T.C. Summary Opinion 2006-34
UNITED STATES TAX COURT
BRENDA J. CLARK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9035-04S. Filed February 22, 2006.
Brenda J. Clark, pro se.
Inga C. Plucinski, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 in effect when the petition was filed.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 years at
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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In a notice of deficiency to petitioner and her former
spouse, James B. Clark (Mr. Clark), respondent determined income
tax deficiencies, an addition to tax, and penalties as follows:
Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1998 $ 7,494 $776.75 $1,498.80
2000 14,163 -- 2,832.60
2001 5,754 -- 1,150.80
The sole issue for decision is whether, under section 6015,
petitioner is entitled to relief from joint liability for the
above deficiencies, addition to tax, and penalties.
Some of the facts were stipulated. Those facts, with the
exhibits annexed thereto, are so found and are made part hereof.
Petitioner’s legal residence at the time the petition was filed
was West Valley City, Utah.
During the years at issue, petitioner was married to Mr.
Clark. The two filed joint Federal income tax returns for 1998,
2000, and 2001. Petitioner and Mr. Clark were divorced on
September 26, 2003. On March 1, 2004, respondent issued a notice
of deficiency jointly to petitioner and Mr. Clark in which the
above deficiencies, addition to tax, and penalties were
determined. Mr. Clark filed a petition with this Court, in his
own behalf, for a redetermination of the adjustments in the
notice of deficiency. That case proceeded to trial, and the
Court sustained respondent on all determinations in the notice of
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deficiency. Clark v. Commissioner, T.C. Memo. 2005-292.
Petitioner was not a party in Mr. Clark’s case. In this case,
petitioner has not challenged the determinations in the notice of
deficiency. Petitioner’s sole claim is that she is entitled,
under section 6015, to relief from joint liability for the 3
years in question.2 Mr. Clark was served with notice of this
case and his right to intervene. Mr. Clark did not file a notice
of intervention and did not appear or participate in the trial of
this case.
Petitioner and her spouse were married in 1975 and had three
children, all of whom were adults at the time of trial. On the
1998 return, one child was claimed as a dependent. None were
claimed as dependents on the subsequent returns.
Petitioner’s educational background included studies at a
vocational technical school, which was a part of Idaho State
University, where she took accounting and business math courses.
For approximately 25 years, petitioner’s employment was primarily
as a secretary, which, at times, involved accounting and
administrative record keeping. Petitioner’s spouse was an
accountant. At the time of trial, petitioner described her
2
It follows that a decision in this case will be entered
against her for the determinations in the notice of deficiency,
and the Court will further decide on petitioner’s claim for
relief under sec. 6015. Except as otherwise provided in sec.
6015, petitioner bears the burden of proof. Rule 142(a); Alt v.
Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34
(6th Cir. 2004).
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employment as being in the “accounting area” for her employer
Boise Cascade Corp.
Prior to 1998, petitioner and Mr. Clark lived in Idaho.
During 1998, they moved from Idaho to Murray, Utah, where they
purchased a home. In 1999, Mr. Clark quitclaimed his interest in
the home to petitioner. At some point in time, petitioner sold
the home and purchased a condominium in West Valley City, Utah.
Although petitioner and Mr. Clark were divorced on September 26,
2003, they lived together during the 3 years at issue.
As previously stated, petitioner and Mr. Clark filed joint
Federal income tax returns for 1998, 2000, and 2001. On their
1998 return, petitioner and Mr. Clark reported the following
income and deductions:
Wages and salary $36,718
Taxable interest 305
Taxable refunds 983
Total pensions and annuities (taxable portion) 14,475
Unemployment compensation 4,510
Total income $56,991
Moving expenses (35,304)
Adjusted gross income $21,687
Itemized deductions (9,767)
Dependency exemptions (8,100)
Taxable income $ 3,820
The $35,304 in moving expenses was for the move by petitioner and
Mr. Clark from Idaho to Murray, Utah.3
3
In Mr. Clark’s case before this Court, he admitted that the
$35,304 claimed for moving expenses included approximately
(continued...)
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For the year 2000, petitioner and Mr. Clark filed a joint
Federal income tax return on which they reported the following
income and deductions:
Wages and salary $27,007
Taxable interest 17
Loss, Schedule C, Profit or Loss From Business (10,607)
Total income $16,417
Itemized deductions (10,741)
Dependency exemptions (5,600)
Taxable income $ 76
Of the items listed above, the $10,607 Schedule C loss came
from a trade or business activity of Mr. Clark. Of the $27,007
in wage and salary income, $24,906.91 represented petitioner’s
earnings and $2,100 represented earnings of Mr. Clark.
For the year 2001, petitioner and Mr. Clark filed a joint
return in which they reported the following income:
Wages and salary $41,660
Taxable refunds 1,218
Total income $42,878
Of the wage and salary reported, $25,350 represented petitioner’s
wage and salary income and $16,310 represented wages and salary
of Mr. Clark.
3
(...continued)
$20,000 to replace the roof of their Idaho residence, which
presumably was an improvement that would facilitate its sale in
connection with petitioner and Mr. Clark’s move from Idaho to
Utah.
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Approximately 1 year before the issuance of the notice of
deficiency, and presumably motivated by respondent’s examination
of the tax returns for the years at issue, petitioner filed Form
8857, Request for Innocent Spouse Relief. In that request,
petitioner claimed as her basis for relief:
My husband prepares our taxes and I am not informed of any
information of ways he prepares these taxes. I don’t know
of expenses or income he claims. I do not review the taxes
he prepares. He is responsible for any taxes due, past and
future. I know he is being audited for 1998, 2000, and
2001, and I have no input into these returns and know
nothing of these results. Take my liability for any taxes
owed off me because I am not responsible for his actions,
filings, information, or money.
Respondent’s action on petitioner’s application for section
6015 relief is set out in the notice of deficiency. In addition,
the parties stipulated a copy of the transcript of petitioner’s
hearing before the Appeals officer. That officer considered
petitioner’s application for relief under section 6015(b), (c),
and (f). He concluded that petitioner was not entitled to relief
under the cited provisions.
Generally, married taxpayers may elect to file jointly a
Federal income tax return. Sec. 6013(a). Each spouse is jointly
and severally liable for the entire tax due. Sec. 6013(d)(3). A
spouse (requesting spouse) may, however, seek relief from joint
and several liability under section 6015(b) or, if eligible, may
seek an allocation of liability under section 6015(c). Sec.
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6015(a). If relief is not available under section 6015(b) or
(c), a requesting spouse may seek equitable relief under section
6015(f). Sec. 6015(f)(2).
A prerequisite to granting relief under section 6015(b) or
(c) is the existence of a tax deficiency or, as referred to in
various cases, an “understatement of tax”. Sec. 6015(b)(1)(B)
and (c)(1); Block v. Commissioner, 120 T.C. 62, 65-66 (2003). In
this case, there are understatements of tax; consequently,
petitioner is entitled to consideration for relief under section
6015(b) and (c) as well as section 6015(f).
Under section 6015(b), a taxpayer is entitled to full or
apportioned relief from joint and several liability for an
understatement of tax on a joint return if, among other
requirements, the taxpayer establishes that he or she “did not
know, and had no reason to know” that the other spouse
understated the tax on the return. Sec. 6015(b)(1)(C).
In the examination of petitioner’s joint returns for the 3
years at issue, because of inadequate records respondent
determined the taxable income of petitioner and her spouse by use
of the bank deposits method. The issue in this case,
petitioner’s entitlement to relief from joint liability, to some
extent is predicated on her personal background in education and
work experience in areas of business and accounting. Petitioner,
therefore, knew or should have known of the necessity of books
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and records with respect to the determination of taxable income.
Since petitioner and her husband’s records were so deficient that
respondent was required to employ an indirect method in
determining their income for the years at issue, it is a fair
observation that petitioner bears some culpability in the failure
to keep books and records. That alone, however, does not
foreclose petitioner’s entitlement to claim relief from joint
liability under section 6015.
Section 6015(b)(1) allows relief from joint and several
liability if five elements are met. Two of those elements are
pertinent in this case: (1) On the joint return, there is an
understatement of tax attributable to erroneous items of one
individual filing the return, and (2) 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
an understatement. Sec. 6015(b)(1)(A), (B), and (C). With
respect to the year 1998, in the examination of petitioner’s bank
accounts, which included one bank account of petitioner and a
joint account with her husband, respondent determined that
several deposits into these accounts, totaling $9,131,
constituted unreported gross income. Another item of
significance was the claimed deduction for moving expenses in the
amount of $35,304 on the 1998 return. In the audit of the
returns, petitioner readily admitted that such an amount for
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moving was excessive and that the actual cost was between $300 to
$500. She and her spouse had not employed a commercial house
mover but had rented a U-Haul trailer and a truck, which they
drove themselves. That exorbitant cost was also noted in Mr.
Clark’s case before this Court. Petitioner, therefore, knew or
should have known that these unexplained deposits were coming
from somewhere, i.e., her husband’s trade or business activity,
and also admitted the $35,304 deduction for moving expenses was
incorrect. Thus, for 1998, petitioner knew, in signing the
return, that there was an understatement of tax with respect to
the items discussed. Petitioner, therefore, is not entitled to
relief for 1998.
For the year 2000, the joint return included a Schedule C
for an Internet trade or business activity of Mr. Clark, which
petitioner was well aware of. On Schedule C for that year, the
reported gross income was $1,682, the expenses deducted were
$12,289, and the reported net loss was $10,607. Respondent
determined that the gross receipts from the activity were
$33,986.23 and that, during the course of the year, $11,019 was
transferred from the joint account petitioner had with her
husband to petitioner’s personal account. Thus, the $10,607 loss
from this Schedule C activity served to reduce petitioner and Mr.
Clark’s wage and salary income of $27,007, $24,906.91 of which
represented earnings of petitioner. Petitioner knew her husband
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had a business and, therefore, knew that these deposits or
transfers to her account came from that business. Therefore, in
connection with petitioner’s claim for relief, for purposes of
section 6015(b), there was an understatement of tax attributable
to erroneous items of the other spouse, and petitioner, in
signing the return, knew or had reason to know of an
understatement of tax attributable to this income. Sec.
6015(b)(1)(B) and (C). The Court, therefore, sustains
respondent’s determination that petitioner is not entitled to
relief under section 6015(b) for the year 2000.
For the year 2001, the tax return for that year included an
itemized deduction of $21,355 for unreimbursed employee business
expenses. In the audit of the return for that year, respondent
contacted Mr. Clark’s employer, and that employer verified that
these claimed expenses had been reimbursed to Mr. Clark.
Respondent also determined that, as in prior years, unexplained
deposits of $7,038 were made to petitioner’s account during 2001,
all of which were attributable to her husband’s activity. The
Court is satisfied that petitioner knew or had reason to know of
this omitted income in the same fashion as she did for the 2
earlier years. Respondent also determined, as was determined in
earlier years, that the unexplained deposits to her account also
represented income from her husband’s trade or business activity.
The Court holds, therefore, that, in signing the income tax
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return for 2001, petitioner knew that there was an underpayment
of tax attributable to these items. Respondent, therefore, is
sustained in denying petitioner relief for the year 2001 under
section 6015(b).
The Court next addresses whether petitioner is entitled to
relief under section 6015(c). Section 6015(c) provides relief
from joint liability for spouses either no longer married,
legally separated, or living separate and apart. Generally, this
avenue of relief allows a spouse to elect to be treated as if a
separate return had been filed. Rowe v. Commissioner, T.C. Memo.
2001-325. Section 6015(c)(2) places the burden of proof with
respect to establishing the portion of the deficiency allocable
to the electing spouse upon that spouse. An election is not
valid if the Commissioner demonstrates that the electing spouse
had actual knowledge of an item giving rise to the deficiency.
Sec. 6015(c)(3)(B).
As to these 3 years, respondent considered the same facts
discussed above relating to petitioner’s claim for relief under
section 6015(b). Based on these facts, the examiner concluded
that petitioner knew or had reason to know of the various
transactions that gave rise to the deficiencies, and that
petitioner benefited from the redetermined items of income and
disallowed expenses. As noted earlier, some of the deposits to
petitioner’s bank account came from Mr. Clark’s trade or
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business. Since petitioner had actual knowledge of these
transfers, that alone precludes her from claiming relief under
section 6015(c).
If a taxpayer’s request for relief under section 6015(f) is
denied, the taxpayer may petition this Court (pursuant to section
6015(e)(1)) for a review of the determination. Ewing v.
Commissioner, 118 T.C. 494, 497-507 (2002). To prevail,
petitioner must prove that respondent’s denial of equitable
relief from joint liability under section 6015(f) was an abuse of
discretion. Jonson v. Commissioner, 118 T.C. 106, 125
(2002), affd. 353 F.3d 1181 (10th Cir. 2003); Cheshire v.
Commissioner, 115 T.C. 183, 198 (2000), affd. 282 F.3d 326 (5th
Cir. 2002); Butler v. Commissioner, 114 T.C. 276, 291-292 (2000).
Section 6015(f) provides:
SEC. 6015(f). Equitable Relief.–-Under procedures
prescribed by the Secretary, if–-
(1) taking into account all the facts and
circumstances, it is inequitable to hold the individual
liable for any unpaid tax or any deficiency (or any
portion of either); and
(2) relief is not available to such individual
under subsection (b) or (c),
the Secretary may relieve such individual of such liability.
As directed by section 6015(f), the Commissioner has
prescribed guidelines in Rev. Proc. 2003-61, 2003-2 C.B. 296,
modifying Rev. Proc. 2000-15, 2000-1 C.B. 447, that are to be
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used in determining whether it is inequitable to hold a
requesting spouse liable for all or part of the liability for any
unpaid tax or deficiency.4 The requesting spouse must satisfy
seven conditions (threshold conditions) before the Commissioner
will consider a request for relief under section 6015(f). Rev.
Proc. 2003-61, supra. Respondent agrees that petitioner has
satisfied those threshold conditions.
Where, as here, the requesting spouse satisfies the
threshold conditions, Rev. proc. 2003-61, sec. 4.03,5 lists
factors to be considered in determining whether to grant
equitable relief. Therefore, the Court considers the factors in
Rev. Proc. 2003-61, sec. 4.03(2)(a) and (b) in determining
whether respondent abused his discretion in denying equitable
relief under section 6015(f).
In this case, petitioner satisfies only one of the factors
listed in the revenue procedure. Petitioner divorced Mr. Clark
in 2003; therefore, she satisfies the first factor. With respect
4
Rev. Proc. 2000-15, 2000-1 C.B. 447, was superseded by Rev.
Proc. 2003-61, 2003-2 C.B. 296, and is effective as to requests
for relief filed on or after Nov. 1, 2003, and also is effective
for requests for relief pending on Nov. 1, 2003, as to which no
preliminary determination letter had been issued as of that date.
Petitioner’s application for relief was filed on Feb. 18, 2003,
and the report of the Appeals officer is dated Feb. 15, 2005.
Therefore, petitioner’s claim for relief was pending on Nov. 1,
2003.
5
The Court need not consider Rev. Proc. 2003-61, sec. 4.02,
2003-2 C.B. at 298, since that section relates to
“underpayments”.
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to the second factor, the taxpayer must show that he or she would
be unable to pay basic reasonable living expenses if relief were
not granted. Monsour v. Commissioner, T.C. Memo. 2004-190.
Being unable to pay basic reasonable living expenses would amount
to economic hardship. Sec. 301.6343-1(b)(4)(i), Proced. & Admin.
Regs. Petitioner has not established that denial of her request
for relief would result in economic hardship. She was gainfully
employed, she had no dependents to support, and, in 1999,
petitioner’s spouse had quitclaimed his interest in their Murray,
Utah, home. In the divorce decree, petitioner was awarded
$27,500, which represented all of the proceeds from the sale of
that home. Additionally, the divorce decree ordered the former
spouse to pay petitioner alimony of “not less than $300 per
month” until either her death, remarriage, or cohabitation with
an adult male who was not a blood relative. The Court fails to
see, and petitioner has not established, that she would suffer
economic hardship if her request for relief from joint liability
is denied.
As to the third factor, the Court has held that petitioner,
particularly in light of her educational background and chosen
vocation, knew or should have known that Mr. Clark’s bookkeeping
was deficient. Moreover, petitioner received direct deposits,
both in her personal account and her joint account with Mr.
Clark, of unreported gross income during each of the years at
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issue. Therefore, petitioner knew when she signed her joint
return for each of the years at issue that there was an
understatement of tax. Rev. Proc. 2003-61, supra, specifically
states that actual knowledge by the requesting spouse of the item
giving rise to the deficiency is a strong factor weighing against
relief. This strong factor may only be overcome if the factors
in favor of equitable relief are particularly compelling.
The fourth and sixth factors are neutral. There was no
legal obligation on either side to pay for the liability for the
years at issue and there is no evidence that petitioner either
failed to comply with or fully complied with tax obligations.6
Petitioner also fails to satisfy the fifth factor, because
although the gross income and claimed deductions from which the
liability arises is directly attributable to Mr. Clark,7
petitioner received a significant benefit from the items giving
rise to the deficiency. This benefit goes beyond that of normal
support. Part of Mr. Clark’s unreported income was deposited
6
In determining whether petitioner complied or failed to
comply with tax obligations, the Court notes that petitioner did
not allege she suffered any abuse, mental or physical, from Mr.
Clark. In addition, petitioner presented no evidence that she
was in poor mental or physical health either when she signed the
return or when she filed her request for relief.
7
The liability for the years at issue consisted of
unreported nonemployee compensation to Mr. Clark, a claimed
deduction for unreimbursed employee expenses for Mr. Clark, a
claimed deduction for moving expenses for Mr. Clark, and Schedule
C losses attributed to Mr. Clark’s business.
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directly into petitioner’s personal account, and the remainder
was deposited into their joint bank account. In addition, the
exaggeration of Mr. Clark’s moving expenses, unreimbursed
employee expenses, and Schedule C losses reduced petitioner’s tax
liability on the joint returns. Finally, petitioner’s greatest
benefit was the quitclaim deed Mr. Clark executed in 1999, which
gave all of his interest in their home solely to petitioner. The
house was purchased in 1998, presumably with the income of both
petitioner and Mr. Clark and with income that Mr. Clark failed to
report. As previously noted, petitioner sold that home, received
all proceeds from the sale, and later used them to purchase a
condominium.
The failure of petitioner to satisfy all but one of the
factors in Rev. Proc. 2003-61, supra, is determinative. After
considering all the facts and circumstances, the Court holds that
there was no abuse of discretion by respondent in denying relief
to petitioner under section 6015(f). The Court, therefore,
sustains that denial.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.