T.C. Summary Opinion 2009-19
UNITED STATES TAX COURT
LINDA SUSAN WILLIAMS, Petitioner, AND JOHN H. HUGO, Intervenor
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17993-05S. Filed February 10, 2009.
Linda Susan Williams, pro se.
John H. Hugo, pro se.
Kaelyn J. Romey, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time 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
- 2 -
indicated, all section references are to the Internal Revenue
Code, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
This proceeding was commenced under section 6015 for review
of respondent’s determination that petitioner is not entitled to
relief from joint and several liability with respect to an
underpayment of Federal income tax reported on a joint tax return
filed with intervenor for 2000. The issue for decision is
whether petitioner is entitled to innocent spouse relief under
section 6015(f).
Background
Some of the facts have been stipulated and are so found.
The stipulations and the attached exhibits are incorporated by
reference. Petitioner resided in California at the time the
petition was filed.
Petitioner and intervenor were married on October 1, 1993.
Petitioner graduated from Dartmouth College with an undergraduate
degree and attended Wharton School of Business for 2 years but
did not complete her degree. During 2000 petitioner worked for a
commercial real estate brokerage firm as an account executive
handling domestic and international real estate transactions.
In 2000 petitioner received income of $96,386 from her
employment, and she had Federal income tax of $11,708 withheld
from her wages.
- 3 -
During the marriage intervenor was an investment banker in
the real estate finance field. He was self-employed during 2000.
Intervenor received a monthly consulting fee of $12,500 during
2000, and his 2000 income was $152,600. At the time, intervenor
believed that these monthly payments would be only a fraction of
his total compensation for the year from his consulting work.
However, he did not receive the substantial yearend bonus that he
expected to receive. Federal income tax was not withheld from
intervenor’s compensation during 2000. Petitioner and intervenor
did not make quarterly estimated tax payments for 2000. They had
not made estimated tax payments in previous years because
intervenor incurred deductible medical expenses that offset his
income.
Petitioner and intervenor filed a joint Federal income tax
return for 2000. Petitioner provided intervenor with tax
information including income, withholding, and business expenses
for the year, which she compiled. Intervenor prepared the 2000
return using commercial tax software. Petitioner reviewed and
signed the return. The return reported total tax due of $37,471
and a $25,763 underpayment of tax. No remittance was made with
the filing of the 2000 return.
Petitioner realized that no quarterly estimated tax payments
had been made only after the 2000 return was prepared but before
she signed it. Before petitioner signed the return, intervenor
- 4 -
acknowledged to petitioner that the unpaid tax liability was
attributable to his self-employment income and claimed that he
did not have money to pay the tax at that time. However,
intervenor set out, in handwritten notes with his financial
documents, specific sources of funds that could be used to pay
the tax owed, including rental income from the marital residence
and a $10,000 payment relating to intervenor’s consulting
services. Despite intervenor’s statements to the contrary,
petitioner believed that intervenor had sufficient funds to pay a
portion of the tax due. She further believed that intervenor
would enter into an installment plan for the unpaid balance.
Petitioner knew that no payment would be made toward the reported
underpayment at the time of filing.
During their marriage petitioner and intervenor experienced
financial difficulties. Intervenor had serious medical problems
that made it difficult for him to work. Although petitioner
understood that intervenor’s 2000 income was higher than in
previous years, she was aware of continued financial
difficulties. Petitioner and intervenor borrowed money from
petitioner’s parents in January 2001 to pay off credit card debt.
In February 2001 intervenor’s consulting contract was not
renewed. By the spring of 2001 petitioner realized that the
couple could not maintain their current standard of living.
- 5 -
However, in late 2001 intervenor listed his monthly income as
$25,000 on loan documents.
Before filing the 2000 return in April 2001, intervenor had
told petitioner that he wanted a divorce, and they were in the
process of separating. Intervenor filed a petition for
dissolution of marriage on May 29, 2001, listing the date of
separation as April 1, 2001. On approximately June 15, 2001,
petitioner and her son moved out of the marital residence, a
4,000-square-foot house in Pacific Palisades, California.
Intervenor purchased the residence before his 1993 marriage to
petitioner. Petitioner and intervenor had resided at the
residence since 1998. Petitioner and intervenor refinanced the
residence during the marriage, giving petitioner a community
property interest in the residence. Petitioner and intervenor
had an agreement that they would both vacate the marital
residence in order to rent the property. Intervenor listed
rental income from the property in his handwritten notes as a
potential source of funds to pay the 2000 tax liability.
However, intervenor did not move out of the marital residence,
and it was not rented. There is evidence in the record that the
rent was set at an above-market rate and intervenor refused to
lower the rent.
- 6 -
Upon moving out of the marital residence, petitioner moved
into a nearby rental property in Pacific Palisades. In May 2001
petitioner began being paid on a commission-only basis and no
longer received a monthly salary. As a result, her annual income
decreased dramatically. In January 2004 petitioner determined
that she could no longer meet the high costs of living in the Los
Angeles area and decided to move to a place with a lower cost of
living. Petitioner chose to move to the Lake Tahoe area because
she could live with her parents rent free temporarily.
Petitioner and her son lived with her parents for approximately 1
year. Thereafter, she moved into two different rental apartments
before moving into a carriage house on her parents’ property at a
rent of $1,000 per month in addition to an obligation to provide
caretaking services. Employment opportunities in the Lake Tahoe
area were limited for someone with petitioner’s experience as a
commercial real estate broker. At times petitioner worked three
part-time jobs because of the seasonal nature of employment
opportunities in the Lake Tahoe area. Petitioner’s current
income is modest, and she often struggles to meet her monthly
living expenses. At times she has borrowed from her parents to
pay living expenses. During this time petitioner did not receive
court-ordered child support payments from intervenor.
- 7 -
Throughout their marriage, petitioner and intervenor
generally maintained separate bank accounts. Neither spouse had
access to the other’s account records. Intervenor had some
account statements mailed to a post office box rather than the
marital residence. Petitioner and intervenor divided living
expenses, which they paid from their separate accounts, and
performed regular accountings to reconcile expenses paid by each
spouse. For the most part, intervenor paid the mortgage, real
estate taxes, and maintenance expenses associated with the
marital residence. Petitioner paid for child care costs,
utilities, food expenses, and other personal living expenses. At
times petitioner had to make the mortgage payment when intervenor
did not have sufficient funds to do so.
Petitioner incurred attorney’s fees in excess of $1 million
during the divorce proceedings, including more than $500,000 from
a 10-day trial. Petitioner borrowed money from her parents to
pay almost all of the legal fees. During the course of the
divorce proceedings intervenor repeatedly disobeyed court orders
and interfered with the ordered sale of the marital residence,
the couple’s principal community asset. Intervenor interfered
with the marketing of the marital residence, including refusing
to sign a listing agreement, renting the property without
petitioner’s consent, disconnecting utilities in violation of a
court order, interfering with petitioner’s access to the
- 8 -
residence, failing to provide keys to the property, failing to
timely advise petitioner of water damage sustained by the
property and the cost of repairs, and residing in the residence
in violation of a court order. Because of intervenor’s
misconduct, petitioner had to seek intervention from the family
law court on numerous occasions. As a result of intervenor’s
actions, the court imposed on him a $50,000 sanction to be paid
to petitioner.
A divorce judgment, dated May 20, 2006, awarded an
equalization payment of $490,685 to petitioner. The equalization
payment included, among other adjustments, $295,424 for a
property settlement relating to the marital residence, $50,000 in
sanctions against intervenor, and $97,241.82 for child support
arrearage and interest. The divorce proceeds were distributed to
pay existing debt obligations of petitioner, principally to
reimburse her parents for attorney’s fees relating to the divorce
proceedings and to pay outstanding legal bills. None of the
equalization payment was distributed directly to petitioner. The
divorce court retained jurisdiction over the 2000 tax liability
pending resolution of this case. Thus, the divorce court
reserved the right to allocate the 2000 tax liability between the
former spouses as part of the divorce settlement if innocent
spouse relief is not granted to petitioner.
- 9 -
On January 16, 2002, petitioner filed Form 8857, Request for
Innocent Spouse Relief. On June 20, 2005, respondent issued a
notice of determination denying petitioner’s claim for innocent
spouse relief. The notice of determination does not state the
basis for the denial of relief. A preliminary letter dated
November 29, 2002, denied relief on the ground that petitioner
did not have a reasonable belief that intervenor would pay the
tax owed. The “appeals case memo” recommended against relief
based primarily on petitioner’s expected receipt of over $500,000
from the divorce. The Appeals memo stated that the request for
innocent spouse relief should be reconsidered if there was a
significant change in that monetary award, which was on appeal by
intervenor. The Appeals memo did not consider the effect of
petitioner’s outstanding legal bills.
Discussion
Generally, married taxpayers may elect to file a joint
Federal income tax return. Sec. 6013(a). After making the
election, each spouse is jointly and severally liable for the
entire tax due for that year. Sec. 6013(d)(3); Butler v.
Commissioner, 114 T.C. 276, 282 (2000). A spouse may seek relief
from joint and several liability under procedures set forth in
section 6015. Sec. 6015(a).
Under section 6015(a), a spouse may seek relief from joint
and several liability under section 6015(b) or, if eligible, may
- 10 -
allocate liability according to provisions set forth in section
6015(c). If a taxpayer does not qualify for relief under section
6015(b) or (c), the taxpayer may seek equitable relief under
section 6015(f). Section 6015(f) confers on the Secretary
discretion to grant equitable relief to taxpayers where “it is
inequitable to hold the individual liable for any unpaid tax or
any deficiency (or any portion of either)”. Petitioner contends
that she is entitled to innocent spouse relief under section
6015(f) for 2000.
Except as otherwise provided in section 6015, the taxpayer
bears the burden of proving that he or she is entitled to section
6015 relief. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311
(2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004). In previous
cases, we have applied an abuse of discretion standard of review
for the Commissioner’s denial of equitable relief under section
6015(f). Washington v. Commissioner, 120 T.C. 137, 146 (2003);
Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282
F.3d 326 (5th Cir. 2002). We do not address the standard of
review issue because the standard applied would not affect the
result.
As directed by section 6015(f), the Commissioner has
prescribed procedures for determining whether a spouse qualifies
for relief under that subsection. The applicable provision is
- 11 -
found in Rev. Proc. 2000-15, 2000-1 C.B. 447.1 Respondent admits
that petitioner has satisfied the seven threshold conditions for
consideration of a request for innocent spouse relief under
section 6015(f) set forth in Rev. Proc. 2000-15, sec. 4.01, 2000-
1 C.B. at 448. Intervenor has not raised any issues with respect
to these threshold conditions. Accordingly, we find that
petitioner has satisfied the threshold requirements for
consideration of a request for innocent spouse relief under
section 6015(f).
Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. at 448, provides
a safe harbor for section 6015(f) relief. The Appeals memo did
not specifically analyze whether petitioner qualified for relief
under the safe harbor. Because we find below that petitioner is
entitled to relief under an alternative provision of Rev. Proc.
2000-15, supra, we have not considered whether petitioner
satisfies the requirements of the safe harbor.
Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448-449,
provides a list of positive and negative factors for determining
whether to grant equitable relief under section 6015(f).
According to the revenue procedure, no single factor is
1
This revenue procedure was superseded by Rev. Proc. 2003-
61, 2003-2 C.B. 296, which is effective for requests for relief
filed on or after Nov. 1, 2003, or for requests for relief
pending on Nov. 1, 2003, for which no preliminary determination
letter has been issued as of Nov. 1, 2003. Id. sec. 7, 2003-2
C.B. at 299. The preliminary determination letter denying relief
was issued in this case on Nov. 29, 2002.
- 12 -
determinative, all facts are to be considered and weighed
appropriately, and the list of factors is not intended to be
exclusive. Id.; see Jonson v. Commissioner, 118 T.C. 106, 125
(2002), affd. 353 F.3d 1181 (10th Cir. 2003).
I. Factors Against Relief
We first review the six factors weighing against relief, as
listed under Rev. Proc. 2000-15, sec. 4.03(2), 2000-1 C.B. at
449.
A. Attributable to Nonrequesting Spouse
The unpaid tax is attributable to self-employment income
earned by the nonrequesting spouse and resulted from the failure
to make estimated tax payments on such income. Tax liability
attributable to petitioner’s 2000 income was satisfied through
withholding on her wages. This factor does not support denial of
relief.
B. Knowledge or Reason To Know
The general rule for reported but unpaid tax liability is
that the requesting spouse’s knowledge or reason to know at the
time the return was signed that the tax would be unpaid weighs
against granting innocent spouse relief. Id., sec. 4.03(2)(b).
The requesting spouse must establish that: (1) She did not know
or have reason to know at the time she signed the return that the
reported tax liability would not be paid, and (2) it was
reasonable to believe that the nonrequesting spouse would pay the
- 13 -
reported tax liability. Ogonoski v. Commissioner, T.C. Memo.
2004-52; Rev. Proc. 2000-15, sec. 4.03(2)(b).
Typically, in the case of a reported but unpaid tax
liability, the relevant knowledge is that the tax would not be
paid when the return was signed. Merendino v. Commissioner, T.C.
Memo. 2006-2. Petitioner knew that no remittance was made with
the 2000 return. Thus, she knew that the tax would not be paid
when the return was filed. However, she argues that she
reasonably believed, at the time she signed the return, that
intervenor would pay the 2000 tax liability at some point on the
basis of assurances that intervenor made to her before she signed
the return. During the preparation of the 2000 return intervenor
listed specific sources of funds to be used for payment of the
reported tax, including rental income from the marital residence
and an expected payment relating to his consulting activities.
We do not find credible intervenor’s testimony denying that he
made any assurances or representations to petitioner concerning
his responsibility to pay the tax due. Petitioner and intervenor
took steps to rent the marital residence in 2001, although this
plan was not accomplished because of circumstances out of
petitioner’s control.
It would appear to be reasonable to consider anticipated
payments to be made after the return is filed to determine
whether a requesting spouse had knowledge or reason to know that
- 14 -
the tax would not be paid. See Banderas v. Commissioner, T.C.
Memo. 2007-129 (“a reasonable belief that taxes would be paid
must at minimum incorporate a belief that funds would be on hand
within a reasonably prompt period of time”.) Petitioner signed
the return with a reasonable belief that the tax would be paid
out of the rental income and intervenor’s consulting income.
Petitioner and intervenor maintained separate bank accounts, and
petitioner did not have access to intervenor’s bank records.
Thus, she could not completely know intervenor’s financial
condition. Nevertheless, she believed that he had sufficient
funds to make a partial payment of the tax at the time of filing
(although she knew no payment was remitted with the return). The
record confirms that intervenor had funds available at and around
that time to pay the tax liability.
Even though petitioner knew that the reported tax liability
was not paid upon the filing of the return, we find that she
reasonably believed that the tax would be paid at some point.
Given the counterbalancing nature of her knowledge, we find that
this factor is neutral in our consideration of whether relief
should be granted.
C. Significant Benefit
The record does not indicate that petitioner significantly
benefited (beyond normal support) from the unpaid tax liability.
To determine whether the requesting spouse received a significant
- 15 -
benefit from the unpaid tax, we determine whether the taxpayers
were able to make expenditures that they otherwise could not have
made and that were important to the requesting spouse. Krasner
v. Commissioner, T.C. Memo. 2006-31. Intervenor argues that
petitioner benefited because he continued to pay the mortgage on
the marital residence and petitioner benefited from appreciation
in the residence. The Appeals memo found that petitioner
significantly benefited from the unpaid tax for this reason.
There is no evidence in the record that petitioner and
intervenor acquired any assets or incurred unusual or lavish
expenses for petitioner’s benefit during 2000. Petitioner
apparently left the marriage with no assets or investments beside
her interest in the marital residence. Although the marital
residence was large, payment of the mortgage does not provide a
basis for finding a significant benefit to petitioner beyond
normal support. The unpaid tax represents only 4 months of
mortgage payments; appreciation of the residence does not
constitute a benefit beyond normal support. Petitioner moved out
of the residence shortly thereafter and began living in a more
modest fashion. There is no indication that the residence, which
intervenor purchased before his marriage, was important to
petitioner. This factor does not support denial of relief.
- 16 -
D. Lack of Economic Hardship
The fact that the requesting spouse will not suffer economic
hardship from payment of the tax liability weighs against
granting relief. Rev. Proc. 2000-15, sec. 4.03(2)(d).
Conversely, the presence of economic hardship favors granting
relief. Id., sec. 4.03(1)(b), 2000-1 C.B. at 448-449. Economic
hardship occurs where the requesting spouse would not be able to
pay reasonable basic living expenses if liability for the tax
were imposed. Butner v. Commissioner, T.C. Memo. 2007-136. In
determining a reasonable amount for basic living expenses, the
Court considers, among other things: (1) The taxpayer’s age,
employment status and history, ability to earn, and number of
dependents; (2) an amount reasonably necessary for food,
clothing, housing, medical expenses, transportation, current tax
payments, and expenses necessary to the taxpayer’s production of
income; (3) the cost of living in the taxpayer’s geographic area;
(4) the amount of property available to pay the taxpayer’s
expenses; (5) any extraordinary circumstances; i.e., special
education expenses, a medical catastrophe, or a natural disaster;
and (6) any other factor bearing on economic hardship. See sec.
301.6343-1(b)(4)(ii), Proced. & Admin. Regs. Consideration of
unique circumstances of the requesting spouse is appropriate in
determining whether she would suffer an economic hardship if
- 17 -
relief is denied. Sec. 301.6343-1(b)(4)(i), Proceed. & Admin.
Regs.
At the time of trial petitioner struggled to pay basic
living expenses. Petitioner submitted Form 433-A, Collection
Information Statement for Wage Earners and Self-Employed
Individuals, to respondent on April 8, 2005. The form listed no
assets but checking accounts with nominal balances and a 1992
used car. The form also listed monthly living expenses that
exceeded monthly income. The parties have not disputed that
these amounts are reasonable.
Intervenor argues that petitioner would not suffer economic
hardship because she received nearly $500,000 from the divorce.
Intervenor argues that she chose to use the money to pay her
legal bills and could have paid the 2000 tax liability instead.
The Appeals memo relied on the divorce distribution to find a
lack of economic hardship and did not take into account
petitioner’s extraordinary legal bills. There is evidence in the
administrative record that petitioner’s legal bills totaled
$650,000 as of April 2004.
First, we note that nearly $100,000 of the equalization
payment was to compensate for intervenor’s failure to provide
child support for his son. In addition, we find that it is
appropriate to consider petitioner’s legal fees in determining
her ability to meet her basic living expenses. The extraordinary
- 18 -
legal fees resulted from the contentious nature of the divorce
and the division and sale of the marital residence. Section
301.6343-1(b)(4), Proced. & Admin. Regs., expressly authorizes
the consideration of extraordinary circumstances faced by the
taxpayer and any other factor bearing on economic hardship.
Taxpayers are not required to choose among which debt to pay for
determining economic hardship, as intervenor contends. Rather,
the question is whether the legal fees may be taken into account
to determine whether petitioner can meet her basic living
expenses. Under the facts of this case, the legal fees would
place a significant burden on petitioner’s ability to meet her
living expenses. Accordingly, we find that petitioner would
suffer an economic hardship if liability for the 2000 tax is
imposed. This factor does not weigh against relief.
E. Noncompliance With Federal Income Tax Laws
The requesting spouse must make a good faith effort to
comply with Federal income tax laws in the years after the year
for which relief is requested. Rev. Proc. 2000-15, sec.
4.03(2)(e). Although there were allegations of noncompliance in
earlier years, petitioner has complied with her tax obligations
for years after 2000. Accordingly, this factor does not support
denial of relief.
- 19 -
F. Requesting Spouse’s Legal Obligation
The family law court has retained jurisdiction over the
divorce proceeding pending the outcome of this case. Since it
has not ruled on this issue, petitioner remains liable for the
unpaid tax. This factor does not support denial of relief.
II. Factors in Favor of Relief
We next review the following six factors, as listed under
Rev. Proc. 2000-15, sec. 4.03(1), 2000-1 C.B. at 448-449 to
evaluate whether petitioner is entitled to equitable relief under
section 6015(f).
A. Marital Status
Petitioner and intervenor are divorced. This factor is in
petitioner’s favor.
B. Economic Hardship
For the reasons stated above, we conclude that petitioner
would experience economic hardship if section 6015(f) relief were
denied. Accordingly, this factor favors granting relief.
C. Abuse
Petitioner did not contend that she was subject to abuse.
This factor does not apply.
D. No Knowledge or Reason To Know
For the reasons stated above, we find that although she knew
no remittance was made upon the filing of the 2000 return,
- 20 -
petitioner had a reasonable belief that the tax would be paid at
some point. This factor is neutral.
E. Nonrequesting Spouse’s Legal Obligation
As explained above, intervenor does not have a legal
obligation under the divorce decree to pay the outstanding tax
liability. This factor favors granting relief.
F. Attributable to Requesting Spouse
As stated above, the unpaid tax was attributable to
intervenor’s self-employment income. This factor favors relief.
Conclusion
Upon consideration of the entire record, we hold that
petitioner is entitled to relief from joint and several liability
under section 6015(f).
Petitioner’s knowledge that the reported tax was not paid
upon filing of the return is the only factor that potentially
weighs against the granting of relief in this case. The
significance of that knowledge is lessened by petitioner’s
reasonable belief that intervenor would pay the tax at some
point. Although it is unclear whether it is appropriate to
consider payments made after the filing of the return, this
factor alone does not support the denial of innocent spouse
relief. “[W]hen the factors in favor of equitable relief are
unusually strong, it may be appropriate to grant relief under
§ 6015(f) in limited situations where a requesting spouse knew or
- 21 -
had reason to know that the liability would not be paid”. Rev.
Proc. 2000-15, sec. 4.03(2)(b). Accordingly, we hold that
petitioner is entitled to relief from joint and several liability
for 2000 under section 6015(f).
To reflect the foregoing,
Decision will be entered
for petitioner.