T.C. Summary Opinion 2006-190
UNITED STATES TAX COURT
DEBRA KAY FORISTER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8930-04S. Filed December 14, 2006.
Debra Kay Forister, pro se.
Robert V. Boeshaar, 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 year at issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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Respondent determined a deficiency of $3,603 in petitioner’s
Federal income tax for the taxable year 2000. Petitioner does
not challenge the deficiency. This case involves petitioner’s
election to seek relief from joint and several liability for
Federal income tax for the year 2000 under section 6015(b), (c),
or (f). Respondent determined that petitioner is not entitled to
relief under any of the aforementioned subsections of section
6015. The sole issue for decision is whether petitioner is
entitled to relief under section 6015(b), (c), or (f).
Some of the facts were stipulated. Those facts, with the
annexed exhibits, are so found and are made part hereof.
Petitioner’s legal residence at the time the petition was filed
was Everett, Washington.
During the year at issue, petitioner was married to Kyle M.
Lathrop (Mr. Lathrop). Petitioner and Mr. Lathrop were married
in 1995. They separated sometime in July 2002, and their divorce
was finalized on September 13, 2003. Petitioner was employed by
Payless Shoe Source during part of the year at issue, and Mr.
Lathrop received nonemployee compensation from flooring work he
performed during that time, as well as unemployment compensation.
On a joint Federal income tax return for 2000, petitioner
and Mr. Lathrop reported a tax due of $1,386. The tax was not
paid at the time the return was filed. In addition, the return
did not include $3,990 of income from unemployment compensation
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received by Mr. Lathrop and $9,250 of nonemployee compensation he
had earned. On June 12, 2002, a notice of deficiency was issued
to petitioner and Mr. Lathrop in which respondent determined a
deficiency of $3,603 in Federal income tax for 2000 based on
their failure to include these items of income on the return.2
Neither petitioner nor Mr. Lathrop petitioned this Court in
response to the notice of deficiency. Accordingly, the
deficiency was assessed.
On December 9, 2002, respondent applied a $2,012 overpayment
of tax from petitioner’s individual return for taxable year 2001
to the unpaid tax liability for the year at issue. Petitioner,
thereafter, filed a Form 8857, Request for Innocent Spouse
Relief, on July 7, 2003. She alleges that Mr. Lathrop prepared
their 2000 tax return, that the omitted items of income were his
income, and that she signed the return without reviewing its
contents. On April 14, 2004, respondent issued a Final Notice to
petitioner determining that she was not entitled to relief from
joint and several liability under section 6015(b), (c), or (f)
for taxable year 2000 because she was aware and knew that the tax
shown on the return would not be paid at the time of filing; she
had actual knowledge of the omitted income giving rise to the
2
The omitted income enabled petitioner and Mr. Lathrop to
qualify for an earned income credit of $406. As a result of the
inclusion of the unreported income, the earned income credit was
not allowable due to the limitation of sec. 32(a)(2).
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deficiency; and, by not reviewing the return, she did not satisfy
her duty of inquiry.
Petitioner argues in her petition that she is entitled to
relief from joint and several liability under section 6015
because Mr. Lathrop was responsible for the items of income that
gave rise to the 2000 tax liability, and she is unable to pay the
tax liability. Pursuant to Rule 325 and King v. Commissioner,
115 T.C. 118 (2000), respondent served Mr. Lathrop with notice of
this proceeding and his right to intervene. He did not, however,
file a notice of intervention and did not appear or participate
in the trial of this case.
A taxpayer may petition this Court for a review of the
Commissioner’s determination denying relief under section 6015.
Sec. 6015(e)(1)(A). Respondent issued a notice of deficiency for
the year at issue. The petition, however, was filed timely in
response to a final notice issued by respondent denying
petitioner’s request for section 6015 relief from her total
income tax liability for the taxable year 2000. Because a
deficiency was asserted for petitioner’s 2000 taxable year, the
Court has jurisdiction to review respondent’s denial of section
6015 relief for both the underpayment of tax and the deficiency
in tax, which form the basis of petitioner’s tax liability for
the year at issue. See Billings v. Commissioner, 127 T.C. 7
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(2006); Butler v. Commissioner, 114 T.C. 276, 288 (2000); Naftel
v. Commissioner, 85 T.C. 527, 533 (1985).
Generally, married taxpayers may elect to file a Federal
income tax return jointly. Sec. 6013(a). Each spouse filing a
joint return is jointly and severally liable for the accuracy of
the return and the entire tax due. Sec. 6013(d)(3). Under
certain circumstances, however, section 6015 provides relief from
joint liability. Section 6015 applies to any liability for tax
arising after July 22, 1998, and to any liability for tax arising
on or before July 22, 1998, remaining unpaid as of such date.
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3201(g), 112 Stat. 740.
In general terms, there are three avenues of relief under
section 6015: Section 6015(b) provides relief with respect to
certain erroneous items on the return, section 6015(c) provides
for a separation of liability for separated taxpayers, and
section 6015(f) more broadly confers on the Secretary discretion
to grant equitable relief for taxpayers who otherwise do not
qualify for relief under either subsection (b) or (c).
A prerequisite for relief under section 6015(b) or (c) is
the existence of an “understatement of tax” or a tax deficiency.
Sec. 6015(b)(1)(B), (c)(1); Block v. Commissioner, 120 T.C. 62,
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65-66 (2003).3 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 requirements,4 the taxpayer establishes that she “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), (2). Except as otherwise provided in section
6015, the requesting spouse bears the burden of proving that she
satisfies each requirement of section 6015(b)(1). See Rule
142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101
Fed. Appx. 34 (6th Cir. 2004).
In the instant case, the Court finds that petitioner knew or
had reason to know of the understatement of tax at the time she
signed the return. The Court is satisfied that petitioner was
aware that Mr. Lathrop received both unemployment compensation
and nonemployee compensation during the year at issue.
Petitioner admitted in her testimony that she knew of these
sources of income because she discussed them with her former
3
The requirement that a proposed or assessed deficiency be
present precludes petitioner from seeking relief under sec.
6015(b) or (c) for the underpayment of income tax reported on the
joint return.
4
Neither respondent nor petitioner disputes that, in this
case, the requirements of subpars. (A), (B), and (E) of sec.
6015(b)(1) have been satisfied. The dispute is solely as to
whether petitioner meets the requirements of subpars. (C) and (D)
of sec. 6015(b)(1).
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spouse, and she knew that he deposited the income received from
these sources into their joint bank account. Moreover,
petitioner admitted in her Form 12510, Questionnaire for
Requesting Spouse, that she reviewed their monthly bank
statements and paid household expenses out of the very account
into which Mr. Lathrop deposited all income he received during
the year at issue. Petitioner’s testimony establishes actual
knowledge on her part that Mr. Lathrop received both unemployment
compensation and nonemployee compensation during the year at
issue. Her basis for requesting relief was that, as she had not
reviewed the return, she was unaware that Mr. Lathrop had not
included the entirety of these items of income on their return
for the year at issue.
Section 6015 relief was not intended to provide relief to
spouses who simply did not look at the amount of income reported
on the return, unless it is clearly established that the spouse
was forced under duress to sign the return without reviewing it.
Frederick v. Commissioner, T.C. Memo. 1981-602. The record does
not support a finding that petitioner was forced to sign the
return under duress. A spouse requesting relief under section
6015 has a duty of inquiry. Butler v. Commissioner, supra at
284. A requesting spouse has reason to know of an understatement
if a “reasonably prudent person with knowledge of the facts
possessed by the person claiming * * * [relief] should have been
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alerted to the possibility of a substantial understatement.”
Flynn v. Commissioner, 93 T.C. 355, 365 (1989).
Petitioner’s educational and business backgrounds were not
made part of the record; nonetheless, the Court is not convinced
that her failure to inquire was reasonable. She and her former
spouse signed the return, and Mr. Lathrop’s unreported items of
income were more than one-half of the taxable income they
received that year.5 Even a cursory review of the return would
have revealed that Mr. Lathrop completely omitted the nonemployee
compensation he received, causing a substantial portion of their
taxable income to be unreported. For the reasons discussed
above, petitioner is not entitled to relief under section
6015(b).
Section 6015(c) affords proportionate relief to the
requesting spouse through allocation of the tax items to the
responsible party. 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. To be
eligible for relief under section 6015(c), the requesting spouse
must be no longer married to, be legally separated from, or have
lived at least 12 months apart from the individual with whom the
5
Petitioner and Mr. Lathrop reported $11,949 of taxable
income for 2000. They should have reported $24,544 of taxable
income ($3,999 of unemployment compensation plus $9,250 of
nonemployee compensation less a $654 self-employment tax
deduction).
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tax return was filed. Sec. 6015(c)(3)(A)(i). Relief under
section 6015(c) is not available, however, 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 Mr.
Lathrop, and the divorce was finalized before she requested
relief from joint and several liability.
However, as noted above, petitioner not only had reason to
know of the understatement at the time the return was signed, but
she also had actual knowledge of the items giving rise to the
deficiency. Because petitioner had actual knowledge of these
items of income, she is precluded from claiming relief under
section 6015(c).
Petitioner may be considered for relief under section
6015(f) where there is an unpaid tax or deficiency for which she
is not eligible for relief under section 6015(b) or (c). Sec.
6015(f)(2). Section 6015(f)(1) provides that a taxpayer may be
relieved from joint and several liability if it is determined,
after considering all the facts and circumstances, that it is
inequitable to hold the taxpayer liable for the unpaid tax or
deficiency. This Court reviews the Commissioner’s denial of
relief pursuant to section 6015(f) under an abuse of discretion
standard. Butler v. Commissioner, 114 T.C. at 287-292. The
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Court defers to respondent’s determination unless it is
arbitrary, capricious, or without sound basis in fact. Jonson v.
Commissioner, 118 T.C. 106, 125 (2002), affd. 353 F.3d 1181 (10th
Cir. 2003). Petitioner bears the burden of proving that there
was an abuse of discretion. Abelein v. Commissioner, T.C. Memo.
2004-274.
The Commissioner has prescribed guidelines that are
considered 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. Rev. Proc. 2000-15,6 sec. 4.01, 2000-1
C.B. 447, 448, sets forth seven threshold conditions that the
requesting spouse must satisfy before the Commissioner will
consider a request for relief under section 6015(f). Respondent
agrees that petitioner has satisfied those threshold conditions.
Where, as here, the requesting spouse satisfies the
threshold conditions, Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B.
447, 448, lists factors to be considered in determining whether
to grant equitable relief for underpayments of tax. Equitable
relief under section 6015(f) for an underpayment of tax on a
6
Rev. Proc. 2003-61, 2003-2 C.B. 296, which supersedes Rev.
Proc. 2000-15, 2000-1 C.B. 447, is effective for requests for
relief filed on or after Nov. 1, 2003, or requests for relief
pending on Nov. 1, 2003, for which no preliminary determination
letter has been issued as of that date. Petitioner’s request for
relief was submitted on July 7, 2003, and a preliminary
determination letter was issued on Oct. 3, 2003. Accordingly,
the guidelines found in Rev. Proc. 2000-15, supra, are applicable
in this case.
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joint return will ordinarily be granted by the Commissioner if
all three of the following criteria are met: (1) The requesting
spouse is divorced, is legally separated, or has been physically
separated for 1 year from the nonrequesting spouse at the time
relief is requested; (2) the requesting spouse did not know or
have reason to know that the income tax liability would not be
paid at the time the joint return was signed; and (3) the
requesting spouse will, absent relief, suffer economic hardship.
Although she was divorced from her husband at the time
relief was requested, petitioner was aware that the income tax
liability for taxable year 2000 would not be paid at the time she
signed the return. Petitioner admitted at trial that, even had
she reviewed the return and discovered the underpayment, she and
her former spouse did not have the funds to pay the tax
liability. Additionally, in her Form 12510, petitioner indicated
that there were no funds available to pay the tax at the time of
filing because she and her former spouse were having financial
problems at that time and had difficulty paying monthly living
expenses. Because petitioner knew that the income tax liability
would not be paid at the time the return was signed, there was no
abuse of discretion in denying her relief from the underpayment
pursuant to Rev. Proc. 2000-15, sec. 4.02.
Rev. Proc. 2000-15, sec 4.03, 2000-1 C.B. at 448, provides
factors to be evaluated for requests for relief under section
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6015 for requesting spouses who filed a joint return and do not
qualify for relief under Rev. Proc. 2000-15, sec. 4.02. Rev.
Proc. 2000-15, sec. 4.03(a), offers a partial list of positive
factors to be considered, including: (1) Marital status; (2)
economic hardship; (3) abuse; (4) no knowledge or reason to know
that the reported liability would not be paid or of the items
giving rise to the deficiency; (5) whether the nonrequesting
spouse had a legal obligation to pay the liability; and (6)
whether the liability for which relief is sought is solely
attributable to the nonrequesting spouse. Negative factors
weighing against granting equitable relief are found in Rev.
Proc. 2000-15, sec. 4.03(2), 2000-1 C.B. at 449, and they
include: (1) The unpaid liability or item giving rise to the
deficiency is attributable to the requesting spouse; (2) the
requesting spouse knew or had reason to know that the reported
liability would be unpaid at the time of signing or knew or had
reason to know of the item giving rise to the deficiency; (3) the
requesting spouse benefited significantly from the unpaid
liability or items giving rise to the deficiency; (4) the
requesting spouse will not experience economic hardship if relief
is not granted; (5) the requesting spouse has not made a good
faith attempt to comply with the tax laws in subsequent years;
and (6) the requesting spouse has a legal obligation to pay the
deficiency. The Court considers these factors in determining
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whether respondent abused his discretion in denying equitable
relief under section 6015(f) for the underpayment or the
deficiency. Although petitioner’s marital status and the fact
that the liability for which relief is sought is attributable to
Mr. Lathrop’s items of income weigh in favor of granting relief,
the Court is unconvinced that it would be inequitable to deny
petitioner relief under section 6015(f).
For a taxpayer who seeks relief from an underpayment of
income tax due, Rev. Proc. 2000-15, sec. 4.03(2)(b), questions
whether the requesting spouse knew or had reason to know that the
income tax liability would not be paid by the nonrequesting
spouse. As previously noted, petitioner admitted at trial and on
her Form 12510 that she and her former spouse were experiencing
financial difficulties and knew that they were unable to pay the
reported tax liability at the time the return was signed.
Petitioner’s knowledge that the reported liability would not be
paid when the return was signed weighs heavily against granting
her relief. Rev. Proc. 2000-15, sec. 4.03(2)(b), 2000-1 C.B.
449.
In the case of an income tax liability that arises from a
deficiency, a finding that the requesting spouse knew or had
reason to know of the item giving rise to the deficiency is an
extremely strong factor weighing against relief. Id. Thus,
petitioner must establish that she did not know and had no reason
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to know about Mr. Lathrop’s unemployment compensation or
nonemployee compensation for the year at issue.
As discussed earlier, petitioner had actual knowledge of Mr.
Lathrop’s unemployment and nonemployee compensation.
Petitioner’s actual knowledge is a strong factor weighing against
relief, which can be overcome only if the factors in favor of
equitable relief are particularly compelling.
Petitioner contends in her petition to this Court that she
would experience economic hardship if she were forced to pay the
tax liability for the year at issue. A taxpayer might experience
economic hardship if he or she were unable to pay basic
reasonable living expenses. Sec. 301.6343-1(b)(4)(i), Proced. &
Admin. Regs. It is the taxpayer’s burden to show both that the
expenses qualify and that they are reasonable. Monsour v.
Commissioner, T.C. Memo. 2004-190. Despite her assertion that
paying the tax liability would cause her to experience economic
hardship, petitioner provided no evidence at trial that she would
be unable to pay basic living expenses if she were held liable
for the deficiency. The Court fails to see, and petitioner has
not established, that she would suffer economic hardship if her
request for relief from joint liability were denied. This factor
weighs against granting petitioner relief.
On the basis of the facts and circumstances in this case,
including the factors set forth in Rev. Proc. 2000-15, supra, the
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Court concludes that there was no abuse of discretion by
respondent in denying petitioner’s request for equitable relief
under section 6015(f) for the underpayment or the deficiency. To
the extent not addressed herein, other considerations are without
merit or unnecessary to reach. The Court, therefore, sustains
respondent’s determination that petitioner is not entitled to
relief from joint and several liability pursuant to section
6015(b), (c), or (f).
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.