T.C. Summary Opinion 2008-92
UNITED STATES TAX COURT
JODENE SEAMONS, Petitioner, AND
JOHN ALAN DAVIS, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18478-06S. Filed July 29, 2008.
Jodene Seamons, pro se.
John Alan Davis, pro se.
Heather D. Horton, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 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. Unless otherwise indicated, subsequent section references
- 2 -
are to the Internal Revenue Code as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
This case arises from petitioner’s request for relief from
joint and several liability with respect to her tax liability for
2004. Respondent determined that petitioner qualified for relief
from joint and several liability under section 6015(b);
intervenor disagrees. Thus, the issue for decision is whether
petitioner is entitled to relief from joint and several liability
under section 6015(b).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. When petitioner filed her
petition, she resided in Arizona.
Intervenor and petitioner married in May 2001. At the time
petitioner resided in Phoenix, Arizona, and was employed as a
paralegal. Intervenor resided in Kingman, Arizona, and was
employed as a college professor.
Around April/May 2003 intervenor was discharged from his
professorship. Intervenor received unemployment compensation for
about 2-1/2 months until he was hired by a financial services
company in July 2003. In November 2003 intervenor sold his
mobile home for $19,000, less commissions.
- 3 -
On completion of intervenor’s training with the financial
services company, the couple moved to Chino Valley, and he opened
a branch in Prescott, Arizona. However, intervenor was
terminated from the financial services company in February 2004.
Around February through April 2004 intervenor applied for and
received unemployment compensation from the Arizona Department of
Economic Security (department). In April 2004 he obtained new
employment and was employed with that company for the remainder
of 2004.
Around March 2004 petitioner and intervenor began living
separate and apart–-petitioner in Phoenix and intervenor in Chino
Valley and Seligman, Arizona. The arrangement took a toll on
their relationship, and petitioner filed for divorce in October
2004. During their divorce settlement conference in December
2004, the couple agreed to file joint Federal and State income
tax returns for 2004. They also agreed that they would provide
each other with all necessary documentation for the preparation
of the returns, that petitioner would prepare the returns, and
that they would share equally in any refunds or hold each other
harmless for half of any additional income taxes or “costs”.
Intervenor did not disclose at the divorce settlement
conference (or at anytime thereafter) that he had received
unemployment compensation in 2004. His unemployment compensation
- 4 -
was mailed to his Chino Valley and Seligman residences, while
petitioner’s mail was addressed to her Phoenix residence.
On or about February 22, 2005, petitioner prepared and filed
their joint Form 1040, U.S. Individual Income Tax Return, for
2004. Intervenor did not provide petitioner with a Form 1099-G,
Certain Government Payments, showing that he had received
unemployment compensation in 2004. Petitioner did not report
intervenor’s unemployment compensation on the Form 1040; it
showed a $1,061 overpayment.
On August 28, 2006, respondent issued a notice of deficiency
to petitioner and intervenor. Respondent, from third-party payor
records, determined that intervenor had received $2,513 in
unemployment compensation in 2004. Respondent determined a $625
deficiency. In response, petitioner filed a timely petition with
the Court and a request for relief from joint and several
liability with the Internal Revenue Service (IRS). Intervenor
filed a Form 12507, Innocent Spouse Statement, with the IRS and a
notice of intervention with the Court. Petitioner and respondent
agree that petitioner’s request for relief from joint and several
liability pursuant to section 6015(b) should be granted in full.
Discussion
I. Burden of Proof
Except as otherwise provided in section 6015, petitioner
bears the burden of proof with respect to her entitlement to
- 5 -
relief from joint and several liability. See Rule 142(a); Alt v.
Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34
(6th Cir. 2004); McClelland v. Commissioner, T.C. Memo. 2005-121
(and cases cited therein). But petitioner need only persuade the
Court by a preponderance of the evidence. See Haltom v.
Commissioner, T.C. Memo. 2005-209; McClelland v. Commissioner,
supra.
II. Joint and Several Liability and Section 6015 Relief
Section 6013(d)(3) provides that if a joint return is filed,
the tax is computed on the taxpayers’ aggregate income, and
liability for the resulting tax is joint and several. See also
sec. 1.6013-4(b), Income Tax Regs. But the IRS may relieve a
taxpayer from joint and several liability under section 6015 in
certain circumstances. Section 6015(b) provides full or
apportioned relief for an understatement of tax if certain
criteria are satisfied. See sec. 6015(b)(1) and (2).
The parties agree that petitioner satisfies the requirements
of section 6015(b)(1)(A), (B), and (E).1 Intervenor asserts,
however, that petitioner knew or had reason to know when she
signed the return that there was an understatement of tax, see
sec. 6015(b)(1)(C), and taking into account all of the facts and
circumstances, it would not be inequitable to hold her liable for
1
Petitioner and respondent agree that petitioner satisfies
all five elements of sec. 6015(b)(1)(A)-(E).
- 6 -
the understatement, see sec. 6015(b)(1)(D). Thus, according to
intervenor, petitioner is not entitled to relief from joint and
several liability.
A. Knowledge or Reason To Know of the Understatement
The parties have stipulated that petitioner did not know
that intervenor had applied for and received unemployment
compensation in 2004. Intervenor testified that he never advised
petitioner that he had applied for or received unemployment
compensation in 2004. Additionally, the record contains no
evidence establishing that petitioner had actual knowledge that
the Form 1040 contained an understatement when she signed it.
The Court’s analysis, therefore, is governed by whether
petitioner had reason to know of the understatement when she
signed the Form 1040.
In the Ninth Circuit2 the requesting spouse has reason to
know of an understatement “if a reasonably prudent taxpayer in
her position at the time she signed the return could be expected
to know that the return contained the substantial
understatement.”3 Price v. Commissioner, 887 F.2d 959, 965 (9th
2
But for sec. 7463(b), an appeal would lie with the Court
of Appeals for the Ninth Circuit. See sec. 7482(b)(1)(A).
Therefore, the Court follows the law of that circuit. See Golsen
v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985
(10th Cir. 1971).
3
The Court has employed a similar test: whether a
reasonably prudent taxpayer in the requesting spouse’s position,
(continued...)
- 7 -
Cir. 1989) (and cases cited thereat), revg. an Oral Opinion of
the Court; see also Pietromonaco v. Commissioner, 3 F.3d 1342,
1345 (9th Cir. 1993) (extending the Price test to omission of
income cases), revg. T.C. Memo. 1991-361 and T.C. Memo. 1991-472.
With respect to omission of income cases, in determining
whether the requesting spouse had reason to know of the
understatement when she signed the return, courts also consider
whether the requesting spouse was aware of the circumstances of
the transactions that gave rise to the understatement, not the
tax consequences. Wiksell v. Commissioner, T.C. Memo. 1994-99,
revd. on other grounds 90 F.3d 1459 (9th Cir. 1996); Pietromonaco
v. Commissioner, T.C. Memo. 1991-361; see also Bokum v.
Commissioner, 94 T.C. 126, 145-146 (1990) (a “taxpayer claiming
innocent spouse status must establish that he or she is unaware
of the circumstances that give rise to * * * [the understatement,
not merely the tax consequences]”), affd. 992 F.2d 1132 (11th
Cir. 1993); Korchak v. Commissioner, T.C. Memo. 2006-185
(applying the knowledge of the circumstances of the transactions
test in the context of a claim for relief under section 6015).
In determining whether the requesting spouse was aware of
the circumstances of the transactions that gave rise to the
3
(...continued)
when the requesting spouse signed the return, could be expected
to know that the return contained an understatement or that
further investigation was warranted. Haltom v. Commissioner,
T.C. Memo. 2005-209 (and cases cited therein).
- 8 -
understatement, the Court of Appeals for the Ninth Circuit
examines factors including: (1) The requesting spouse’s
education level; (2) the requesting spouse’s involvement in their
business and financial affairs; (3) the presence of expenditures
that appear lavish or unusual when compared to their past income
levels, standard of living, and spending patterns; and (4) the
“culpable” spouse’s evasiveness and deceit concerning their
finances.4 Pietromonaco v. Commissioner, 3 F.3d at 1345; Price
v. Commissioner, supra at 965.
1. Circumstances of the Transaction
Intervenor asserts that petitioner knew that he was
unemployed in 2004 (the circumstance of the transaction). Thus,
she had a duty to inquire into whether he had received
unemployment compensation in 2004. According to intervenor, a
reasonable paralegal with “substantial experience in family law
* * * would believe that a person with sound mind would apply for
and receive unemployment compensation rather than allow the
equity in a small personal residence to dissipate entirely.”
4
The Court has employed similar factors: (1) The
requesting spouse’s education level and her business knowledge
and experience; (2) the requesting spouse’s participation in
business affairs or bookkeeping; (3) the nonrequesting spouse’s
openness about their income and business transactions; (4) the
presence of unusual or lavish expenditures; and (5) whether their
standard of living improved significantly during the years in
issue. Laird v. Commissioner, T.C. Memo. 1994-564.
- 9 -
The Court rejects intervenor’s contention that his mere
unemployed status and the fact that he was arguably eligible for
unemployment compensation are the relevant circumstances of the
transaction. The Court finds that the circumstance of the
transaction was the department’s finding that intervenor was
eligible for unemployment benefits pursuant to Arizona law. See
Ariz. Rev. Stat. Ann. secs. 23-771, -772, -773 (2004). But for
the department’s determination that intervenor was eligible for
unemployment benefits, he would not have received any benefits–-
notwithstanding that he was unemployed and was arguably eligible
for such benefits. See Ariz. Rev. Stat. Ann. secs. 23-771
(listing seven qualifying conditions), -773; see also Braden v.
Commissioner, T.C. Memo. 2001-69 (the Court examines whether the
taxpayer was aware of the “underlying transaction” that produced
the omitted income); Cheshire v. Commissioner, 115 T.C. 183
(2000) (the taxpayer knew of the distribution from her spouse’s
retirement plan and the interest earned on a certain account that
produced the omitted income items), affd. 282 F.3d 326 (5th Cir.
2002); Charlton v. Commissioner, 114 T.C. 333 (2000) (the
underlying circumstance was the spouse’s transcript service that
produced the omitted income item).
Moreover, the Court has also determined that taxpayers must
have sufficient knowledge of the transaction to permit them to
inquire as to its appropriate tax treatment. Braden v.
- 10 -
Commissioner, supra (citing Hillman v. Commissioner, T.C. Memo.
1993-151). Had intervenor provided petitioner with a Form 1099-G
or informed her that he had received unemployment benefits, she
could have inquired about the appropriate tax treatment of the
benefits. The Court is inclined to agree with petitioner that
“when you are unemployed you’re eligible for lots of things” but
that status and the mere fact that someone might be eligible for
benefits, by themselves, are not determinative under Arizona law.
Without more, such circumstances did not trigger a duty of
inquiry on petitioner’s behalf.
2. The Price Factors Applied
Application of the Price factors to the facts here leads the
Court to the conclusion that petitioner had no reason to know of
the understatement resulting from intervenor’s omission of his
unemployment compensation when she signed the return. He
received the unemployment compensation when they were living
apart, and his unemployment checks were mailed to his separate
residences. He did not provide petitioner with a Form 1099-G
showing that he had received unemployment compensation in 2004.
He also failed to disclose during their divorce settlement
conference (or at any other time) that he received unemployment
compensation in 2004.
The record also supports a conclusion that petitioner’s
involvement in their finances was insufficient to put a
- 11 -
reasonable person in her position on notice that the Form 1040
contained an understatement when it was signed. Additionally,
there is no evidence that their expenditures were unusual or
extravagant or that their overall standard of living
significantly improved during 2004 such as to put a reasonably
prudent person in petitioner’s position on notice when the Form
1040 was signed that intervenor had received and failed to report
his unemployment compensation. See Mysse v. Commissioner, 57
T.C. 680, 697-700 (1972); Haltom v. Commissioner, T.C. Memo.
2005-209; Barranco v. Commissioner, T.C. Memo. 2003-18; Laird v.
Commissioner, T.C. Memo. 1994-564. On the record their
expenditures and standard of living appear to be commensurate
with their expenditures and standards of living in prior years.
Thus, the circumstances “were [not] so out-of-whack that they
should have triggered the duty of inquiry” on petitioner’s part.
Haltom v. Commissioner, supra; see also Juell v. Commissioner,
T.C. Memo. 2007-219; Kling v. Commissioner, T.C. Memo. 2001-78.
The Court rejects intervenor’s contention that he did not
inform petitioner that he had received unemployment compensation
because he did not know that it was taxable.5 Not only is his
knowledge irrelevant, but intervenor, a former college professor
5
The Court notes that Ariz. Rev. Stat. Ann. sec. 23-792
(2004) provides that at the time of filing a claim for
unemployment benefits, the individual shall be informed that
unemployment benefits are subject to Federal income tax, and he
may elect to have the tax withheld.
- 12 -
who taught business classes, worked for a financial services
company, and had opened a branch for the company, should have
known that his unemployment compensation was taxable.
The Court can examine other factors relevant to the issue
before it. See Pietromonaco v. Commissioner, 3 F.3d at 1345;
Price v. Commissioner, 887 F.2d at 965. Petitioner and
intervenor were directed by their divorce decree to file a joint
return and to provide all necessary documentation to each other.
Respondent contends that a “reasonably prudent person in
Petitioner’s position [when she signed the return] would believe
that the return was correct in order to truly finalize the
divorce.” Simply put, the Court agrees, and this factor weighs
in petitioner’s favor.
Intervenor contends that it was not reasonable for
petitioner to believe that he “‘had sufficient funds with which
to support himself * * * [in 2004 and implicitly give up
unemployment compensation since he had relied on unemployment
compensation in 2003].’”6 Respondent, on the other hand,
contends that a “reasonably prudent person in Petitioner’s
position [when she signed the return] would not [have assumed]
6
Petitioner testified that she suggested that intervenor
might want to look into unemployment compensation in 2003 in
order to meet his child support obligations, but she cannot
recall whether he did or whether he had received unemployment
compensation in 2003.
- 13 -
that Intervenor had applied for unemployment when Intervenor had
money to support himself.”
Respondent’s argument is persuasive. Intervenor had sold
his mobile home in November 2003 for about $19,000, less
commissions, before becoming unemployed in February 2004.
Intervenor received $28,326 as compensation for services in
2004.7 He was unemployed for less than 3 months, a relatively
short period. Considering that the amounts are comparable, it
would be reasonable for a prudent person in petitioner’s position
when the return was signed to believe that he could have
supported himself with the sale proceeds for the short time in
which he was diligently searching for employment rather than
obtain unemployment compensation.
B. Inequity of Respondent’s Grant of Relief to Petitioner
The two most often cited factors for determining whether it
would be inequitable to hold a requesting spouse liable for a
deficiency are whether: (1) The requesting spouse received
significant benefit, Pietromonaco v. Commissioner, 3 F.3d at 1347
(and cases cited thereat); and (2) the failure to report the
correct tax liability results from the nonrequesting spouse’s
concealment, overreaching, or other wrongdoing, Alt v.
Commissioner, 119 T.C. at 314.
7
Intervenor received $2,675 for January through February
and $25,651 for April through December 2004.
- 14 -
Although the parties have stipulated that petitioner
received no benefit from the unemployment compensation,
intervenor contends that she received a benefit to the extent
that it was used to pay her last month’s rent at the “Chino
Valley apartment”. But normal support is generally not
considered a significant benefit. Pietromonaco v. Commissioner,
3 F.3d at 1347 (and cases cited thereat). Moreover, the record
supports a conclusion that petitioner did not receive any benefit
from intervenor’s unemployment compensation: he received it
after they had started living apart, and she paid most, if not
all, of their living expenses during their marriage, while his
income was used to satisfy his obligations. As to the second
factor, the Court has found that intervenor concealed his receipt
of the unemployment compensation.
The Court finds that it would be inequitable to hold
petitioner liable for the deficiency attributable to intervenor’s
omission of his unemployment compensation; therefore, section
6015(b)(1)(D) is satisfied. The Court also finds, by a
preponderance of the evidence, that petitioner has satisfied the
requirements of section 6015(b)(1) and she is entitled to relief
from joint and several liability.
To reflect the foregoing,
Decision will be entered for
petitioner.