T.C. Summary Opinion 2010-119
UNITED STATES TAX COURT
ALINA OLIVERA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5761-09S. Filed August 18, 2010.
Alina Olivera, pro se.
Anna A. Long, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code of 1986, as amended,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
In a final notice of determination respondent denied
petitioner’s claim for section 6015 relief regarding joint and
several liability arising from the 2003 and 2005 joint Federal
income tax returns filed by petitioner and George Navarrete (Mr.
Navarrete). According to that notice, petitioner was not
eligible for relief under section 6015(b), (c), or (f). The
issue for decision is whether petitioner is entitled to relief
from joint and several liability under section 6015.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts, supplemental stipulation of facts, and accompanying
exhibits. Petitioner resided in the State of California when the
petition was filed.
Petitioner and Mr. Navarrete were married in May 1997. They
have two children together. In May 2007, petitioner and Mr.
Navarrete separated, and they were divorced in November 2007.
The judgment for dissolution of marriage entered by the Superior
Court of California, County of Riverside, includes a marital
settlement agreement (MSA) drafted by petitioner. By the terms
of the MSA, Mr. Navarrete is to pay one-half of the “IRS Bills
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2003-2005”, and petitioner is to pay one-half of the “TAX 2003-
2005 IRS obligation.”
In 1999, both petitioner and Mr. Navarrete became registered
nurses. Petitioner holds an associate’s degree and a bachelor of
science degree in nursing. Mr. Navarrete holds an associate’s
degree in nursing.
Petitioner alleges that throughout their marriage Mr.
Navarrete intimidated her, broke objects, belittled her and the
children, had substance abuse issues, and moved in and out of
treatment facilities for bipolar disorder. Other than
petitioner’s testimony, the record does not provide evidence
(testimonial or documentary) of these allegations for the years
in issue.2
During 2003 and 2005, Mr. Navarrete was the primary
breadwinner, working as a registered nurse. In 2003 petitioner
had a business called On Legal Nurse Consulting, while in 2005
petitioner had a business called Spa2YouNet, a mobile day spa
business. Petitioner stated that she began each of these
businesses so that she could be home more to provide care for her
young children and to limit the interactions between the children
and Mr. Navarrete. During 2003 and 2005 petitioner saved
2
Petitioner stated that Mr. Navarrete’s substance abuse
(other than alcohol) began in 2006, though “[h]e was starting to
drink before then, but it was out of the house.” Petitioner
obtained a temporary restraining order against Mr. Navarrete in
June 2007.
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receipts for expenses related to the businesses and placed them
in folders to be used in the preparation of tax returns.
Petitioner handled most of the financial affairs of the
businesses.
During 2003 and 2005 petitioner and Mr. Navarrete shared
responsibility for the family’s finances; however, petitioner was
the one who reconciled the bank statements at the end of each
month.
Petitioner and Mr. Navarrete timely filed their 2003 and
2005 joint Federal income tax returns. Both returns were
prepared by Mr. Navarrete using tax preparation software. For
both 2003 and 2005, petitioner provided Mr. Navarette with
receipts for her businesses. After the returns were completed,
they were at all times available to petitioner for review on the
household computer.
Attached to the 2003 tax return is a Schedule C, Profit or
Loss From Business, for On Legal Nurse Consulting, of which
petitioner was the proprietor. The Schedule C reported zero
income and a net loss of $46,242. Also attached to the return
are two Forms 2106, Employee Business Expenses. The first Form
2106 bears Mr. Navarrete’s name and claimed unreimbursed employee
business expenses of $10,895 for his occupation as a registered
nurse. The second Form 2106 bears petitioner’s name and claimed
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unreimbursed employee business expenses of $2,030 for her
occupation as a registered nurse.
Attached to the 2005 tax return is a Schedule C for
Spa2YouNet, of which petitioner was the proprietor. The Schedule
C reported gross receipts of $6,816 and a net loss of $29,207.
Also attached to the return is a Form 2106 on which Mr. Navarrete
claimed unreimbursed employee business expenses of $30,107 for
his occupation as a registered nurse.
For 2004 petitioner filed a return using the married filing
separately filing status and claiming a minimal Schedule C net
loss.
In 2006, the Internal Revenue Service selected petitioner’s
2005 joint Federal income tax return for audit, and in early 2007
the audit was expanded to include 2003. Petitioner actively
participated in the audit of both years whereas Mr. Navarrete
took a more secondary role. During the audit process, innocent
spouse relief provisions were discussed, but neither petitioner
nor Mr. Navarrete expressed a desire to pursue relief.
Ultimately, petitioner and Mr. Navarrete agreed with the examiner
that they owed a $5,566 deficiency and a $1,473 accuracy-related
penalty for 2003. On February 21, 2007, petitioner sent
respondent a request for an installment agreement for the 2003
liability, which agreement respondent accepted.
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In a notice of deficiency dated May 25, 2007, respondent
determined a deficiency of $4,426 and an accuracy-related penalty
of $885.20 for 2005. Neither petitioner nor Mr. Navarrete filed
a petition for redetermination.
For both 2003 and 2005 respondent disallowed deductions
claimed (1) on petitioner’s Schedules C, for car and truck
expenses and other expenses; (2) on the Schedules A, Itemized
Deductions, for gambling losses, mortgage interest, tax
preparation fees, investment expenses, job search expenses, and
union and professional dues; (3) for unreimbursed employee
business expenses; and (4) for educator expenses. For 2005
respondent disallowed deductions for tuition and fees and self-
employed health insurance expenses. Respondent also disallowed
the additional child tax credit for 2005.
On April 8, 2008, petitioner filed a Form 8857, Request for
Innocent Spouse Relief. On her Form 8857, petitioner admitted
that she signed the income tax returns and did not claim that she
signed them under duress. Petitioner also admitted on the Form
8857 that at the time she signed the returns she was concerned
about the refund of all income tax withheld, but that Mr.
Navarrete assured her that the returns were accurate. Finally,
the financial statement on the Form 8857 indicates that
petitioner has no income but incurs expenses in excess of $4,000
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per month for the maintenance of a household for herself and her
children.
In the final notice of determination dated January 29, 2009,
respondent denied petitioner’s request for relief under section
6015.
Discussion
In general, spouses may elect to file a joint Federal income
tax return for a year even if one spouse has no obligation to
file a return for that year. Sec. 6013(a). After electing to
file a joint Federal income tax return, each spouse is jointly
and severally liable not only for the entire tax due, but also
for any deficiency subsequently determined. Sec. 6013(d)(3);
Butler v. Commissioner, 114 T.C. 276, 282 (2000). If certain
requirements are met, however, an individual may be relieved of
joint and several liability under section 6015. Except as
otherwise provided in section 6015, the taxpayer bears the burden
of proving his or her entitlement to relief. Rule 142(a); Alt v.
Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34
(6th Cir. 2004).
There are three types of relief available under section
6015. In general, section 6015(b) provides full or apportioned
relief from joint and several liability, section 6015(c) provides
proportionate tax relief to divorced or separated taxpayers, and
in certain circumstances section 6015(f) provides equitable
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relief from joint and several liability if relief is not
available under subsection (b) or (c).
A. Section 6015(b)
Under section 6015(b), a requesting spouse may be relieved
of joint and several liability from an understatement of tax to
the extent that the understatement is attributable to the
nonrequesting spouse. The understatements on petitioner’s joint
returns for 2003 and 2005 are in large part attributable to the
deductions claimed on petitioner’s Schedules C. With respect to
any understatement attributable to Mr. Navarrete, petitioner must
establish, inter alia, that she did not know and had no reason to
know that there was an understatement. See sec. 6015(b)(1)(C).
A spouse seeking relief has reason to know of the
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 * * * understatement.” Price v.
Commissioner, 887 F.2d 959, 965 (9th Cir. 1989). Factors to
consider in analyzing whether the spouse had “reason to know” of
the 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
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culpable spouse’s evasiveness and deceit concerning the couple’s
finances. Id.; Wiener v. Commissioner, T.C. Memo. 2008-230.
At the time the 2003 and 2005 tax returns were filed,
petitioner was a college graduate. Petitioner was involved in
the household financial affairs and was primarily responsible for
the financial affairs for her Schedule C businesses. On the
other hand, petitioner and Mr. Navarrete did not have an
obviously apparent change in lifestyle during the years in issue.
However, the recitation of the foregoing facts does not end
the required analysis. Under Price v. Commissioner, supra at
965-966, a taxpayer has reason to know of an understatement if
she has a duty to inquire and fails to satisfy that duty. The
requesting spouse has a duty to inquire when she knows “enough
facts to put her on notice that such an understatement exists.”
Id. A tax return claiming a large deduction that significantly
reduces a couple’s tax liability generally puts the taxpayer who
joins in filing a joint return on notice that the return may
contain an understatement. Wiener v. Commissioner, supra; see
also Levin v. Commissioner, T.C. Memo. 1987-67. The requesting
spouse is deemed to have constructive knowledge of the
understatement if she fails to inquire. Price v. Commissioner,
supra at 965-966; see also Von Kalinowski v. Commissioner, T.C.
Memo. 2001-21 (requesting spouse found to possess constructive
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knowledge of the understatement where income of $370,263 was
offset by losses of $228,133).
Petitioner did not prepare the tax returns; however, she
provided receipts to Mr. Navarrete to facilitate the completion
of the returns. And during the audit process petitioner told the
IRS examiner that she reviewed the completed returns and signed
them. In addition, on her Form 8857 petitioner stated that when
she signed the returns she was uncertain why she and Mr.
Navarrete were receiving such large refunds.
In contrast, petitioner testified at trial that she did not
review the returns when she signed them.3 However, we are unable
to accept petitioner’s testimony at face value. See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986). We find that when
petitioner signed the returns, she reviewed them, at least in a
cursory fashion, and therefore had a duty to inquire.
Petitioner’s failure to inquire does not insulate her from
joint and several liability. See Price v. Commissioner, supra at
965-966; see also Von Kalinowski v. Commissioner, supra.
Accordingly, petitioner is not entitled to relief from joint
and several liability under section 6015(b).
3
When asked at trial whether she trusted Mr. Navarrete to
fill out the tax returns accurately, petitioner stated that “it
wasn’t my priority.” Petitioner explained further that she
“didn’t even review [returns] when they were being prepared [by a
paid preparer] because I trusted it was being prepared
correctly.”
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B. Section 6015(c)
Under section 6015(c), if the requesting spouse is no longer
married to or is legally separated from the spouse with whom she
filed the joint return, the requesting spouse may elect to limit
her liability for a deficiency to that portion of the liability
which is properly allocable to her under section 6015(d).
At the time petitioner filed her request for relief on April
8, 2008, she and Mr. Navarrete were divorced; therefore,
petitioner was eligible to elect relief under section 6015(c)
when she filed her request.
Generally, items giving rise to a deficiency on a joint
return are allocated between spouses as if separate returns had
been filed. Sec. 6015(d)(3)(A); see also sec. 1.6015-3(d)(2),
Income Tax Regs. Under the flush language of section 6015(a),
any allocation under section 6015(d)(3) is made without regard to
community property laws. Charlton v. Commissioner, T.C. Memo.
2001-76.
On the 2003 return respondent disallowed deductions
attributable to petitioner for job search expenses claimed on
Schedule A, car and truck expenses and other expenses claimed on
Schedule C, and unreimbursed employee business expenses claimed
on Form 2106. Because these deductions are allocable to
petitioner, she is not entitled to section 6015(c) relief with
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respect to them. See sec. 6015(d)(3)(A); see also sec. 1.6015-
3(d)(2)(iv), Income Tax Regs.
Also for 2003 respondent disallowed deductions allocable to
Mr. Navarrete for unreimbursed employee business expenses and
gambling losses. The remaining deductions disallowed for 2003
for mortgage interest expenses, tax preparation fees, investment
expenses, union and professional dues, and educator expenses are
(consistent with respondent’s view) attributable equally to
petitioner and Mr. Navarrete.
On the 2005 return respondent disallowed deductions
attributable to petitioner for car and truck expenses claimed on
Schedule C and for self-employed health insurance expenses.
Petitioner’s gross receipts were also increased by an amount not
reported on her Schedule C. Because these items are allocable to
petitioner, she is not entitled to section 6015(c) relief with
respect to them. See sec. 6015(d)(3)(A); see also sec. 1.6015-
3(d)(2)(iii) and (iv), Income Tax Regs.
For 2005 respondent disallowed a deduction allocable to Mr.
Navarrete for unreimbursed employee business expenses. The
remaining deductions disallowed for 2005 for tuition and fees and
educator expenses are (consistent with respondent’s view)
attributable equally to petitioner and Mr. Navarrete.
An election under section 6015(c) is ineffective with
respect to any portion of a deficiency if the Commissioner proves
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by a preponderance of the evidence that the requesting spouse had
actual knowledge, when signing the return, of an item giving rise
to a deficiency that is otherwise allocable to the nonrequesting
spouse. Sec. 6015(c)(3)(C); Hopkins v. Commissioner, 121 T.C.
73, 86 (2003).4 In cases involving erroneous deductions, a
spouse is deemed to have actual knowledge of an item giving rise
to a deficiency if she had actual knowledge of the factual
circumstances that made the deduction unallowable. King v.
Commissioner, 116 T.C. 198, 204 (2001). Actual knowledge of the
tax laws or legal consequences of the operative facts is not
required. Id.; Cheshire v. Commissioner, 115 T.C. 183, 196-197
(2000), affd. 282 F.3d 326 (5th Cir. 2002).
We find that petitioner had actual knowledge, when signing
the returns, of the items allocable to Mr. Navarrete giving rise
to the deficiencies. Although petitioner alleges that she did
not review the returns, she made at least a cursory review of
them.
In addition, petitioner had actual knowledge of the factual
circumstances making unallowable both the deductions attributable
solely to Mr. Navarrete and those attributable equally to
4
The requirement that a taxpayer not have actual knowledge
of an item is eliminated where the taxpayer signs the return
under duress. Sec. 6015(c)(3)(C). At trial petitioner alleged
that she signed the returns under duress; however, on her Form
8857 petitioner did not indicate that she signed the returns
under duress. Based on the record as a whole, we find that
petitioner did not sign the returns under duress.
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petitioner and Mr. Navarrete. For example, at trial petitioner
stated that neither she nor Mr. Navarrete was an educator during
the years in issue and that she did not think she or Mr.
Navarrete would have incurred unreimbursed employee business
expenses as registered nurses.
Accordingly, petitioner is not entitled to section 6015(c)
relief.
C. Section 6015(f)
Section 6015(f) permits relief from joint and several
liability where “it is inequitable to hold the individual liable
for any unpaid tax or any deficiency (or any portion of either)”.
Sec. 6015(f)(1). We review de novo petitioner’s entitlement to
equitable relief under section 6015(f). See Porter v.
Commissioner, 132 T.C. 203, 210 (2009).
Pursuant to section 6015(f), the Commissioner has prescribed
revenue procedure guidelines to help IRS employees determine
whether a requesting spouse is entitled to relief from joint and
several liability. See Rev. Proc. 2003-61, 2003-2 C.B. 296,
modifying and superseding Rev. Proc. 2000-15, 2000-1 C.B. 447.
The Court consults these guidelines when reviewing the IRS’
denial of relief. See Washington v. Commissioner, 120 T.C. 137,
147-152 (2003).
According to Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at
297-298, a requesting spouse must satisfy seven conditions
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(threshold conditions) before the Commissioner will consider a
request for relief under section 6015(f). The threshold
conditions of this section are stated in the conjunctive, and
each condition must be satisfied to be eligible for relief under
section 6015(f). Id.
As relevant herein Rev. Proc. 2003-61, sec. 4.01(7), 2003-2
C.B. at 297-298, provides that the income tax liability from
which the requesting spouse seeks relief must be attributable to
an item of the nonrequesting spouse, unless one of four
enumerated exceptions applies. Petitioner is, therefore, not
entitled to relief under section 6015(f) for the items
attributable solely to her unless one of the enumerated
exceptions applies.
The only exception relevant to petitioner’s case applies if
the requesting spouse establishes that he or she was the victim
of abuse before the time the return was signed and that fear of
retaliation prevented the requesting spouse from challenging the
treatment of items on the return. See id. Abuse is not limited
to physical abuse and may include verbal and mental abuse.
Nihiser v. Commissioner, T.C. Memo. 2008-135. An allegation of
abuse, however, requires substantiation, or at least specificity.
Id.; see also, e.g., Downs v. Commissioner, T.C. Memo. 2010-165
(finding no abuse when reported incidents of claimed abuse,
harassment, and stalking occurred after the years in issue); Fox
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v. Commissioner, T.C. Memo. 2006-22 (weighing abuse as a positive
factor where a police report corroborated the requesting spouse’s
claim of assault); Knorr v. Commissioner, T.C. Memo. 2004-212
(finding no abuse where the requesting spouse provided only
generalized claims of physical and emotional abuse); Collier v.
Commissioner, T.C. Memo. 2002-144 (finding no abuse in absence of
specific details).
In the instant case, corroboration supporting petitioner’s
claim of abuse by Mr. Navarrete indicates only that abuse
occurred sometime after the returns at issue were signed. See
Downs v. Commissioner, supra. Therefore, we are unable to
conclude that petitioner has satisfied all of the threshold
requirements necessary for relief under section 6015(f) for those
items attributable solely to her.
However, petitioner has satisfied the threshold conditions
with respect to those items attributable solely to Mr. Navarrete
and, consistent with respondent’s conclusions, for one-half of
those items attributable equally to petitioner and Mr. Navarrete.
Therefore, petitioner may still be eligible for relief under
section 6015(f) for these items.
Rev. Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298-299,
contains a nonexclusive list of factors, based on the facts and
circumstances, that the Commissioner will consider in determining
whether to grant equitable relief under section 6015(f). The
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nonexclusive list of factors includes: (1) Whether the
requesting spouse is separated or divorced from the nonrequesting
spouse; (2) whether the nonrequesting spouse would suffer
economic hardship if not granted relief; (3) whether the
requesting spouse knew or had reason to know of the
understatement; (4) whether the nonrequesting spouse had a legal
obligation to pay the outstanding tax liability pursuant to a
divorce decree or agreement; (5) whether the requesting spouse
received a significant benefit from the nonpayment of the tax
liability; and (6) whether the requesting spouse has made a good
faith effort to comply with the tax laws for the tax years
following the year to which the request for such relief relates.
Id. sec. 4.03(2)(a), 2003-2 C.B. at 298.
Several factors favor granting petitioner relief under
section 6015(f). Petitioner and Mr. Navarrete were divorced when
petitioner filed her request for relief. Petitioner has
established that she would suffer economic hardship if relief is
not granted. Petitioner has complied with Federal income tax
laws in the years following the taxable years for which she seeks
relief. On the other hand, the knowledge factor weighs against
granting relief.
In addition, Rev. Proc. 2003-61, sec. 4.03(2)(b), 2003-2
C.B. at 299, lists two positive factors that the Commissioner
will consider in favor of granting relief if present. Those
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factors are: (1) Whether the nonrequesting spouse abused the
requesting spouse, and (2) whether the requesting spouse was in
poor mental or physical health when signing the return or
requesting relief.
As we have previously found, petitioner has not proven abuse
before the time that the returns were signed. In addition,
petitioner did not assert or demonstrate that she was in poor
mental or physical health when signing the returns or requesting
relief. Therefore, these factors are neutral.
On balance, we conclude that it would be inequitable to hold
petitioner liable for the tax liabilities arising from the 2003
and 2005 joint Federal income tax returns that are either (1)
attributable solely to Mr. Navarrete or (2) Mr. Navarrete’s
portions of the liabilities that are attributable equally to
petitioner and Mr. Navarrete. Accordingly, for 2003 and 2005
petitioner is entitled to partial relief from joint and several
liability under section 6015(f) for those items attributable
solely to Mr. Navarrete and for one-half of those items
attributable equally to petitioner and Mr. Navarrete.
Conclusion
We have considered all of the arguments made by the parties,
and, to the extent that we have not specifically addressed them,
we conclude that they are unpersuasive.
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Finally, we observe that our holding does not preclude
petitioner from requesting a collection alternative, such as an
installment agreement, offer-in-compromise, or currently not
collectible status.
To reflect the foregoing,
Decision will be entered
under Rule 155.