DeFORE v. COMMISSIONER

T.C. Summary Opinion 2004-162

UNITED STATES TAX COURT

QUENTIN PAUL DeFORE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14248-03S. Filed November 30, 2004.

Quentin Paul DeFore, pro se.

James L. May, Jr., for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463.1 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
year at issue, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
 - 2 -

Respondent determined a deficiency of $2,512 in petitioner’s

Federal income tax for the year 2001. The sole issue for

decision is whether petitioner is entitled to relief from joint

liability under section 6015 for 2001 Federal income taxes.2

Some of the facts were stipulated. Those facts, with the

exhibits annexed thereto, are so found and made part hereof.

Petitioner’s legal residence at the time the petition was filed

was Lancaster, Tennessee.

Petitioner filed a timely 2001 Federal income tax return

jointly with his spouse, Debbie A. DeFore (Ms. DeFore), on April

15, 2002. On November 6, 2002, petitioner and Ms. DeFore were

divorced by a Texas State court. On July 28, 2003, separate

notices of deficiency were issued to petitioner and Ms. DeFore in

which respondent determined a deficiency of $2,512 in Federal

income tax for the year 2001. The sole adjustment in both

notices of deficiency was the inclusion in gross income of $9,877

that was not reported on the joint 2001 Federal income tax

2
The deficiency included a determination by respondent
that petitioner and his former spouse, Ms. DeFore, are liable for
self-employment tax on Ms. DeFore’s unreported income. The Forms
1099-MISC, Miscellaneous Income, Ms. DeFore failed to include
with her 2001 tax return stated the amounts she received were
nonemployment compensation, thus making her liable for self-
employment tax. Petitioner bears the burden of proof on this
issue, and he did not contest respondent’s determination at
trial; therefore, he is deemed to have conceded respondent’s
determination. As a result, petitioner and Ms. DeFore’s 2001 tax
return will be adjusted to reflect a deduction for one-half of
the self-employment tax due for the year 2001.
 - 3 -

return. This omitted income consisted of two information returns

filed by third-party payors evidencing payments of nonemployee

compensation to Ms. DeFore during the year 2001. One of the

information returns was for payments by TJR Partnership in the

amount of $4,642, and the other information return was for

payments by S G, Inc., in the amount of $5,235.

Petitioner filed a timely petition in this Court. Ms.

DeFore has not petitioned this Court. Petitioner’s sole position

is that he is entitled to relief from joint liability under

section 6015. After the petition was filed, petitioner filed

with the Internal Revenue Service Form 8857, Request for Innocent

Spouse Relief. There is no indication in the record that

respondent acted on this request. Respondent, pursuant to Rule

325 and King v. Commissioner, 115 T.C. 118 (2000), served notice

of this proceeding on Ms. DeFore; however, Ms. DeFore has not

intervened in this case, nor did she testify at the trial.

Petitioner was married to Ms. DeFore from 1993 until 2002.

Both are natives of Texas, and they resided in Texas during their

marriage. Petitioner was a pipe fitter and had been employed as

such since 1987. Prior thereto, petitioner attended 2 years of

community college in Alvin, Texas, where he studied courses such

as mechanical drafting, agriculture, and real estate. Although

he took the real estate examination, petitioner has never been

employed in that capacity or in any of the fields he studied in
 - 4 -

college. As a pipe fitter, petitioner performed maintenance and

construction work for a variety of heavy industrial plants, paper

mills, steel mills, and refineries, such as Exxon and Shell.

Ms. DeFore was engaged in a variety of fields during her

marriage with petitioner. She attended high school through the

11th grade and then worked as a race horse jockey for 14 years.

Upon retirement, Ms. DeFore worked on construction jobs with

petitioner and held a few positions with various retailers before

commencing work for a real estate developer midway through 2001.

The deficiency in the couple’s 2001 joint Federal income tax

return arose from Ms. DeFore’s performance of services for that

real estate developer, Darrell Hall.

It appears that Ms. DeFore’s work for Mr. Hall consisted

largely of showing undeveloped lots to prospective buyers.3 If a

prospective buyer decided to purchase a lot, the buyer would then

return to the office with Ms. DeFore and select a house floor

plan. Because Ms. DeFore dealt only with undeveloped lots and

not finished homes, she did not need a real estate license.

Ms. DeFore continued working for Mr. Hall through the

beginning of 2002, after which she worked for Paul Turner, who

owned three western stores. In March 2002, Ms. DeFore left for

3
As Ms. DeFore was not present at trial, petitioner
provided the only testimony concerning the nature of Ms. DeFore’s
work for Mr. Hall.
 - 5 -

Las Vegas, Nevada, with Mr. Turner. Upon her return, Ms. DeFore

filed for divorce against petitioner.

Although they had separated in March 2002, Ms. DeFore and

petitioner met at an H&R Block office the following April to

prepare a joint income tax return for 2001. Each supplied income

information to the H&R Block representative who then prepared

their return. Upon completion of the return, petitioner glanced

over it, assumed Ms. DeFore had submitted all necessary

information, and signed the return. Petitioner and Ms. DeFore

subsequently finalized their divorce in November 2002.

Petitioner’s agreed divorce decree, also signed by Ms. DeFore,

states that any penalty resulting from the omission of income

from the previous year’s tax return shall be paid solely by the

party who earned the omitted income.

Petitioner was unaware of any problem with the tax return

until he received a notice of deficiency in July 2003. Ms.

DeFore suggested to petitioner that they each pay half the

deficiency; however, petitioner was unwilling to do so because

the deficiency was attributable to the omission of Ms. DeFore’s

income and her failure to present this information to the tax

preparer at H&R Block.

Spouses who file a joint Federal income tax return generally

are jointly and severally liable for the payment of the tax shown

on the return or found to be owing. Sec. 6013(d)(3); Cheshire v.
 - 6 -

Commissioner, 115 T.C. 183, 188 (2000), affd. 282 F.3d 326 (5th

Cir. 2002). Furthermore, agreements between spouses with respect

to how liability for tax deficiencies is to be shared are not

binding on this Court. Pesch v. Commissioner, 78 T.C. 100, 129

(1982)(citing Bruner v. Commissioner, 39 T.C. 534, 537 (1962);

Neeman v. Commissioner, 13 T.C. 397, 399 (1949), affd. per curiam

200 F.2d 560 (2d Cir. 1952); Casey v. Commissioner, 12 T.C. 224,

227 (1949); Bonner v. Commissioner, T.C. Memo. 1979-435;

Ballenger v. Commissioner, T.C. Memo. 1955-171). Therefore, one

spouse is not relieved of liability merely because the other

spouse agreed to be responsible. Ballenger v. Commissioner,

supra. Petitioner’s divorce decree, therefore, is not binding on

the Tax Court. However, relief from joint and several liability

is available to certain taxpayers under section 6015. There are

three avenues for relief available under this section–-section

6015(b), (c), (f). Neither party disputes that, in this case,

the requirements of subparagraphs (A), (B), and (E) of section

6015(b)(1) have been satisfied. The dispute is whether the

requirements of subparagraphs (C) and (D) of section 6015(b)(1)

have been met.

The first avenue for relief is section 6015(b). Under

section 6015(b), the Court may grant a taxpayer full or

apportioned relief from joint and several liability for an

understatement of tax on a joint return if, among other
 - 7 -

requirements, the taxpayer establishes that he “did not know, and

had no reason to know” that the other spouse understated that

spouse’s tax liability on the return. Sec. 6015(b)(1)(C),

(b)(2). Petitioner asserts that he had no reason to know of the

understatement attributable to Ms. DeFore’s income from Mr. Hall

because petitioner and Ms. DeFore did not maintain a joint bank

account or commingle funds. Petitioner and Ms. DeFore divided

responsibility for the household expenses each month between

themselves and did not discuss finances or their mutual income

with each other. Petitioner merely paid the bills he owed for

any given month and retained the remainder of his paycheck. Ms.

DeFore did the same. Therefore, petitioner asserts he had no

reason to know how much income Ms. DeFore was earning from her

work for Mr. Hall. The Court disagrees.

Ms. DeFore submitted to the tax preparer at H&R Block only

one of three information returns she received for her work with

Mr. Hall during 2001. She included $2,658 as profit from a sole

proprietorship, Exchange Land Co., LTD. Ms. DeFore’s claimed

“sole proprietorship” profit was actually compensation for her

work with Mr. Hall. Ms. DeFore received additional nonemployment

compensation in the form of cash under two other company names,

$4,642 from TJR Partnership, LTD, and $5,235 from S G, Inc., both

of which were affiliated with Mr. Hall. Petitioner contends that

Ms. DeFore worked solely for Mr. Hall, who paid her primarily in
 - 8 -

cash; therefore, petitioner believed all three companies who paid

Ms. DeFore nonemployment compensation were controlled by Mr.

Hall. The return did not include the income from TJR Partnership

and S G, Inc., as reflected on the information returns issued by

these entities.

A spouse has “reason to know” of an understatement of income

if “a reasonable prudent taxpayer in * * * [his] position at the

time * * * [he] signed the return could be expected to know that

the return contained the substantial understatement.” Jonson v.

Commissioner, 118 T.C. 106, 116 (2002) (citing Price v.

Commissioner, 887 F.2d 959, 965 (9th Cir. 1989)). Although

petitioner did not know the exact amount of Ms. DeFore’s

compensation, he admitted he knew she worked for Mr. Hall for the

last 5 months of 2001. Furthermore, Ms. DeFore worked solely for

Mr. Hall during those months, and, during that time, Ms. DeFore

continued paying her portion of the bills.4 Using the reasonable

taxpayer standard, the Court concludes that petitioner had reason

to know that Ms. DeFore earned more than $2,658 in her 5 months

of working with Mr. Hall. Therefore, petitioner is denied relief

under section 6015(b).

The second avenue for relief is section 6015(c). Section

6015(c) affords proportionate relief to a spouse through

4
Petitioner did not testify as to the exact bills Ms.
DeFore was responsible for.
 - 9 -

allocation to the responsible party. To be eligible for relief

under section 6015(c), the individual seeking relief must no

longer be married to, or must be legally separated from, the

individual with whom the tax return was filed and must have

elected the applicability of section 6015(c) not later than 2

years after the date on which collection activity began. Sec.

6015(c)(3). Furthermore, relief under section 6015(c) is not

available to a taxpayer if it is shown that the taxpayer had

actual knowledge when signing the return of any “item” giving

rise to a deficiency. Sec. 6015(c)(3)(C).

As previously discussed, petitioner is divorced from Ms.

DeFore. His divorce was finalized before he requested relief

from joint and several liability. Also, he filed a timely Form

8857, Request for Innocent Spouse Relief, to request relief.

Therefore, the last requirement petitioner is required to meet to

be eligible for relief under section 6015(c) is to prove he had

no actual knowledge of the income item leading to the

underpayment.

The Court has concluded that petitioner had reason to know

of Ms. DeFore’s omitted income; however, that does not mean

petitioner actually knew of the omitted income. Charlton v.

Commissioner, 114 T.C. 333 (2000); Martin v. Commissioner, T.C.

Memo. 2000-346. Petitioner testified that he and Ms. DeFore did

not share a bank account. They did not transfer money between
 - 10 -

each other but merely divided responsibility for monthly bills.

Petitioner did not know how much or how often Ms. DeFore received

payment from Mr. Hall. Petitioner testified he had “no earthly

idea” how much money Ms. DeFore received from Mr. Hall in 2001.

The Court has no reason not to believe him. Moreover, petitioner

believed and knew that Ms. DeFore worked for Mr. Hall; however,

the record does not suggest a finding that petitioner knew that

Ms. DeFore’s compensation for her services for Mr. Hall came from

three separate sources. Petitioner believed that the one

information return Ms. DeFore presented to the income tax return

preparer reflected her sole earnings that year. Petitioner,

therefore, had no actual knowledge that there were two

undisclosed information returns from Mr. Hall that would fully

represent Ms. DeFore’s income for 2001. Therefore, petitioner

qualifies for relief under section 6015(c).5 Thus, the

procedures in section 6015(d) to allocate items between

petitioner and Ms. DeFore apply.

For purposes of section 6015(c), the item giving rise to the

deficiency on a joint return is allocated as if the individuals

had filed separate returns. Sec. 6015(d)(3)(A). Since the

understatement in tax is entirely attributable to Ms. DeFore’s

omitted income, it follows that the entire amount of the

5
Because the Court has granted petitioner relief under
sec. 6015(c), it is not necessary to address whether petitioner
also qualifies for relief under sec. 6015(f).
 - 11 -

deficiency is allocated to her. Petitioner, therefore, is

relieved of the entire amount of the deficiency.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be entered

for petitioner.