428(b)(2) provides, in part, that a declaratory judgment or decree shall not be issued in any proceeding unless the Tax Court, the United States Court of Federal Claims, or the District Court of the



United States for the District of Columbia determines that the organization involved has exhausted all of the administrative remedies available to it within the IRS.



If you do not intend to protest this determination, you do not need to take any further action.



If we do not hear from you within 30 days, we will issue a final adverse determination letter.



That letter will provide information about filing tax returns and other matters.



Please send your protest statement, Form 2848, and any supporting documents to the applicable address:



Mail to:



Internal Revenue Service



EO Determinations Quality Assurance



P.O. Box 2508



Room 7-008



Cincinnati, OH 45201 Deliver to:



Internal Revenue Service



EO Determinations Quality Assurance 550 Main Street



Room 7-008



Cincinnati, OH 45202



You may fax your statement using the fax number shown in the heading of this letter. If you fax your statement, please call the person identified in the heading of this letter to confirm that he or she received your fax.



If you have any questions, please contact the person whose name and telephone number are shown in the heading of this letter.



Sincerely,



Lois Lerner



Director, Exempt Organizations

Innocent spouse

Farzana Zaher, et vir. v. Commissioner, TC Memo 2012-11 , Code Sec(s) 6015.




FARZANA ZAHER, Petitioner, AND MOHAMMAD ZAHER, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent .

Case Information: Code Sec(s): 6015

Docket: Docket No. 5984-10.

Date Issued: 01/10/2012

Judge: Opinion by COHEN





HEADNOTE

XX.



Reference(s): Code Sec. 6015



Syllabus

Official Tax Court Syllabus

Counsel

Adam D. Christensen, for petitioner.

Mohammad Zaher, pro se.



Angela J. Kennedy, for respondent.



Opinion by COHEN



MEMORANDUM FINDINGS OF FACT AND OPINION

This proceeding was commenced under section 6015 for review of respondent's determination that petitioner is not entitled to relief from joint and several liability for 2006 with respect to a Federal income tax return she filed with her former spouse, intervenor. The issue for decision is whether petitioner is entitled to relief under section 6015(f). All section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.



FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. At the time the petition was filed, petitioner resided in Indiana. At the time the notice of intervention was filed, intervenor resided in California.



Petitioner holds a bachelor's degree and graduated from dental school in 2004. During the marriage, intervenor participated in various entrepreneurial activities, including owning and operating a gas station through a corporate entity that he owned and controlled, Zaher Enterprises, Inc. Intervenor sold the gas station, and payments were made to intervenor during 2006. Petitioner had no ownership or controlling interest in intervenor's business activities, and petitioner had no access to intervenor's business bank account.



Petitioner's involvement with the family finances was limited. The couple had some joint accounts, but they also had separate personal and business accounts. Intervenor generally was responsible for filling out bank forms, applying for loans, and ensuring that the couple's tax returns were prepared by their accountant and filed. Petitioner was not abused by intervenor, and petitioner did not suffer from mental or physical health problems.



During 2006, petitioner and intervenor lived together in Indiana with their two minor children. Petitioner was employed as a dentist. Intervenor realized capital gains of $587,760 from the sale of the gas station. After several loans associated with the gas station operations were paid and payment was made for work relating to a piece of investment property, the remainder of the capital gains from the gas station sale (gas station proceeds), approximately $315,000, was deposited in petitioner and intervenor's joint savings account. At the time, intervenor told petitioner that any taxes owed with respect to the capital gains would be paid from the 2006 net proceeds. No estimated tax payments were made with respect to the 2006 capital gains.



Petitioner and intervenor began having marital difficulties in December 2006. On August 1, 2007, only a week before petitioner filed for divorce, intervenor transferred the gas station proceeds from the couple's joint savings account to his business checking account. This transfer left the joint savings account with a balance of less than $1,000 and was made without petitioner's knowledge, although petitioner did learn of the transfer before filing for divorce.



A few days after transferring the gas station proceeds to his business account, intervenor wrote a check drawn on his business account for $320,000 that was deposited in an account owned by one of his brothers. At the time, petitioner had no knowledge of the transfer to intervenor's brother.



On August 8, 2007, petitioner filed for divorce in the Circuit Court for Hamilton County, Indiana (circuit court), and requested that the circuit court issue a financial restraining order. On August 10, 2007, the circuit court issued a temporary financial restraining order prohibiting petitioner or intervenor from disposing of marital assets without written consent of both parties or permission of the circuit court.



Petitioner and intervenor began living apart in November 2007. On November 20, 2007, intervenor sent an email to petitioner stating that he had left a copy of the couple's 2006 joint tax return at her home for her to review and sign. From this email, petitioner learned for the first time that their 2006 tax return had not been filed by the due date and that there was a significant amount of tax due. Intervenor advised petitioner that they needed to sign and file the 2006 tax return and that he had set up an appointment for petitioner to discuss the tax return with their accountant.



In early December 2007, petitioner met with the accountant to review the 2006 tax return, which reported a tax due of $63,379. Petitioner then had her divorce attorney forward an unsigned copy of the 2006 joint return to intervenor's attorney for intervenor's signature, because petitioner was afraid intervenor would make unauthorized changes to the 2006 tax return if she gave him a signed copy.



In a series of emails exchanged from November 2007 to January 2008, petitioner and intervenor discussed the 2006 tax return and how the tax due would be paid. Because petitioner no longer had access to the gas station proceeds, she urged intervenor to pay the tax. Intervenor responded that he did not have the money and suggested that they first file the return, then talk to the Internal Revenue Service (IRS) about a payment plan. Intervenor also said he was seeking another accountant to redo the 2006 return since he felt their accountant “went too much by the book”.



In April 2008, in violation of the financial restraining order, intervenor directed his brother to distribute to other family members the gas station proceeds he had been holding for intervenor. Intervenor eventually signed the 2006 return as originally prepared and sent it back to petitioner in mid-2008. Petitioner signed the return for filing with the IRS. By this time, petitioner had learned of the transfer of the gas station proceeds to the bank account of intervenor's brother.



The 2006 joint return was filed on December 3, 2008. The return reported petitioner's wage income of $113,037, intervenor's capital gains of $587,760, rental losses of $137,781, and taxable interest income of $35,073. After crediting petitioner's wage withholding of $15,866, the joint return showed tax due of $63,379, which petitioner and intervenor did not pay when they filed the return. The reported balance due for 2006 was solely attributable to intervenor.



Petitioner submitted a Form 8857, Request for Innocent Spouse Relief, to the IRS dated April 30, 2009. An IRS tax examiner reviewed petitioner's request under the process described in Rev. Proc. 2003-61, 2003-2 C.B. 296, and ultimately denied her relief under section 6015. A final determination letter dated December 10, 2009, was sent to petitioner. According to the IRS' workpaper, the denial was based, in large part, on the examiner's conclusion that petitioner had not established that she had a reasonable belief when the return was signed that the tax would be paid by intervenor and that petitioner would not suffer economic hardship if relief was not granted.



In March 2010, after several years of contentious proceedings, petitioner and intervenor's divorce became final. In April and May 2010, the circuit court issued orders regarding the couple's property division and child custody issues. Petitioner was granted full custody of the couple's two children.



As to the property division, the circuit court included the gas station proceeds in the marital estate because the court ruled that intervenor had wrongfully transferred the funds from the couple's joint account just before petitioner filed for divorce. However, in the light of intervenor's greater financial contributions during the marriage and petitioner's future earning potential as a dentist, the circuit court awarded intervenor 55 percent and petitioner 45 percent of the marital assets. To effect this property division, the circuit court required petitioner to take on a much greater share of marital debt than intervenor.



The circuit court also ruled that intervenor had violated the financial restraining order on numerous occasions, including instructing his brother to distribute the gas station proceeds to other family members. Intervenor claimed that these distributions were made to repay loans that family members made to petitioner and intervenor during their marriage, but the circuit court ruled that no credible evidence supported the existence of these claimed family loans. The circuit court found it probable that the gas station proceeds had been distributed to family members in a scheme to funnel the money back to intervenor through “loans” and “gifts” from the same family members. The circuit court further concluded that intervenor had remained voluntarily unemployed during the entire course of the divorce proceedings to avoid “paying his fair share to raise his children” and had attempted to foist all his financial responsibilities on petitioner. The divorce decree did not assign responsibility for the 2006 tax liability.



On November 1, 2010, intervenor filed his notice of intervention. Intervenor stated in his notice that he believed petitioner should be responsible for all of the 2006 income tax liability.



OPINION

Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). After making this election, each spouse generally is jointly and severally liable for the entire tax due for that taxable year. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000). A requesting spouse, however, may seek relief from joint and several liability under section 6015(b) or, if eligible, may allocate liability under section 6015(c). Sec. 6015(a). If relief is not available under section 6015(b) or (c), a requesting spouse may seek equitable relief under section 6015(f). Because this case involves failure to pay tax shown on a return, rather than a deficiency, petitioner and respondent agree that petitioner is not entitled to relief under section 6015(b) or (c). See Washington v. Commissioner, 120 T.C. 137, 146-147 (2003).



Petitioner contends that she is entitled to relief under section 6015(f) from joint and several liability. Section 6015(f) gives the Commissioner the discretion to grant equitable relief from joint and several liability if “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either)”.



We have jurisdiction to review respondent's denial of petitioner's request for equitable relief under section 6015(f). See sec. 6015(e)(1). In doing so, we apply a de novo standard of review, as well as a de novo scope of review. Porter v. Commissioner, 132 T.C. 203, 210 (2009); Porter v. Commissioner, 130 T.C. 115, 117 (2008). Respondent disagrees, contending that the proper standard of review is abuse of discretion and that the proper scope of review is limited to the administrative record.



The presence of intervenor as a We decline to revisit Porter. party in this case emphasizes the need to consider matters not in the administrative record. See Porter v. Commissioner, 132 T.C. at 219-220 (Gale, J., concurring). Petitioner bears the burden of proving that she is entitled to relief under section 6015(f). See Porter v. Commissioner, 132 T.C. at 210; see also Rule 142(a).



The Commissioner has outlined procedures for determining whether a taxpayer qualifies for equitable relief under section 6015(f) from joint and several liability. See Rev. Proc. 2003-61, supra. First, Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297-298, sets forth seven threshold conditions that must be satisfied before the Commissioner will consider a request for equitable relief under section 6015(f). There is no dispute that petitioner meets the threshold conditions.



If the threshold conditions are satisfied, the requesting spouse will ordinarily be granted relief if he or she then satisfies each requirement of the safe harbor provision found in Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298: (1) On the date of the request for relief, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse; (2) on the date the requesting spouse signed the joint return, the requesting spouse had no knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability; and (3) the requesting spouse will suffer economic hardship if not granted relief. Petitioner concedes that she does not satisfy the third condition. Accordingly, petitioner does not qualify for relief under Rev. Proc. 2003-61, sec. 4.02.



When a requesting spouse satisfies the threshold conditions but fails to satisfy the conditions in Rev. Proc. 2003-61, sec. 4.02, he or she still may be eligible for relief under section 6015(f) if, taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for an underpayment. Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298-299, lists nonexclusive factors to be considered in determining whether to grant equitable relief under section 6015(f). No single factor is determinative, all factors are to be considered and weighed, and the list of factors is not intended to be exhaustive. Id. These listed factors are: (1) Whether the requesting spouse is separated or divorced from the nonrequesting spouse; (2) whether the requesting spouse would suffer economic hardship if not granted relief; (3) whether the requesting spouse knew or had reason to know that the other spouse would not pay the tax; (4) whether the nonrequesting spouse has a legal obligation to pay the outstanding tax liability pursuant to a divorce decree or agreement; (5) whether the requesting spouse received a significant benefit (beyond normal support) from nonpayment of the tax liability; and (6) whether the requesting spouse has made a good-faith effort to comply with the tax laws for the taxable years following the year to which the request for relief relates. Other factors, if present, that favor equitable relief are: (1) The nonrequesting spouse abused the requesting spouse, and (2) the requesting spouse was in poor mental or physical health on the date the return was signed or at the time relief was requested. However, the absence of these last two factors will not weigh against equitable relief. Id.



The IRS denied petitioner's request for relief under section 6015(f) after reviewing and weighing these factors. Our analysis of the relevant factors and circumstances is as follows. Marital Status The first factor considered is whether the requesting spouse is separated or divorced from the nonrequesting spouse. Petitioner and intervenor were separated at the time of her initial request for innocent spouse relief, and they have since divorced. Therefore, this factor weighs in favor of relief for petitioner. Economic Hardship The second factor considered is whether the requesting spouse will suffer economic hardship if relief is not granted. Petitioner concedes that she will not suffer economic hardship. This factor weighs against relief. Knowledge or Reason To Know The third factor considered is whether the requesting spouse had knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability. For this factor to weigh in favor of a requesting spouse, the requesting spouse must establish that (1) when he or she signed the return, he or she had no knowledge or reason to know the nonrequesting spouse would not pay the tax reported on the return; and (2) it was reasonable for him or her to believe that the nonrequesting spouse would pay the tax shown as due. See Collier v. Commissioner, T.C. Memo. 2002-144 [TC Memo 2002-144]. Another relevant consideration is whether petitioner believed that intervenor would pay the taxes “reasonably promptly after the filing of the joint return.” See Waldron v. Commissioner, T.C. Memo. 2011-288 [TC Memo 2011-288]; see also Schepers v. Commissioner, T.C. Memo. 2010-80 [TC Memo 2010-80]; Banderas v. Commissioner, T.C. Memo. 2007-129 [TC Memo 2007-129]. When petitioner signed the 2006 return reporting an unpaid balance due that was filed with the IRS in December 2008, petitioner knew that intervenor had transferred the gas station proceeds at least two times, first to intervenor's business account and then to intervenor's brother. Intervenor also told petitioner that he did not have the money. Furthermore, although intervenor never explicitly stated that he was not going to pay the tax, intervenor made it clear that he did not accept sole responsibility for the tax that was due. Considering these circumstances, it simply is not reasonable for petitioner to have believed, at the time she signed the 2006 return that was filed in late 2008, that intervenor would pay the tax that was due. This factor weighs against relief for petitioner. Nonrequesting Spouse's Legal Obligation This factor is concerned with whether the nonrequesting spouse has a legal obligation to pay the outstanding tax liability pursuant to a divorce decree or agreement. The parties agree that petitioner and intervenor's divorce decree does not determine who has the legal obligation to pay the tax liability. Therefore, this factor is neutral. Significant Benefit The fifth factor considered is whether the requesting spouse has received a significant benefit (beyond normal support) from the unpaid income tax liability. Normal support is measured by the circumstances of the particular parties. Porter v. Commissioner, 132 T.C. at 212; Estate of Krock v. Commissioner, 93 T.C. 672, 678-679 (1989). At the administrative level, respondent determined that petitioner had not received a significant benefit beyond normal support. Now, respondent contends that petitioner received a significant benefit beyond normal support because the circuit court included the misappropriated gas station proceeds in the marital estate subject to division, but not the tax liability, and petitioner received substantial assets in the divorce proceeding.



Before this controversy arose, intervenor was a successful entrepreneur, and petitioner was a practicing dentist. In accordance with their level of income, petitioner and intervenor acquired substantial assets that had no connection with their failure to pay the 2006 tax liability. The assets petitioner was awarded in the property division were not acquired as a result of the unpaid tax liability. In addition, the property division was unequal, with petitioner receiving a smaller share than intervenor and shouldering more of the couple's debts than intervenor. Furthermore, the record contains no evidence that, as a result of the unpaid tax liability, petitioner lived an unusually lavish lifestyle, made extravagant purchases, or took expensive vacations, typical hallmarks of significant benefits beyond normal See Washington v. Commissioner, 120 T.C. at 151; Wiener support. v. Commissioner, T.C. Memo. 2008-230 [TC Memo 2008-230]. Accordingly, petitioner did not receive a significant benefit beyond normal support. This factor weighs in favor of relief. Compliance With Income Tax Laws This factor considers whether the requesting spouse has made a good-faith effort to comply with income tax laws since the year at issue. Respondent concedes that petitioner has made a good- faith effort to comply with the income tax laws since 2006. This factor weighs in favor of relief for petitioner. See Kruse v. Commissioner, T.C. Memo. 2010-270 [TC Memo 2010-270]; Chou v. Commissioner, T.C. Memo. 2007-102 [TC Memo 2007-102]. Abuse and Mental or Physical Health These factors consider whether the requesting spouse was abused by the nonrequesting spouse and whether the requesting spouse had mental or physical health problems at the time the return at issue was signed or at the time he or she requested relief. Petitioner concedes that she was not abused by intervenor nor has she had any mental or physical health problems. Therefore, these two factors are neutral.



Analysis

Considering all the factors discussed above, three weigh in favor of relief for petitioner, two weigh against relief, and three are neutral. However, our analysis does not end here. The factors listed in Rev. Proc. 2003-61, sec. 4.03 are nonexclusive, and other relevant factors are to be considered. We have allowed innocent spouse relief in cases where as few as two listed factors favored relief when there were other relevant factors to consider. See Bozick v. Commissioner, T.C. Memo. 2010-61 [TC Memo 2010-61] (the taxpayer was “browbeaten” into signing the joint tax return); Wiener v. Commissioner, supra (the taxpayer was in her 70s and in bad health, and her husband had consistently misled her about their tax problems).



Petitioner argues that the facts and circumstances regarding intervenor's sale of the business that resulted in the tax liability and his subsequent evasiveness and deceit concerning the funds that were to be used to pay the tax liability weigh in favor of granting relief under section 6015(f). Intervenor misappropriated the gas station proceeds, which could and should have been used to pay the 2006 tax liability. Intervenor then went to great lengths over several years to place the gas station proceeds beyond petitioner's reach, effectively preventing petitioner from using these funds herself to pay the 2006 tax liability. Equitable relief is more likely to be appropriate where concealment, overreaching, or other wrongdoing on the part of the nonrequesting spouse is present. See Van Arsdalen v. Commissioner, T.C. Memo. 2007-48 [TC Memo 2007-48] (citing 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]). Intervenor's egregious misconduct weighs in favor of relief for petitioner, and respondent acknowledged as much at trial.



Taking into account all of the facts and circumstances, we hold that petitioner is entitled to relief from joint and several liability under section 6015(f) with respect to any unpaid Federal income tax liability for 2006. We have considered the arguments of the parties not specifically addressed in this opinion. They are either without merit or irrelevant to our decision. To reflect the foregoing,



Decision will be entered for petitioner.