T.C. Memo. 2009-20
UNITED STATES TAX COURT
WINNIE L. GREER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24062-06. Filed January 29, 2009.
Kenton L. Ball, for petitioner.
Denise A. Diloreto, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: The issue for decision is whether to uphold
respondent’s determination that petitioner is not entitled to
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relief under section 6015(b)1 or (f) for 1979, 1980, 1981, and
1982. For the reasons explained herein, we uphold respondent’s
determination.
FINDINGS OF FACT
At the time the petition was filed, petitioner resided in
Kentucky.
Petitioner graduated from high school in Floyd County,
Kentucky, in 1965. She then attended the University of Kentucky,
for 2 years and transferred to Louisiana State University from
where she graduated with a bachelor of arts degree in music in
1969. Petitioner also received a master’s degree in music
education from Marshall University in 1973. Petitioner did not
pursue studies in economics, finance, or accounting in her formal
education.
Petitioner married Daniel C. Greer in 1967, and they remain
married. Petitioner and Mr. Greer have two daughters, born in
1974 and in 1977. Mr. Greer is a licensed chemical engineer and
was employed by Ashland Oil Co., Inc., from 1969 through July
1993.
From September 1969 through May 1972 petitioner was employed
as a high school music teacher. After that she pursued graduate
studies and raised her daughters. From 1975 to 1985 she acted as
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code.
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a part-time choir director at the Episcopal church where she and
Mr. Greer became members sometime in 1982 and 1983.
In 1979 petitioner began a photography business. She
specialized in wedding and portrait photography. She opened her
first photography studio in late 1979 in the family home.
Improvements were made to the home in 1982, and the structure
remained petitioner’s photography studio even after petitioner
and her family moved their residence in 1986.
Throughout the years of her marriage up to and including the
years in issue, petitioner relied upon Mr. Greer to manage their
financial affairs. Mr. Greer did not conceal any financial
activities from petitioner or mislead her with respect to those
activities. However, he was the primary decisionmaker, and she
relied upon him to direct their investments and make decisions
regarding their finances and taxes.
In 1979 Mr. Greer and petitioner’s father founded G&L
Communications, Inc. (G&L), a closely held cable television
business that operated in Boyd and Greenup Counties of Kentucky.
G&L was taxed as an S corporation until the sale of its assets in
November 1982. Petitioner and Mr. Greer each owned 61 shares of
G&L stock. Petitioner was not active in G&L’s management, nor
was she an employee of G&L. In 1982 petitioner and Mr. Greer
each continued to own 61 shares. They each received a cash
distribution of $146,918.02 attributable to their respective
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portions of the proceeds of the sale. Thus their combined
distribution from G&L was $293,836. Following the sale of G&L’s
assets in 1982, two identical Forms 1099-DIV, Statement For
Receipts of Dividends and Distributions, were issued to
petitioner and Mr. Greer, each reflecting a dividend distribution
of $35,976, a capital gain distribution of $82,072, and a
nontaxable distribution of $28,869 for a total distribution to
each of $146,917.
Motivated by the anticipated income tax consequences of the
G&L dividends and distributions, Mr. Greer invested in Madison
Recycling Associates, Inc. (Madison). The background of this
transaction and its consequences are fully described in previous
judicial opinions, Greer v. Commissioner, T.C. Memo. 2007-119,
Madison Recycling Associates v. Commissioner, 295 F.3d 280 (2d
Cir. 2002), affg. T.C. Memo. 2001-85, and Madison Recycling
Associates v. Commissioner, T.C. Memo. 1992-605. We simply note
here that the result of those opinions is that respondent has
assessed joint deficiencies in income tax and additions to tax
against petitioner and Mr. Greer for the years 1979 through 1982.
These deficiencies and additions to tax are the liabilities from
which petitioner seeks section 6015 relief. The parties
previously agreed that any request by petitioner for relief from
joint and several liability under section 6015 would not be
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determined in the most recent Tax Court litigation reflected in
Greer v. Commissioner, supra.
The 1982 joint income tax return for petitioner and Mr.
Greer was prepared by John W. Artis, C.P.A. Mr. Artis advised
Mr. Greer that because the tax benefits associated with Madison
significantly exceeded the dollars invested, the Madison
investment was “fairly aggressive”. Petitioner was not a party
to those discussions and relied totally on Mr. Greer to make the
decision to claim the tax benefits associated with Madison. Mr.
Greer chose not to seek an opinion from Mr. Artis regarding the
merits of the Madison transaction. In Greer v. Commissioner,
supra, we found as fact that Mr. Greer expected that Madison
would provide tax savings of approximately $1.75 for each dollar
invested, and the record in this case is consistent with that
finding.
On December 16, 1982, Mr. Greer signed a check for $50,000
payable to Madison and drawn on the joint checking account of
petitioner and Mr. Greer to purchase a 5.5-percent limited
partnership interest in Madison. This was the only checking
account that petitioner and Mr. Greer had at the time. At the
time of the Madison investment, petitioner knew Mr. Greer was
purchasing an interest in Madison, and they briefly discussed the
Madison transaction before the investment.
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In March 1983 Madison filed a partnership return for the
taxable year ended December 31, 1982, which reported a loss of
$704,111 and a tax credit basis of $7 million. Petitioner and
Mr. Greer filed joint individual income tax returns for the years
1979, 1980, 1981, and 1982. The Madison-related pass-through
losses and investment credits reported on the joint returns for
1979, 1980, 1981, and 1982 were as follows:
Year Loss Investment Credit
1979 -0- $177.28
1980 $9,808 7,153.00
1981 3,146 4,128.00
1982 38,726 51,131.00
Of the $51,131 credit reported on the 1982 joint Federal income
tax return, the net credit used in 1982 from Madison totaled
$33,066 because $22,012 was eliminated in the alternative minimum
tax computation, and only an additional $3,947 was allowed as a
credit against alternative minimum tax. As a result, credits
were available to be carried back to 1979, 1980, and 1981.
The distributions from G&L were reported on the 1982 joint
return. Reflecting the listed ownership of 61 shares by each,
the dividends and capital gain distributions reflected on the
Federal income tax return were divided equally between Mr. Greer
and petitioner on two separate Forms 740, Kentucky Individual
Income Tax Return, which were filed using the status married
filing separately. Petitioner signed both the Federal joint
income tax return and her separate Kentucky form 740 for 1982.
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On February 28, 1983, petitioner and Mr. Greer signed a Form
1045, Application for Tentative Refund, for the years 1979, 1980,
and 1981, seeking a refund totaling $39,534 as a result of
carrying back to those years the credits from the Madison
investment. Subsequently in August 1983 petitioner also signed a
declaration relating to the Form 1045, which was requested by the
Internal Revenue Service to confirm the execution of the original
Form 1045. Petitioner discussed the execution of this
declaration with Mr. Greer. In October 1983 three refund checks
related to the Form 1045 were deposited into the joint account of
petitioner and Mr. Greer. The total deposit resulting from these
checks was $39,532. There is no explanation in the record for
the discrepancy of $2 between this amount and the amount claimed
on the Form 1045. Petitioner did not review the 1982 joint
Federal income tax return, nor did she review the Form 1045.
Petitioner did not ask Mr. Greer for details about the Madison
investment, and she did not ask Mr. Greer or Mr. Artis any
questions about the 1982 joint Federal income tax return or the
Form 1045. However, petitioner was aware of the Madison
investment.
Petitioner made an election for relief under section 6015
from liability for the deficiencies, additions to tax, and
interest determined against her for 1979 to 1982 in a Form 8857,
Request for Innocent Spouse Relief, submitted to respondent in
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September 2005. Petitioner’s grounds for relief were that the
erroneous items at issue are those of Mr. Greer, that he handled
the family finances and was responsible for having the returns
prepared, that she did not review the returns before signing
them, and that she relied upon Mr. Greer to have the returns
prepared correctly. Petitioner provided no information regarding
her current income or living expenses. In late 2005 respondent
issued a preliminary determination denying petitioner’s request
for relief on the basis that petitioner was aware of the items on
the joint Federal income tax returns that led to the deficiencies
in question. Petitioner protested this preliminary
determination.
Petitioner’s request for relief was then considered by an
Appeals officer, who determined after conducting an investigation
that petitioner was not entitled to relief because the factors
against relief outweighed the factors for relief. The Appeals
officer found that the factors against relief included that
petitioner knew or had reason to know of the understatement of
tax. The Appeals officer determined that petitioner should have
made a further inquiry concerning the tax liability, which may
have been generated by the Madison transaction. The Appeals
officer also determined that petitioner received benefit from the
tax which was not paid because of the Madison transaction,
inferring that the success of petitioner’s photography business
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was tied to the building of the photography studio on a tract of
land she purchased in 1983 and that an increase in net worth of
petitioner and Mr. Greer was caused by not paying the tax
liabilities for the years in question. Finally, the Appeals
officer determined that there would not be economic hardship to
petitioner and Mr. Greer as a result of the payment of the
underlying tax liabilities if Mr. Greer’s assets were considered
as a source of payment, as well as petitioner’s assets. The
Appeals officer also determined that petitioner was in compliance
with the tax laws and that this was a favorable factor for
petitioner.
The Appeals officer estimated that petitioner and Mr. Greer
owned assets which provided a reasonable collection potential to
respondent of $2,262,749. The Appeals officer estimated the Mr.
Greer’s assets totaled approximately $925,000 and petitioner
owned the remainder. The parties have stipulated that
petitioner’s personal assets at the end of September 2007 had a
value in excess of $2,134,000. Petitioner averaged over $42,000
in annual wages from Greer Photography during 2004 through 2006.
The deficiencies in tax, additions to tax, and interest for
the years 1979 through 1982 associated with the joint income tax
liabilities of petitioner and Mr. Greer exceed $1.2 million at
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this time, largely because of the interest for all 4 years and
the 50-percent additional interest under section 6653(a)(2) for
1981 and 1982.
After receipt of the notice of determination reflecting the
Appeals officer’s negative conclusions, petitioner filed a timely
petition.
OPINION
In general, taxpayers filing joint Federal income tax
returns are each responsible for the accuracy of their returns
and are jointly and severally liable for the entire tax liability
for the year of the returns. Sec. 6013(d)(3). In certain
circumstances, however, a spouse may obtain relief from joint and
several liability by satisfying the requirements of section 6015.
Section 6015(a)(1) provides that a spouse who made a joint
return may elect to seek relief from joint and several liability
under section 6015(b) (dealing with relief from liability for an
understatement of tax on a joint return). Section 6015(c) is not
available to petitioner on the facts of this case. If relief is
not available under section 6015 (b) or (c), an individual may
seek equitable relief under section 6015(f).
I. Section 6015(b)
Section 6015(b) provides that a taxpayer will be relieved of
liability for an understatement of tax if (1) a joint return was
filed for the taxable year in question; (2) there is an
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understatement of tax attributable to erroneous items of Mr.
Greer; (3) the taxpayer requesting relief “did not know, and had
no reason to know, that there was such understatement” when he or
she signed the return; (4) taking into account all of the facts
and circumstances, it would be inequitable to hold the taxpayer
liable for the deficiency attributable to such understatement;
and (5) the taxpayer elects to have section 6015(b) apply within
2 years of the initial collection action. Respondent agrees that
petitioner meets the first and fifth requirements and thus
focuses on the second, third, and fourth factors as the basis for
supporting the determination to deny relief. The burden is on
petitioner to establish that she is entitled to the relief.
This case does not involve a deficiency stemming from an
omission of an item of income on a tax return. Rather, the
deficiency arises from the disallowance of investment credits and
a partnership loss. In such situations a taxpayer may be aware
that a transaction took place but may not know that an
understatement will result from the transaction. Knowledge of the
transaction has been held to be sufficient knowledge of the
understatement to bar relief under former section 6013(e)(1)(C),
which had a similar requirement to that of section 6015(b)(1)(C).
See, e.g., Bokum v. Commissioner, 94 T.C. 126, 146 (1990), affd.
992 F.2d 1132 (11th Cir. 1993). The Court of Appeals for the
Ninth Circuit held that a taxpayer meets the standard for relief
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if the taxpayer did not know or did not have reason to know that
the erroneous deduction or credit would give rise to an
understatement despite the presence of the deduction on the
return. Price v. Commissioner, 887 F.2d 959, 963 (9th Cir.
1989). Because of the similarity between the two statutory
standards, we have held that the cases interpreting former
section 6013(e) remain instructive in analyzing the issue
presented by section 6015(b)(1)(C). Jonson v. Commissioner, 118
T.C. 106, 115 (2002) (citing Butler v. Commissioner, 114 T.C.
276, 283 (2000)), affd. 353 F.3d 1181 (10th Cir. 2003); Doyel v.
Commissioner, T.C. Memo. 2004-35.
The Court of Appeals for the Sixth Circuit is the likely
venue for any appeal of this case. In Purcell v. Commissioner,
826 F.2d 470, 473-474 (6th Cir. 1987), affg. 86 T.C. 228 (1986),
that Court of Appeals held that knowledge of the transaction
giving rise to omitted income was sufficient to bar relief under
former section 6013(e). In Richardson v. Commissioner, 509 F.3d
736 (6th Cir. 2007), affg. T.C. Memo. 2006-69, that Court of
Appeals followed Purcell in a case where the taxpayer sought
relief under section 6015(b) from a tax deficiency arising from
the use of alleged trusts to shield income. The trusts in
question were held to be a sham.
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Petitioner notes that the Court of Appeals for the Sixth
Circuit has embraced a test requiring the examination of all
facts and circumstances, citing Shea v. Commissioner, 780 F.2d
561 (6th Cir. 1986), affg. in part and revg. in part T.C. Memo.
1984-310. Shea involved omissions of income and an analysis of
the facts and circumstances to determine whether a person had
reason to know of the omissions. We find that under the facts
and circumstances of this case petitioner had reason to know of
the understatement on the joint income tax return for 1982.
II. Reason To Know
In Shea, the Court of Appeals for the Sixth Circuit adopted
the description of the “reason to know” test used in Sanders v.
United States, 509 F.2d 162, 166 (5th Cir. 1975). Shea v.
Commissioner, supra at 565-566, has the following explanation:
The test adopted by the Sanders court is the same
test advanced by Restatement (Second) of Agency § 9,
comment d (1958), which read as follows:
A person has reason to know of a fact if he had
information from which a person of ordinary
intelligence which such person may have, or of the
superior intelligence which such person may have,
would infer that the fact in question exists or
that there is such a substantial chance of its
existence that, in exercising reasonable care with
reference to the matter in question, his action
would be predicated upon the assumption of its
possible existence.
509 F.2d at 167. By adopting this reasonable person
standard, the court rejected a more restrictive
interpretation which would have required the taxpayer
to provide that there was no possibility of discovering
the omissions. Id. at 166. The primary ingredient of
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the “reason to know” tests are (1) the circumstances
which face the petitioner, and (2) whether a reasonable
person in the same position would infer that omissions
or erroneous deductions had been made.
The “reason to know” test is also explained in Price v.
Commissioner, supra at 965:
A spouse has “reason to know” of the substantial
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. Factors to consider in
analyzing whether the alleged innocent spouse had
“reason to know” of the substantial understatement
include: (1) the spouse’s level of education; (2) the
spouse’s involvement in the family’s business and
financial affairs; (3) the presence of expenditures
that appear lavish or unusual when compared to the
family’s past levels of income, standard of living, and
spending patterns; and (4) the culpable spouse’s
evasiveness and deceit concerning the couple’s
finances. [Citations omitted.]
In reviewing whether petitioner had reason to know of the
understatement, we will begin with the four factors listed in
Price.
(i) Education
Petitioner is highly educated, having received a master’s
degree in music education. She is not specifically educated in
accounting, economics, or finance, but she is an intelligent,
well-educated person.
(ii) Involvement in Financial Affairs
Petitioner’s ownership of 61 shares of G&L stock led to a
cash distribution to her of approximately $147,000 in 1982.
Petitioner argues that she held the shares only as a nominee for
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Mr. Greer. Regardless, petitioner was aware of the significant
cash distributions that both she and Mr. Greer received as a
result of the sale of G&L’s assets. Petitioner also signed a
Kentucky income tax return which reflected her separate share of
the proceeds from the sale of G&L’s assets. In addition, she
signed forms seeking significant tax refunds, which resulted from
the tax reporting of the Madison investment. Finally, the
investment in the Madison transaction was paid from the joint
checking account of petitioner and Mr. Greer. Petitioner does not
maintain that she was unaware of the investment, only that she did
not realize the reporting of the Madison transaction would result
in an understatement of tax. Regarding the large G&L
distributions which were the key to the motivation of Mr. Greer in
making the Madison investment, petitioner was likewise not in the
dark. She maintains that she always relied on Mr. Greer to handle
financial affairs, but she was at least generally aware of the
results of the G&L sale. Such knowledge is not irrelevant. Price
v. Commissioner, supra at 963 n.9; Doyel v. Commissioner, T.C.
Memo. 2004-35.
(iii) Changes in Standard of Living
The parties have argued in great detail about whether
petitioner directly benefited from the reported tax treatment of
the Madison investment. While a specific dollar benefit to
petitioner personally is not clearly established, there is no
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question that petitioner and Mr. Greer maintained a very
comfortable lifestyle during 1982 and for all the years thereafter
and that they provided for the education of their two children.
Cash is fungible, and the reporting of the Madison transaction
generated significant cash savings on the joint tax liability of
petitioner and Mr. Greer for 1979 through 1982. The record does
not establish any extravagant change in petitioner’s lifestyle,
however.
(iv) Mr. Greer’s Evasiveness and Deceit Regarding Finance
Mr. Greer was not deceitful or evasive with petitioner
regarding the Madison investment or the G&L cash distributions.
Petitioner relied upon Mr. Greer to make the decisions concerning
the family financial transactions and their tax consequences, but
the record does not support the conclusion that she was misled or
denied information.
III. Did Petitioner Have “Reason To Know”?
Three of the four Price factors would support the conclusion
that petitioner should have at least made further inquiry about
the extraordinary tax benefits reflected on the joint return for
1982. She knew there was substantial additional income, yet she
signed forms reflecting tax refunds generated in the years 1979
through 1981 as a result of the reporting of the 1982 Madison
investment. Almost $40,000 in refunds was deposited into the same
joint checking account on which the check of $50,000 for the
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Madison investment was drawn. These refunds were in addition to
tax savings of over $33,000 sought through the aggressive
reporting of the Madison transaction on the joint return for 1982.
Petitioner chose not to know; she was not deceived or misled.
[B]eing a homemaker and preparing for weddings,
graduations and reunions certainly cannot relieve a
taxpayer of joint and several tax liability. The
petitioner does not make a showing that Mr. Greer’s
financial affairs were unreasonably complex, nor does
she provide the court with convincing reasons for not
reviewing her own bank statements * * *
Shea v. Commissioner, 780 F.2d at 566-567 (citation omitted). In
conclusion, petitioner has failed to establish that she had no
reason to know that there was an understatement on the 1982 joint
Federal income tax return. Accordingly, she is not entitled to
relief under section 6015(b).
IV. Section 6015(f)
Section 6015(f) provides for relief from joint liability if
after taking into account all the facts and circumstances, it is
inequitable to hold the individual liable. Under the authority
granted by section 6015(f), the Commissioner has issued Rev. Proc.
2003-61, sec. 4.03, 2003-2 C.B. 296, 298, which sets forth the
factors to be applied when making a determination in a case
involving an understatement of tax for requests made when
petitioner’s was submitted to respondent. We will review those
factors in the light of the facts and circumstances of this case.
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(i) Marital Status. Because petitioner remained married to
Mr. Greer, this factor is neutral.
(ii) Economic Hardship. Petitioner has failed to establish
that respondent’s determination regarding a lack of economic
hardship was incorrect. Therefore, this factor is negative.
(iii) Knowledge or Reason To Know. For the reasons
discussed previously, this factor is negative to petitioner.
(iv) Legal Obligation of Nonrequesting Spouse. There is no
such obligation in this case; this factor is neutral.
(v) Significant Benefit. As discussed previously, in this
record an unusual financial benefit is not clearly established;
this factor is favorable to petitioner.
(vi) Compliance with Tax Laws. This factor favors granting
relief.
(vii) Other Factors. Rev. Proc. 2003-61, supra, provides
factors which if present will weigh in favor of granting relief,
but the absence of which will not support the denial of relief.
These factors are spousal abuse or poor mental or physical health
at the time the return was filed. Neither of these factors is
applicable in this case.
In summary, there are two negative and two positive factors;
given its significance, factor (iii) pushes the scale against
granting relief under section 6015(f).
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V. Prior Cases
This case is distinguishable from other cases where spouses
of individuals who invested in tax shelters were found eligible
for relief. See, e.g., Korchak v. Commissioner, T.C. Memo. 2006-
185 (requesting spouse established no reason to know where
requesting spouse did not know nonrequesting spouse was making
investment; requesting spouse had no practical business
experience; and tax return reported multiple investment losses and
credits so that disallowed investment did not stand out); Campbell
v. Commissioner, T.C. Memo. 2006-24 (requesting spouse established
no reason to know where requesting spouse did not know
nonrequesting spouse was making investment; there was concealment
by nonrequesting spouse; and reported items were not noticeable
given complexity of return). Petitioner knew of the Madison
investment. There was no deception or concealment by Mr. Greer.
Petitioner was put on notice by the claimed tax benefits on Form
1045 for years prior to 1982 that something out of the ordinary
was generating large tax benefits. She also knew the significant
distributions they were receiving as a result of the sale of the
G&L assets. The Madison investment was reflected in the joint
bank account to which petitioner had access. These facts
distinguish the present case from Korchak and Campbell.
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Conclusion
Petitioner is not entitled to relief from joint liability
under section 6015 (b) or (f). Accordingly,
Decision will be entered
for respondent.