T.C. Summary Opinion 2008-133
UNITED STATES TAX COURT
BRENDA H. JENNINGS AND ROBIN D. JENNINGS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4939-06S. Filed October 16, 2008.
Brenda H. Jennings and Robin D. Jennings, pro sese.
James H. Harris, Jr., for respondent.
NIMS, 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
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otherwise indicated, subsequent section references are to the
Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
Background
Some of the facts have been stipulated and are so found.
When this petition was filed, Brenda H. Jennings and Robin D.
Jennings resided in Pennsylvania. At all relevant times, Mr. and
Ms. Jennings were married, though at the time of trial the two
were in the process of obtaining a divorce.
In 2003 Mr. and Ms. Jennings shared the same house. During
that year, Mr. Jennings withdrew $16,990 from a section 401(k)
plan from a previous employer. Mr. Jennings did so without the
knowledge of Ms. Jennings. He then attempted to purchase a
vehicle for his own use, using $12,000 of the proceeds from the
withdrawal and financing the remainder. Mr. Jennings then
returned the vehicle and received $9,800 of his downpayment in
return. Mr. Jennings then used an undetermined amount of the
funds from the withdrawal to replace the floor in the kitchen of
the Jennings’ house, purchase new kitchen appliances, and improve
steps and walls in other areas of the house. The floor was
replaced due to water damage caused by Mr. Jennings.
On their 2003 joint income tax return, Mr. and Ms. Jennings
included the $16,990 withdrawal as income but did not report the
section 72(t) early withdrawal addition to tax. In addition, the
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Jenningses failed to include $9,850 of unemployment compensation
Mrs. Jennings received from the Commonwealth of Pennsylvania.
On the basis of the original return, respondent determined a
$3,689 deficiency in the Jenningses’ 2003 Federal income tax.
The deficiency was due to the two items identified above. In
November of 2005 Mr. and Ms. Jennings amended their 2003 return
to correct these two items, and they calculated that they owed
$2,677 in tax and penalties, of which $1,699 is attributable to
the section 72(t) additional tax. The parties now agree that
this figure is the correct amount of the underpayment, and this
amount remains unpaid.
Two weeks after amending their 2003 return, the Jenningses
received a notice of deficiency based upon the original 2003
return. The petition seeking redetermination of the original
deficiency was filed with this Court on March 9, 2006.
On August 3, 2006, after petitioning this Court, Ms.
Jennings filed with respondent a Form 8857, Request for Innocent
Spouse Relief, seeking to avoid liability for the early
withdrawal additional tax. At the time of her request, Ms.
Jennings still resided with Mr. Jennings. In January 2007
respondent denied Ms. Jennings’ request for innocent spouse
relief. Ms. Jennings did not amend the petition to challenge
respondent’s determination to deny her relief from joint and
several liability.
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Trial was held on March 10, 2008. The parties consented to
the introduction of the innocent spouse issue at trial pursuant
to Rule 41(b). Because the parties and respondent have agreed to
the correct amount of the underpayment, the sole issue for
decision is whether respondent abused his discretion in denying
Ms. Jennings relief from joint and several liability as to the
portion of the underpayment that represents an additional tax for
early withdrawal under section 72(t).
Discussion
A. Jurisdiction
At trial, there was a question as to whether either Mr.
Jennings or Ms. Jennings had signed the petition. Both Mr. and
Ms. Jennings claimed not to have signed the petition.
Handwriting samples were taken in open court from both
individuals by the presiding Judge and compared with the
purported signatures on the petition. Based upon the testimony
of the parties and the handwriting samples, we find that Ms.
Jennings did in fact sign the petition, but Mr. Jennings did not.
There is no evidence that Mr. Jennings permitted any other party
to sign on his behalf, and at trial Mr. Jennings refused to
accept the petition as filed. As a result, the Court lacks
jurisdiction over Mr. Jennings. Because the Court retains
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jurisdiction over Ms. Jennings, we may now proceed to the
substance of her argument. For purposes of convenience, Ms.
Jennings will hereafter be referred to as petitioner.
B. Relief From Joint and Several Liability
Petitioner argues that she should not be held responsible
for $1,699 of the underpayment because that amount represents an
additional tax on Mr. Jennings’s early withdrawal from a section
401(k) plan. Petitioner contends that she did not know of the
distribution to Mr. Jennings when the distribution was made and
that she received no benefit from the distribution.
Section 6015 provides that an individual may seek relief
from joint and several liability on a joint income tax return
provided that individual meets the requirements of section
6015(b) or (c). In addition, section 6015(f) provides that even
if the taxpayer does not qualify under section 6015(b) or (c),
the taxpayer may be relieved of liability in the event the
Secretary determines that it is “inequitable to hold the
individual liable for any unpaid tax or any deficiency (or any
portion of either)”.
Petitioner does not qualify for relief under section
6015(b). Section 6015(b)(1)(C) requires that the taxpayer
establish that she had no reason to know of the understatement.
Even if we accept petitioner’s statement that she did not know of
the section 401(k) distribution at the time it was made, the
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distribution was reported on petitioner’s original tax return,
and petitioner signed the return. Petitioner cannot rely solely
on ignorance of the tax consequences of an item giving rise to a
deficiency to satisfy her burden under section 6015(b)(1)(C).
See Price v. Commissioner, 887 F.2d 959, 964 (9th Cir. 1989);
Hopkins v. Commissioner, 121 T.C. 73, 78 n.11 (2003). Thus,
petitioner had reason to know of the understatement. She cannot
satisfy the conditions of section 6015(b).
Furthermore, petitioner cannot qualify under section
6015(c). Section 6015(c)(3)(A) requires petitioner, at the time
she applied for relief, to be either: (1) Divorced from the
individual with whom she filed the joint return; (2) legally
separated from that individual; or (3) not a member of the same
household as that individual for any time during the 12-month
period before the application is made. At the time petitioner
applied for relief, she was neither divorced nor legally
separated from Mr. Jennings, and the two lived together.
Therefore, petitioner cannot satisfy the conditions of section
6015(c).
Having failed to qualify for relief from joint and several
liability under section 6015(b) or (c), petitioner may only
qualify for relief, if at all, under section 6015(f). Section
6015(f) allows relief from joint and several liability if,
“taking into account all the facts and circumstances, it is
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inequitable to hold the individual liable”. Pursuant to
respondent’s discretionary authority to grant relief under
section 6015(f), the Commissioner has prescribed procedures, set
forth in Rev. Proc. 2003-61, 2003-2 C.B. 296, which the
Commissioner applies in determining whether a spouse is eligible
for relief.
As a threshold matter, Rev. Proc. 2003-61, sec. 4.01, 2003-2
C.B. at 297, lists seven conditions that must be met to be
eligible to submit a request for equitable relief. Of these
seven conditions, respondent concedes that petitioner has met the
first three. The fourth condition is met if there has been no
fraudulent transfer of assets between the spouses. There is no
evidence to suggest that any fraudulent transfer between the
spouses has occurred here. The fifth condition is met if there
has been no transfer of “disqualified assets” between the
spouses, which under section 6015(c)(4)(B) are assets transferred
for the purpose of the avoidance of tax. There is no indication
that any such transfer took place. The sixth condition is met if
the requesting spouse did not file the return with fraudulent
intent, which petitioner did not. The seventh condition is met
if the item of income that gave rise to the liability is
attributable to the nonrequesting spouse. Here, the section
401(k) withdrawal giving rise to the section 72(t) additional tax
at issue was made by Mr. Jennings at his sole request. That item
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of income is attributable to Mr. Jennings. Therefore, petitioner
has met all seven of the threshold conditions. From there, we
must determine whether petitioner is entitled to equitable
relief.
Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298, creates a
safe harbor for those seeking equitable relief. If the liability
reported on the return is unpaid, as it is here, and the
requesting spouse’s situation meets all of the circumstances
listed, equitable relief will ordinarily be granted. If not, the
requesting spouse may only qualify for relief on the basis of a
balancing of factors listed in Rev. Proc. 2003-61, sec. 4.03,
2003-2 C.B. at 298.
The first condition of the safe harbor is the same condition
of section 6015(c): The requesting spouse must have been
divorced or legally separated from the nonrequesting spouse, or
the spouses have lived apart for more than 12 months. As
discussed above, that condition is not met here. Thus,
petitioner does not qualify for the safe harbor, and must submit
to the balancing of factors listed in Rev. Proc. 2003-61, sec.
4.03.
Rev. Proc. 2003-61, sec. 4.03, lists six factors the
Commissioner considers in determining whether to grant equitable
relief: (1) Marital status; (2) economic hardship; (3) knowledge
or reason to know; (4) nonrequesting spouse’s legal obligation;
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(5) significant benefit; and (6) compliance with income tax laws.
In addition to these, there are two additional factors that, when
present, weigh in favor of relief, but do not weigh against
relief when not present. These two factors are: (1) Whether the
nonrequesting spouse abused the requesting spouse; and (2)
whether the requesting spouse was in poor mental or physical
health at the time the return was signed or at the time that
spouse requested relief. We will discuss each of these factors
in turn to determine whether respondent abused his discretion in
denying petitioner’s request for relief from joint and several
liability.
First, the marital status factor asks whether the requesting
spouse is divorced or separated from the nonrequesting spouse.
At the time the request was filed, petitioner was neither
divorced nor separated from Mr. Jennings. They are now living
apart and are in the process of obtaining a divorce. Respondent
concedes that this factor weighs in favor of granting relief.
Second, the economic hardship factor asks whether the
requesting spouse will suffer economic hardship if she must pay
the liability. The issue is whether the requesting spouse will
be able to pay her reasonable living expenses if relief is not
granted. See Alt v. Commissioner, 119 T.C. 306, 314-315 (2002),
affd. 101 Fed. Appx. 34 (6th Cir. 2004); sec. 301.6343-1(b)(4),
Proced. & Admin. Regs. Petitioner has not alleged that paying
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this liability will result in economic hardship, and she has not
provided any information about her current living expenses that
would allow us to determine whether she would suffer economic
hardship. This factor weighs against relief.
Third, the knowledge factor asks whether the requesting
spouse did not know and had no reason to know that the non-
requesting spouse would not pay the income tax liability.
Consideration is given to the requesting spouse’s level of
education, deceit on the part of the nonrequesting spouse, and
the requesting spouse’s involvement in household financial
matters and financial expertise, and any lavish or unusual
expenditures compared to past spending levels. Rev. Proc. 2003-
61, sec. 4.03(2)(a)(iii)(C), 2003-2 C.B. at 298. Petitioner
amended her return to reflect the existence of the section 72(t)
additional tax and made little effort to see that Mr. Jennings
paid that portion of the deficiency. Petitioner and Mr. Jennings
disagree as to whether Mr. Jennings orally agreed to pay this
liability. Although this oral agreement required petitioner to
satisfy the remaining portion of the liability, she has not done
so, which shows either that the agreement never existed or that
neither party considered it to have any binding effect. In any
case, we do not need to accept petitioner’s self-serving
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statement on this score. See Tokarski v. Commissioner, 87 T.C.
74, 77 (1986). As a result, this factor weighs against granting
relief.
Fourth, the legal obligation factor asks whether the non-
requesting spouse has a legal obligation to pay the outstanding
income tax liability pursuant to a divorce decree or agreement.
No such agreement exists, and so neither party has a legal
obligation to satisfy the liability. This factor is neutral.
Fifth, the significant benefit factor asks whether the
requesting spouse received significant benefit from the unpaid
income tax liability or item giving rise to the deficiency.
Significant benefit is defined as any benefit in excess of normal
support. Sec. 1.6015-2(d), Income Tax Regs. Mr. Jennings spent
$12,000 of the section 401(k) withdrawal to purchase an
automobile. However, Mr. Jennings subsequently returned the
vehicle to the dealership and received in return $9,800.
Petitioner acknowledged that an undetermined amount of this money
was spent for a new floor and several appliances for the kitchen
of the Jenningses’ house, as well as new steps and walls for
other areas of the home. The kitchen floor was replaced due to
water damage caused by Mr. Jennings. Petitioner contends that
this work was done in a year other than 2003, but petitioner
offers no tangible evidence as to the timing and amount of these
transactions. Without information regarding the scope and
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expense of this renovation, we cannot determine whether the
renovation represents a significant benefit or ordinary support.
Respondent determined that this work represented a significant
benefit, and petitioner has given us no reason to question that
determination. This factor weighs against relief.
Sixth, the compliance factor asks whether the requesting
spouse has made a good faith effort to comply with the income tax
laws in the years following the year to which the request for
relief relates. Petitioner did not file a return for her 2006
tax year until 2008 and did not file for any extension of time to
file the return. This does not represent a good faith effort to
comply with the income tax laws. This factor weighs against
relief.
Next, we turn to the two factors that, if present, weigh in
favor of relief but do not weigh against relief if not present.
Petitioner did not allege either that she was the victim of abuse
or was in poor health at the time the return was filed or the
time the request was made. In a question posed to Mr. Jennings,
petitioner asserted that a protection from abuse order had been
filed against Mr. Jennings at the time of the disbursement, but
she did not present evidence that such order existed, and she did
not offer sworn testimony that would show that she was the victim
of abuse. These two factors do not enter into the consideration
of this case.
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Of the first six factors, only one weighs in favor of
relief, while the rest either weigh against relief or are
neutral. As a result, we hold that petitioner has not met her
burden to show that she is entitled to relief from joint and
several liability. We have considered all the arguments made by
the parties, and to the extent not addressed in this opinion, we
conclude that they are moot, irrelevant, or without merit. In
accordance with the foregoing,
An appropriate order
and decision will be entered.