T.C. Summary Opinion 2005-84
UNITED STATES TAX COURT
SHUANG-DI SUN BENNETT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6291-03S. Filed June 16, 2005.
Shuang-Di Sun Bennett, pro se.
Elaine T. Fuller, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of sections 6330(d) and 7463 of the
Internal Revenue Code in effect when 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. Unless otherwise
indicated, all subsequent section references are to the Internal
Revenue Code in effect at relevant times. All Rule references
are to the Tax Court Rules of Practice and Procedure.
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Respondent issued to petitioner a Notice of Determination
Concerning Collection Action(s) Under Section 6320 and/or 6330
(notice of determination), in which respondent sustained a
proposed levy to collect petitioner’s unpaid 1998 tax liability
following an administrative hearing. The issues for decision
are: (1) Whether, in the context of this collection action,
petitioner is liable for the underlying tax for the taxable year
1998 and, if so, (2) whether respondent may proceed with
collection.
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts, the supplemental stipulation of
facts, and the attached exhibits are incorporated by this
reference. At the time of filing the petition, petitioner
resided in Monterey Park, California.
Petitioner is a native of Shanghai, China. In December
1993, petitioner married Alva D. Bennett (Mr. Bennett), a U.S.
citizen, and she immigrated to the United States in September
1994. As described by petitioner, Mr. Bennett went to Shanghai
to marry her, and then “picked [her] up from the airport” a
little less than a year later. At some point in 1999, petitioner
discovered that Mr. Bennett was having an extramarital affair.
Petitioner suspects that the extramarital affair began much
earlier than 1999. Petitioner continued to reside in the same
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house as Mr. Bennett until May 8, 2000, the date their divorce
became final.
Petitioner spoke little or no English when she immigrated to
the United States. Even at the time of trial petitioner had
somewhat limited proficiency in English. She placed her trust in
and completely relied on Mr. Bennett to manage their household
and financial matters. She often signed documents at the request
of Mr. Bennett without knowing or understanding what she was
signing. During the year at issue, Mr. Bennett was employed as
general manager of and possibly had an ownership interest in
Premium Fresh Juice & Food Co. (Premium Fresh Juice).
During the tax year 1998, petitioner and Mr. Bennett were
married and living together in California, a community property
State. Petitioner and Mr. Bennett filed separate Federal income
tax returns for 1998, each claiming a filing status of married
filing separately. Petitioner’s 1998 return provided Mr.
Bennett’s name and Social Security number. The return reported
gross income of $34,288 ($31,385 of taxable wages, $723 of
taxable interest, and $2,180 from a taxable IRA distribution), a
total tax of $3,372, total payments of $624, and a tax due of
$2,870.1 Attached to her 1998 return was a Form W-2, Wage and
Tax Statement, from Columbia Cleaning Co. (Columbia Cleaning),
1
The tax due reflected a $122 estimated tax penalty.
Petitioner claimed $8,546 in itemized deductions for the year and
a deduction of $2,000 for an IRA contribution.
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reporting that petitioner was paid wages of $19,384.68 in 1998.2
Petitioner failed to pay the amount of tax reported on her 1998
return.
Petitioner’s 1998 return was prepared by a professional tax
preparer on October 20, 1999, and petitioner purportedly signed
and dated it on October 21, 1999. However, her return was not
filed until December 13, 2000, a date occurring after petitioner
and Mr. Bennett were divorced. She had not previously filed an
application for an extension of time to file a return.
Respondent accepted petitioner’s return as it was filed and
assessed the income tax liability reported therein as well as an
addition to tax for filing a delinquent return, an addition to
tax for failing to pay a tax shown on a return, and interest.
Respondent did not issue petitioner a statutory notice of
deficiency for 1998. Although petitioner was a married
individual living in a community property State and filed a
return as “married filing separately”, respondent did not
determine or assess a tax based upon her one-half share of
community income.
On his separate 1998 return, also filed on December 13,
2000, Mr. Bennett reported gross income of $57,138, taxable
income of $50,534, and a total tax due of $11,394. Mr. Bennett’s
2
Other third-party information reported that petitioner
earned wages of $13,626 in 1998.
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1998 return was not introduced into the record. Transcripts of
account reflect that Mr. Bennett’s gross income included $40,054
of wages and $4,834 of taxable interest, and he claimed $1,904 in
itemized deductions. Mr. Bennett also failed to pay the amount
of tax reported on his separate return, and respondent assessed
the tax liability reported therein. As with petitioner’s return,
respondent did not determine or assess a tax based on Mr.
Bennett’s share of community income. Respondent has initiated a
separate collection activity against Mr. Bennett.3
On February 12, 2001, respondent issued to petitioner a
written request for payment of her 1998 tax liability.
Petitioner contacted respondent to discuss her tax liability. In
correspondence received by respondent on November 20, 2001,
petitioner wrote:
1) * * * I also never worked for Columbia Cleaning
Company. My ex-husband had partners who ownd [sic]
this company and he told them to prepare this W-2 form.
2) My ex-husband prepared the ‘98 & ‘99 tax forms for
me to sign and I didn’t know what I was signing.
3) I went to Columbia Cleaning Company on 11-19-01 and
asked them for an amended W-2 form but they refused to
give me one.
3
The collection of Mr. Bennett’s unpaid 1998 tax
liability, as assessed, is not at issue in this case. The income
reflected on Mr. Bennett’s return is relevant only for purposes
of determining petitioner’s underlying tax liability under
California’s community property laws.
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On June 17, 2001, petitioner submitted an amended 1998
return, on which she reported no taxable income, no taxes
withheld, and a tax liability of zero. Petitioner did not submit
a corrected Form W-2 with the amended return. Petitioner’s
amended 1998 return was received on June 17, 2001, but respondent
did not process the amended return.
On March 12, 2002, respondent issued to petitioner a Final
Notice--Notice of Intent to Levy and Notice of Your Right to a
Hearing. Petitioner timely filed a Form 12153, Request for a
Collection Due Process Hearing, on which petitioner stated, in
pertinent part:
I came to U.S.A. 9-1-1994 and I have never worked at
all. My ex-husband put me on his partner’s company
payroll for insurance but I have never received any pay
from any source. * * * He prepared the tax form for my
signature and I signed it without looking at or
understanding the form. I had no income from any job
in 1998. My request for an amended W-2 Form was
refused. * * *
On September 10, 2002, an administrative hearing was held
between petitioner and a hearing officer from the IRS Office of
Appeals. On March 21, 2003, respondent issued to petitioner the
notice of determination. In the notice, respondent determined
that it was appropriate to proceed with collection. The notice
provided the following explanation, in pertinent part:
The taxpayer appeared for the conference and reiterated
the argument presented in the Request for a Collection
Due Process Hearing. The taxpayer was given an
opportunity to provide evidence to support her argument
that she did not earn wages [from] her former husband’s
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company. The taxpayer failed to respond. A follow-up
letter was sent on January 20, 2002 but was returned
undeliverable. The follow-up letter was sent a second
time on February 6, 2003 in case the Post Office made a
mistake. The follow-up letter was returned again
undeliverable. I am processing this case based on the
facts in the file since the taxpayer has failed to
provide any evidence.
No other issues were raised. Compliance followed the
proper procedures.
Petitioner timely filed with the Court a petition for lien and
levy action pursuant to section 6330(d).4
At trial, respondent introduced into the record paychecks
made out to petitioner in 1998. The paychecks included 12 checks
from Trojan Management Co. (Trojan Management) totaling $10,099
and 41 checks from Columbia Cleaning totaling $15,757.12.5
Executive officers from Trojan Management and Columbia Cleaning
testified that they issued paychecks to petitioner as payroll
agents for Premium Fresh Juice and that petitioner did not work
4
We note that respondent filed a motion for summary
judgment on Nov. 14, 2003, on the basis that petitioner could not
challenge a self-assessed tax liability under sec. 6330(c)(2)(B).
Following this Court’s Opinion in Montgomery v. Commissioner, 122
T.C. 1 (2004), we denied respondent’s motion for summary
judgment. By order dated Jan. 27, 2004, we remanded this case to
the IRS Appeals Office for further consideration of the
underlying tax liability reported on petitioner’s original
return. In a status report, filed Mar. 29, 2004, respondent
advised that upon reconsideration he had concluded that
petitioner was liable for the full tax and penalty as assessed.
5
The checks purported to represent net wages after
withholding of taxes and other miscellaneous deductions.
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for either Trojan Management or Columbia Cleaning in 1998.6
Furthermore, in their capacity as payroll agents, they did not
independently verify whether petitioner performed services for
Premium Fresh Juice but issued paychecks to her based solely on
payroll information provided to them by Mr. Bennett. As
explained by the president of Trojan Management: “Mr. Bennett
asked us to put Ms. Bennett on our payroll, and the juice company
would reimburse us, plus pay us our profit that we normally
charge for such services”.
The paychecks were deposited into joint bank accounts
belonging to petitioner and Mr. Bennett at Bank of America and
Mercantile National Bank. Petitioner had signatory authority on
these joint accounts. Petitioner examined the paychecks and
stated that the endorsement signatures were not hers. Respondent
admitted that there was a “substantial question about whether
[the endorsements were] petitioner’s signature”.
In addition to the joint bank accounts, petitioner
maintained a separate bank account at Bank of America in 1998.
Petitioner kept a modest combined balance in standard checking
and regular savings accounts ranging from a combined balance of
approximately $600 to $3,641. Petitioner also maintained
6
The function of payroll agent was explained at trial by
the president of Trojan Management: “Trojan Management provided
payroll services, where we prepared payroll checks, payroll tax
deposits, for Mr. Bennett’s company, Premium Fresh Juice.”
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certificate of deposit accounts at Bank of America with a
combined balance ranging from approximately $10,000 to $12,050
during the year. Most of the deposits into petitioner’s
individual accounts came from checks written by Mr. Bennett from
their joint bank accounts.7
Discussion
I. General Rules--Lien and Levy
Section 6331(a) authorizes the Commissioner to levy upon
property and property rights where a taxpayer liable for taxes
fails to pay them within 10 days after notice and demand for
payment. Before the Commissioner can proceed with a levy,
section 6331(d) requires the Secretary to send to the taxpayer a
written notice of intent to levy, and section 6330 entitles the
taxpayer to an administrative hearing conducted by an impartial
hearing officer from the Office of Appeals.
Section 6330(c)(2)(A) provides that the taxpayer may raise
any relevant issue with regard to the Commissioner’s collection
activities, including spousal defenses, challenges to the
appropriateness of the intended collection action, and
alternative means of collection. Additionally, the taxpayer may
challenge the existence or amount of the underlying tax
liability, including a liability reported by the taxpayer on an
7
Petitioner earned $608 of the taxable interest in 1998
from her accounts at Bank of America.
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original return, if the taxpayer “did not receive any statutory
notice of deficiency for such tax liability or did not otherwise
have an opportunity to dispute such tax liability.” Sec.
6330(c)(2)(B); see also Montgomery v. Commissioner, 122 T.C. 1,
9-10 (2004).
A taxpayer may appeal the Commissioner’s administrative
determination to this Court, and we have jurisdiction with
respect to such an appeal so long as we generally have
jurisdiction over the type of tax involved in the case. Sec.
6330(d); Iannone v. Commissioner, 122 T.C. 287, 290 (2004). If
the underlying tax liability is properly at issue, the Court will
review that issue de novo. See Sego v. Commissioner, 114 T.C.
604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181 (2000).
If the validity of the underlying tax liability is not properly
at issue, the Court will review the Commissioner’s determination
for abuse of discretion. See Sego v. Commissioner, supra at 610;
Goza v. Commissioner, supra at 181.
We have jurisdiction over petitioner’s appeal because the
underlying tax liability relates to Federal income taxes. See
sec. 6330(d)(1); Montgomery v. Commissioner, supra at 9-10;
Landry v. Commissioner, 116 T.C. 60, 62 (2001). At her
administrative hearing, petitioner challenged the existence of
her underlying tax liability. Since petitioner did not receive a
statutory notice of deficiency and did not otherwise have an
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opportunity to challenge her tax liability before her
administrative hearing, we review petitioner’s underlying tax
liability de novo.
In a trial de novo, our findings and conclusions concerning
a taxpayer’s liability must be based on the merits of a case
without deference to the determination reached at the
administrative level. See Ewing v. Commissioner, 122 T.C. 32,
37-38 (2004); Jones v. Commissioner, 97 T.C. 7, 18 (1991).
Although petitioner resided in a community property State and
filed her return as “married filing separate”, respondent did not
determine or assess a tax based upon petitioner’s share of
community income and, consequently, there was no consideration of
the issue in the notice of determination. Since our task in a
trial de novo is to arrive at a conclusion of the correct amount
of a taxpayer’s underlying tax liability, we apply Federal income
tax principles as they relate to the taxpayer’s share of
community income.
II. De Novo Review of Petitioner’s Underlying Tax Liability
A. Community Property--General Rules
Generally, a spouse residing in a community property State
has a vested interest in and is owner of one-half of both
spouses’ community property. United States v. Mitchell, 403 U.S.
190, 196 (1971). California law defines community property as
all property, real or personal, wherever situated, acquired by a
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married person during the marriage while domiciled in California.
Cal. Fam. Code sec. 760 (West 2004). Under California law, there
is a rebuttable presumption that all property acquired during
marriage is community property. Hanf v. Summers, 332 F.3d 1240,
1242-1243 (9th Cir. 2003); Haines v. Haines, 39 Cal. Rptr. 2d
673, 681 (Ct. App. 1995). It follows that there is a rebuttable
presumption that all income derived during the marriage while
domiciled in California is community property. See, e.g., Dooley
v. Commissioner, T.C. Memo. 1992-39. Since Federal income tax
liability follows ownership with respect to income, there is a
rebuttable presumption that any income derived in a marriage in
California is taxable as community income. See United States v.
Mitchell, supra at 197.
Spouses who reside in a community property State may file
either a joint Federal income tax return or separate Federal
income tax returns. If separate returns are filed, then
generally each spouse must report and pay tax on one-half of the
community income, regardless of whether the spouse actually
received that income. Id. at 196-197; Hardy v. Commissioner, 181
F.3d 1002 (9th Cir. 1999), affg. T.C. Memo. 1997-97; Bernal v.
Commissioner, 120 T.C. 102, 105-106 (2003).
B. Petitioner’s Community Income
The potential sources of community income in this case are:
(1) The items of income reported on petitioner’s return totaling
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$34,288 and (2) the items of income reported on Mr. Bennett’s
return totaling $57,138. Unless petitioner can rebut the
presumption under California law that these items are community
property, the Bennetts’ total community income for 1998 was
$91,426, and petitioner’s one-half share of community income was
$45,713, as follows:
Item of Community Income Total Amount Petitioner’s Share
Petitioner’s “wages” $31,385 $15,692.50
Petitioner’s interest 723 361.50
Petitioner’s IRA 2,180 1,090.00
Total (petitioner) 34,288 17,144.00
Husband’s wages 40,054 20,027.00
Husband’s interest 4,834 2,417.00
Husband’s other income 12,250 6,125.00
Total (husband) 57,138 28,569.00
Petitioner’s share $45,713.00
of community income
There is no evidence in the record to rebut the presumption
that any of the items of income listed above were community
property. While petitioner contends that she did not work for
Premium Fresh Juice in 1998 and that she should not owe taxes on
any portion of the $31,385 in wages, she does not dispute that
paychecks were issued in her name and deposited into joint bank
accounts over which she had signatory authority. As a result,
legal title to the purported wages passed to the Bennetts in
1998, and they are properly included in the Bennetts’ community
income for 1998.8
8
There is no evidence in the record that Premium Fresh
(continued...)
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III. Statutory Relief Under Section 66
Having concluded that petitioner’s share of community income
is $45,713, we consider the application of section 66. Under
certain circumstances, section 66 provides that a taxpayer may be
relieved of liability on community income. Section 66(a)
addresses the treatment of community income in the case of
spouses who live apart. Section 66(b) allows the Secretary to
disallow the benefits of community property laws if the taxpayer
acted as if he or she were solely entitled to the income and
failed to notify his or her spouse of the nature and amount of
the income before the due date for filing the return. Section
66(c) provides a taxpayer with relief if certain circumstances
are satisfied.
Under the circumstances of the present case, petitioner is
not eligible for the type of relief provided by section 66(a) and
(b). Section 66(a) does not apply because petitioner and Mr.
Bennett lived together in 1998. Section 66(b) allows the
Commissioner to disregard the benefits of community property
laws, and in the present case, petitioner is seeking relief from
8
(...continued)
Juice considered any of the payments as improper or illegally
issued.
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community income.9 Consequently, we need to consider only relief
under section 66(c).
To qualify for statutory relief under section 66(c),
petitioner must satisfy all four conditions provided in
paragraphs (1)-(4) of section 66(c). In particular, section
66(c) provides:
SEC. 66(c). Spouse Relieved of Liability in
Certain Other Cases.-- Under regulations prescribed by
the Secretary, if–-
(1) an individual does not file a joint
return for any taxable year,
(2) such individual does not include in
gross income for such taxable year an item of
community income properly includible therein
which, in accordance with the rules contained
in section 879(a), would be treated as the
income of the other spouse,
(3) the individual establishes that he
or she did not know of, and had no reason to
know of, such item of community income, and
(4) taking into account all facts and
circumstances, it is inequitable to include
such item of community income in such
individual’s gross income,
then, for purposes of this title, such item of
community income shall be included in the gross income
of the other spouse (and not in the gross income of the
individual). Under procedures prescribed by the
Secretary, if, taking into account all the facts and
circumstances, it is inequitable to hold the individual
liable for any unpaid tax or any deficiency (or any
9
Sec. 66(b) is not a relief provision and can be used only
by the Commissioner to disallow the benefits of community
property laws to a taxpayer. It cannot be used by a taxpayer to
claim relief from community property.
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portion of either) attributable to any item for which
relief is not available under the preceding sentence,
the Secretary may relieve such individual of such
liability.
A. The Items of Community Income From Petitioner’s Return
Fail To Satisfy Section 66(c)(2)
Section 66(c)(2) provides that petitioner must not have
included in gross income an item of community income properly
includable therein, which, in accordance with the rules contained
in section 879(a), would be treated as the income of Mr. Bennett.
As it relates to the items of community income reflected on her
1998 return ($31,385 of “wages”, $723 of taxable interest, and
$2,180 of IRA distributions), petitioner fails to satisfy either
of the conditions for relief under section 66(c)(2).
The first condition, that petitioner must not “include in
gross income for such taxable year an item of community income
properly includible therein”, is not satisfied because
petitioner’s original 1998 return reported the items of community
income from which she seeks relief. Although petitioner
subsequently submitted an amended “zero return” claiming no
income, this amended return does not negate the filing of the
original return.
Even if her amended return were sufficient to satisfy the
first requirement of section 66(c)(2), petitioner would not
satisfy the second requirement that the items of community income
“would be treated as the income of the other spouse” in
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accordance with the rules provided in section 879(a). Section
879(a) provides that (1) “earned income”10 is attributable to the
spouse who performed the services; (2) trade or business income
is attributable in accordance with section 1402(a)(5); (3)
community income not described in either (1) or (2) which is
derived from the spouse’s separate property is attributable to
that spouse; and (4) all other items of community income are
attributable in accordance with the applicable community property
law. We conclude that the correct classification of all the
items of community income reported on petitioner’s return is
under the category of “other such community income” under section
879(a)(4). Although payroll agents acting on behalf of Premium
Fresh Juice reported that petitioner earned $31,385 of wages in
1998, the payroll agents did not verify that petitioner performed
services for Premium Fresh Juice and acted solely on the basis of
payroll information submitted to them by Mr. Bennett.
Petitioner’s testimony that she never worked for Mr. Bennett’s
company was credible, and as a result, we find that the $31,385
is correctly classified as “other such community income” rather
than wages. The taxable interest and the IRA distribution also
10
For purposes of sec. 879(a), “earned income” is defined
by reference to sec. 911(d)(2), which provides that the term
means “wages, salaries, or professional fees, or and other
amounts received as compensation for personal services actually
rendered”.
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do not fit one of the other categories of section 879(a), and are
also classified as “other such community income”.
Other such community income is treated under the applicable
community property law. Therefore, the half of the $34,288 of
community income reported on petitioner’s return, or $17,144,
cannot be treated as Mr. Bennett’s income, and she is not
entitled to further relief under section 66(c)(2).
B. The Items of Community Income From Mr. Bennett’s Return
Fail To Satisfy Section 66(c)(3)
Section 66(c)(3) provides that petitioner must establish
that she did not know, and had no reason to know, of the
community income. With regard to the items of community income
reflected on Mr. Bennett’s return ($40,054 of wages, $4,834 of
taxable interest, and $12,250 of other income), petitioner does
not satisfy section 66(c)(3).
A taxpayer’s knowledge of an item of community income must
be determined with reference to her knowledge of the particular
income-producing activity. See McGee v. Commissioner, 979 F.2d
66, 70 (5th Cir. 1992), affg. T.C. Memo. 1991-510; Hardy v.
Commissioner, T.C. Memo. 1997-97, affd. 181 F.3d 1002 (9th Cir.
1999). Petitioner was aware that Mr. Bennett was employed by
Premium Fresh Juice and was aware that his wages were used to pay
their household living expenses. While petitioner may not have
known the precise amount of Mr. Bennett’s salary, she had
knowledge of his employment. Accordingly, we find that
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petitioner knew, or had reason to know, about Mr. Bennett’s wages
of $40,054.
Similarly, in regard to her share of the $4,834 of taxable
interest, petitioner was aware that the couple had joint bank
accounts. As a result, petitioner knew, or had reason to know,
of the taxable interest income.
With regard to her share of the remaining $12,250 of
unidentified community income, we do not have enough information
to evaluate whether petitioner knew or had reason to know of this
income. Therefore, for purposes of section 66(c)(3), petitioner
has not established that she did not know, and had no reason to
know, of the unidentified income.
Accordingly, we hold that she is not entitled to relief from
any of the items of community income reported on Mr. Bennett’s
return under section 66(c)(3).
IV. Equitable Relief Under the Flush Language of Section 66(c)
The flush language of section 66(c) provides:
Under procedures prescribed by the Secretary, if,
taking into account all the facts and circumstances, it
is inequitable to hold the individual liable for any
unpaid tax or any deficiency (or any portion of either)
attributable to any item for which relief is not
available under the preceding sentence, the Secretary
may relieve such individual of such liability.[11]
11
The flush language providing equitable relief was added
to sec. 66(c) as part of the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201,
112 Stat. 734, the same section of the same legislation that
(continued...)
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Generally, a spouse has to submit a request for relief under
the equitable relief provision of section 66(c) on Form 8857,
Request for Innocent Spouse Relief. See Rev. Proc. 2003-61,
2003-2 C.B. 296; Rev. Proc. 2000-15, 2000-1 C.B. 447. However,
since respondent did not seek until trial to collect a tax based
upon community property principles, petitioner had no reason to
submit a Form 8857 or request equitable relief until trial.
Since respondent did not consider equitable relief for petitioner
under section 66(c), we view section 66(c) as an affirmative
defense and may review respondent’s denial of that relief. See
Rules 39, 41(a); Butler v. Commissioner, 114 T.C. 276, 287-288
(2000) (discussing jurisdiction under section 6015(f)).
We review the Commissioner’s denial of equitable relief
under section 66(c) under an abuse of discretion standard. Beck
v. Commissioner, T.C. Memo. 2001-198. We previously stated that
our determination of petitioner’s tax liability takes place in a
trial de novo. See supra p. 11. Where the Commissioner has not
previously considered equitable relief, and our review of the
Commissioner’s determination is for an abuse of discretion in a
trial de novo, we have jurisdiction to determine whether
11
(...continued)
created the similar equitable relief provision under sec.
6015(f). Accordingly, cases interpreting our jurisdiction under
sec. 6015(f) provide guidance on interpreting our jurisdiction
under the equitable relief provision of sec. 66(c). See Beck v.
Commissioner, T.C. Memo. 2001-198.
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equitable relief is appropriate. See Ewing v. Commissioner, 122
T.C. at 38-39, 43-44 (discussing jurisdiction under section
6015(f)). Our determination is not limited to matter in the
administrative record, and we consider equitable relief within
the guidelines that the Commissioner has published. Id. at 43-
44.
As directed by section 66(c), the Secretary has prescribed
factors in Rev. Proc. 2003-61, supra,12 that the Commissioner
will consider in determining whether an individual qualifies for
equitable relief under the flush language of section 66(c). Rev.
Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298, provides a
“nonexclusive list of factors” that the Commissioner will
consider in determining whether, taking into account all the
facts and circumstances, it is inequitable to hold the spouse
requesting relief liable for all or part of the unpaid tax
liability. Rev. Proc. 2003-61, sec. 4.03(2)(a), provides that
the following factors are relevant to whether the Commissioner
will grant equitable relief: (1) Marital status, (2) economic
hardship, (3) knowledge or reason to know, (4) the nonrequesting
12
Rev. Proc. 2003-61, 2003-2 C.B. 296, supersedes Rev.
Proc. 2000-15, 2000-1 C.B. 447. Rev. Proc. 2003-61, supra, is
effective for requests for relief filed on or after Nov. 1, 2003,
and for requests for relief pending on Nov. 1, 2003, for which no
preliminary determination letter has been issued as of Nov. 1,
2003. Because respondent has not issued a determination letter
in this case regarding equitable relief under sec. 66(c), Rev.
Proc. 2003-61, supra, applies to this case.
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spouse’s legal obligation, (5) significant benefit, (6)
compliance with income tax laws, (7) abuse, and (8) mental or
physical health. Further, Rev. Proc. 2003-61, supra, provides
that no single factor will be determinative, but that all
relevant factors, regardless of whether the factor is listed in
Rev. Proc. 2003-61, sec. 4.03, will be considered and weighed.
A. Marital Status
Rev. Proc. 2003-61, supra, provides that petitioner’s
marital status is a factor in determining whether a spouse should
be granted equitable relief. Petitioner and Mr. Bennett divorced
on May 8, 2000, and her divorce weighs in favor of granting
equitable relief under section 66(c).
B. Economic Hardship
Whether a spouse will suffer economic hardship if equitable
relief is not granted under section 66(c) is a factor which may
be considered pursuant to Rev. Proc. 2003-61, supra. Economic
hardship exists if a levy will cause a taxpayer to be unable to
pay his or her reasonable basic living expenses. Sec. 301.6343-
1(b)(4), Proced. & Admin. Regs.
In this case, we are unable to properly evaluate whether
petitioner would suffer economic hardship if equitable relief
were not granted. While petitioner testified that she was
economically dependent upon Mr. Bennett during their marriage, we
are not aware of petitioner’s current employment situation or
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expenses. Given the paucity of information in the record, we
view this factor as neutral.
C. Knowledge or Reason To Know
A spouse’s knowledge, or reason to know, of the income from
which she seeks relief is a factor in determining whether the
spouse should be granted equitable relief. In evaluating whether
a spouse had reason to know of an item of community income, Rev.
Proc. 2003-61, supra, provides that we may consider the spouse’s
level of education, any deceit or evasiveness, the spouse’s
degree of involvement in the activity generating the tax
liability, her involvement in business and household financial
matters, and her business or financial expertise.
Petitioner was undeniably an unsophisticated spouse with
respect to business and household financial matters. Petitioner
did not speak English when she immigrated to the United States in
1994 and had no prior experience with financial matters or with
running a household. Further, it is undeniable that Mr. Bennett
exercised complete control over their financial matters. Mr.
Bennett filed income tax returns and was responsible for
virtually all matters relating to their household finances.
Petitioner often signed documents at the request of Mr. Bennett
without knowing or understanding what she was signing. Mr.
Bennett forbade petitioner to open mail that arrived at their
home, to review bank statements from their joint bank accounts,
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and to withdraw money or to write checks from their joint bank
accounts.13
1. Knowledge, or Reason To Know, About the Items of
Community Income Reported on Petitioner’s Return
Petitioner did not argue that she did not know about the
$723 of interest income or the $2,180 in distributions from her
IRA that were reported on her return.
However, with respect to the $31,385 of wages petitioner
purportedly earned from Premium Fresh Juice, petitioner testified
that Mr. Bennett placed her on his company’s payroll without her
knowledge.14 In evaluating whether petitioner knew, or had
13
We have granted relief from joint and several liability
on a joint return in cases involving an unsophisticated spouse
and a controlling spouse who misled, controlled, or hid financial
matters from the unsophisticated spouse. See, e.g., Guth v.
Commissioner, 897 F.2d 441, 442 (9th Cir. 1990), affg. T.C. Memo.
1987-522; Price v. Commissioner, 887 F.2d 959 (9th Cir. 1989);
Laird v. Commissioner, T.C. Memo. 1994-564. These cases involved
relief from joint and several liability on a joint return
pursuant to former sec. 6013 and sec. 6015 rather than relief
under sec. 66. However, we believe that interpretations of
spousal relief from joint liability are instructive to our
interpretation of equitable relief from community income. See,
e.g., Beck v. Commissioner, T.C. Memo. 2001-198.
14
Although we previously concluded that petitioner had
knowledge or reason to know of Mr. Bennett’s wages from Premium
Fresh Juice for purposes of sec. 66(c)(3) because a taxpayer’s
knowledge of a particular item of community income is determined
with reference to knowledge of a particular income-producing
activity, see supra pp. 18-19, that conclusion has no bearing on
the wages purportedly earned by petitioner. Although both
petitioner’s purported wages and Mr. Bennett’s wages were from
Premium Fresh Juice, they are distinctly different. We have
concluded that petitioner, unlike Mr. Bennett, did not perform
services for Premium Fresh Juice and, thus, amounts paid to her
(continued...)
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reason to know, about the purported wages from Premium Fresh
Juice, we must determine: (1) Whether the payroll checks issued
in petitioner’s name and deposited into petitioner and Mr.
Bennett’s joint bank account gave petitioner knowledge, or reason
to know, of the purported wages, (2) whether petitioner’s 1998
return, which reported these wages from Premium Fresh Juice, gave
petitioner knowledge, or reason to know, of the purported wages,
and (3) whether the Form W-2 issued to petitioner from Columbia
Cleaning (as payroll agent for Premium Fresh Juice) gave
petitioner knowledge, or reason to know, of the purported wages.
Although the payroll checks were issued in petitioner’s name
and deposited into joint accounts with her purported endorsement
signature, petitioner testified that she never saw, and certainly
did not endorse for deposit, the payroll checks. Further,
petitioner testified that she did not have access to monthly bank
statements and was forbidden by Mr. Bennett to access the
accounts. We found petitioner’s testimony to be credible and
trustworthy. Given Mr. Bennett’s position as general manager of
Premium Fresh Juice, and his control over their household and
14
(...continued)
from Premium Fresh Juice are not wages. In addition, there is no
indication that petitioner’s purported wages were actually the
wages of Mr. Bennett. Accordingly, we do not impute to
petitioner knowledge of the $31,385 of purported wages reported
on her return by virtue of the fact that Mr. Bennett worked for
the company.
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financial matters, we conclude that petitioner did not have
knowledge about the purported wages reported in her name from
Premium Fresh Juice.
A taxpayer may be charged with constructive knowledge of the
content of a return even when he or she signs an original return
without reviewing or understanding its contents. Hayman v.
Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C.
Memo. 1992-228; Levin v. Commissioner, T.C. Memo. 1987-67. The
appropriate standard to be applied in determining whether a
taxpayer has constructive knowledge is whether a reasonable
person under the circumstances of the taxpayer at the time of
signing the return could be expected to know. Terzian v.
Commissioner, 72 T.C. 1164, 1170 (1979); Levin v. Commissioner,
supra.15 As we stated earlier, petitioner was unsophisticated in
regard to financial matters, and she had a limited proficiency in
English. She frequently signed documents at the request of Mr.
Bennett without understanding what she was signing. We do not
believe that petitioner willingly turned a blind eye to the
contents of her return, but rather that she was not in a position
to understand the return and trusted Mr. Bennett to prepare
accurate returns on her behalf.
Finally, we conclude that the Form W-2 issued to petitioner
from Columbia Cleaning did not provide petitioner with knowledge
15
See supra note 13 and accompanying text.
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or reason to know of her purported wages. We previously found
that Mr. Bennett forbade her to open mail and thus, we believe
petitioner’s testimony that she never saw the Form W-2.
In sum, we conclude that petitioner did not have knowledge,
or reason to know, of the $31,385 of purported wages, but that
she knew, or had reason to know, of the $723 of taxable interest
and $2,180 of income from an IRA distribution. This factor
weighs in favor of equitable relief with respect to the wage
income, but against granting equitable relief from the taxable
interest and IRA distributions reported on her original return.
2. Knowledge, or Reason To Know, About the Items of
Community Property Reported on Mr. Bennett’s Return
We have previously held during our discussion on section
66(c)(3) that petitioner had knowledge, or reason to know, about
Mr. Bennett’s wages and the interest income reported on his
return. With respect to the $6,125 of unidentified income
reported on Mr. Bennett’s return, we were unable to determine
whether petitioner knew of these items, but held for purposes of
section 66(c)(3) that petitioner could not establish that she did
not know, or have reason to know, about the income. Thus, in
regard to Mr. Bennett’s wages and taxable interest, this factor
weighs against equitable relief but is relatively neutral with
respect to the $6,125 of unidentified income reported on Mr.
Bennett’s return because we do not have enough information to
evaluate her knowledge or reason to know.
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D. Other Spouse’s Legal Obligation
No evidence was introduced in the case regarding Mr.
Bennett’s legal obligation pursuant to a divorce decree or
agreement. We regard this factor as neutral.
E. Significant Benefit
Whether petitioner received a significant benefit (beyond
normal support) from the items of community income is a factor to
consider in weighing petitioner’s eligibility for equitable
relief. The balances from petitioner’s individual bank accounts
and joint bank accounts with Mr. Bennett were modest, and even
though petitioner had certificates of deposit on account ranging
in value from $10,000 to $12,050 during the year, there is no
evidence to suggest that petitioner lived a lavish lifestyle or
had extravagant expenses. Rather, Mr. Bennett controlled all of
the couple’s accounts, regardless of in whose name the account
was held. Therefore, we conclude that petitioner did not receive
a significant benefit beyond normal support from the items of
community income.
Therefore, this factor weighs in favor of relief from the
items of community income from both petitioner’s return and Mr.
Bennett’s return.
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F. Compliance With Income Tax Laws
There is no evidence regarding petitioner’s compliance with
income tax laws in subsequent years. This factor is, therefore,
neutral.
G. Abuse
There is no evidence that petitioner was the victim of abuse
in this case. Rev. Proc. 2003-61, 2003-2 C.B. 296, however,
provides that the presence of abuse is only a factor which may
weigh in favor of equitable relief; the absence of abuse is not a
negative factor weighing against equitable relief. Thus, this
factor is neutral in this case.
H. Mental or Physical Health
At trial, petitioner was extremely emotional and distraught.
Petitioner testified that she was financially and emotionally
dependent upon Mr. Bennett, and that she became depressed and
physically ill when she discovered that Mr. Bennett was engaged
in an extramarital affair. Further, during their marriage, Mr.
Bennett exercised control over all facets of petitioner’s life,
and according to petitioner, would threaten to have her deported
to China if she disobeyed him.
On the basis of the record as a whole, we believe that she
was suffering from poor mental health. This factor weighs in
favor of granting relief.
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I. Conclusion
In regard to petitioner’s share of items of community income
reported on her return ($15,692.50 share of “wages”, $361.50 of
taxable interest, and $1,090 of IRA distribution), petitioner’s
marital status, lack of knowledge or reason to know of the wages
from Premium Fresh Juice, a lack of significant benefit, and poor
mental health weigh in favor of granting equitable relief. There
was insufficient evidence for us to evaluate petitioner’s
economic hardship, Mr. Bennett’s legal obligation pursuant to a
divorce decree or agreement, and her compliance with income tax
laws in subsequent years. None of the factors under Rev. Proc.
2003-61, supra, weighed against relief with respect to her
community share of the wages reported on her return, and the only
factor weighing against relief with respect to her community
share of the taxable interest and IRA distribution is that she
had knowledge or reason to know of them. Therefore, we conclude
that it is inequitable to hold petitioner liable for her share of
the purported wages of $15,692.50 reported on her return, but
that she remains liable for $361.50 in taxable interest and
$1,090 in IRA distributions.
With respect to petitioner’s community share of the items of
community income reported on Mr. Bennett’s return ($20,027 of
wages, $2,417 of taxable interest, and $6,125 of other income),
the factors weigh as they do for the items on petitioner’s
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return, except that we hold that she had knowledge, or reason to
know, of Mr. Bennett’s wages and taxable interest. It would not
be inequitable to hold her liable for the amounts of which she
had knowledge or reason to know. We cannot make a finding about
petitioner’s knowledge or reason to know of the remaining
community share of $6,125 of income reported on Mr. Bennett’s
return. Because the source and nature of this other income is
uncertain, we cannot find that it is inequitable to hold her
liable for this amount. Therefore, we conclude that petitioner
is not entitled to equitable relief with respect to her community
share of Mr. Bennett’s reported wages of $20,027, her community
share of taxable interest reported on his return of $2,417, or
her community share of the $6,125 of unidentified income.
In sum, petitioner is liable for tax on gross income of
$30,020.50 and is relieved from liability on gross income of
$15,692.50 under the flush language of section 66(c).
V. Addition to Tax
Section 6651(a)(1) imposes an addition to tax for a
taxpayer’s failure to file a required return on or before the
specified filing due date, including extensions. Section
6651(a)(2) imposes an addition to tax for failing to pay an
amount shown on a return. An addition to tax under either
section 6651(a)(1) or (2) is inapplicable, however, if the
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taxpayer’s failure to file the return was due to reasonable cause
and not due to willful neglect. Sec. 6651(a)(1) and (2).
Respondent has introduced evidence sufficient to establish
the appropriateness of imposing additions to tax under section
6651(a)(1) and (2). See Higbee v. Commissioner, 116 T.C. 438,
446 (2001). Petitioner’s 1998 return was filed December 13,
2000, well after its statutory due date of April 15, 1999, and no
application for extension of the filing due date was filed. The
return showed a balance due of $2,748, but petitioner did not
remit payment with the return, and the outstanding balance
remains unpaid.
Thus, petitioner is liable for additions to tax for filing a
delinquent return and failing to pay the tax due unless she can
attribute her failures to reasonable cause and not willful
neglect. There are several established principles that operate
against petitioner. First, a taxpayer cannot rely upon his or
her spouse to file a return or pay a tax due for purposes of
excusing the taxpayer from section 6651 liability. See James v.
Commissioner, T.C. Memo. 1980-99. Second, even though petitioner
did not actually know about the income from Premium Fresh Juice,
she is required to file a return and pay taxes based upon her
share of community income. See United States v. Mitchell, 403
U.S. at 196-197. Consequently, petitioner cannot attribute her
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failure to timely file a return and pay tax to reasonable cause
and not willful neglect.
Accordingly, respondent is sustained on the imposition of
additions to tax under section 6651(a)(1) and (2), but the
amounts of the additions to tax must be adjusted to account for
our finding that petitioner is not liable for tax on a portion of
the community income at issue.
VI. Collection of Underlying Tax Liability
Respondent’s determinations, aside from issues relating to
petitioner’s underlying tax liability, are reviewed for abuse of
discretion. See Sego v. Commissioner, 114 T.C. at 610; Goza v.
Commissioner, 114 T.C. at 181. An abuse of discretion occurs if
the hearing officer takes action that is arbitrary, capricious,
or without sound basis in fact or law. See Woodral v.
Commissioner, 112 T.C. 19, 23 (1999).
Under section 6330(c)(3), the Commissioner’s hearing officer
is required to consider any relevant issue raised at a taxpayer’s
administrative hearing, including spousal defenses, challenges to
the appropriateness of the intended collection action, and
collection alternatives. Aside from challenging her underlying
tax liability, petitioner did not directly raise any relevant
issue relating to the unpaid tax or the proposed levy. No
collection alternatives were discussed. A spousal defense under
section 66 has been fully considered during the Court’s de novo
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review of petitioner’s underlying tax liability, and there is no
reason to give further consideration to that issue. Respondent’s
hearing officer obtained verification that any applicable law or
administrative procedure was met before making his determination
to proceed with collection.
On the basis of the foregoing, we conclude that there was no
abuse of discretion by respondent’s hearing officer. All the
requirements of section 6330 have been satisfied, and respondent
may proceed with his proposed collection action as to
petitioner’s underlying tax liability, as determined by the
Court.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
An appropriate order and
decision will be entered.