T.C. Memo. 2003-301
UNITED STATES TAX COURT
RUTHE G. OHRMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5667-02. Filed October 29, 2003.
Steven B. Hval, for petitioner.
Nhi T. Luu-Sanders, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: 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 1999
with respect to a joint return filed with Steven F. Ohrman
(Mr. Ohrman). The issues for decision are: (1) Whether
petitioner is eligible for relief from joint and several
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liability under section 6015(b); (2) whether petitioner is liable
under section 6015(c)(4) to the extent she received disqualified
assets notwithstanding a valid election under section 6015(c);
and (3) whether respondent abused his discretion in denying
petitioner’s request for relief from joint and several liability
under section 6015(f).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. All
dollar amounts have been rounded to the nearest dollar.
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 in this case was filed, petitioner resided in
Portland, Oregon.
Background
Petitioner and Mr. Ohrman were married in Seattle,
Washington, on March 26, 1988. On September 9, 1994, petitioner
and Mr. Ohrman purchased a personal residence on Birdshill Road
in Portland, Oregon (Birdshill residence). At the time of trial
in March 2003, petitioner was 53 years old and Mr. Ohrman was
56 years old.
Petitioner attended college for at least 2 years and worked
towards a teaching degree, but she did not graduate. From 1985
to 1995, petitioner worked as a lending officer at two large
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banks. While working as a lending officer, petitioner dealt with
real estate agents and reviewed mortgage loan applications.
Petitioner became a full-time homemaker when her grandniece Alexa
moved into her home in 1995.
Mr. Ohrman has worked for Spicers Paper, Inc. (Spicers
Paper), in Gresham, Oregon, as its regional manager for the
Portland, Oregon, and Seattle, Washington, divisions for several
years including 1999. As of the time of trial, Mr. Ohrman’s
salary was $135,000 per year, and his take-home pay was
approximately $6,800 per month.
Mr. Ohrman’s Gambling Addiction
Mr. Ohrman has an admitted gambling addiction. Petitioner
first became aware of Mr. Ohrman’s gambling in 1993. In 1998,
Mr. Ohrman enrolled in Project STOP (the State of Oregon gambling
treatment center) to seek treatment for his gambling addiction.
Petitioner participated in Project STOP’s “significant other”
program to support Mr. Ohrman. While participating in Project
STOP, Mr. Ohrman revealed to petitioner that he had accrued
approximately $200,000 in outstanding gambling debts on various
joint credit cards held in Mr. Ohrman’s and petitioner’s names.
Mr. Ohrman graduated from Project STOP on December 19, 1998, and
received a Certificate of Achievement.
During the Project STOP program, petitioner was advised to
block Mr. Ohrman’s ability to obtain money. Pursuant to this
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advice, petitioner took control of the family finances in 1999.
Petitioner wrote checks to pay the bills, reviewed monthly bank
statements, and maintained a file drawer in the Birdshill
residence where she kept the family’s financial records. In
addition, petitioner removed Mr. Ohrman’s name from their joint
checking account at U.S. Bank (U.S. Bank checking account) as
well as from their joint money market savings account at U.S.
Bank. Petitioner also obtained quarterly credit reports under
her name to check for inquiries and new credit during 1999.
Petitioner, however, did not remove Mr. Ohrman’s name from either
the $60,000 home equity line of credit held by petitioner and
Mr. Ohrman with Wells Fargo Bank (Wells Fargo home equity line of
credit) or the joint checking account petitioner and Mr. Ohrman
maintained at Key Bank in Seattle.
After she took control of the family finances, petitioner
had Mr. Ohrman’s wages from Spicers Paper deposited directly into
her U.S. Bank checking account during 1999. Petitioner was the
only authorized signer on the U.S. Bank checking account, and
Mr. Ohrman had no access to this account. Mr. Ohrman’s wages
provided the only income source from which petitioner paid her
family’s ongoing living expenses, including Mr. Ohrman’s pre-1998
gambling debts. Despite petitioner’s efforts, Mr. Ohrman’s
gambling addiction persisted through 1999.
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Mr. Ohrman’s Early Withdrawals From His Retirement Account
During 1999, Mr. Ohrman was the owner of an individual
retirement account (IRA) at Dean Witter Reynolds (Dean Witter
account). The Dean Witter account was a rollover account set up
by petitioner and Mr. Ohrman in 1997. Petitioner was present
with Mr. Ohrman when the Dean Witter account was established.
Thereafter, petitioner maintained a file for the Dean Witter
account and placed the monthly account statements into a
notebook. As of February 28, 1999, the Dean Witter account had a
total asset value of $454,406.
Petitioner was the designated beneficiary of the Dean Witter
account, but her written consent was not required to make an
early withdrawal. Petitioner was aware of how much money was in
the Dean Witter account in 1998 and 1999, and she believed there
was approximately $700,000 in the account at one point in 1998.
Because of the size of the Dean Witter account, petitioner
solicited promises from Mr. Ohrman before and during 1999 that he
would not use any of the funds in the Dean Witter account for
gambling.
Despite his promises to petitioner, Mr. Ohrman withdrew
$79,000 in early distributions from the Dean Witter account in
11 separate transactions from March 19 to December 21, 1999, to
fund his gambling addiction. Petitioner neither knew about nor
consented to these early distributions, nor did petitioner sign
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any of the IRA distribution request forms. Mr. Ohrman was the
only person who endorsed the distribution checks.
Statements for the months of March, April, May, June, July,
and August 1999 for the Dean Witter account were received at the
Birdshill residence. These monthly statements showed that
withdrawals totaling $44,000 were taken from the Dean Witter
account in the following amounts: March, $5,000; April, $5,000;
May, $8,000; June, $5,000; July, $13,000; and August, $8,000. In
September 1999, Mr. Ohrman changed the address on the Dean Witter
account statements from the Birdshill residence to his work
address at Spicers Paper. Consequently, the monthly statements
for September, October, November, and December 1999 for the Dean
Witter account were sent to Mr. Ohrman’s work address.
Mr. Ohrman opened an individual checking account at Wells
Fargo Bank (Wells Fargo checking account) prior to December 8,
1998, and he used this checking account throughout 1999 in
connection with his gambling. Mr. Ohrman opened the Wells Fargo
checking account without petitioner’s knowledge or consent.
Mr. Ohrman also obtained credit cards in his name alone after
graduating from Project STOP. These credit cards were used to
fund his gambling addiction and were not known to petitioner
until June 2001. The early withdrawals taken by Mr. Ohrman from
the Dean Witter account during 1999 were used at least in part to
pay down the gambling debt attributable to these credit cards.
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On April 15, 2000, petitioner and Mr. Ohrman filed a joint
1999 Federal income tax return (joint 1999 return), Form 1040,
U.S. Individual Income Tax Return, and attachments. Petitioner
prepared the joint 1999 return on her home computer using Turbo
Tax, a tax preparation program. Although two Forms 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-
Sharing Plans, IRAs, Insurance Contracts, etc., for 1999 were
sent to Mr. Ohrman at the Birdshill residence--one indicating a
gross distribution and taxable amount of $71,000 from the Dean
Witter account and the other indicating a gross distribution and
taxable amount of $8,000 from the Dean Witter account–-the
$79,000 in distributions withdrawn by Mr. Ohrman from his Dean
Witter account was not reported on the joint 1999 return filed by
petitioner and Mr. Ohrman.
The $79,000 withdrawn by Mr. Ohrman from the Dean Witter
account was taxable income, the omission of which from the joint
1999 return resulted in an understatement of tax attributable to
an erroneous item of Mr. Ohrman. At the time petitioner signed
the joint 1999 return, she did not have actual knowledge of the
early distributions from the Dean Witter account.
On May 29, 2001, respondent issued a letter of proposed
changes to petitioner’s and Mr. Ohrman’s reported tax liability
for 1999. This letter proposed that petitioner and Mr. Ohrman
owed an additional $42,927 (consisting of $32,217 in deficiency,
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$6,443 in accuracy-related penalty, and $4,267 in interest) for
1999. The letter of proposed changes was received by petitioner
at the Birdshill residence in early June 2001. Within a few days
after receiving respondent’s letter of proposed changes,
petitioner confronted Mr. Ohrman and learned of the early
distributions from the Dean Witter account.
Legal Separation Proceedings and Transfer of Assets
Within 1 week after receipt of respondent’s letter of
proposed changes, petitioner met with Laura Rackner (Rackner), an
attorney in Portland who specializes in divorce and family law,
for advice. During this meeting, petitioner told Rackner that
she received respondent’s letter of proposed changes for 1999.
In addition, petitioner told Rackner that Mr. Ohrman was a
compulsive gambler and that she wanted to be protected from his
gambling-related debt.
Rackner informed petitioner that there was a possibility
that she could obtain relief from joint and several liability for
the 1999 tax deficiency. After hearing Rackner’s advice,
petitioner told Rackner that she wanted a financial separation
from Mr. Ohrman. Accordingly, petitioner provided assets and
liabilities information to Rackner, including the value of the
Birdshill residence and the value of the funds in Mr. Ohrman’s
Dean Witter account and in his 401(k) retirement account. On
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June 21, 2001, petitioner filed for a legal separation from
Mr. Ohrman in Clackamas County (Oregon) Circuit Court.
On June 25, 2001, petitioner and Mr. Ohrman signed a
Stipulated Judgment for Unlimited Separation (separation
agreement), and Mr. Ohrman conveyed his interest in the Birdshill
residence to petitioner. Rackner drafted the separation
agreement for petitioner.
On July 3, 2001, Circuit Court Judge Patrick D. Gilroy
signed the separation agreement in the matter of Ohrman v.
Ohrman, Case No. DR0106592. Mr. Ohrman was not represented at
any point during the proceedings for legal separation. Upon
execution of the separation agreement, Mr. Ohrman conveyed to
petitioner his interest in the Birdshill residence. Petitioner
also received ownership of a 1998 Lexus automobile, the Dean
Witter account, and a 401(k) retirement account that had been
held in Mr. Ohrman’s name. In addition, Mr. Ohrman was required
to pay to petitioner spousal support as follows: (1) $6,000 per
month, commencing on July 1, 2001, until the Birdshill residence
was sold and the sales transaction was completed; (2) $5,000 per
month for 12 months thereafter; (3) $4,000 per month for 66
months thereafter; and then (4) $1,500 per month indefinitely.
Pursuant to the separation agreement, Mr. Ohrman has been
required to maintain medical, dental, and hospital insurance on
petitioner. He has also been required to maintain life insurance
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through his employer and through Transamerica with petitioner as
beneficiary. Additionally, Mr. Ohrman was required to pay,
defend, indemnify, and hold harmless petitioner for 19 specified
credit cards held in his name in addition to all other credit
cards, loans, debts, notes, encumbrances, credit lines, equity
lines, or other financial obligations in his name, with the
exception of an Alaska Airlines Visa account.
Finally, Mr. Ohrman agreed to:
pay, defend, indemnify and hold * * * [petitioner]
harmless from any claim made by any taxing agency
arising out of tax returns previously filed by the
parties. * * * [Mr. Ohrman] shall be liable, indemnify
and hold * * * [petitioner] harmless from the tax
liabilities resulting for 1999, 2000 and 2001. * * *
[Mr. Ohrman] shall be responsible for communicating
with the taxing agencies and do all that is necessary
to protect * * * [petitioner] from the tax obligation.
Excluding the right to spousal support, insurance coverages,
and the 1998 Lexus, petitioner received assets with an
approximate fair market value of $782,000 under the separation
agreement. The fair market value of the Birdshill residence as
of June 2001 was approximately $500,000. The true and actual
stated consideration in the Bargain and Sale Deed transferring
Mr. Ohrman’s interest in the Birdshill residence to petitioner
was $0. The 401(k) retirement account had a value of $36,581 on
March 31, 2001. The Dean Witter account had a value of $246,234
on May 31, 2001. Under the separation agreement, Mr. Ohrman
retained only his personal belongings, which consisted of
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clothing, items stored in the garage of the Birdshill residence,
his tools, and a 1997 Honda automobile.
Petitioner’s and Mr. Ohrman’s Relationship After Their “Financial
Separation”
Although petitioner and Mr. Ohrman were legally separated as
of July 2001, they continued to reside together. They remained
at the Birdshill residence until June 20, 2002. On June 10,
2002, petitioner sold the Birdshill residence for $520,000.
Petitioner received $63,087 in proceeds from the sale of the
Birdshill residence.
After the sale of the Birdshill residence, petitioner and
Mr. Ohrman rented a room together at a hotel in Portland from
June 21, 2002, through July 15, 2002. On July 15, 2002,
petitioner purchased a new personal residence on Carlton Street
in Portland (Carlton residence) for $363,000. Petitioner made a
downpayment of $79,438 to purchase the Carlton residence. In
petitioner’s Uniform Residential Loan Application for the
purchase of the Carlton residence, dated July 17, 2002,
petitioner listed assets with a total value of $940,000 and
reported a net worth of $525,373. Petitioner and Mr. Ohrman have
resided together at the Carlton residence from July 20, 2002, to
at least March 2003.
In addition to residing together, petitioner and Mr. Ohrman
have been raising their grandniece Alexa together as parents.
Petitioner and Mr. Ohrman were awarded full custody of Alexa on
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February 24, 2002. Petitioner and Mr. Ohrman have also continued
to socialize together as a couple since their legal separation.
Petitioner has remained in control of the family finances
since the legal separation and has used Mr. Ohrman’s monthly
support payments to pay her family’s ongoing living expenses,
consisting of the monthly mortgage payment on the Carlton
residence, the utilities, the monthly payment due on her Alaska
Airlines Visa credit card, the house and car insurance premiums,
and groceries for Mr. Ohrman, Alexa, and herself. In addition to
making the monthly support payments to petitioner, Mr. Ohrman
pays at least an additional $1,800 per month for Alexa’s
schooling, his gambling debt, health insurance for petitioner and
Alexa, and life insurance.
Revenue Agent McConnell’s Examination
On December 10, 2001, respondent sent a statutory notice of
deficiency to petitioner and Mr. Ohrman for 1999. In the notice
of deficiency, respondent determined that petitioner and
Mr. Ohrman are liable for a deficiency in income tax of $31,515
and a section 6662(a) accuracy-related penalty in the amount of
$6,303. On March 10, 2002, petitioner timely filed her Petition
for Determination of Relief from Joint and Several Liability on a
Joint Return under section 6015(b), (c), and (f) in response to
the statutory notice of deficiency.
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In August 2002, Revenue Agent Joan McConnell (McConnell) was
assigned to examine petitioner’s qualification for relief from
joint and several liability under section 6015. McConnell
interviewed petitioner on September 11, 2002. During this
interview, petitioner told McConnell that monthly statements for
the Dean Witter account came to the Birdshill residence during
1999, but she did not open them because they were not addressed
to her. Additionally, petitioner explained to McConnell that she
obtained the legal separation from Mr. Ohrman in order to protect
herself financially. Petitioner also provided to McConnell a
written response to respondent’s Innocent Spouse Questionnaire at
this interview and signed it under penalties of perjury.
McConnell interviewed Mr. Ohrman on October 31, 2002. When
questioned during this interview about the transfer of assets to
petitioner, Mr. Ohrman told McConnell that the legal separation
and transfer of assets were his ideas and that he did not feel
that petitioner should have to pay for his mistakes.
McConnell referred to Rev. Proc. 2000-15, 2000-1 C.B. 447,
to determine whether petitioner should be granted equitable
relief under section 6015(f) for the 1999 tax deficiency. Based
upon her analysis of the facts and circumstances of petitioner’s
case, McConnell determined that petitioner did not qualify for
equitable relief under section 6015(f). McConnell concluded that
petitioner received a transfer of disqualified assets from
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Mr. Ohrman. In addition, McConnell concluded that petitioner had
reason to know of at least some of the distributions from the
Dean Witter account.
OPINION
Generally, married taxpayers may elect to file a joint
Federal income tax return. Sec. 6013(a). After making the
election, each spouse is jointly and severally liable for the
entire tax due for that taxable year. Sec. 6013(d)(3). A spouse
(requesting spouse) may, however, seek relief from joint and
several liability by following procedures established in
section 6015. Sec. 6015(a). A requesting spouse may request
relief from liability under section 6015(b) or, if eligible, may
allocate liability according to provisions under section 6015(c).
Sec. 6015(a). If relief is not available under section 6015(b)
or (c), an individual may seek equitable relief under section
6015(f).
Section 6015(b) Analysis
Section 6015(b) provides, in pertinent part, as follows:
SEC. 6015(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
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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,
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.
The requirements of section 6015(b)(1) are stated in the
conjunctive. Accordingly, a failure to meet any one of them
prevents a requesting spouse from qualifying for relief offered
therein. Alt v. Commissioner, 119 T.C. 306, 313 (2002).
There is no dispute that petitioner satisfies subparagraphs
(A) and (B) of section 6015(b)(1). Moreover, respondent does not
argue that petitioner’s election was untimely under section
6015(b)(1)(E). Respondent contends, however, that petitioner
failed to meet the requirements of subparagraphs (C) and (D) of
section 6015(b)(1). Petitioner argues that she has met all of
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the requirements for equitable relief set forth in section
6015(b)(1) and is entitled to relief from joint and several
liability for the joint 1999 return.
Section 6015(b)(1)(C) requires that the requesting spouse
establish that in signing the return she did not know, and had no
reason to know, that there was an understatement. The parties
have stipulated that petitioner did not have actual knowledge of
the understatement at the time she signed the joint 1999 return.
In deciding whether petitioner has carried her burden of proof in
establishing that she had no reason to know of the understatement
in the joint 1999 return, witness credibility is an important
consideration. See Penfield v. Commissioner, T.C. Memo. 2002-
254; Ishizaki v. Commissioner, T.C. Memo. 2001-318. In this
case, as discussed below, various inconsistencies in the
assertions of petitioner and Mr. Ohrman undermine the reliability
of their generalized assertions that petitioner had no reason to
know of the withdrawals from the Dean Witter account. Therefore,
we are not required to accept them. See Geiger v. Commissioner,
440 F.2d 688 (9th Cir. 1971), affg. T.C. Memo. 1969-159.
Petitioner believed that there was approximately $700,000 in
the Dean Witter account at one point in 1998. In an effort to
protect this amount, she solicited promises from Mr. Ohrman
before and during 1999 that he would not use any of the funds in
the Dean Witter account for gambling. Petitioner was aware of
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how much money was in the Dean Witter account in 1998 and 1999
because she was present with Mr. Ohrman when the account was
established and had maintained a file for the account’s monthly
statements.
While Mr. Ohrman may have been deceitful in hiding the
actual withdrawals from the Dean Witter account from petitioner,
the account statements showing these withdrawals were sent to the
Birdshill residence for the months of March, April, May, June,
July, and August 1999. These statements show that withdrawals
totaling $44,000 were taken from the Dean Witter account during
these months. Mr. Ohrman changed the address on the Dean Witter
account to his work address in September 1999.
It is not clear from the testimony or the evidence before us
what happened to the Dean Witter account statements for the
months of March, April, May, June, July, and August 1999.
Petitioner does not account for these six monthly account
statements in her written response to respondent’s Innocent
Spouse Questionnaire. Specifically, in petitioner’s response to
question No. 22 of the Innocent Spouse Questionnaire, she
provided information only as to Mr. Ohrman’s changing the address
on the Dean Witter account statements for the months of
September, October, November, and December 1999 and his
evasiveness about the account statements for those months.
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When McConnell interviewed petitioner on September 11, 2002,
she inquired as to the Dean Witter account statements for the
6 months of March through August 1999. Petitioner told McConnell
that monthly statements for the Dean Witter account came to the
Birdshill residence during 1999, but she did not open them
because they were not addressed to her. When questioned at
trial, however, petitioner was not so forthcoming with an
explanation as to what happened to the Dean Witter account
statements for the 6 months of March through August 1999.
Petitioner testified that she could not remember getting any
statements during 1999 for the Dean Witter account at the
Birdshill residence. Therefore, when examined in their totality,
petitioner’s response on the Innocent Spouse Questionnaire, her
response to McConnell during their interview of September 11,
2002, regarding the delivery of the Dean Witter account
statements to the Birdshill residence during 1999, and her
response at trial about these statements are vague, inconsistent,
and evasive.
Mr. Ohrman also provided testimony as to what happened to
the Dean Witter account statements for the 6 months of March
through August 1999. Mr. Ohrman testified that he would leave
work and “chase the mailtruck” in order to prevent the Dean
Witter account statements from reaching the Birdshill residence.
He also testified that, when petitioner asked about the Dean
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Witter account statements, he would show her statements that he
had “doctored up” in order to hide his withdrawals from the Dean
Witter account. When asked about the whereabouts of these
“doctored up” statements on cross-examination, however,
Mr. Ohrman acknowledged that neither he nor petitioner had
provided them and that “they were thrown away” by him or
petitioner.
The Dean Witter account statements were not the only source
of information indicating that Mr. Ohrman had taken the early
withdrawals during 1999. Two Forms 1099-R for 1999 were also
sent to the Birdshill residence--one indicating a gross
distribution and taxable amount of $71,000 from the Dean Witter
account and the other indicating a gross distribution and taxable
amount of $8,000 from the Dean Witter account. On the Innocent
Spouse Questionnaire, petitioner stated that the two Forms 1099-R
were sent to Mr. Ohrman’s work address. This statement is
inconsistent with the address clearly shown on both Forms 1099-R.
Petitioner is a fairly well-educated individual who had
gained experience with financial matters as a result of her
10 years of employment as a lending officer with two large banks.
Petitioner took complete control of her family’s finances in 1999
as a result of Mr. Ohrman’s gambling addiction, was aware of the
existence and magnitude of the Dean Witter account, and prepared
the joint 1999 return by herself. A reasonable person in
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petitioner’s position would have been put on notice by
Mr. Ohrman’s evasion and deception with respect to the Dean
Witter account statements. Petitioner was well aware of the
extent of Mr. Ohrman’s past gambling and that he needed access to
money in order to continue gambling. Even though petitioner had
knowledge of these facts, she did not keep close watch over the
Dean Witter account. Although petitioner also suffered difficult
personal circumstances during 1999, she was able to retain
control of other aspects of the family finances. Therefore, when
we consider the entire record of this case, we conclude that
petitioner has not established that she had no reason to know of
the understatement when she signed the joint 1999 return.
We also conclude that petitioner has not satisfied the
requirements of subparagraph (D) of section 6015(b)(1). Taking
into account all the facts and circumstances of petitioner’s
case, it is not inequitable to hold her liable for the 1999 tax
deficiency because the tax-avoidance purpose of the separation
agreement is apparent from the evidence. First, a proposed tax
liability of nearly $43,000 prompted petitioner to meet with
Rackner for advice in early June 2001. Second, petitioner told
Rackner about the proposed tax deficiency during this meeting,
and Rackner informed her that relief from joint and several
liability might be available. Third, with the knowledge that
relief from joint and several liability might be available to
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her, petitioner instructed Rackner to draft the separation
agreement whereby she would be financially separated from
Mr. Ohrman. Fourth, pursuant to this separation agreement,
petitioner received approximately $782,000 in assets that had
previously been held in Mr. Ohrman’s name along with spousal
support amounting to at least $4,000 per month for a minimum
period of 78 months, leaving Mr. Ohrman stripped of nearly all of
his assets and monthly income. Finally, petitioner and
Mr. Ohrman have continued their marital relationship since their
legal separation was finalized in July 2001 and have continued to
use Mr. Ohrman’s income to pay the family’s ongoing living
expenses.
In Doyle v. Commissioner, T.C. Memo. 2003-96, we denied a
taxpayer relief from joint and several liability under section
6015(b)(1)(D) because she and her family had engaged in a
systematic plan to put their assets beyond the reach of
respondent’s legitimate collection activities. Similarly, in
Pierce v. Commissioner, T.C. Memo. 2003-188, we denied a taxpayer
relief under section 6015(b)(1)(D) when the object of a series of
transactions entered into by the taxpayer was to shield assets
from creditors, which ultimately included respondent. In both
cases, we concluded that granting relief to taxpayers in such
circumstances would wrongfully permit them to shield themselves
from Federal tax liabilities by using section 6015.
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In this case, petitioner has presented no credible nontax
reason for the transfer of assets pursuant to the separation
agreement. Mr. Ohrman’s gambling addiction, long known to her,
did not cause a legal separation. Petitioner reacted to that
situation by taking practical control of the family finances.
These circumstances lead us to the ultimate conclusion that
petitioner obtained a legal separation in order to shield as many
assets and as much of the family’s income as possible from the
1999 tax deficiency.
Furthermore, it is not inequitable to hold petitioner liable
for the 1999 tax deficiency because she would not suffer a major
financial hardship as a result. Petitioner holds assets that she
could use to pay the 1999 tax deficiency. In addition, her
family’s living expenses are all paid from Mr. Ohrman’s earnings.
Therefore, although her circumstances may be unfortunate, they do
not compel relief from joint and several tax liability under
section 6015(b).
Section 6015(c) Analysis
Because petitioner cannot avoid liability for the deficiency
arising from the joint 1999 return under section 6015(b), we now
turn our attention to her claim for relief from joint and several
liability under section 6015(c). Section 6015(c) allows a
taxpayer, who is eligible and so elects, to limit his or her
liability to the portion of a deficiency that is properly
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allocable to the taxpayer as provided in section 6015(d). Sec.
6015(c)(1). Under section 6015(d)(3)(A), generally, any items
that give rise to a deficiency on a joint return, e.g., the
unreported early distributions from the Dean Witter account,
shall be allocated to the individual filing the return in the
same manner as it would have been allocated if the individual had
filed a separate return for the taxable year.
A taxpayer is eligible to elect the application of section
6015(c) if, at the time the election is filed, the taxpayer is
legally separated from the individual with whom the taxpayer
filed the joint return to which the election relates. Sec.
6015(c)(3)(A)(i)(I). Furthermore, the election under section
6015(c) must not be made later than 2 years after the date on
which respondent has begun collection activities with respect to
the taxpayer making the election. Sec. 6015(c)(3)(B).
Respondent does not contend that petitioner’s election under
section 6015(c) was untimely. Therefore, petitioner is eligible
to elect the application of section 6015(c) to limit her
liability for the 1999 tax deficiency.
The issue with which we are faced in this case, however,
deals with the application of section 6015(c)(4) to the transfer
of assets from Mr. Ohrman to petitioner pursuant to the
separation agreement. Specifically, we must decide whether the
amount of the 1999 tax deficiency for which petitioner can be
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held liable under section 6015(c)(1) may be increased as a result
of a transfer of disqualified assets under section 6015(c)(4).
Under section 6015(c)(4)(A), the portion of the deficiency
for which the taxpayer electing the application of section
6015(c) is liable (without regard to section 6015(c)(4)(A)) is
increased by the value of any disqualified asset transferred to
the taxpayer. The term “disqualified asset” means any property
or right to property transferred to the taxpayer making the
election under section 6015(c) (i.e., petitioner) by the other
individual filing such joint return (i.e., Mr. Ohrman) if the
principal purpose of the transfer was the avoidance of tax or
payment of tax. Sec. 6015(c)(4)(B)(i).
Under section 6015(c)(4)(B)(ii), there is a presumption that
any asset transfer that occurs after the date that is 1 year
before the first letter of proposed deficiency is sent by
respondent has as its principal purpose the avoidance of tax or
payment of tax. (The letter of proposed deficiency allows the
taxpayer an opportunity for administrative review in the Internal
Revenue Service Office of Appeals. Sec. 6015(c)(4)(B)(ii)(I).)
This presumption, however, does not apply to any transfer made
pursuant to a decree of divorce or separate maintenance or a
written instrument incident to such a decree. Sec.
6015(c)(4)(B)(ii)(II); see also sec. 71(b)(2)(B) (explaining that
the term “divorce or separation instrument” means a written
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separation agreement). Consequently, this presumption is not
applicable in this case because the transfer of assets from
Mr. Ohrman to petitioner took place pursuant to a written
separation agreement.
Respondent argues that the burden of proof under section
6015(c)(4) is on petitioner because of the language of section
6015(c)(2) and caselaw interpreting section 6015(c). Conversely,
petitioner contends that respondent has the burden of proof
because of the language of section 1.6015-3(c)(3)(iii), Income
Tax Regs., and the legislative history of section 6015(c). We
need not resolve this dispute, however, because the preponderance
of the evidence establishes that the principal purpose of the
transfer was the avoidance of tax.
Respondent contends that the facts of this case show that
petitioner and Mr. Ohrman intentionally and purposely obtained a
legal separation and transferred assets in an attempt to shield
these assets from respondent’s effort to collect the 1999 tax
deficiency. Petitioner primarily argues that, because the
transfer of assets from Mr. Ohrman to petitioner took place
pursuant to the equitable distribution rules of Oregon family
law, the transfer did not have as its principal purpose the
avoidance of tax or payment of tax. For the reasons set forth
below, respondent’s argument is persuasive on this matter.
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Petitioner’s use of State family law as a vehicle to lend
legitimacy to Mr. Ohrman’s transfer of assets and income to her
is the type of abuse that Congress expressly intended to stop by
adding paragraph (4) to section 6015(c). While the State of
Oregon’s equitable distribution rules provided the mechanism for
the transfer of Mr. Ohrman’s assets and income to petitioner,
they do not negate the principal purpose for which the transfer
occurred, the avoidance of tax. As discussed in detail above,
the separation agreement was a way for petitioner to enjoy the
benefits of the family assets and income without satisfying the
1999 tax deficiency. Accordingly, we hold that petitioner
received a transfer of disqualified assets under section
6015(c)(4).
The next step in the section 6015(c) analysis is to decide
the amount by which petitioner’s liability for the 1999 tax
deficiency should be increased because of the transfer of
disqualified assets. Under section 6015(c)(4)(A), the portion of
the deficiency for which petitioner is liable is increased by the
value of the disqualified assets that were transferred to her.
In this case, petitioner’s portion of the 1999 tax deficiency
would have been zero absent the transfer of disqualified assets
because of her eligibility to make an election to limit her
liability under section 6015(c)(3). The value of the
disqualified assets petitioner received, however, far exceeds
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petitioner’s liability for the 1999 tax deficiency.
Consequently, her election under section 6015(c) does not allow
her to avoid liability for those taxes.
Section 6015(f) Analysis
Section 6015(f) provides an additional opportunity for
relief to those taxpayers who do not otherwise meet the
requirements of subsection (b) or (c) of section 6015.
Specifically, section 6015(f) gives respondent 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”.
We have jurisdiction to review respondent’s denial of
petitioner’s request for equitable relief under section 6015(f).
Jonson v. Commissioner, 118 T.C. 106, 125 (2002); Butler v.
Commissioner, 114 T.C. 276, 292 (2000). We review such denial of
relief to decide whether respondent abused his discretion by
acting arbitrarily, capriciously, or without sound basis in fact.
Jonson v. Commissioner, supra at 125; Butler v. Commissioner,
supra at 292. The review of respondent’s denial of petitioner’s
request for relief under section 6015(f) is a question of fact.
Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282
F.3d 326 (5th Cir. 2002). Petitioner bears the burden of proving
that respondent abused his discretion. Washington v.
Commissioner, 120 T.C. 137, 146 (2003); see also Alt v.
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Commissioner, 119 T.C. 306, 311 (2002) (“Except as otherwise
provided in section 6015, petitioner bears the burden of
proof.”); Jonson v. Commissioner, supra at 113 (same).
As directed by section 6015(f), respondent has prescribed
procedures to use in determining whether a relief-seeking spouse
qualifies for relief under section 6015(f). At the time that
petitioner filed her Petition for Determination of Relief from
Joint and Several Liability on a Joint Return, March 10, 2002,
those procedures were found in Rev. Proc. 2000-15, 2000-1 C.B.
447. Section 4.01 of Rev. Proc. 2000-15, 2000-1 C.B. at 448,
lists seven threshold conditions that must be satisfied before
respondent will consider a request for relief under section
6015(f). The threshold conditions are as follows:
(1) The requesting spouse filed a joint return for
the taxable year for which relief is sought;
(2) Relief is not available to the requesting
spouse under [section] 6015(b) or 6015(c);
(3) The requesting spouse applies for relief no
later than two years after the date of the Service’s
first collection activity after July 22, 1998, with
respect to the requesting spouse;
(4) * * * the liability remains unpaid. * * *
(5) No assets were transferred between the spouses
filing the joint return as part of a fraudulent scheme
by such spouses;
(6) There were no disqualified assets transferred
to the requesting spouse by the nonrequesting spouse.
If there were disqualified assets transferred to the
requesting spouse by the nonrequesting spouse, relief
will be available only to the extent that the liability
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exceeds the value of such disqualified assets. For
this purpose, the term “disqualified asset” has such
meaning given such term by section 6015(c)(4)(B); and
(7) The requesting spouse did not file the return
with fraudulent intent.
Id. A requesting spouse must satisfy all seven threshold
conditions before respondent will consider his or her request for
equitable relief under section 6015(f). Id. We have upheld the
use of these procedures in reviewing a negative determination.
See Washington v. Commissioner, supra at 147; Jonson v.
Commissioner, supra at 125.
Respondent denied petitioner’s request for equitable relief
under section 6015(f) because she did not meet all seven of the
threshold conditions listed above. Specifically, respondent
concluded that petitioner received a transfer of disqualified
assets from Mr. Ohrman in violation of the sixth condition of
Rev. Proc. 2000-15, sec. 4.01. Respondent reached this
conclusion by considering the time line of events beginning with
petitioner’s receipt of the May 29, 2001, letter of proposed
changes to petitioner’s and Mr. Ohrman’s reported tax liability
for 1999, the transfer of assets from Mr. Ohrman to petitioner
pursuant to the separation agreement, and statements made by
petitioner and Mr. Ohrman during their separate interviews with
respondent. Petitioner maintains that she did not receive a
transfer of disqualified assets; thus, petitioner argues that she
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has satisfied the threshold requirements of Rev. Proc. 2000-15,
sec. 4.01.
Because we decided that petitioner received a transfer of
disqualified assets from Mr. Ohrman, we conclude that petitioner
does not meet all seven of the threshold conditions of Rev. Proc.
2000-15, sec. 4.01. Accordingly, we conclude that respondent did
not abuse his discretion by acting arbitrarily, capriciously, or
without sound basis in fact in denying petitioner’s request for
equitable relief under section 6015(f).
Conclusion
We hold that respondent did not err in denying petitioner
relief from joint and several liability under section 6015 with
respect to the joint return filed with Mr. Ohrman for 1999. We
have considered the arguments of the parties not specifically
addressed in this opinion. Those arguments are either without
merit or irrelevant to our decision.
To reflect the foregoing,
Decision will be entered
for respondent.