T.C. Summary Opinion 2010-106
UNITED STATES TAX COURT
MAGDALENE H. SMOLEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13018-08S. Filed July 29, 2010.
Matthew F. Sarnell, for petitioner.
Michelle Maniscalco, for respondent.
WELLS, 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 be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
1
All section references are to the Internal Revenue Code in
effect at all relevant times. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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case. This case arises from a request for relief pursuant to
section 6015(f) with respect to petitioner’s joint income tax
liability for 2005. Respondent determined that petitioner was
not entitled to relief from joint and several liability under
section 6015(f). Petitioner timely filed a petition with the
Court. The issue to be decided is whether petitioner is entitled
to equitable relief under section 6015(f) for her 2005 tax year.
Background
Some of the facts and certain exhibits have been stipulated.
The facts stipulated by the parties are incorporated herein by
reference and found accordingly. At the time the petition was
filed, petitioner resided in New York.
Petitioner and her husband, Robert Dreilinger, were married
in 1999. Mr. Dreilinger worked as an emergency room physician
until he suffered a permanent disability in 2003. Mr. Dreilinger
suffers from back problems. Petitioner is employed as an
assistant administrator at a nursing home. Petitioner continues
to live with and file joint tax returns with Mr. Dreilinger.
Petitioner and Mr. Dreilinger maintain separate bank and
brokerage accounts. Petitioner owns their home and pays all of
their living expenses. During late 2003 Mr. Dreilinger began
receiving disability payments. In the preparation of their 2003
Federal income tax return (2003 return), Mr. Dreilinger omitted
an income item.
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Petitioner and Mr. Dreilinger filed a joint Federal income
tax return for their 2005 tax year (2005 return). During 2005
Mr. Dreilinger received distributions from his retirement
accounts that were not reported on their joint income tax
return.2
On March 12, 2007, respondent mailed Notice CP2000 for
petitioner’s 2005 tax year, indicating an increase in tax of
$12,894, a payment increase of $707, penalties of $2,437 and
interest of $1,170 for a total proposed balance due of $15,794.
On March 22, 2007, petitioner and Mr. Dreilinger signed Notice
CP2000 indicating that they agreed with the total proposed
balance due.
On May 16, 2007, petitioner signed and submitted to
respondent Form 8857, Request for Innocent Spouse Relief, for her
2005 tax year. On Form 12510, Questionnaire for Requesting
Spouse, petitioner indicated that Mr. Dreilinger denied receiving
any unreported income and that she has no access to Mr.
Dreilinger’s accounts.
Respondent denied petitioner’s request for section 6015(f)
relief, stating that the claim did not meet the statutory
requirements. Petitioner filed Form 12509, Statement of
2
Petitioner concedes that these amounts should have been
included on her and Mr. Dreilinger’s joint Federal income tax
return but contests her responsibility for the tax associated
with the unreported retirement income.
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Disagreement, claiming that Mr. Dreilinger wrote to respondent
that petitioner had no knowledge of the unreported income and
that he was taking full responsibility.
Respondent’s Appeals Officer Mary Ann Halloway (Ms.
Halloway) reviewed petitioner’s Form 12509. According to Ms.
Halloway’s notes, Mr. Dreilinger omitted $46,413 of retirement
income from the 2005 return. Ms. Halloway discovered that Mr.
Dreilinger had unreported retirement income for 2004 as well. On
the basis of her review of the record, Ms. Halloway determined
that petitioner was ineligible for innocent spouse relief
pursuant to section 6015(f). Petitioner timely filed a petition
in this Court requesting relief pursuant to section 6015(f).
Discussion
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. However, section 6015(a)
allows an individual who has filed a joint return to seek relief
from joint and several liability. A requesting spouse may seek
either (1) relief from liability pursuant to section 6015(b) if
he or she can show that he or she did not know or have reason to
know of unreported income or inflated deductions; or (2) to have
the tax liability allocated between the requesting spouse and his
or her estranged or former spouse pursuant to section 6015(c).
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See Billings v. Commissioner, 127 T.C. 7, 11 (2006). A
requesting spouse may also seek relief pursuant to section
6015(f) if he or she is ineligible for relief pursuant to
subsection (b) or (c) and can show that “‘taking into account all
the facts and circumstances, it is inequitable to hold [him]
liable for any unpaid tax or deficiency (or any portion of
either).’” See Billings v. Commissioner, supra at 11 (quoting
section 6015(f)) (alteration in original). Petitioner makes her
claim for innocent spouse relief under section 6015(f).
Except as otherwise provided in section 6015, the requesting
spouse 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). We apply a de novo standard and scope of review
to the Commissioner’s determinations pursuant to section 6015(b),
(c), and (f). Porter v. Commissioner, 132 T.C. 203, 210 (2009);
Alt v. Commissioner, supra at 313-316.
Relief pursuant to section 6015(b) or (c) is premised on the
existence of a deficiency or an understatement of tax. Sec.
6015(b)(1)(B), (c)(1); Block v. Commissioner, 120 T.C. 62, 65-66
(2003). The parties agree that petitioner is not eligible for
relief pursuant to section 6015(b) or (c), and petitioner seeks
relief only pursuant to section 6015(f).
The Commissioner has issued revenue procedures listing the
factors to be considered in considering relief under section
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6015(f). Rev. Proc. 2003-61, 2003-2 C.B. 296, modifying and
superseding Rev. Proc. 2000-15, 2000-1 C.B. 447.3 Rev. Proc.
2003-61, sec. 4.01, 2003-2 C.B. at 297, sets forth seven
threshold conditions that individuals seeking relief under
section 6015(f) must satisfy. Respondent concedes that
petitioner satisfies each of the seven threshold conditions.
Additionally, Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at
298, sets forth a safe harbor in which relief will ordinarily be
granted under section 6015(f) with respect to an underpayment of
a properly reported liability.4 To qualify for relief under Rev.
Proc. 2003-61, sec. 4.02(1), the requesting spouse must: (1) No
longer be married to, be legally separated from, or not have been
a member of the same household as the other spouse at any time
during the 12-month period ending on the date of the request for
relief; (2) have had no knowledge or reason to know when signing
the returns that the other spouse would not pay the tax
3
The guidelines set forth in Rev. Proc. 2003-61, 2003-2 C.B.
296, are effective for requests for relief filed, as in the
instant case, on or after Nov. 1, 2003. Id. Sec. 7, 2003-2 C.B.
at 299.
4
We note that petitioner signed Notice CP2000, agreeing to
the increase in tax. We need not decide whether the signing of
the Notice CP2000 recharacterized the joint income tax liability
in issue from an understatement or deficiency to an underpayment,
because petitioner is ineligible for relief under the factors set
forth in Rev. Proc. 2003-61, sec. 4.02 and 4.03, 2003-2 C.B. at
298-299. While a conclusion that an understatement or a
deficiency existed would allow petitioner to claim relief
pursuant to sec. 6015(b), the parties have agreed that petitioner
is not entitled to relief under sec. 6015(b).
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liability; and (3) suffer economic hardship if relief is not
granted. Petitioner and Mr. Dreilinger are not divorced, legally
separated, or no longer members of the same household.
Accordingly, petitioner is not entitled to relief under the safe
harbor of Rev. Proc. 2003-61, sec. 4.02.
Where the requesting spouse fails to qualify under Rev.
Proc. 2003-61, sec. 4.02, the Commissioner may still grant
equitable relief under section 6015(f). Rev. Proc. 2003-61, sec.
4.03, 2003-2 C.B. at 298, contains a nonexclusive list of factors
that the Commissioner will take into account in determining
whether to grant equitable relief. Those factors are: (1)
Marital status; (2) economic hardship; (3) in the case of an
underpayment, knowledge or reason to know that the nonrequesting
spouse would not pay the liability, or in the case of a liability
that arose from a deficiency, knowledge or reason to know of the
item giving rise to the deficiency; (4) the nonrequesting
spouse’s legal obligation; (5) significant benefit; and (6)
compliance with income tax laws. Id. sec. 4.03(2)(a). We
consider those factors and any other relevant facts and
circumstances in determining whether the taxpayer is entitled to
innocent spouse relief. Sec. 6015(f). No single factor is
determinative, and all factors are to be considered and weighed
appropriately. See Haigh v. Commissioner, T.C. Memo. 2009-140.
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The first factor addresses the requesting spouse’s marital
status. Petitioner remains married to Mr. Dreilinger.
Consequently, the marital status factor is negative. See Olson
v. Commissioner, T.C. Memo. 2009-294.
The second factor addresses economic hardship if relief from
joint and several liability is not granted. See Rev. Proc. 2003-
61, sec. 4.03(2)(a)(ii). The Commissioner is directed to base
his determination of whether a requesting spouse will suffer
economic hardship on rules similar to those provided in section
301.6343-1(b)(4), Proced. & Admin. Regs. Id. That regulation
provides the following:
(4) Economic hardship.--(i) General rule.--* * * This
condition applies if satisfaction * * * will cause an
individual taxpayer to be unable to pay his or her
reasonable basic living expenses. The determination of a
reasonable amount for basic living expenses will be made by
the director and will vary according to the unique
circumstances of the individual taxpayer. Unique
circumstances, however, do not include the maintenance of an
affluent or luxurious standard of living.
(ii) Information from taxpayer.--In determining a
reasonable amount for basic living expenses the director
will consider any information provided by the taxpayer
including--
(A) The taxpayer’s age, employment status and
history, ability to earn, number of dependents, and
status as a dependent of someone else;
(B) The amount reasonably necessary for food,
clothing, housing (including utilities, home-owner
insurance, home-owner dues, and the like), medical
expenses (including health insurance), transportation,
current tax payments (including federal, state, and
local), alimony, child support, or other court-ordered
payments, and expenses necessary to the taxpayer’s
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production of income (such as dues for a trade union or
professional organization, or child care payments which
allow the taxpayer to be gainfully employed);
(C) The cost of living in the geographic area in
which the taxpayer resides;
(D) The amount of property exempt from levy which
is available to pay the taxpayer’s expenses;
(E) Any extraordinary circumstances such as
special education expenses, a medical catastrophe, or
natural disaster; and
(F) Any other factor that the taxpayer claims
bears on economic hardship and brings to the attention
of the director.
It is the taxpayer’s burden to demonstrate that her expenses
qualify as basic living expenses and that those expenses are
reasonable. Monsour v. Commissioner, T.C. Memo. 2004-190.
Petitioner made no showing of economic hardship. Petitioner
testified that she pays all of the household expenses, but she
did not show that she would be unable meet her basic living
expenses if she were not relieved of the 2005 joint income tax
liability. Petitioner’s argument was that it would be “unjust”
to hold her liable because the liability from which petitioner
requests relief is Mr. Dreilinger’s liability. This argument is
irrelevant to a determination of economic hardship.
Additionally, petitioner testified that her husband, who receives
his own income, is willing and able to pay the outstanding
liability. On the basis of the record, we conclude that
petitioner will not suffer economic hardship if relief is not
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granted. The economic hardship factor therefore weighs against
granting the requested relief. See Olson v. Commissioner, supra.
The third factor addresses the requesting spouse’s knowledge
or reason to know of the underpayment or item giving rise to the
deficiency.5 See Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii). In
the case of an underpayment, the inquiry regards whether “the
requesting spouse did not know or had no reason to know that the
nonrequesting spouse would not pay the income tax liability.”
Id. sec. 4.03(2)(a)(iii)(A). In the case of a deficiency, the
inquiry regards whether “the requesting spouse did not know and
had no reason to know of the item giving rise to the deficiency.”
Id. sec. 4.03(2)(a)(iii)(B). In either case, the Commissioner is
directed to base his determination on the following:
the requesting spouse’s level of education, any deceit or
evasiveness of the nonrequesting spouse, the requesting
spouse’s degree of involvement in the activity generating
the income tax liability, the requesting spouse’s
involvement in business and household financial matters, the
requesting spouse’s business or financial expertise, and any
lavish or unusual expenditures compared with past spending
levels. [Id. sec. 4.03(2)(a)(iii)(C).]
Petitioner does not appear to have actual knowledge of Mr.
Dreilinger’s retirement income. The retirement account belonged
solely to Mr. Dreilinger, and she and Mr. Dreilinger kept
separate finances. Neither party offered evidence regarding
5
See supra note 4. We need not decide whether petitioner’s
outstanding liability is an underpayment or an understatement
because petitioner is ineligible for relief under either
analysis.
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lavish or unusual expenditures compared with past spending
levels.
While petitioner may or may not have had actual knowledge of
Mr. Dreilinger’s retirement income, she had reason to know of the
retirement income. Petitioner holds a master’s degree and is the
assistant administrator at a nursing home. Her education and
occupation suggest business experience. Additionally, petitioner
pays all of the household bills.
Petitioner testified that Mr. Dreilinger suffers from
cognition problems and that she could not trust him to perform
simple tasks. Petitioner offered general testimony regarding Mr.
Dreilinger, but nothing specific, such as Mr. Dreilinger’s
disease or disorder and what care he receives, and she failed to
offer any other evidence to support her contention. However,
assuming Mr. Dreilinger’s cognition problems existed, petitioner
failed to explain why she did not independently monitor his
sizable banking and brokerage accounts. Mr. Dreilinger received
over $44,000 in unreported retirement income during 2005.
As to Mr. Dreilinger’s deceitfulness, petitioner had warning
signals. While Mr. Dreilinger may have had a tendency to hide
petitioner’s mail, petitioner failed to testify as to the actions
she took, if any, to assure the accurate reporting of their tax
information. According to Ms. Halloway’s notes, five separate
Forms 1099-R, Distributions From Pensions, Annuities, Retirement
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or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., were
issued disclosing Mr. Dreilinger’s retirement income.6 Moreover,
petitioner learned that Mr. Dreilinger had omitted retirement
income from the 2003 return around the time the 2005 return was
filed. While petitioner testified that she could not be sure
whether she learned of the 2003 omitted income before or after
signing the 2005 return, we conclude that she knew or should have
known of the income before signing the 2005 return because she
and Mr. Dreilinger filed the return after receiving an extension
of time to file. See sec. 1.6081-4T(a), Temporary Income Tax
Regs., 70 Fed. Reg. 67359 (Nov. 7, 2005), (allowing an automatic
6-month extension of time to file an individual return).
According to Ms. Halloway’s notes, Mr. Dreilinger also had
unreported retirement income from their 2004 tax year. Finally,
petitioner testified that Mr. Dreilinger lends money to his
parents “all the time”. Mr. Dreilinger’s loans to his parents
could also have alerted petitioner to an undisclosed income
source. On the basis of the record, we conclude that petitioner
should have known of Mr. Dreilinger’s unreported retirement
income.
Mr. Dreilinger received over $44,000 in unreported income
during 2005. However, petitioner testified that Mr. Dreilinger
6
Ms. Halloway did not testify. Petitioner did not object to
the admission of Ms. Halloway’s report or discredit her report in
any way.
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could not account for his own funds and she could not trust him
to perform simple tasks. Petitioner also failed to offer
evidence regarding Mr. Dreilinger’s other sources of reported
income, if any, and whether such sources would have been
sufficient to support loans to his parents. On the basis of the
record, we conclude that petitioner had reason to known that Mr.
Dreilinger would not pay the outstanding tax liability.
Therefore, the knowledge factor weighs against petitioner.
The fourth factor addresses the nonrequesting spouse’s legal
obligation to pay pursuant to a divorce decree or agreement. See
Rev. Proc. 2003-61, sec. 4.03(2)(a)(iv). Petitioner and Mr.
Dreilinger are still married; therefore the “legal obligation”
factor weighs against granting relief to petitioner; i.e. the
obligation remains a joint obligation. See Olson v.
Commissioner, T.C. Memo. 2009-294.
The fifth factor addresses whether the nonrequesting spouse
significantly benefited from the unpaid tax liability. See Rev.
Proc. 2003-61, sec. 4.03(2)(a)(v). There is no evidence in the
record to indicate that petitioner did not receive any
significant benefit from Mr. Dreilinger’s unreported retirement
income. Petitioner bears the burden of establishing the
evidentiary basis for relief. Therefore, the significant benefit
factor weighs against granting relief.
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The sixth factor addresses compliance with income tax laws
and whether the requesting spouse has made a good faith effort to
comply with income tax laws in the tax years after the tax year
in issue. See id. sec. 4.03(2)(a)(vi). Respondent concedes
petitioner’s compliance in filing subsequent returns, which
weighs in favor of granting relief.
Additionally, Rev. Proc. 2003-61, sec. 4.03(2)(b), lists two
positive factors that the Commissioner will consider in favor of
granting equitable relief, if present. Those factors are: (1)
Whether the nonrequesting spouse abused the requesting spouse
(the abuse factor); and (2) whether the requesting spouse was in
poor mental or physical health when signing the return or
requesting relief (the mental or physical health factor).
As to the abuse factor, the record does not establish that
Mr. Dreilinger abused petitioner. As to the mental or physical
health factor, petitioner did not assert or demonstrate that she
was in poor mental or physical health when requesting relief or
signing the return; rather, petitioner merely claimed anguish
over Mr. Dreilinger’s condition. Therefore, those two factors
are inapplicable.
In sum, on the basis of our examination of the entire record
before us, we conclude that petitioner has failed to carry her
burden of showing that she is entitled to relief under section
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6015(f) with respect to the portion of the liability relating to
the retirement income for the tax year 2005.
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we conclude that
they are without merit, irrelevant, or moot.
To reflect the foregoing,
Decision will be entered
for respondent.