T.C. Memo. 2002-17
UNITED STATES TAX COURT
ANGELA C. MORRIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10368-00. Filed January 16, 2002.
Angela C. Morris, pro se.
Susan Smith Canavello, for respondent.
MEMORANDUM OPINION
POWELL, Special Trial Judge: Respondent determined
deficiencies in petitioner’s 1996 and 1997 Federal income taxes
of $1,544 and $1,600, respectively. This case involves some of
the peculiarities that emanate from the union of community
property concepts and the Internal Revenue Code. The issues are
(1) whether distributions to petitioner’s husband from an
individual retirement account (IRA) held by petitioner’s husband
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are included in petitioner’s share of community income and (2)
whether petitioner is entitled, under section 66(c), to equitable
relief from liability for unpaid taxes on half of the community
income for 1996 and 1997.1 Petitioner resided in Baton Rouge,
Louisiana, at the time the petition was filed.
The facts may be summarized as follows. During 1996 and
1997, petitioner was married to and lived with Larry Morris (Mr.
Morris) in Louisiana, a community property State. They did not
have a matrimonial agreement separating their property during the
years at issue. Petitioner and Mr. Morris are currently
separated and living apart.
During the years at issue petitioner and Mr. Morris
maintained one checking account over which both had signature
authority. Mr. Morris kept the checkbook and all bank records in
his possession and gave petitioner checks for household expenses
such as the mortgage, utilities, and food. Petitioner did not
have ready access to the bank records. Mr. Morris used this same
checking account for his business activities.
In 1996, Mr. Morris withdrew $7,645 from an IRA that was
created and owned by him and withdrew an additional $25,660 from
the IRA in 1997. Petitioner knew that Mr. Morris made a
withdrawal in 1997 because he purchased a new automobile for his
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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use. She was unaware of the 1996 withdrawal and the precise
amount of the 1997 withdrawal.
Petitioner was not involved in any way with the operations
or the recordkeeping for Mr. Morris’s business activities. She
knew, however, that he did not maintain proper records and dealt
in cash. Petitioner suspected that Mr. Morris did not report all
of his income on his Federal income tax returns. When petitioner
confronted Mr. Morris regarding his income, records, and the
proper filing of his Federal income tax returns he became
verbally and physically abusive.
Petitioner filed separate Federal income tax returns for
1996 and 1997 because of her suspicions regarding Mr. Morris’s
honesty in reporting his correct Federal income tax liability.
She believed that filing separately would relieve her of any
liability from his defalcations.
Respondent determined that during 1996 and 1997, without
regard to the effect of a community property regime, petitioner
and Mr. Morris received income and were entitled to deductions as
follows:
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1996 1997
Income Petitioner Mr. Morris Petitioner Mr. Morris
Wages $21,407 $2,301 $3,265 $-0-
State tax refund 195 -0- 463 -0-
Dividends 2 -0- -0- -0-
IRA early distributions -0- 7,645 -0- 25,660
Schedule C, Profit or Loss
from Business, net income -0- 15,305 -0- (5,373)
Deductions
Medical 2,769 -0- 1,291 3,561
Mortgage interest 6,989 -0- 6,962 -0-
Charitable contributions 6,070 4,489 150 4,152
Taxes 617 -0- 175 -0-
Miscellaneous itemized 70 -0- 75 -0-
Other
Sec. 72(t) additional tax -0- 764 -0- 2,566
Taxes withheld 2,163 125 288 -0-
Respondent applied community property principles to
determine the parties’ share of income, additional tax, and
deductions, allocating to petitioner her community property share
as follows:
Income 1996 1997
Wages $11,854.00 $1,632.50
State tax refund 97.50 231.50
Dividends 1.00 -0-
IRA early distributions 3,822.50 12,830.00
Schedule C net income 7,652.50 (2,686.50)
Deductions
Medical 1,384.50 2,426.00
Mortgage interest 3,494.50 3,481.00
Charitable contributions 5,279.50 2,151.00
Taxes 308.50 87.50
Miscellaneous itemized 35.00 37.50
Other
Sec. 72(t) additional tax 382.00 1,283.00
Taxes withheld 1,144.00 144.00
For 1996, respondent’s adjustments resulted in a net
increase of $2,018.50 in petitioner’s income, a net decrease of
$6,013 in petitioner’s deductions, a $1,019 decrease in
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petitioner’s withholding credits, and the imposition of the
section 72(t) additional tax of $382. For 1997, respondent’s
adjustments resulted in a net increase of $8,277.50 in
petitioner’s income, a net decrease of $470 in petitioner’s
deductions, a $144 decrease in petitioner’s withholding credits,
and the imposition of the section 72(t) additional tax of $1,283.
Petitioner timely filed a Form 8857, Request for Innocent
Spouse Relief, seeking equitable relief from liability under the
provisions of section 66(c). Respondent determined that
petitioner was not entitled to equitable relief under section
66(c).
Discussion
1. IRA Distributions and Petitioner’s Gross Income
Spouses domiciled in Louisiana are subject to a community
property regime. La. Civ. Code Ann. arts. 2327, 2334 (West
1985). Spouses may opt out of the community property regime by
entering into a matrimonial agreement to that effect. La. Civ.
Code Ann. art. 2329 (West 1985). There was no such agreement
between petitioner and Mr. Morris. The first issue is whether,
under these circumstances, portions of the distributions from Mr.
Morris’s IRA to him are included in petitioner’s income as
community property income.2
2
The facts are not in dispute and the issue is primarily
one of law. Sec. 7491, concerning burden of proof, has no
bearing on this issue.
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Section 408(d) generally sets forth the tax treatment of
distributions from IRA’s as follows:
SEC. 408(d) Tax Treatment of Distributions.-–
(1) In general.–-Except as otherwise provided in this
subsection, any amount paid or distributed out of an
individual retirement plan shall be included in gross income
by the payee or distributee, as the case may be, in the
manner provided under section 72.
We have held that the distributee or payee of a
distribution from an IRA is “the participant or beneficiary who,
under the plan, is entitled to receive the distribution.” Bunney
v. Commissioner, 114 T.C. 259, 262 (2000); see also Darby v.
Commissioner, 97 T.C. 51, 58 (1991). In noncommunity property
jurisdictions, since Mr. Morris was entitled to and did receive
the distributions, those distributions would be taxable to him.
Sec. 408(d)(1). The question then is whether the Louisiana
community property regime dictates a different result. Section
408(g) provides that “This section shall be applied without
regard to any community property laws.” We held in Bunney that
by operation of section 408(g), in a community property
jurisdiction the spouse of a distributee, who did not receive the
distribution from the IRA, is not treated as a distributee
despite whatever his or her community property interest in the
IRA may have been. Bunney v. Commissioner, supra at 263.
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Under Bunney, no portion of Mr. Morris’s IRA distributions
are included in petitioner’s gross income.3 Similarly, the
section 72(t) additional tax does not apply to petitioner, and
applies only to Mr. Morris.
2. Relief Under Section 66(c)
We next turn to petitioner’s claim that respondent abused
his discretion in refusing to grant equitable relief under
section 66(c). Initially, we note that we are only concerned
with whether petitioner is entitled to equitable relief under
section 66(c) for the year 1996. With regard to 1997, petitioner
has no deficiency since no part of the IRA distribution for that
year is taxable to her.
Under a community property regime, each spouse is entitled
to file separate Federal income tax returns. When separate
Federal tax returns are filed, each spouse must report half of
the community income. United States v. Mitchell, 403 U.S. 190,
196-197 (1971). Under certain limited circumstances, one spouse
may be relieved of liability for taxes on that spouse’s share of
community income. These circumstances are set forth in section
66(c) as follows:
3
We note that in Bunney v. Commissioner, 114 T.C. 259, 262
(2000), respondent argued that the taxpayer was taxable on the
full amount of the distribution because he received the
distribution. Under this rationale, it would appear here that
petitioner would not be taxable on the distributions since she
did not receive any of the distributions.
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(c) Spouse Relieved of Liability in Certain Other
Cases.–-Under regulations prescribed by the Secretary, if-–
(1) an individual does not file a joint return for
any taxable year,
(2) such individual does not include in gross
income for such taxable year an item of community
income properly includible therein which, in accordance
with the rules contained in section 879(a), would be
treated as the income of the other spouse,
(3) the individual establishes that he or she did
not know of, and had no reason to know of, such item of
community income, and
(4) taking into account all facts and
circumstances, it is inequitable to include such item
of community income in such individual’s gross income,
then, for purposes of this title, such item of community
income shall be included in the gross income of the other
spouse (and not in the gross income of the individual).
Under procedures prescribed by the Secretary, 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) attributable to
any item for which relief is not available under the
preceding sentence, the Secretary may relieve such
individual of such liability.
Petitioner’s request for relief relies on the last sentence
of section 66(c). This provision generally applies to any
liability for tax arising after July 22, 1998, and any liability
for tax arising on or before such date but remaining unpaid as of
such date. See H. Conf. Rept. 105-599, at 251 (1998), 1998-3
C.B. 145, 200. The deficiencies at issue arose prior to July 22,
1998, but remain unpaid.
We have the authority to review respondent’s denial of
equitable relief under the last sentence of section 66(c). Beck
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v. Commissioner, T.C. Memo 2001-198. Here, we review
respondent’s denial of equitable relief under section 66(c) for
abuse of discretion. Id.; see also Fernandez v. Commissioner,
114 T.C. 324 (2000), Butler v. Commissioner, 114 T.C. 276 (2000).
Pursuant to the directions in the statute, respondent issued
Rev. Proc. 2000-15, 2000-5 I.R.B. 447, setting forth the criteria
under which respondent will consider equitable relief. This list
of factors is not intended to be exhaustive and includes
consideration of the economic hardship on the spouse and whether
the spouse had reason to know of the items giving rise to the
deficiency. Certainly these factors are important. Petitioner
knew that her husband was engaged in business, and it is
petitioner’s share of that community income that gives rise to
the remaining deficiency for 1996. See Beck v. Commissioner,
supra. Moreover, it would appear that petitioner did benefit
from that income. Finally, according to our rough calculation,
the remaining deficiency is less than $200. Petitioner has not
established that payment of such an amount would create a
substantial hardship. Under these circumstances, we believe
respondent’s denial of equitable relief to petitioner under
section 66(c) was not an abuse of discretion as it relates to the
remaining deficiency for 1996.
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To reflect the foregoing,
Decision will be entered
under Rule 155.