T.C. Summary Opinion 2011-78
UNITED STATES TAX COURT
KENNETH P. SHANKS, Petitioner, AND
LYDIA L. SHANKS, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24592-09S. Filed June 29, 2011.
Kenneth P. Shanks, pro se.
Lydia L. Shanks, pro se.
Horace Crump, for respondent.
THORNTON, 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
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case. Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended.
The issue for decision is whether for 2007 petitioner is
entitled to relief from joint and several liability under section
6015.
Background
Kenneth P. Shanks (petitioner) and Lydia L. Shanks
(intervenor) (collectively, the Shankses) married in 2000 and
separated in 2008. They have two children.
During 2007 petitioner worked as a produce clerk for Kroger
Limited (Kroger), earning $31,077 of wages. During 2007
intervenor worked for Staffers, Inc. (Staffers), earning $2,778
of wages. In addition, during 2007 intervenor received $6,776 of
nonemployee compensation from ExamOne World Wide, Inc. (ExamOne),
and $1,386 of unemployment benefits from the Mississippi
Department of Employment Security. Intervenor deposited her
ExamOne earnings and her unemployment benefits in the Shankses’
joint checking account, but petitioner did not review the bank
records; he relied upon intervenor to keep the bank balances.
Although petitioner knew that intervenor performed services for
ExamOne and received unemployment benefits, he did not know the
amounts of these items that intervenor received in 2007.
The Shankses filed a joint Federal income tax return for
taxable year 2007. Jackson Hewitt Tax Service prepared the
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return using information the Shankses provided. Petitioner
signed the return without reviewing it. On their joint return
the Shankses reported their combined wages from Kroger and
Staffers, but they did not report intervenor’s nonemployee
compensation from ExamOne or her unemployment benefits. On their
joint return the Shankses claimed a $5,926 refund, attributable
in part to an earned income credit and additional child tax
credit.1 The Shankses used the refund to obtain $5,552 in
proceeds from a tax refund anticipation loan. The Shankses
shared these proceeds.
Respondent determined a $3,057 deficiency in the Shankses’
2007 Federal income tax. The deficiency was attributable in part
to $957 of self-employment tax on intervenor’s unreported
nonemployee compensation. The remaining $2,100 of deficiency
represented reductions to the Shankses’ earned income credit and
additional child tax credit. These last-mentioned computational
adjustments resulted from respondent’s increasing the Shankses’
income to include intervenor’s unreported nonemployee
compensation and unemployment benefits.2
1
More particularly, on their 2007 joint return the Shankses
reported zero total tax, $3,469 of income tax withholding (of
which $3,411 represented petitioner’s withholding on his wage
income and $58 represented intervenor’s withholding on her own
wage income), a $1,244 earned income credit, and a $1,213
additional child tax credit.
2
Because of an offsetting increase in the Shankses’ child
(continued...)
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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 on their aggregate income. Sec. 6013(d)(3). An
individual may seek relief from joint and several liability under
section 6015, which offers three avenues of possible relief under
subsections (b), (c), and (f). In general, section 6015(b)
provides full or apportioned relief from joint and several
liability with respect to an understatement; section 6015(c)
provides proportionate tax relief to divorced or separated
taxpayers with respect to a deficiency; and in certain
circumstances section 6015(f) provides equitable relief if relief
is unavailable under section 6015(b) or (c). An individual
against whom a deficiency has been asserted may petition this
Court to determine the appropriate relief under section 6015.
Sec. 6015(e)(1)(A).3 In determining the appropriate relief
2
(...continued)
tax credit resulting from the inclusion of the unreported income
in the Shankses’ income, the deficiency reflects no additional
tax liability, apart from the items described above.
3
The parties have stipulated that petitioner made an
administrative request for relief under sec. 6015 at the same
time that he filed his petition. Cf. Cheshire v. Commissioner,
115 T.C. 183, 192 n.4 (2000) (in the absence of any objection
from the Commissioner, treating the raising of sec. 6015 relief
in the petition as a timely filed election), affd. 282 F.3d 326
(5th Cir. 2002).
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available under section 6015, we apply a de novo scope and
standard of review. See Porter v. Commissioner, 132 T.C. 203,
210 (2009).
I. Section 6015(b) Relief
Under section 6015(b), if certain requirements are met, a
requesting spouse may be relieved of joint and several liability
from a tax understatement that is attributable to the
nonrequesting spouse if, among other requirements, the requesting
spouse establishes that he or she “did not know, and had no
reason to know” that the other spouse understated that spouse’s
tax liability on the return. Sec. 6015(b)(1)(C), (2). No relief
is available under this provision if the requesting spouse has
“actual knowledge of the underlying transaction that produced the
omitted income”. Cheshire v. Commissioner, 115 T.C. 183, 192-193
(2000), affd. 282 F.3d 326 (5th Cir. 2002).
Because petitioner knew that intervenor performed services
for ExamOne and received unemployment benefits, he is not
entitled to relief under section 6015(b).
II. Section 6015(c) Relief
A. Eligibility--the Knowledge Requirement
If various requirements are met, an election under section
6015(c) treats the former spouses as if they had filed separate
returns, and each spouse’s liability is limited to the portion of
the deficiency properly allocable to the electing spouse, as
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determined under the rules contained in section 6015(d). See
sec. 6015(c)(1), (d)(3). Such an election is generally not valid
if the Secretary demonstrates that the individual making the
election had “actual knowledge, at the time such individual
signed the return, of any item giving rise to a deficiency (or
portion thereof) which is not allocable to such individual under
subsection (d)”. Sec. 6015(c)(3)(C).
In his pretrial memorandum and again at the commencement of
trial respondent’s counsel conceded that petitioner was entitled
to elect relief under section 6015(c) with respect to the $957 of
self-employment tax attributable to intervenor’s nonemployee
compensation. In his opening remarks at trial respondent’s
counsel explained this concession as being based on a
determination by respondent’s Appeals Office that “it could not
be shown that Mr. Shanks had knowledge of the unemployment
benefits * * * and the income from Exam One.” But at the
conclusion of trial respondent’s counsel sought to retract this
concession on the ground that petitioner’s testimony established
that he had actual knowledge of these omitted items so as to
invalidate his election under section 6015(c).4
4
Respondent does not contend that petitioner fails the
requirements for electing relief under sec. 6015(c) in any
respect other than allegedly having actual knowledge of the
omitted income.
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1. ExamOne Earnings
Because petitioner knew that intervenor performed services
for ExamOne, he should have known of this omitted income. But
that does not mean he had actual knowledge of it. See Charlton
v. Commissioner, 114 T.C. 333, 340-341 (2000) (finding that the
requesting spouse lacked actual knowledge of the omitted income
from his ex-wife’s business even though he knew of the business
and had access to her business records but never checked them to
determine whether she had accounted for all her income).
Petitioner testified credibly that although intervenor deposited
her ExamOne earnings in their joint checking account, he did not
know the amounts of these deposits because he never reviewed the
bank accounts, entrusting that task to her. Intervenor did not
directly contradict this testimony; she testified merely that
petitioner had “access” to the joint checking account and “was
aware of what was going on.” Respondent, who introduced no
evidence on this point, has failed to carry his burden of proving
that petitioner had actual knowledge of intervenor’s omitted
earnings from ExamOne. Cf. sec. 1.6015-3(c)(4), Example
(4)(iii), Income Tax Regs. (where the requesting spouse knew that
the nonrequesting spouse had income from his business but did not
know the exact amount, her section 6015(c) election was valid
except insofar as she knew the minimum amount of his earnings
from the business). Consequently, we disagree with respondent
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that petitioner’s section 6015(c) election is invalid because
petitioner had actual knowledge of intervenor’s ExamOne earnings.
2. Unemployment Benefits
Petitioner testified that he was aware that intervenor was
receiving unemployment benefits in 2007 but did not know the
amount. Intervenor, by contrast, testified that petitioner
“wasn’t aware of the unemployment”. Respondent introduced no
evidence on this point. On the basis of this sparse record, we
conclude that petitioner had at least reason to know of the
unemployment benefits. But we need not decide whether petitioner
had actual knowledge of the unemployment benefits because, as
discussed below, even if he lacked actual knowledge, petitioner
has not shown that the portion of the deficiency attributable to
the unemployment benefits is not properly allocable to him.5
B. Allocation of Deficiency
Generally, a spouse who is eligible for relief under section
6015(c) is allocated a portion of the joint return deficiency in
proportion to the net amount of items taken into account in
computing the deficiency that is allocable to the electing
spouse. Sec. 6015(d)(1). As an exception to this general rule,
two types of items are treated separately in making this
5
Furthermore, as discussed infra, for purposes of our
analysis of whether petitioner is entitled to equitable relief
under sec. 6015(f), it is not determinative whether petitioner
had actual knowledge or only reason to know of the unemployment
benefits.
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allocation, rather than being aggregated with all other items to
which the deficiency is attributable: (1) Disallowed credits;
and (2) any tax (other than income tax imposed by section 1 or
alternative minimum tax imposed by section 55) that is required
to be included with the joint return. Sec. 6015(d)(2).
Consequently, pursuant to this rule, the disallowed credits and
the self-employment tax that make up the Shankses’ deficiency are
treated separately in allocating the deficiency.
Items giving rise to a deficiency on a joint return are
generally allocated as if the spouses had filed separate returns.
Sec. 6015(d)(3)(A). Erroneously omitted items of income are
allocated to the spouse who was the source of the income. Sec.
1.6015-3(d)(2)(iii), Income Tax Regs. But an erroneous item that
otherwise would be allocated to the nonrequesting spouse is
allocated to the requesting spouse to the extent that the
requesting spouse received a “tax benefit” on the joint return.
Sec. 6015(d)(3)(B); sec. 1.6015-3(d)(2)(i), Income Tax Regs.
1. Self-Employment Tax on Intervenor’s ExamOne
Earnings
The omitted income from intervenor’s ExamOne earnings is
allocated to her; consequently, the $957 of self-employment tax
on these earnings is also attributable to her and not to
petitioner. Respondent does not contend that petitioner realized
any tax benefit on the joint return as relates to this unreported
self-employment tax liability. We conclude and hold, consistent
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with respondent’s original concession, that the $957 of the
deficiency that is attributable to intervenor’s self-employment
tax liability is properly allocable to her and not to petitioner.
2. Disallowed Tax Credits
The regulations provide that if a disallowed credit is
attributable in whole or part to both spouses, “then the IRS will
determine on a case by case basis how such item will be
allocated.” Sec. 1.6015-3(d)(4)(ii), Income Tax Regs.
Respondent has effectively determined that the disallowed credits
are to be allocated to both spouses, declining to relieve
petitioner of joint and several liability with respect to the
disallowed credits.
On the basis of our review of all the facts and
circumstances, we conclude that the disallowed credits are
properly allocable to both petitioner and intervenor. After all,
it was the combination of petitioner’s income and intervenor’s
income (her reported wage income plus her omitted ExamOne
earnings and unemployment benefits) that caused their total
income to exceed allowable income limits for the earned income
credit and additional child tax credit shown on their joint
return. Moreover, the Shankses’ tax refund was attributable in
significant part to the earned income credit and additional child
tax credit that respondent has disallowed. Insofar as the record
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shows, the Shankses shared equally the benefit of the tax refund,
in the form of a tax refund anticipation loan.
Petitioner, as the requesting spouse, bears the burden of
proving the portion of the deficiency that is properly allocable
to him. See sec. 6015(c)(2); sec. 1.6015-3(d)(3), Income Tax
Regs. He has not shown that the portion of the deficiency
attributable to the disallowed credits is not properly allocable
to him.
III. Section 6015(f) Relief
Because we have held that petitioner is not entitled to
relief under section 6015(b) and is entitled to only partial
relief under section 6015(c), we finally consider whether he may
be eligible for additional relief under section 6015(f). See
sec. 6015(f)(2). Section 6015(f)(1) provides that a taxpayer may
be relieved from joint and several liability if it is determined,
after considering all the facts and circumstances, that it is
inequitable to hold the taxpayer liable for the unpaid tax or
deficiency.
Rev. Proc. 2003-61, sec. 4.01(1)-(7), 2003-2 C.B. 296, 297,
sets out seven threshold conditions that a requesting spouse must
meet before the Commissioner will consider a request for relief
under section 6015(f). Respondent does not dispute that
petitioner meets these threshold conditions.
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Rev. Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298, sets
forth a nonexclusive list of factors to be evaluated in requests
for relief under section 6015 for spouses who have met the
threshold conditions. The factors are: (1) Marital status, (2)
economic hardship that would result absent relief, (3) knowledge
or reason to know of the item giving rise to the deficiency,6 (4)
any legal obligation of the nonrequesting spouse to pay the tax
liability pursuant to a divorce decree or agreement, (5)
significant benefit received by the requesting spouse, (6) the
requesting spouse’s compliance with income tax laws following the
year for which relief is requested, (7) spousal abuse, and (8)
the requesting spouse’s mental or physical health at the time the
return was filed or relief was requested.
Petitioner and intervenor are separated. This factor weighs
in support of equitable relief. See id. sec. 4.03(2)(a)(i),
2003-2 C.B. at 298. But, as discussed below, petitioner has
failed to establish that any of the other enumerated factors
weigh in favor of relief.
6
Under these guidelines, the requesting spouse’s actual
knowledge of the income giving rise to the deficiency weighs
strongly against granting relief. See Rev. Proc. 2003-61, sec.
4.03(2)(a)(iii)(B), 2003-2 C.B. 296, 298. Such knowledge may be
overcome only if the factors in favor of equitable relief are
“particularly compelling.” Id. By contrast, reason to know of
the item giving rise to the deficiency is weighted no more
heavily than other factors. Id.
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At a minimum, petitioner had reason to know of intervenor’s
ExamOne earnings and unemployment benefits. This factor weighs
against equitable relief. See id. sec. 4.03(2)(a)(iii)(B), 2003-
2 C.B. at 298.
The omission of part of intervenor’s income from the
Shankses’ joint return resulted in a higher tax refund, which
petitioner and intervenor shared. Petitioner has not established
that he received no significant benefit (beyond normal support)
from the understatement. See sec. 1.6015-2(d), Income Tax Regs.
(stating that the fact that the spouse received a benefit from
the understatement on the return is a factor that may be taken
into account in determining whether the spouse significantly
benefited from an understatement); Rev. Proc. 2003-61, sec.
4.03(2)(v), 2003-2 C.B. at 299. This factor also weighs against
relief.
Petitioner claims he will suffer economic hardship if he is
not granted relief because he is caring for his two children.
Generally, economic hardship exists if collection of the tax
liability will render the taxpayer unable to pay reasonable basic
living expenses. See sec. 301.6343-1(b)(4), Proced. & Admin.
Regs. Petitioner has made no such showing. This factor weighs
against relief. See Rev. Proc. 2003-61, sec. 4.03(2)(a)(ii),
2003-2 C.B. at 298.
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Petitioner does not contend and the record does not suggest
that intervenor had a legal obligation to pay the outstanding
income tax liability pursuant to a divorce decree or agreement.
Nor does the record suggest that petitioner was subject to abuse
or was in poor mental or physical health either when he signed
the 2007 joint return or when he requested relief. See Rev.
Proc. 2003-61, sec. 4.03(2)(a)(iv), (b)(i) and (ii), 2003-2 C.B.
at 298-299. Finally, the record does not show whether petitioner
has been in compliance with the income tax laws for years after
2007.
The totality of the factors discussed above convinces us
that it is not inequitable to hold petitioner liable for the part
of the deficiency attributable to items other than intervenor’s
$957 of self-employment tax. Consequently, we hold that
petitioner is not entitled to equitable relief under section
6015(f).
To reflect the foregoing,
An appropriate decision
will be entered.