T.C. Summary Opinion 2008-74
UNITED STATES TAX COURT
JOSEPH B. YAKUBIK, Petitioner,
AND SUSAN M. (YAKUBIK) WILEY, Intervenor
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21773-06S. Filed June 26, 2008.
Joseph B. Yakubik, pro se.
Susan M. (Yakubik) Wiley, pro se.
Denise A. DiLoreto, for respondent.
GOEKE, Judge: This case was heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect at the time the petition was filed. Pursuant to section
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case. Petitioner seeks review of respondent’s
determination denying him relief from joint and several liability
for the 2003 tax year under section 6015(b), (c), and (f).
We review respondent’s determination for an abuse of
discretion, and for the reasons explained herein we find
respondent’s determination denying petitioner relief from joint
and several liability under section 6015(f) was in error.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner resided in West Virginia.
Petitioner and intervenor were married throughout 2003 and
divorced on June 8, 2005. During 2003 intervenor was employed by
a local attorney as a paralegal. Intervenor earned wages, was
paid by check, and received a Form W-2, Wage and Tax Statement,
at the end of 2003. Intervenor earned about $4,455 in wages
during 2003.
At some point during 2003, intervenor began to embezzle
funds from her employer. In addition to this embezzlement
intervenor began to write bad checks from petitioner and
intervenor’s joint bank account and to forge checks belonging to
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petitioner’s stepfather. It is unclear from the record whether
intervenor stole checks from petitioner’s stepfather and used
them to make purchases or stole checks issued to petitioner’s
stepfather and forged the endorsement in order to cash those
checks.
Intervenor was arrested for allegedly committing a number of
felonies. Pursuant to a plea agreement intervenor pleaded guilty
to a number of felonies including forgery and embezzlement. On
December 1, 2003, intervenor was sentenced in the Circuit Court
of Randolph County, West Virginia, to a term of not less than 1
but no more than 10 years in State prison. Intervenor was also
ordered to pay restitution of $17,000 to her former employer and
to pay $3,000 to petitioner’s stepfather for the forged checks.
Intervenor was incarcerated from October 20, 2003, to November 9,
2005, and was paroled on November 9, 2005.
On March 8, 2004, petitioner and intervenor filed a joint
Form 1040, U.S. Individual Income Tax Return, for tax year 2003.
Although intervenor was incarcerated at the time, she executed a
Form 2848, Power of Attorney and Declaration of Representative,
for tax year 2003 giving petitioner the authority to act on her
behalf. Petitioner used this authority to file their joint
return. Petitioner and intervenor failed to include on the joint
return the amount intervenor embezzled from her former employer,
the amount of forged checks related to petitioner’s stepfather,
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or the wages intervenor earned as a paralegal. On the basis of
the Form 1040, respondent issued to petitioner a refund of
$5,017. Because petitioner did not report the embezzled funds
and wages on the joint return, petitioner and intervenor
qualified for an earned income credit that they would not have
qualified for had those amounts been included in income.
Petitioner did not file an amended return after receiving
the Form W-2 from intervenor’s employer. Respondent examined the
joint return and issued a notice of deficiency (the notice) on
May 31, 2005. The notice determined that the $17,000 intervenor
embezzled and the $4,455 intervenor earned should have been
included in income. The notice did not include in income the
$3,000 worth of forged checks. Respondent determined an increase
of $5,188 in petitioner and intervenor’s tax liability and an
accuracy-related penalty of $996 under section 6662. Neither
petitioner nor intervenor petitioned this Court to challenge
respondent’s determinations in the notice.
On or about December 28, 2005, petitioner submitted a Form
8857, Request for Innocent Spouse Relief. On January 26, 2006,
respondent notified intervenor by letter of petitioner’s request
for relief from joint and several liability.
On April 3, 2006, respondent sent separate letters to
petitioner and intervenor indicating respondent’s preliminary
determination to grant petitioner relief from liability under
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section 6015(c) and deny relief under section 6015(f). On May 5,
2006, intervenor sent a letter to respondent with attachments
disagreeing with respondent’s determination regarding
petitioner’s claim for relief. These attachments included a
brief statement of disagreement, a copy of intervenor’s
sentencing order, and a copy of intervenor’s restitution order.
On July 27, 2006, respondent issued a final notice of
determination denying petitioner’s request for relief from joint
and several liability under section 6015(b), (c), and (f). On
October 25, 2006, petitioner mailed to the Court a letter that
was filed as an imperfect petition. The Court ordered petitioner
to submit a proper amended petition to conform with the Rules.
On December 14, 2006, the Court received and filed petitioner’s
amended petition seeking a review of respondent’s determinations.
Discussion
Section 6013(d)(3) provides that taxpayers filing joint
Federal income tax returns are jointly and severally liable for
the taxes due. Section 6015, however, provides that
notwithstanding section 6013(d)(3), under certain facts and
circumstances limited relief from joint and several liability may
be available under section 6015(b), (c), or (f). Except as
otherwise provided in section 6015, the taxpayer seeking relief
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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To prevail, the taxpayer must show the Commissioner’s
determination was arbitrary, capricious, or without sound basis
in law or fact. Butler v. Commissioner, 114 T.C. 276, 291-292
(2000).
Intervenor, as the nonelecting spouse, had the right to
intervene in this proceeding by filing a notice of intervention.
See sec. 6015(e)(4); Rule 325; Corson v. Commissioner, 114 T.C.
354, 364-365 (2000). By exercising that right, intervenor became
a party to this case. See Tipton v. Commissioner, 127 T.C. 214,
217 (2006).
Section 6015(b)
Petitioner first seeks relief under section 6015(b). To
qualify for relief pursuant to section 6015(b)(1), the requesting
spouse must establish that: (1) A joint return was filed; (2)
there was an understatement of tax attributable to erroneous
items of the nonrequesting spouse; (3) at the time of signing the
return, the spouse seeking relief did not know, and had no reason
to know, of the understatement; (4) taking into account all the
facts and circumstances, it is inequitable to hold the spouse
seeking relief liable for the deficiency in tax attributable to
the understatement; and (5) the requesting spouse seeks relief
within 2 years of the first collection activity.
Petitioner’s request for relief fails to satisfy section
6015(b)(1)(C). Petitioner’s knowledge of how much money
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intervenor embezzled is not clear. During their marriage they
shared a joint bank account, but their testimony varied as to who
had access to this account. Petitioner testified that intervenor
maintained control over the account and that he would give his
paychecks to intervenor, who would then deposit them into the
joint account. Intervenor, however, testified that petitioner
did in fact make deposits to the joint account and also possessed
an ATM card he used to make withdrawals.
At trial petitioner testified that he did not include those
amounts on the joint return because he did not know how much
intervenor had embezzled and because he had never received a Form
W-2 for intervenor’s employment. Petitioner later admitted that
he had received a Form W-2 for intervenor after he had filed the
joint return. Petitioner testified that although he was present
at intervenor’s sentencing and knew that she had embezzled funds,
he was unaware of the amount because he was not allowed to remain
in the courtroom while the prosecutor, the presiding judge, and
intervenor discussed how much restitution was to be paid.
Intervenor, however, testified that she had told petitioner the
amount of restitution she was ordered to pay and that petitioner
knew the amount before filing the joint return. Although
petitioner testified at trial that he was not in the courtroom
during the portion of intervenor’s sentencing when amounts of
restitution were discussed and that he had not received a Form W-
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2 from intervenor’s employer until after filing the return,
petitioner knew that intervenor had both embezzled funds and
earned wages during 2003 and failed to include those amounts on
the return.
Petitioner, although unaware of the exact amounts intervenor
had embezzled and earned, had reason to know of the
understatement.
Section 6015(c)
A taxpayer may elect to seek relief under section 6015(c) if
(1) at the time the election was made, the taxpayer was no longer
married to, or was legally separated from, the person with whom
the joint return was filed, or (2) for the 12-month period
preceding the time of making the election the taxpayer did not
live with such person. If a taxpayer elects relief under section
6015(c), such taxpayer’s “liability for any deficiency which is
assessed with respect to the return shall not exceed the portion
of such deficiency properly allocable to the individual” under
section 6015(d). Sec. 6015(c)(1). Relief is not available under
section 6015(c) with respect to an unpaid liability reported in a
return.
If the Commissioner proves that the electing spouse had
actual knowledge at the time he signed the return of any item
giving rise to the deficiency and the item was allocable to the
nonrequesting spouse, then the election is invalid with respect
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to the portion of the deficiency that is attributable to the
item. See sec. 6015(c)(3)(C); sec. 1.6015-3(c)(2), Income Tax
Regs.
As stated above, petitioner’s request for relief fails to
satisfy section 6015(b) because he had reason to know of the
items giving rise to the understatement. In order to determine
whether petitioner qualifies for relief under section 6015(c), we
must determine whether petitioner had actual knowledge, rather
than a reason to know, of the items giving rise to the
deficiency. We believe that petitioner had actual knowledge of
intervenor’s earnings and embezzled income. Although petitioner
did not know the exact amounts intervenor earned and embezzled,
he knew all of the facts surrounding those items. Petitioner was
aware that intervenor had worked throughout the year and had been
arrested and sentenced for embezzlement. Thus, petitioner’s
request for relief fails to satisfy section 6015(c).
Section 6015(f)
The only remaining opportunity for relief to petitioner is
section 6015(f). Section 6015(f) provides that the Secretary may
relieve an individual of joint and several liability if (1)
relief is not available to the individual under section 6015(b)
or (c), and (2) taking into account all the facts and
circumstances, it is inequitable to hold the individual liable
for any unpaid tax or deficiency. The Commissioner has
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prescribed guidelines in Rev. Proc. 2003-61, 2003-2 C.B. 296, for
determining whether relief should be granted under section
6015(f). To prevail under section 6015(f), petitioner must show
that respondent’s denial of equitable relief under that section
was an abuse of discretion. We review respondent’s denial of
relief under section 6015(f) for an abuse of discretion.
Respondent argues that in evaluating petitioner’s request
under section 6015(f), we are limited to the administrative
record as compiled by respondent. This Court has recently ruled
that our review under section 6015(f) is not limited to the
administrative record. See Porter v. Commissioner, 130 T.C. ___
(2008). If we find that respondent abused his discretion in
denying petitioner relief, we will determine the appropriate
relief, rather than remanding the case to the Internal Revenue
Service. See Friday v. Commissioner, 124 T.C. 220, 222 (2005).
Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297, 298,
lists seven threshold conditions that the Commissioner considers
in determining whether an individual qualifies for equitable
relief under section 6015(f). The Commissioner will not grant
relief unless these threshold conditions have been met: (1) The
taxpayer must have filed joint returns for the taxable years for
which relief is sought; (2) the taxpayer does not qualify for
relief under section 6015(b) or (c); (3) the taxpayer must apply
for relief no later than 2 years after the date of the
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Commissioner’s first collection activity after July 22, 1998,
with respect to the taxpayer; (4) no assets were transferred
between the spouses filing the joint returns as part of a
fraudulent scheme by such spouses; (5) there were no disqualified
assets transferred to the taxpayer by the nonrequesting spouse;
(6) the taxpayer did not file the returns with fraudulent intent;
and (7) absent enumerated exceptions, the liability from which
relief is sought is attributable to an item of the nonrequesting
spouse.
Respondent concedes, and we agree, that petitioner satisfies
these seven threshold conditions.
Rev. Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298, lists
eight nonexclusive factors that the Commissioner will consider in
determining whether, taking into account all the facts and
circumstances, it is inequitable to hold the requesting spouse
liable for all or part of the deficiency and full or partial
equitable relief under section 6015(f) should be granted. These
nonexclusive factors include whether: (1) The requesting spouse
is separated or divorced from the nonrequesting spouse; (2) the
requesting spouse will suffer economic hardship without relief;
(3) the requesting spouse did not know or have reason to know of
the item giving rise to the deficiency; (4) the nonrequesting
spouse had a legal obligation to pay the outstanding liability;
(5) the requesting spouse received a significant benefit from the
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item giving rise to the deficiency; (6) the requesting spouse has
made a good faith effort to comply with income tax laws in
subsequent years; (7) the requesting spouse was abused by the
nonrequesting spouse; and (8) the requesting spouse was in poor
mental or physical health when signing the return or requesting
relief. Rev. Proc. 2003-61, sec. 4.03(2), further provides that
no single factor will controlling; all relevant factors will be
considered and weighed appropriately.
1. Petitioner’s Marital Status
Petitioner was divorced from intervenor when he sought
relief. This factor favors petitioner.
2. Economic Hardship
Respondent’s Appeals Office determined that petitioner will
not suffer economic hardship if relief is not granted. Rev.
Proc. 2003-61, sec. 4.02(1)(c), 2003-2 C.B. at 298, provides that
the Commissioner will base this determination on rules similar to
those provided in section 301.6343-1(b)(4), Proced. & Admin.
Regs., which provides that the requesting spouse will suffer
economic hardship if he is unable to pay his reasonable basic
living expenses.
Petitioner’s request for relief indicates that at the time
petitioner sought relief, he was earning $1,200 per month and
spending $1,100 per month on his average monthly household
expenses. Respondent’s Appeals Case Memorandum states that
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“[petitioner] has not demonstrated that he would have an economic
hardship if required to pay the tax.” Respondent’s final
determination makes no mention of economic hardship and instead
relies on petitioner’s knowledge of the embezzlement in order to
deny relief.
We disagree with respondent on this factor. Petitioner has
minimal education and although currently employed, testified
credibly that his hours had recently been cut back. The record
shows that petitioner would suffer economic hardship if relief
were not granted. This factor favors petitioner, and the
examiner’s evidence in the record supports a determination of
hardship.
3. Knowledge or Reason To Know
Respondent’s Appeals Office determined that petitioner’s
knowledge or reason to know of the item giving rise to the
deficiency weighed against relief, and we agree.
4. Intervenor’s Legal Obligation
Petitioner’s and intervenor’s divorce agreement is silent as
to who is responsible for paying any outstanding taxes.
Respondent determined that this factor is neutral, and we agree.
5. Significant Benefit
We consider a lack of a significant benefit to the taxpayer
seeking relief from joint and several liability a factor favoring
relief. Beatty v. Commissioner, T.C. Memo. 2007-167.
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Respondent’s Appeals officer determined that petitioner had not
received any significant benefit. At trial counsel for
respondent argued that although petitioner did not receive a
significant benefit, he nonetheless benefited and this factor
should weigh against relief.
Petitioner testified that a portion of the refund was used
(1) to pay restitution for bad checks written by intervenor, (2)
to pay past-due bills and rent, and (3) to purchase Christmas
gifts for intervenor’s children. Intervenor, however, testified
that the only restitution payments made on her behalf were made
by her and were based upon her earnings while at a work release
center. Intervenor testified that she made restitution payments
for three bad checks she had written during 2003 because she was
required to do so before she could have her driver’s license
reinstated. Intervenor was unable to recall whether the three
bad checks she had paid restitution on in order to reclaim her
driver’s license were the only bad checks she had written during
2003.
We disagree with respondent on this factor. Petitioner
testified credibly at trial how he used the refund to make
payments on behalf of intervenor, including restitution on bad
checks, paying past-due bills for rent, electricity, and other
costs, and for Christmas presents for intervenor’s children while
she was incarcerated. According to petitioner, intervenor was
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responsible for paying household bills before her incarceration
but had stopped paying them. Intervenor never informed
petitioner that their living expenses were no longer being paid
before her being arrested. This factor favors granting relief to
petitioner.
6. Good Faith Effort To Comply With Tax Laws
Respondent determined, and we agree, that petitioner has
made a good faith effort to comply with tax laws. Petitioner has
filed all required tax returns, and this factor is considered
neutral since petitioner was in compliance.
7. Spousal Abuse
Petitioner did not allege that there was abuse in his former
marriage. Respondent determined that this factor is neutral, and
we agree.
8. Mental or Physical Health
There is no evidence in the record that petitioner suffered
any ailment that would have affected his ability to pay his
Federal income tax obligations for the years in issue.
Respondent determined that this factor is neutral, and we agree.
Conclusion
In sum, three factors weigh in favor of relief, one factor
weighs against relief, and four factors are neutral. Rev. Proc.
2003-61, sec. 4.03(2)(a)(iii)(B), provides that in deficiency
cases, reason to know of the item giving rise to the deficiency
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will not be given more weight than other factors, but that actual
knowledge of the item weighs heavily against relief. Actual
knowledge weighing against relief may be overcome if those
factors weighing in favor of relief are particularly compelling.
Id.
Petitioner’s lack of significant benefit, his marital
status, and the prospect of economic hardship are sufficiently
compelling and outweigh petitioner’s knowledge of intervenor’s
earnings and embezzled income. Taking into account all of the
facts and circumstances, we find that it would be inequitable to
deny petitioner relief from joint and several liability. We
hereby conclude on the facts of this case that respondent has
abused his discretion in denying petitioner relief from joint and
several liability under section 6015(f).
To reflect the foregoing,
Decision will be entered
for petitioner.