HAGGART v. COMMISSIONER

T.C. Summary Opinion 2003-70

UNITED STATES TAX COURT

CHARLES R. AND DRU L. HAGGART, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2087-02S. Filed June 9, 2003.

Charles R. and Dru L. Haggart, pro se.

Jack T. Anagnostis, for respondent.

POWELL, Special Trial Judge: This case was heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect at the time the petition was filed. The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.

1
Unless otherwise indicated, subsequent 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.
 - 2 -

Respondent determined deficiencies in petitioners’ 1996 and

1997 Federal income taxes and accuracy-related penalties as

follows:

Penalty
Year Deficiency Sec. 6662(a)

1996 $7,359 $1,467.40
1997 10,536 2,107.20

After concessions,2 the issues are (1) whether petitioners

are liable for the accuracy-related penalties under section

6662(a), and (2) whether petitioner Dru Haggart (Mrs. Haggart) is

entitled to relief from joint and several liability under section

6015. Petitioners resided in Holland, Pennsylvania, at the time

the petition was filed.

Background

Petitioners are married. Mrs. Haggart has a high school

education, and is employed as a travel agent for B&B Travel, Inc.

B&B Travel reports Mrs. Haggart’s yearly wages to her on Form W-

2, Wage and Tax Statement. Petitioner Charles Haggart (Mr.

Haggart) is a subcontractor for Roman Building Products, Inc.

(Roman). Roman is engaged in the business of selling and

installing materials, such as shower doors, mirrors, and

shelving, in new residential homes. Roman pays Mr. Haggart

biweekly and reports total earnings to him for each year on Form

1099-MISC, Miscellaneous Income.

2
Petitioners conceded the deficiencies for the years in issue.
 - 3 -

Petitioners maintained one joint bank account during 1996

and 1997. Using this account, petitioners deposited all wages

and business income and paid all business and household expenses.

Petitioners hired John J. Poltonowicz (Mr. Poltonowicz), a

certified public accountant, to prepare their 1996 and 1997

Federal income tax returns. Mrs. Haggart provided Mr.

Poltonowicz with her Forms W-2, Mr. Haggart’s Forms 1099-MISC,

and a list of his business expenses. For additional guidance in

preparing the 1996 and 1997 returns, Mr. Poltonowicz reviewed

petitioners’ returns from previous years which were prepared by a

different accountant.

For 1996 and 1997, Mr. Poltonowicz prepared Schedules C,

Profit or Loss From Business, for Mr. Haggart’s business.

Petitioners claimed, and respondent disallowed, the following

amounts on their Schedules C as deductions and cost of goods

sold:3

Claimed Disallowed
Schedule C 1996 1997 1996 1997

Total Expenses1 $24,710 $28,863 $12,360 $14,763
Cost of Goods Sold 21,456 31,596 21,456 31,596
1
These expenses included depreciation, insurance, legal and
professional services, supplies, utilities, laundry, bank
charges, and car and truck expenses.

It is unclear how the claimed Schedule C expenses and cost of

3
Respondent also determined that Mr. Haggart failed to report
$79 of income attributable to wages he earned in 1996 from USX
Corp. reported to him on a Form W-2.
 - 4 -

goods sold were computed; it is clear that there is no

documentation in support of these amounts, nor was there any

attempt by Mr. Poltonowicz to verify these items. At trial,

petitioners and Mr. Poltonowicz were unable to explain the

sources from which these items were derived.

Discussion

As a preliminary matter, we address Mrs. Haggart’s

contention at trial that Mr. Haggart was an employee of Roman

rather than a self-employed independent contractor. In this

context, the issue is peculiar because petitioners took the

position on their tax returns that Mr. Haggart was self-employed

and both Mr. Haggart and respondent agree that he was self-

employed. Additionally, Mrs. Haggart did not raise the issue in

the petition filed with this Court. Indeed, in the petition she

prayed that “Spouse seeks emancipation from taxpayer’s

responsibility for self-employment taxes.” The position taken in

the petition, therefore, assumes that there was a liability for

self-employment taxes, and certainly respondent was entitled to

assume this in preparing for trial. If we were to allow Mrs.

Haggart to raise this issue at this late time, respondent would

be unfairly prejudiced. See Toyota Town, Inc. v. Commissioner,

T.C. Memo. 2000-40, affd. sub nom. Bob Wondries Motors, Inc. v.

Commissioner, 268 F.3d 1156 (9th Cir. 2001). Accordingly, we
 - 5 -

do not entertain the issue. See Rule 34(b)(4). We turn to the

issues that are properly before the Court.

Accuracy-Related Penalties

Section 6662(a) provides that “there shall be added to the

tax an amount equal to 20 percent of the portion of the

underpayment to which this section applies.” Section 6662(b)

provides in part:

SEC. 6662(b). Portion of Underpayment to Which
Section Applies.–-This section shall apply to the portion of
any underpayment which is attributable to 1 or more of the
following:

(1) Negligence or disregard of rules or
regulations.

(2) Any substantial understatement of income
tax.[4]

Negligence is defined as the “lack of due care or failure to

do what a reasonable and ordinarily prudent person would do under

the circumstances.” Korshin v. Commissioner, 91 F.3d 670, 672

(4th Cir. 1996), affg. T.C. Memo. 1995-46. Negligence “includes

any failure to make a reasonable attempt to comply with the

provisions” of the Internal Revenue Code. Sec. 6662(c).

“‘Negligence’ also includes any failure by the taxpayer to keep

adequate books and records or to substantiate items properly.”

Sec. 1.6662-3(b)(1), Income Tax Regs.

4
We need not address whether petitioners’ underpayments were
substantial because we hold that petitioners are liable for the
accuracy-related penalties due to negligence.
 - 6 -

The disallowed deductions and costs of goods sold in 1996

and 1997 with respect to Mr. Haggart’s Schedules C business were

claimed by petitioners without any documentation or explanation.

In short, these items appear to have been totally fictitious.

Accordingly, petitioners’ underpayments were, at best,

attributable to negligence.

Petitioners attempt to deflect the accuracy-related

penalties on the ground that they relied on the advice of their

accountant. Generally, a taxpayer may avoid the imposition of

the accuracy-related penalty if “there was a reasonable cause

* * * and that the taxpayer acted in good faith”. Sec. 6664(c).

Whether the taxpayer acted with reasonable cause and in good

faith is determined by the relevant facts and circumstances and,

most importantly, the extent to which the taxpayer attempted to

assess the proper tax liability. See Neely v. Commissioner, 85

T.C. 934 (1985); Stubblefield v. Commissioner, T.C. Memo. 1996-

537; sec. 1.6664-4(b)(1), Income Tax Regs.

Reliance on the advice of a competent adviser can be a

defense to the accuracy-related penalty. See United States v.

Boyle, 469 U.S. 241, 250 (1985). But, reliance on professional

advice is not automatically a defense to negligence. Freytag v.

Commissioner, 89 T.C. 849, 888 (1987), affd. 904 F.2d 1011 (5th

Cir. 1990), affd. 501 U.S. 868 (1991); see also sec. 1.6664-

4(c)(1), Income Tax Regs. The taxpayer must establish, inter
 - 7 -

alia, that the taxpayer provided necessary and accurate

information to the adviser. See, e.g., Rule 142(a); Ellwest

Stereo Theatres of Memphis, Inc. v. Commissioner, T.C. Memo.

1995-610.5

Although the record is silent concerning Mr. Poltonowicz’s

qualifications, we are willing to assume that he was a competent

professional. Petitioners did not establish, however, that they

supplied Mr. Poltonowicz with the necessary documentation to

substantiate the costs of goods sold and the disallowed

deductions. See Johnson v. Commissioner, 74 T.C. 89, 97 (1980),

affd. 673 F.2d 262 (9th Cir. 1982). Indeed, there was no such

documentation. In sum, we find petitioners did not reasonably

rely on the advice of their accountant.

Relief From Joint and Several Liability

We initially note that Mrs. Haggart requests relief only

from the self-employment tax liabilities imposed as a result of

Mr. Haggart’s business. When, as here, a joint return is filed,

the liability for the self-employment tax of one spouse is a

5
Petitioners have not argued that either sec. 7491(a) or (c)
applies to this case to shift the burden of proof and/or
production. Sec. 7491 applies to court proceedings arising from
examinations commencing after July 22, 1998. Internal Revenue
Service Restructuring & Reform Act of 1998 (RRA), Pub. L. 105-
206, sec. 3001, 112 Stat. 726. It would appear that the
examination for 1997 commenced after that date. With regard to
the burden of proof under sec. 7491(a), petitioners have not
satisfied the requirements of that section. Under sec. 7491(c)
respondent has the burden of production with respect to the sec.
6662(a) penalties and respondent has satisfied that burden.
 - 8 -

joint and several liability as to each spouse under section

6013(a). See Travers v. Commissioner, T.C. Memo. 1982-88.

Section 6015, however, may relieve the requesting spouse of a

liability for tax attributable to an understatement of tax.6

Sec. 6015(b). Here, the understatements are attributable each

year to the disallowed Schedule C deductions and cost of goods

sold. Those disallowed amounts increased petitioners’ income tax

liabilities, of which the self-employment tax liabilities are

only a part. With this in mind, we turn to the provisions of

section 6015.

A requesting spouse may elect relief from joint and several

liability under section 6015.7 There are three types of relief

available: (1) Section 6015(b)(1) provides full relief from

joint and several liability; (2) section 6015(c) provides

separate tax liability available to divorced or separated

taxpayers;8 and (3) section 6015(f) provides equitable relief

6
An understatement is the “excess of the amount of tax required
to be shown on the return for the taxable year, over the amount
of tax imposed which is shown on the return”. Secs. 6015(b)(3),
6662(d)(2)(A).
7
Sec. 6015 applies to any liability for tax arising before July
22, 1998, but remaining unpaid as of that date. H. Conf. Rept.
105-599, at 255 (1998), 1998-3 C.B. 747, 1009. Mrs. Haggart’s
tax liabilities arose in 1996 and 1997, and remain unpaid.
8
Relief under sec. 6015(c) is available if the requesting
spouse is no longer married to, is legally separated from, or is
not living in the same household with the nonrequesting spouse at
the time the election is filed. Sec. 6015(c)(3)(A)(i). Mrs.
(continued...)
 - 9 -

from joint and several liability in certain circumstances if

sections 6015(b) and (c) are unavailable.

A. Section 6015(b) Relief

Section 6015(b) provides in part:

SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON JOINT
RETURN.

* * * * * * *

(b) Procedures for Relief From Liability Applicable to
All Joint Filers.--

(1) In general.–-Under procedures prescribed by
the Secretary, if--

(A) a joint return has been made for a
taxable year;

(B) on such return there is an understatement
of tax attributable to erroneous items of 1
individual filing the joint return;

(C) the other individual filing the joint
return establishes that in signing the return he
or she did not know, and had no reason to know,
that there was such understatement;

(D) taking into account all the facts and
circumstances, it is inequitable to hold the other
individual liable for the deficiency in tax for
such taxable year attributable to such
understatement; and

(E) the other individual elects (in such form
as the Secretary may prescribe) the benefits of
this subsection not later than the date which is 2
years after the date the Secretary has begun
collection activities with respect to the
individual making the election,

8
(...continued)
Haggart is not eligible for relief under sec. 6015(c) because she
was married to and living with Mr. Haggart at the time she made
the election.
 - 10 -

then the other individual shall be relieved of
liability for tax (including interest, penalties, and
other amounts) for such taxable year to the extent such
liability is attributable to such understatement.

These requirements are expressed in the conjunctive, and a

requesting spouse must satisfy all the requirements of section

6015(b)(1). Subparagraph (C) requires that the requesting spouse

“did not know, and had no reason to know, that there was * * *

[an] understatement” of tax. Sec. 6015(b)(1)(C).9 Mrs. Haggart

seeks relief from the self-employment taxes imposed as a result

of Mr. Haggart’s business because, according to the Form 12507,

Innocent Spouse Statement, she submitted to respondent, she

“maintained separate employment” and “had no role in the

operation or control” of Mr. Haggart’s “self-employment and

business.”10 But, section 6015(b)(1)(C) requires an analysis of

9
As part of the RRA, supra, sec. 3201(a), 112 Stat. 734,
Congress repealed sec. 6013(e) and enacted sec. 6015(b). The
language of sec. 6015(b)(1)(C) is similar to the language in
former sec. 6013(e)(1)(C). Both provisions require that the
requesting spouse “did not know, and had no reason to know” that
there was an understatement of tax. H. Conf. Rept. 105-599,
supra at 249, 1998-3 C.B. at 1003. Accordingly, the case law
interpreting the language under sec. 6013(e) will be applied in
interpreting the same language under sec. 6015(b). Butler v.
Commissioner, 114 T.C. 276, 283 (2000).
10
It is important to note that Mrs. Haggart’s position as to
whether she understood Mr. Haggart to be self-employed or an
employee of Roman is inconsistent. On Form 12507, Innocent
Spouse Statement, and the petition filed with this Court, she
indicated that Mr. Haggart was self-employed. At trial, however,
she testified that she understood Mr. Haggart was an employee of
Roman because he got “a paycheck every two weeks * * *. He just
went from one job, and I always thought he was an employee.” In
any event, Mrs. Haggart’s belief as to Mr. Haggart’s employment
classification has no bearing on our analysis of sec. 6015(b).
 - 11 -

the requesting spouse’s knowledge, or reason to know, of the

understatement of tax. The understatements of tax in this case

result from the overstatements of the costs of goods sold and the

other Schedule C disallowed deductions. The proper inquiry is

whether Mrs. Haggart knew, or had reason to know, of the

understatements of tax attributable to these items that were

reported on petitioners’ Schedules C for 1996 and 1997.

With the proper inquiry in mind, there are two aspects of

section 6015(b)(1)(C). First, “where a spouse seeking relief has

actual knowledge of the underlying transaction * * * innocent

spouse relief is denied.” Cheshire v. Commissioner, 115 T.C.

183, 192-193 (2000), affd. 282 F.3d 326 (5th Cir. 2002); see also

Purcell v. Commissioner, 826 F.2d 470, 473-474 (6th Cir. 1987),

affg. 86 T.C. 228 (1986). For purposes here, we are willing to

assume that Mrs. Haggart may not have had actual knowledge of the

underlying transaction.

Nonetheless, she must still satisfy the second prong of

section 6015(b)(1)(C). The requesting spouse must not have

reason to know of the underlying transaction which gives rise to

the deficiency at issue. See Bokum v. Commissioner, 94 T.C. 126

(1990), affd. 992 F.2d 1132 (11th Cir. 1993). Mrs. Haggart had

reason to know of the underlying transaction.

Petitioners maintained a joint bank account into which

petitioners’ income was deposited and from which all household

expenses, including expenses related to Mr. Haggart’s employment,

were paid. Mrs. Haggart, upon reviewing bank statements or
 - 12 -

canceled checks, surely would have reason to know of the expenses

paid for in Mr. Haggart’s business. See Kenney v. Commissioner,

T.C. Memo. 1995-431.

Mrs. Haggart argues that she did not have reason to know of

the disallowed deductions and unreported income because she “just

dropped off the typical stuff * * * [documentation] I normally do

and just picked it * * * [completed return] up at a later date.”

But, Mrs. Haggart provided the accountant, Mr. Poltonowicz, with

the documents necessary to prepare the returns, including the

Forms W-2 and 1099-MISC and Mr. Haggart’s “list of business

expenses.” Mrs. Haggart must have reviewed the documents before

leaving them with Mr. Poltonowicz. Otherwise, she could not have

known what she gave to him. Consequently, Mrs. Haggart had

reason to know of the overstated business expenses claimed on the

1996 and 1997 Schedules C.

Additionally, Mrs. Haggart testified that she does not

recall reviewing the return before signing it. But, “a spouse

cannot obtain the benefits of section * * * [6015] by simply

turning a blind eye to--by preferring not to know of--facts fully

disclosed on a return, of such a large nature as would reasonably

put such spouse on notice that further inquiry would need to be

made.” Levin v. Commissioner, T.C. Memo. 1987-67; see also Cohen

v. Commissioner, T.C. Memo. 1987-537. Mrs. Haggart cannot escape

joint and several liability for the large unsubstantiated amounts

unambiguously listed on the Schedules C by simply choosing not to

review the return.
 - 13 -

We find that Mrs. Haggart had reason to know of the

understatements of tax. As a result of our conclusion, we need

not determine whether Mrs. Haggart satisfies the other

requirements, and hold that Mrs. Haggart is not eligible for

relief from joint and several liability under section 6015(b).

B. Section 6015(f) Relief

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.

To prevail, Mrs. Haggart must show that respondent’s denial

of equitable relief under section 6015(f) was an abuse of

discretion. Jonson v. Commissioner, 118 T.C. 106, 125 (2002);

Cheshire v. Commissioner, supra at 198; Butler v. Commissioner,

114 T.C. 276, 292 (2000). As directed by section 6015(f),

respondent prescribed procedures to use in determining whether

the requesting spouse qualifies for relief under section 6015(f).

Those procedures are found in Rev. Proc. 2000-15, 2000-1 C.B.

447.11 The revenue procedure includes partial lists of positive

and negative factors to be considered, including whether the

11
Rev. Proc. 2000-15, sec. 3, 2000-1 C.B. 447, 448, is
applicable for any liability for tax arising on or before July
22, 1998, that was unpaid on that date.
 - 14 -

spouse had reason to know of the items giving rise to the

increased liability and whether she significantly benefited from

the unpaid liability. See Rev. Proc. 2000-15, sec. 4.03(2)(b),

supra, 2000-1 C.B. at 449.

Mrs. Haggart failed to introduce any evidence to establish

that respondent’s denial of equitable relief was an abuse of

discretion. Additionally, we found that Mrs. Haggart had reason

to know of the disallowed deductions and omitted income.

Furthermore, it appears she would have significantly benefited

from the unpaid liabilities. As a result, we hold that Mrs.

Haggart is not eligible for relief from joint and several

liability under section 6015(f).

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for respondent.