T.C. Memo. 2013-292
UNITED STATES TAX COURT
BRENDA REILLY-CASEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6558-11. Filed December 30, 2013.
Richard Ager Uffelman, for petitioner.
Nhi T. Luu, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: This case is before the Court in response to a
determination notice under section 6015(e)1 concerning petitioner’s tax liabilities
1
All section references are to the Internal Revenue Code, as amended and in
effect at all times relevant, and all Rule references are to the Tax Court Rules of
(continued...)
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[*2] for 2006 and 2007 (years at issue). We must decide whether petitioner is
entitled to relief from joint and several liability under section 6015. We hold that
petitioner is not.
FINDINGS OF FACT
Some of the facts have been deemed stipulated pursuant to Rule 91(f) and
are so found. The stipulation of facts and the accompanying exhibits are
incorporated by this reference. Petitioner resided in Oregon when she filed the
petition.
Petitioner has been a successful realtor since the 1980s. She often ranked in
the top 10% of her company’s annual sales rankings. Dann Casey worked for the
same company, and petitioner and Mr. Casey (collectively, couple) were married
in 1993.
Petitioner and Mr. Casey each owned various single-family and multiunit
residential properties before, during and after the years at issue. Petitioner owned
at least three properties during the years at issue, including 7534 SW Elmwood
Street in Portland, Oregon (Elmwood property). The couple resided at the
Elmwood property between 1995 and October 2006. The couple then resided at
1
(...continued)
Practice and Procedure, unless otherwise indicated.
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[*3] 5043 SE 141st Place in Portland, Oregon (141st Place property) from
November 2006 until 2012. Mr. Casey owned the 141st Place property and paid
the mortgage and all associated expenses. Petitioner consequently leased the
Elmwood property and collected $9,900 in annual rent.
Mr. Casey purchased four parcels of real property and invested in a limited
liability company during the years at issue. Mr. Casey also owned residential
properties in Arizona and Nevada. Petitioner periodically used and enjoyed these
properties, and she was added to the title of the property in Arizona.
Petitioner periodically collected rents and facilitated maintenance on Mr.
Casey’s properties. Petitioner lent Mr. Casey $161,250 in 2006 and 2007, $60,000
of which remains outstanding. Petitioner also lent to Mr. Casey’s associate
$80,000 that partially funded another real property purchase with Mr. Casey.
A return preparer assisted petitioner and Mr. Casey with jointly filing Forms
1040, U.S. Individual Income Tax Return, for the years at issue (joint returns).
Petitioner provided a completed questionnaire and documentation to the return
preparer. Petitioner then followed up by telephone with the return preparer. The
return preparer electronically filed the joint returns. Petitioner knew that the joint
returns had been electronically filed. Petitioner received hard copies of the joint
returns soon after the return preparer filed them.
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[*4] Respondent issued to the couple a deficiency notice for the years at issue.
Respondent determined deficiencies of $184,385 for 2006 and $36,752 for 2007
(collectively, understatements) and accuracy-related penalties. Respondent
determined that the couple had failed to report income, overstated interest and
claimed erroneous deductions from real estate activities (real estate items).
Respondent also determined that the couple had failed to report an Oregon State
income tax refund (Oregon refund) received in 2006 and income from pension or
annuities, qualified dividends, capital gain distributions and Social Security for the
years at issue. The couple did not file a petition with this Court for
redetermination of the determinations in the deficiency notice.
Petitioner later submitted to respondent Form 8857, Request for Innocent
Spouse Relief, and Form 12150, Questionnaire for Requesting Spouse.
Respondent denied petitioner’s request for relief.2 Petitioner timely filed a petition
with this Court regarding respondent’s denial of relief.
Petitioner and Mr. Casey dissolved their marriage in 2012. The uncontested
divorce decree did not allocate any payments for outstanding taxes, spousal
support, division of property or repayment of any outstanding loans.
2
Petitioner requested relief in July 2010. Respondent denied the request in
December 2010.
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[*5] Petitioner’s net worth exceeds $1 million, and her monthly income exceeds
her monthly expenses. Petitioner did not suffer from poor mental or physical
health during the years at issue or when she requested relief from joint and several
liability.
Petitioner filed Federal income tax returns for 2009 and 2010 more than
three years late. Petitioner has not filed a Federal income tax return for 2011.
OPINION
We must decide whether petitioner is entitled to relief from joint and several
liability for the joint tax obligations for the years at issue. Petitioner requests
relief from tax liabilities from the real estate items and unreported income from the
Oregon refund. Petitioner contends she neither knew nor had constructive
knowledge of the understatements because she failed to review the joint returns
and was unaware of Mr. Casey’s finances. Respondent argues that petitioner has
not established that she meets the requirements for relief. We agree with
respondent.
I. Standard of Review and Burden of Proof
This Court applies a de novo scope and standard of review to a taxpayer’s
request for innocent spouse relief. Porter v. Commissioner, 132 T.C. 203, 210
(2009). The spouse requesting relief generally bears the burden of proof. See
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[*6] Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff’d, 101 Fed.
Appx. 34 (6th Cir. 2004); Young v. Commissioner, T.C. Memo. 2012-255.
Petitioner has not presented credible evidence relevant to the disputed factual
issues to shift the burden to respondent. See sec. 7491(a).
II. Relief From Joint and Several Liability
We begin with the general principles of joint returns. A married taxpayer
may elect to file a joint Federal income tax return with his or her spouse. Sec.
6013(a). Each spouse filing the return is jointly and severally liable for the entire
tax shown on the return or otherwise determined to be due. Sec. 6013(d)(3);
Cheshire v. Commissioner, 115 T.C. 183, 188 (2000), aff’d, 282 F.3d 326 (5th Cir.
2002). A taxpayer may seek relief from joint and several liability that arises from
a joint return in certain situations and subject to a variety of conditions. See sec.
6015. Petitioner contends she qualifies for innocent spouse relief under
subsection (b) and equitable relief under subsection (f).3
A. Relief Under Subsection (b)
The parties dispute whether petitioner is entitled to relief from joint and
several liability for an understatement under subsection (b). The requesting
3
The parties stipulated that petitioner is not eligible for relief under sec.
6015(c).
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[*7] spouse must establish that he or she did not know and had no reason to know
of the understatement when signing the return.4 See sec. 6015(b)(1)(C); sec.
1.6015-2(a), Income Tax Regs. A requesting spouse had reason to know of an
understatement if a reasonably prudent taxpayer in his or her circumstances would
have known that the tax liability stated was erroneous or that further investigation
was warranted. Guth v. Commissioner, 897 F.2d 441, 443-445 (9th Cir. 1990),
aff’g T.C. Memo. 1987-522. We consider the nature and relative amount of the
erroneous item, the couple’s financial situation, the requesting spouse’s
educational background and business experience, whether the requesting spouse
participated in the activity that resulted in the erroneous item, whether the
requesting spouse inquired about the item and whether the erroneous item
represented a departure from a recurring pattern reflected in prior years’ returns.
Sec. 1.6015-2(c), Income Tax Regs. This is a factual question that we decide
based on the entire record. Guth v. Commissioner, 897 F.2d at 443-445.
Petitioner contends she had no reason to know of the understatements
because she did not sign the joint returns. We find this contention unbelievable.
4
A requesting spouse must satisfy five requirements under sec. 6015(b).
Respondent concedes that joint returns were filed and petitioner timely sought
relief. See sec. 6015(b)(1)(A), (E). The other two requirements are moot in light
of our holding regarding the lack of knowledge requirement.
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[*8] Her testimony is insufficient to establish that she did not sign the joint
returns. Even if she did not sign the joint returns, the record demonstrates that
petitioner spoke with the return preparer, authorized the return preparer to file the
joint returns, knew the joint returns had been filed and received hard copies of the
joint returns. Petitioner tacitly consented to the joint return filings for the years at
issue. See Reifler v. Commissioner, T.C. Memo. 2013-258, at *15. And there is
no indication that she sought to review the joint returns after each was filed or
objected to either Mr. Casey or the return preparer. Petitioner is charged with
knowledge of the joint returns. See Barranco v. Commissioner, T.C. Memo. 2003-
18.
Petitioner also knew about the items and surrounding circumstances such
that she should have understood the stated tax liabilities were erroneous or at least
inquired further. Petitioner is an experienced real estate broker who owns multiple
residential properties. Petitioner assisted in managing Mr. Casey’s properties.
Petitioner also knew that Mr. Casey owned and sold residential properties, even
lending money to Mr. Casey and his business partner. Petitioner was aware of the
transactions underlying the real estate items. See, e.g., Bokum v. Commissioner,
94 T.C. 126, 146 (1990), aff’d, 992 F.2d 1132 (11th Cir. 1993). Petitioner had a
duty of inquiry and ignored facts that would have led a reasonably prudent
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[*9] taxpayer to inquire further. See Butler v. Commissioner, 114 T.C. 276, 283-
284 (2000); Terzian v. Commissioner, 72 T.C. 1164, 1170 (1979); Thomason v.
Commissioner, T.C. Memo. 1994-418. Further, petitioner failed to show that she
had no reason to know of improper deductions that would give rise to substantial
understatements. See Price v. Commissioner, 887 F.2d 959, 963 (9th Cir. 1989).
Similarly, petitioner failed to establish that she had no reason to know about
the Oregon refund income. The Oregon refund resulted from a joint State income
tax return the couple filed. Petitioner did not establish that (or even suggest why)
she was ignorant of the couple’s Oregon tax liability for 2005 or that she was
unaware of the Oregon refund.
Petitioner has not established that she did not know or had no reason to
know of the understatements.5 Petitioner is unable to satisfy this requirement.
Thus, we need not consider the other requirements for relief under subsection (b).
See Alt v. Commissioner, 119 T.C. at 313. Accordingly, petitioner is not entitled
to relief from joint and several liability under subsection (b) for the years at issue.
5
Petitioner neither requests nor argues for relief resulting from other items.
We deem that petitioner concedes relief with respect to other items.
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[*10] B. Equitable Relief Under Subsection (f)
We now consider whether petitioner qualifies for relief under subsection (f).
The Commissioner may relieve a requesting spouse of joint liability if it is
inequitable to hold that spouse liable for any deficiency or unpaid tax. Sec.
6015(f); sec. 1.6015-4(a), Income Tax Regs. Equitable relief under subsection (f)
is available only when the spouse does not qualify for relief under subsections (b)
and (c). Fernandez v. Commissioner, 114 T.C. 324, 329-331 (2000). A requesting
spouse must satisfy seven threshold conditions before a request under subsection
(f) will be considered.6 See Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. 397,
399. A requesting spouse that satisfies the threshold conditions must then
demonstrate that equitable relief is appropriate under certain factors. Id. secs. 4.02
and 4.03, 2013 I.R.B. at 400.
6
We may consider guidelines the Commissioner prescribed in determining
whether a requesting spouse is afforded equitable relief under subsec. (f). See
Pullins v. Commissioner, 136 T.C. 432, 438-439 (2011). We note that the parties
suggest we apply the proposed guidance in Notice 2012-8, 2012-4 I.R.B. 309. We
have declined to do so because Notice 2012-8, supra, had not become final. See,
e.g., Hudgins v. Commissioner, T.C. Memo. 2012-260, at *15. The Commissioner
has since promulgated final guidelines. See Rev. Proc. 2013-34, 2013-43 I.R.B.
397. We will evaluate petitioner’s request for equitable relief under the guidance
in Rev. Proc. 2013-34, supra.
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[*11] 1. Threshold Conditions
Respondent concedes that petitioner satisfies six of the seven threshold
conditions. The seventh condition is that the income tax must be attributable to an
item of the nonrequesting spouse or an underpayment resulting from the
nonrequesting spouse’s income, unless an enumerated exception applies. See id.
sec. 4.01(7). Respondent concedes that petitioner satisfies the seventh threshold
condition with respect to at least a portion of each understatement.7 Thus,
petitioner meets the threshold requirements (with respect to portions of the
understatements), and we consider petitioner’s request for equitable relief.
2. Facts and Circumstances Test
We now consider the seven factors to determine whether equitable relief is
appropriate.8
7
Respondent concedes that portions of each understatement should be
allocated to Mr. Casey. See sec. 1.6015-3(d)(2)(iii) and (iv), Income Tax Regs.
We do not determine the appropriate amounts to allocate based on our holding.
8
A requesting spouse who satisfies three conditions is entitled to equitable
relief under the Commissioner’s streamlined procedure. See Rev. Proc. 2013-34,
sec. 4.02, 2013-43 I.R.B. at 400. The three conditions are the couple’s marital
status, potential economic hardship absent relief and whether the requesting
spouse knew or had reason to know of the understatement. Petitioner did not meet
the economic hardship or knowledge conditions.
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[*12] The first factor is the couple’s marital status. See Rev. Proc. 2013-34, sec.
4.03(2)(a). The couple’s marriage was dissolved by divorce decree in April 2012.
This factor weighs in favor of granting equitable relief.
The second factor is whether petitioner would suffer economic hardship if
relief is not granted. See id. sec. 4.03(2)(b), 2013-43 I.R.B. at 401. Economic
hardship exists if satisfying the tax liability in whole or part would cause the
requesting spouse to be unable to pay reasonable basic living expenses. Id.
Petitioner’s monthly income covers her monthly expenses. Further, petitioner has
more than $1 million in equity in her real property interests. Satisfying the tax
liabilities would not cause petitioner to be unable to pay reasonable basic living
expenses. Accordingly, this factor is neutral.
The third factor is whether petitioner knew or had reason to know of an
understatement. See id. sec. 4.03(2)(c)(i)(A), (iii), 2013-43 I.R.B. at 401-402. As
previously discussed, we find that petitioner did have reason to know of the
understatements. In addition, petitioner does not contend she suffered physical or
mental abuse. And we find that Mr. Casey did not restrict petitioner’s access to
financial information. See id. sec. 4.03(2)(c)(i)(A). This factor weighs against
granting equitable relief.
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[*13] The fourth factor is whether either spouse is obligated by divorce decree or
other binding agreement to pay the outstanding Federal income tax liability. See
id. sec. 4.03(2)(d), 2013-43 I.R.B. at 402. This factor is neutral as the divorce
decree does not address the tax liability.
The fifth factor is whether the requesting spouse significantly benefited
from an understatement. See id. sec. 4.03(2)(e). Petitioner benefited financially
by leasing the Elmwood property while the couple resided at the 141st Place
property. Petitioner also used and enjoyed the Nevada and Arizona properties.
This factor weighs slightly against relief.
The sixth factor is whether the requesting spouse has made a good-faith
effort to comply with the income tax laws in later years. See id. sec. 4.03(2)(f).
Petitioner filed returns for 2009 and 2010 three years late and has not filed a return
for 2011. This factor weighs against relief.
The seventh and final factor is whether the requesting spouse was in poor
mental or physical health. See id. sec. 4.03(2)(g), 2013-43 I.R.B. at 403.
Petitioner was not in poor mental or physical health when the joint returns were
filed or when she requested relief. This factor is neutral.
In toto, we find that petitioner has not established that equitable relief is
appropriate. The facts and circumstances indicate that petitioner had sufficient
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[*14] knowledge to detect the understatements and that she benefited from the
understatements. Further, she has not complied with the income tax laws in the
years following the understatements. And she has not demonstrated that she
would be unable to pay reasonable living expenses. We conclude that petitioner
does not qualify for equitable relief for either understatement.
In reaching these holdings, we have considered all of the parties’ arguments,
and, to the extent not addressed, we conclude that they are moot, irrelevant or
without merit.
To reflect the foregoing,
Decision will be entered
for respondent.