T.C. Summary Opinion 2009-56
UNITED STATES TAX COURT
LISA A. VIRGILIO, Petitioner,
AND FRANK A. VIRGILIO, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4323-08S. Filed April 28, 2009.
Lisa A. Virgilio, pro se.
John M. Janusz, for respondent.
RUWE, Judge: This case was heard pursuant to the provisions
of section 74631 of the Internal Revenue Code in effect when the
petition was filed. Pursuant to section 7463(b), the decision to
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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be entered is not reviewable by any other court, and this opinion
shall not be treated as precedent for any other case.
Respondent determined a $1,136 deficiency in petitioner and
intervenor’s 2005 Federal income tax. Neither petitioner nor
intervenor disagrees with the liabilities set forth in the notice
of deficiency. The only issue for decision is whether petitioner
is entitled to full or partial relief from joint and several
liability with respect to the portion of the understatement of
tax attributable to intervenor.
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 New York. At the time the
notice of intervention was filed, intervenor resided in Florida.
Intervenor has since returned to and currently resides in the
State of New York.
Petitioner and intervenor were married in the State of New
York in June 1987. Petitioner and intervenor lived at their
marital residence until sometime in late December 2005.
Petitioner and intervenor filed a joint Federal income tax return
for tax year 2005. However, as of the end of May 2005 the couple
had separated their finances so that intervenor could accumulate
his earnings to move out and get his own apartment.
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On January 26, 2007, petitioner and intervenor entered into
a property settlement and separation agreement (agreement).
Article V of the agreement, in pertinent part, states:
The Husband and Wife warrant that all joint income
tax returns heretofore filed are true and complete, to
the best of their knowledge and belief, and that all
liabilities thereon have been fully paid, and that
there is no pending audit or examination of any
returns. In any event, the Husband or the Wife shall
pay all liability thereafter assessed or imposed with
respect to his or her portion of income on such income
returns and will indemnify the other party against and
hold the other party harmless for all such liabilities
and expenses, losses and damages as may be incurred by
such other party in connection with those returns. All
audits, examinations, suits or other proceedings in
connection with those returns shall be handled at the
cost and expense of the party who caused such liability
and/or audit or by counsel or accounts [sic] selected
by him or her.
Approximately 5 months later petitioner and intervenor divorced.
The judgment of divorce (decree) dated June 28, 2007,
incorporated, but did not merge, the agreement and stated that
the agreement survived in all respects.
On December 3, 2007, respondent separately mailed a notice
of deficiency (notice) to petitioner and intervenor for the
taxable period ending December 31, 2005. Petitioner and
intervenor’s joint 2005 Federal income tax return was incorrect
because it failed to include in income $218 of unemployment
compensation intervenor received (unemployment compensation) and
$3,400 of miscellaneous income intervenor received from R&D
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Construction (construction income).2 The unemployment
compensation and the construction income were reported on Forms
1099, but the forms were not received until after the joint 2005
Federal income tax return had been filed. At the time the joint
2005 Federal income tax return was filed, petitioner knew that
intervenor had worked for R&D Construction “from approximately
July 27th through the end of October and the beginning of
November in ‘05”, and that a Form 1099 would be received.
Petitioner did not, however, know that intervenor had received
unemployment compensation during 2005.
Petitioner sent to respondent a Form 8857, Request for
Innocent Spouse Relief, which respondent received on January 16,
2008. In her request for relief petitioner asserts: She has
been divorced since June 28, 2007; she holds a college degree of
“Legal Associate’s Degree”; she was not a victim of spousal abuse
or domestic violence during 2005; she signed the 2005 Federal
income tax return; she did not have a mental or physical health
problem then or now; her involvement in the preparation of the
tax return was limited to giving the tax documents to the person
who prepared the return; at the time she signed the return, she
2
The joint 2005 Federal income tax return also failed to
reflect a $153 early distribution penalty attributable to a
retirement plan distribution petitioner received. Petitioner
acknowledged that the $153 was attributable to her, and she has
since provided two payments ($80.03 and $100) to the Internal
Revenue Service to address this omission from the joint 2005
Federal income tax return.
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did not know anything was incorrect or missing; she knew that
intervenor had income during 2005 but did not know any amount was
owed to the Internal Revenue Service; she was having financial
problems in 2005; her involvement with household finances was
limited to the use of a joint bank account to which she made
deposits, paid bills, balanced the checkbook, or reviewed the
monthly bank statements; intervenor had never transferred assets
to her; she was unaware of any unemployment benefits intervenor
received in 2005; intervenor’s Forms 1099 from R&D Construction
and for unemployment compensation were received after she had
already filed the joint 2005 Federal income tax return; and the
agreement stated that intervenor would be responsible for any tax
liability attributable to his income.
Before respondent determined whether to grant petitioner
relief, petitioner timely filed a petition raising as an
affirmative defense entitlement to innocent spouse relief with
respect to the unemployment compensation and construction income.
Respondent, pursuant to Rule 325 and King v. Commissioner, 115
T.C. 118 (2000), served notice of this proceeding on intervenor.
Intervenor timely filed a notice of intervention on June 3, 2008.
In the notice of intervention, intervenor asserts that petitioner
should be held liable for not only the $153 early withdrawal
penalty but also half of the tax owed on the unreported income he
received. By exercising his right to intervene, intervenor
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became a party to this case. Sec. 6015(e)(4); King v.
Commissioner, supra. Intervenor, however, neither appeared nor
participated in the trial of this case.
Discussion
Petitioner raised her claim for innocent spouse relief in a
petition for redetermination filed pursuant to section 6213(a).
“In the context of a deficiency proceeding, a claim for innocent
spouse relief historically has been an affirmative defense that
must be set forth in the pleadings.” Butler v. Commissioner, 114
T.C. 276, 287-288 (2000). Our authority to review petitioner’s
affirmative defense that she is entitled to innocent spouse
treatment is governed by our general jurisdiction to consider any
issue that affects the deficiency before us. Id. at 288.
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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Section 6015(b)
To qualify for relief pursuant to section 6015(b)(1), the
requesting spouse must establish that: (A) A joint return was
filed; (B) there was an understatement of tax attributable to
erroneous items of the nonrequesting spouse; (C) at the time of
signing the return, the spouse seeking relief did not know, and
had no reason to know, of the understatement; (D) 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 (E) the requesting spouse
seeks relief within 2 years of the first collection activity.
There is no dispute that petitioner satisfies subparagraphs
(A), (B), and (E) of section 6015(b)(1). Petitioner, however,
does not satisfy subparagraph (C) with respect to the portion of
the understatement of tax attributable to the construction
income. Petitioner testified that she was aware that intervenor
was working during 2005 and that he would receive a Form 1099.
Consequently, we find that petitioner had actual knowledge of the
item giving rise to the portion of the understatement of tax
attributable to the construction income before she signed the
joint 2005 Federal income tax return.
Notwithstanding the individual’s knowledge or reason to know
of some part of the understatement of tax, section 6015(b)(2)
permits the individual to qualify for relief as to the remainder
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of the understatement. Cullen v. Commissioner, T.C. Memo. 2004-
176. Petitioner stated in both her petition and on Form 8857
that she did not know of the unemployment compensation. It has
also been established that although petitioner and intervenor
continued to live together in the marital residence until
December 2005, they had segregated their finances as of the end
of May 2005. Consequently, we find that pursuant to section
6015(b)(1)(C) petitioner has established that she did not know,
and had no reason to know, of the portion of the understatement
of tax attributable to the unemployment compensation.
We turn to subparagraph (D) to determine whether, taking
into account all the facts and circumstances, it is inequitable
to hold petitioner liable for that portion of the understatement
of tax. Both petitioner and intervenor have stated that
intervenor never transferred assets to petitioner. Furthermore,
respondent conceded that petitioner did not receive a significant
benefit from the item giving rise to the deficiency. Thus,
taking into account all the facts and circumstances, we find it
inequitable to hold petitioner liable for the portion of the
understatement of tax attributable to the unemployment
compensation. Accordingly, we find that petitioner is entitled
to relief from joint and several liability pursuant to section
6015(b) for the portion of the understatement of tax attributable
to the unemployment compensation.
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Next, we must decide whether petitioner is entitled to
relief under section 6015(c) or (f) for the portion of the
deficiency attributable to the construction income.
Section 6015(c)
Section 6015(c) limits the liability of a taxpayer, such as
petitioner, who is no longer married and who makes the
appropriate election. 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 under section 6015(c)
is not available to petitioner if respondent demonstrates that
petitioner had actual knowledge of the item giving rise to the
deficiency. Sec. 6015(c)(3)(C). As we have already found,
petitioner had actual knowledge of the item giving rise to the
portion of the understatement of tax attributable to the
construction income. Accordingly, petitioner is not entitled to
section 6015(c) relief for the portion of the understatement of
tax attributable to the construction income.
Section 6015(f)
If a taxpayer does not qualify for relief from joint and
several liability 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
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taxpayers where “it is inequitable to hold the individual liable
for any unpaid tax or any deficiency (or any portion of either)”.
As directed by section 6015(f), the Secretary’s delegate,
the Commissioner, has prescribed guidelines in Rev. Proc. 2003-
61, 2003-2 C.B. 296, for determining whether equitable relief
should be granted. Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at
297-298, lists seven threshold conditions that must be met for a
request for relief under section 6015(f) to be considered. The
seven threshold requirements are: (1) The requesting spouse
filed a joint return for the taxable year for which he or she
seeks relief; (2) relief is not available to the requesting
spouse under section 6015(b) or (c); (3) the requesting spouse
applies for relief no later than 2 years after the date of the
Service’s first collection activity after July 22, 1998, with
respect to the requesting spouse; (4) no assets were transferred
between the spouses as part of a fraudulent scheme by the
spouses; (5) the nonrequesting spouse did not transfer
disqualified assets to the requesting spouse; (6) the requesting
spouse did not file or fail to file the return with fraudulent
intent; and (7) absent enumerated exceptions, the income tax
liability from which the requesting spouse seeks relief is
attributable to an item of the individual with whom the
requesting spouse filed the joint return. Petitioner has
satisfied all seven of the threshold conditions. We must
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therefore determine whether petitioner is entitled to equitable
relief.
Rev. Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298-299,
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 whether full
or partial equitable relief under section 6015(f) should be
granted. The eight nonexclusive factors and their application to
petitioner’s facts and circumstances are summarized below.
1. Petitioner’s Marital Status
At the time she requested relief from joint and several
liability, petitioner was divorced from intervenor. This factor
weighs in favor of granting relief.
2. Economic Hardship
Petitioner has conceded that she would not suffer economic
hardship if relief is not granted. This factor weighs against
granting relief.
3. Knowledge or Reason To Know
As we have already found, petitioner had actual knowledge of
the item giving rise to the deficiency. As a result, this factor
weighs against granting relief.
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4. Nonrequesting Spouse’s Legal Obligation
Under this factor we consider whether the nonrequesting
spouse has a legal obligation to pay the outstanding income tax
liability pursuant to a divorce decree or agreement. The decree,
having incorporated the agreement, makes petitioner and
intervenor liable for the payment of any later imposed or
assessed income tax liability attributable to her or his portion
of income on the income tax return.
The remaining unreported income from which petitioner seeks
relief (the construction income) is attributable to intervenor’s
work with R&D Construction. By the terms of petitioner and
intervenor’s decree and agreement, intervenor (the nonrequesting
spouse) is obligated to pay the portion of the understatement of
tax that is attributable to him; i.e., the unemployment
compensation and the construction income. Accordingly, we find
that this factor weighs in favor of granting relief.
5. Significant Benefit
Respondent has conceded that petitioner did not receive a
significant benefit from the item giving rise to the deficiency.
As a result, this factor weighs in favor of granting relief.
6. Good Faith Effort To Comply With Tax Laws
Respondent has also conceded that petitioner made a good
faith effort to comply with the income tax laws in the taxable
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years following the taxable year in issue, and this factor favors
granting relief. See Harris v. Commissioner, T.C. Memo. 2009-26.
7. Spousal Abuse
Petitioner has not alleged that there was abuse in her
former marriage. Consequently, we find this factor is neutral.
8. Mental or Physical Health
Petitioner concedes that she was not in poor mental or
physical health on the date she signed the return or at the time
that she requested relief. Accordingly, we find this factor is
neutral.
Conclusion
In sum, four factors weigh in favor of granting relief, two
factors are neutral, and two factors weigh against granting
relief. Accordingly, we conclude that petitioner is entitled to
equitable relief pursuant to section 6015(f) on that portion of
the understatement of tax attributable to the construction
income.
To reflect the foregoing,
Decision will be entered
under Rule 155.