T.C. Memo. 2002-249
UNITED STATES TAX COURT
RUTH FERRARESE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11406-00. Filed September 30, 2002.
Ruth Ferrarese, pro se.
Vivian Rodriguez, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined that petitioner is not
entitled to relief from joint liability for tax under section
6015(f) for 1983. Petitioner filed a petition under section
6015(e)(1) seeking review of respondent’s determination. We hold
that petitioner is entitled to equitable relief from joint
liability for tax for 1983 under section 6015(f).
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Section references are to the Internal Revenue Code in
effect for the applicable years.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioner
Petitioner resided in Coral Springs, Florida, when she filed
her petition. Since October 19, 1952, petitioner has been
married to Albert Ferrarese (Ferrarese).
Petitioner’s and Ferrarese’s checking account balance was
$119.76 on June 22, 2000, $782.53 on July 20, 2000, $315.84 on
August 22, 2000, and $140.78 on September 20, 2000. At the time
of trial, petitioner was 68, Ferrarese was 77 and was suffering
from congestive heart failure, and their only sources of income
were monthly Social Security payments of about $430 to petitioner
and $1,110 to Ferrarese. At that time petitioner’s and
Ferrarese’s expenses exceeded their income, and petitioner’s and
Ferrarese’s children were providing money to them to pay some of
their living expenses. At the time of trial, petitioner and
Ferrarese owned a 1998 Ford Taurus and lived in a condominium in
Florida owned solely by petitioner, the assessed value of which
for county real property tax purposes was between $40,000 and
$50,000.
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B. Prior Tax Court Case
Ferrarese embezzled money from his company from 1975 to
1983. He embezzled $392,468 in 1983. Petitioner learned about
the embezzlement when Ferrarese told her about it in January 1984
when he was fired from his job because his embezzlement was
discovered.
Petitioner agreed in April 1984 to let Ferrarese sign the
1983 return for her, and Ferrarese did so. Respondent determined
deficiencies in petitioner’s and Ferrarese’s income tax for 1981,
1982, and 1983 based on their failure to report the embezzlement
income.
Petitioner used the proceeds from the sale in 1985 of a
house owned jointly by her and Ferrarese in Massapequa, New York,
to buy a house in Merrick, New York. She owned the Merrick house
solely in her name. She sold the Merrick house and used the
proceeds to buy the Florida condominium that she owned at the
time of trial. Petitioner paid $52,000 in 1988 for the
condominium.
In Ferrarese v. Commissioner, T.C. Memo. 1993-404 (Ferrarese
I), affd. 43 F.3d 679 (11th Cir. 1994),1 we held that petitioner
was entitled to relief from joint liability under section 6013(e)
for 1981 and 1982. In that opinion, we concluded that she filed
1
The parties agreed to be bound by the findings of fact in
that case.
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joint returns for those years, she did not know or have reason to
know of the embezzled funds or of the understatements for 1981 or
1982, she did not significantly benefit from the embezzled funds
omitted from income in 1981 and 1982, and it would have been
inequitable to hold her liable for the 1981 and 1982
deficiencies. Petitioner’s standard of living was the same in
1983 as it was in 1981 and 1982, and she has never received any
significant benefit from the embezzlement. However, we held in
Ferrarese I that she was not entitled to relief from joint
liability for 1983 because she knew or had reason to know of the
understatement for 1983 before her husband (with her permission)
signed her name to their 1983 return.
C. Petitioner’s Request for Relief From Joint Liability for Tax
Under Section 6015
On February 19, 2000, petitioner filed Form 8857, Request
for Innocent Spouse Relief (And Separation of Liability and
Equitable Relief), in which she sought relief from joint and
several liability for 1983. Respondent denied petitioner’s
request by determination letter dated October 10, 2000.
Respondent’s only stated reason for denying relief to petitioner
was:
Your request for Relief from Joint and Several
Liability has been disallowed because information
contained in your case indicates that you had knowledge
and reason to know of the items that gave rise to the
tax deficiency. Therefore, your claim is being denied
under Internal Revenue Code Section 6013(e), 6015(b),
6015(c) and 6015(f).
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OPINION
A. Positions of the Parties
Respondent determined that petitioner is not entitled to
relief from joint liability under section 6015(b), (c), and (f).
Petitioner contends that respondent’s determination that
petitioner does not qualify for relief under section 6015(f) was
an abuse of discretion. We agree with petitioner.
To prevail, petitioner must show that respondent’s denial of
equitable relief from joint liability under section 6015(f) was
an abuse of discretion. Jonson v. Commissioner, 118 T.C. 106,
125 (2002); Cheshire v. Commissioner, 115 T.C. 183, 198 (2000),
affd. 282 F.3d 326 (5th Cir. 2002); Butler v. Commissioner, 114
T.C. 276, 292 (2000).
B. Relevance of All the Facts and Circumstances to the
Commissioner’s Determination Under Section 6015(f)
Section 6015(f) provides:
SEC. 6015(f). Equitable Relief.--Under procedures
prescribed by the Secretary, if--
(1) 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);
and
(2) relief is not available to such
individual under subsection (b) or (c),
the Secretary may relieve such individual of such
liability. [Emphasis added.]
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The Commissioner has announced a list of factors in Rev.
Proc. 2000-15, sec. 4.03, 2000-1 C.B. 447, 448, that the
Commissioner will consider in deciding whether to grant equitable
relief under section 6015(f). Rev. Proc. 2000-15, supra, lists
two factors that the Commissioner will consider only in favor of
granting relief: (1) Whether the taxpayer is separated or
divorced from the nonrequesting spouse; and (2) whether the
taxpayer was abused by his or her spouse. Rev. Proc. 2000-15,
supra, lists two factors which the Secretary will consider only
against granting relief: (3) Whether the taxpayer received
significant benefit from the item giving rise to the deficiency;
and (4) whether the taxpayer has made a good faith effort to
comply with Federal income tax laws in the tax years following
the tax year to which the request for relief relates. Rev. Proc.
2000-15, supra, lists four factors the Secretary will consider
for or against granting relief: (5) Whether the taxpayer would
suffer economic hardship if relief is denied; (6) whether the
taxpayer knew or had reason to know of the item giving rise to
the deficiency; (7) whether the deficiency is attributable to the
nonrequesting spouse; and (8) whether either spouse has a legal
obligation pursuant to a divorce decree or agreement to pay the
outstanding liability. Rev. Proc. 2000-15, sec. 4.03(1) and (2),
2000-1 C.B. at 448-449. Rev. Proc. 2000-15, sec. 4.03, supra,
also states:
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No single factor will be determinative of whether
equitable relief will or will not be granted in any
particular case. Rather, all factors will be
considered and weighed appropriately. The list is not
intended to be exhaustive.
In deciding whether respondent’s determination that
petitioner is not entitled to relief under section 6015(f) was an
abuse of discretion, we will consider evidence relating to all
the facts and circumstances.
C. Whether Petitioner Is Entitled to Equitable Relief
Respondent concedes that the deficiency is attributable to
Ferrarese. Petitioner concedes that the marital status and
spousal abuse factors do not favor her, and that the knowledge or
reason to know factor favors respondent. The parties agree that
the legal obligation factor does not apply because petitioner and
Ferrarese are not divorced. As discussed next, we conclude that
the disputed factors all favor petitioner.
1. Economic Hardship
Respondent contends that petitioner offered no evidence that
she would suffer economic hardship if relief is denied. We
disagree. Petitioner testified that her only source of income
was Social Security, that she could barely pay her bills, that
she and Ferrarese must borrow from their children to pay
expenses, and that she would have to sell her condominium if she
were denied relief under section 6015(f). Respondent did not
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cross-examine petitioner on these points and offered no evidence
to contradict petitioner’s testimony.
Respondent contends that petitioner has not shown that she
would suffer economic hardship if relief from liability is denied
because her hardship is hypothetical. Respondent relies on Von
Kalinowski v. Commissioner, T.C. Memo. 2001-21, for the
proposition that section 6015(b) requires the taxpayer to show
that the imposition of joint and several liability is inequitable
in terms of the present and not in terms of a future hypothetical
situation. Respondent’s reliance on Von Kalinowski is misplaced.
In Von Kalinowski, the taxpayer’s hardship was contingent on her
wealthy husband’s not paying the deficiencies during his lifetime
and his dying and disinheriting her. We concluded that the
taxpayer’s situation was not a hardship for purposes of section
6015(b). In contrast, petitioner has shown that she will suffer
economic hardship if she is held liable for the 1983 deficiency.
Thus, we reject respondent’s reliance on Von Kalinowski.
Respondent further contends that petitioner will not suffer
economic hardship if relief is denied because she and Ferrarese
share a bank account and a credit card and function as a single
economic unit. Respondent also contends that the deficiency will
be satisfied from that bank account whether or not petitioner is
denied relief from joint and several liability. We disagree
because the only evidence in the record about petitioner’s joint
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checking account shows that it contains enough to pay only a tiny
fraction of the deficiency for 1983.
Respondent contends that petitioner will not suffer economic
hardship if relief is denied because her children and family pay
some of her and Ferrarese’s living expenses. Respondent
apparently assumes that petitioner’s children would pay the 1983
taxes, and that, as a result, petitioner would suffer no hardship
if held jointly liable for those taxes. We disagree. First,
there is no evidence that petitioner’s children would or could
pay the 1983 taxes; second, we believe it would be a hardship to
compel petitioner to ask her children to do so. We conclude that
petitioner will suffer economic hardship if she is not relieved
of joint liability.
2. Significant Benefit
Respondent contends that petitioner significantly benefited
from the embezzlement income omitted from petitioner’s and
Ferrarese’s return for 1983. We disagree. In Ferrarese I, we
found that petitioner’s expenditures during 1981-83 were neither
unusual nor lavish and did not suggest that petitioner
significantly benefited from the embezzlement income.
Petitioner’s testimony in this case was consistent with our
findings in her prior case, and respondent did not cross-examine
petitioner or offer contrary evidence. We conclude that
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petitioner did not significantly benefit from the embezzlement
income.
As stated above, Rev. Proc. 2000-15, supra, states that the
significant benefit factor can only favor respondent. In
contrast, in cases decided under section 6013(e) in which the
spouse seeking relief did not significantly benefit from the
omitted income or erroneous deductions attributable to the other
spouse, the fact that the taxpayer did not significantly benefit
weighed in favor of granting relief. See, e.g., Belk v.
Commissioner, 93 T.C. 434, 440-441 (1989); Foley v. Commissioner,
T.C. Memo. 1995-16; Robinson v. Commissioner, T.C. Memo. 1994-
557; Klimenko v. Commissioner, T.C. Memo. 1993-340; Hillman v.
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Commissioner, T.C. Memo. 1993-151.2 We conclude that this factor
favors petitioner.
3. Compliance With Tax Laws
Respondent first contends in respondent’s posttrial brief
that petitioner is not in compliance with Federal income tax laws
and that this weighs against relief. Rev. Proc. 2000-15, sec.
4.03(2)(e), 2000-1 C.B. at 449. Respondent also first alleges on
brief that petitioner is in arrears on her tax obligations for
1983 because she failed to make $100 monthly payments for
December 1997; February, June, July, August, and December 1998;
February, March, April, September, October, and December 1999;
and January, February, March, April, May, June, and July 2000.
2
Cases deciding whether a taxpayer was entitled to
equitable relief under sec. 6013(e)(1)(D) are helpful in deciding
whether a taxpayer is entitled to relief under sec. 6015(f).
Mitchell v. Commissioner, 292 F.3d 800, 806 (D.C. Cir. 2002)
(“Subsection (f) has no statutory antecedent as a stand alone
provision, but has roots in the equity test of former
subparagraph 6013(e)(1)(D) carried forward into subparagraph
6015(b)(1)(D).”), affg. T.C. Memo. 2000-332. In Cheshire v.
Commissioner, 282 F.3d 326, 338 n.29 (5th Cir. 2002), affg. 115
T.C. 183 (2000), the U.S. Court of Appeals for the Fifth Circuit
said:
Because the wording of § 6015(f)(1) is virtually
identical to that of former § 6013(e)(1)(D), case law
construing former § 6013(e)(1)(D) is helpful in
determining whether the Commissioner abused his
discretion in denying equitable relief to Appellant
under current § 6015(f)(1). See Butler, 114 T.C. at
291 (applying the § 6013(e)(1)(D) standard to a
§ 6015(f) inquiry because ‘the language of sec.
6015(f)(1) does not differ significantly from the
language of former sec. 6013(e)(1)(D)’).
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Petitioner testified that she has made a good faith effort
to comply with Federal tax laws. Respondent did not cross-
examine petitioner on this point and offered no contrary
evidence. Petitioner attached to her reply brief 18 original
canceled checks for $100, payable to the Internal Revenue
Service, for each of the months for which respondent claims she
is in arrears.3 Respondent concedes that petitioner is not late
or in arrears on any tax obligations other than the 1983 tax
liability. We do not consider respondent’s posttrial factual
allegations because petitioner did not have the opportunity to
dispute them at trial.
D. Conclusion
Respondent points out that petitioner knew or had reason to
know of Ferrarese’s embezzlement before he signed her name to
their 1983 return. However, we believe respondent did not give
adequate weight to other important factors. Petitioner will
suffer economic hardship if relief is not granted, the
embezzlement income was solely attributable to Ferrarese, she did
not significantly benefit from the embezzlement income, and she
has complied with Federal tax laws since 1983. We conclude that
respondent’s denial of relief under section 6015(f) was an abuse
of discretion and that, on the basis of all the facts and
3
Petitioner also sent a payment for December 1999 but did
not attach the canceled check because respondent did not cash it.
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circumstances, it would be inequitable to hold petitioner liable
for the 1983 deficiency. See Belk v. Commissioner, supra; Foley
v. Commissioner, supra; Robinson v. Commissioner, supra; Klimenko
v. Commissioner, supra; Hillman v. Commissioner, supra.
For the foregoing reasons,
Decision will be
entered for petitioner.