T.C. Memo. 2011-202
UNITED STATES TAX COURT
MICHELLE POUNDS, Petitioner, AND DARRYL JOHNSON, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 30363-09. Filed August 17, 2011.
Gregg C. Goodwin and Danielle K. Schulte, for petitioner.
Darryl Johnson, pro se.
Ann L. Darnold, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: Intervenor seeks review of respondent’s final
determination that petitioner is entitled to relief from joint
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and several liability under section 6015(c)1 with respect to a
deficiency in income tax of $25,575 for tax year 2004.
FINDINGS OF FACT
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. Both petitioner and
intervenor resided in Kansas at the time the petition and the
notice of intervention were filed.
Background
Michelle Pounds (petitioner) and Darryl Johnson (intervenor)
were married on April 27, 2003. The couple’s marriage ended in a
physical separation in May 2004, a legal separation on March 24,
2005, and finally a divorce on October 13, 2005.2 Before and
during the marriage, petitioner worked for intervenor in
intervenor’s automobile repossession business (company).
Intervenor and petitioner started dating when petitioner was a
teenager and dated off and on approximately 10 years before
getting married.
1
Section references are to the Internal Revenue Code of 1986
as amended and in effect at all relevant times, and/or in effect
for the year at issue. Rule references are to the Tax Court
Rules of Practice and Procedure.
2
Though the couple did not receive a divorce decree until
Oct. 13, 2005, petitioner and intervenor physically separated in
May 2004, when petitioner moved out of the house in which
intervenor lived and ran his automobile repossession business.
Petitioner initially stayed with a friend and later moved into an
apartment in June 2004.
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Petitioner’s Role at the Company
During the taxable year at issue petitioner worked as an
office manager and a secretary in intervenor’s company, roles she
filled before and during the marriage. Intervenor was in the
automobile repossession industry and was a sole proprietor
throughout all of the periods discussed in this opinion. The
company was operated out of the backyard of the Peck, Kansas,
home. As the office manager, petitioner’s primary duty was data
entry of receipts for the recovery of the automobiles; however,
she also helped to repossess vehicles when necessary, make
reports on the conditions of the vehicles, and talk to banks
about the recovery of their automobiles.
Petitioner never held an ownership interest in the company.
In her role as a secretary, petitioner was always treated as an
employee of the company and was paid a salary for her work. In
addition to her salary, intervenor sometimes paid petitioner lump
sums of money to “stay away” after they had had an argument. All
of these payments were made by checks intervenor signed using the
company checking account.3 After the separation but before the
divorce, petitioner continued to work for intervenor sporadically
3
Intervenor did not observe business formalities during his
management of the company. Intervenor used the company account
for both personal and business expenses. Even though petitioner
frequently wrote checks for the company’s expenses and presented
them to intervenor to sign, petitioner had no signing authority
on the company bank account during the tax year at issue or at
any other time.
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as she moved in and out of the Peck, Kansas, house depending on
their relationship status at the moment.
Before and during the marriage, intervenor and petitioner
rarely, if ever, discussed business or financial matters. Even
though petitioner worked as a secretary, petitioner was never
involved with the overall financial health or reporting of the
company and was unaware of the company’s financial position at
any given time.4 In fact, intervenor’s stepmother, Linda
Johnson, was employed with the company from its inception and,
even though she had no formal accounting experience, was in
charge of the company’s accounting. Intervenor’s stepmother
testified that while in that role in 2004 as company accountant
she took only 1 week off and handed the accounting books to
petitioner. Upon her return, intervenor’s stepmother realized
that petitioner had done no accounting work, and intervenor’s
stepmother had to work hard to update the company’s records.
Intervenor and Petitioner’s Relationship
Intervenor and petitioner had a tumultuous personal
relationship. The first sign of domestic violence was on October
14, 1997, 6 years before their marriage, when petitioner filed a
police report with the Wichita Police Department alleging battery
4
Testimony offered at trial showed that no formal financial
statements were ever prepared for the company, and intervenor
admitted that although he should have been, he was never
concerned with the formalities of running the company, including
accounting and the tax consequences of its operations.
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and domestic violence by intervenor. Despite this incident,
petitioner and intervenor were married on April 27, 2003. The
relationship, however, remained rocky. In May 2004 petitioner
moved out of intervenor’s home and in with a friend until she got
her own apartment in June 2004. On July 29, 2004, a second
incident occurred between petitioner and intervenor after which
petitioner filed an incident report with the Wichita Police
Department alleging intimidation by intervenor.
A few months later, in October 2004, petitioner signed a
search warrant which allowed local law enforcement officers in
Peck to search the house and yard for stolen vehicles and parts.
Furious with petitioner because she allowed the police to search
their house for stolen car parts pursuant to a search warrant,
intervenor filed a petition for a protective order against
petitioner on October 8, 2004. On October 21, 2004, the
protective order was served on petitioner, granting intervenor
exclusive possession of the Peck, Kansas, home.
Intervenor and petitioner continued their relationship
despite the protective order. On November 17, 2004, intervenor
and petitioner jointly signed an application for a mortgage on
the house in Peck, Kansas. However, the relationship continued
to be a struggle, and, on December 1, 2004, petitioner signed a
quitclaim deed which relinquished her interest in the home and
gave intervenor sole possession. On that same day and with
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intervenor making the downpayment, petitioner purchased her own
home in Wichita, Kansas. At some point during the day intervenor
and petitioner had an altercation that resulted in intervenor’s
breaking petitioner’s jaw. As a result, petitioner spent 4 days
in the hospital. Consequently, on December 3, 2004, petitioner
sought a protective order precluding intervenor from entering or
coming around her new Wichita, Kansas, home. The District Court
of Sedgwick County had a hearing and issued that protective order
on December 16, 2004.
Despite their previous issues and the protective orders,
intervenor and petitioner reunited to celebrate the Christmas
holiday in 2004. However, on March 22, 2005, trouble arose
again, and petitioner filed another police report with the
Wichita Police Department alleging intimidation by intervenor.
Even though they had been physically separated for 10 months
at the time, the couple legally separated on March 24, 2005.
Pursuant to a separation agreement drafted by intervenor and
executed on that day, petitioner retained possession of a 2003
Dodge pickup truck for which intervenor continued to make
payments, and a joint restraining order was issued. Just 7 days
later, on March 29, 2005, petitioner filed another police report
alleging intervenor had been shooting paintballs at her house and
intimidating her with harassing phone calls.
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On October 13, 2005, petitioner and intervenor were issued a
divorce decree. The divorce was uncontested, and intervenor was
awarded the home in Peck, Kansas, where he lived and ran his
business.5 The divorce decree provided that petitioner and
intervenor were responsible for filing separate 2005 Federal and
State income tax returns; however, the joint returns filed for
tax year 2004 and prior years would continue to be the joint
responsibility of petitioner and intervenor. Consequently,
intervenor testified that he and petitioner were expecting an
$8,000 credit from their tax return for tax year 2003 and,
pursuant to the divorce decree which mandated that they split the
tax liability, they were expecting to split that refund upon
5
The divorce decree was drafted by the attorney whom
intervenor had used for his personal and the company’s legal
issues. Neither petitioner nor intervenor contested the divorce,
so they decided to use one attorney for efficiency. However,
petitioner did not seek independent counsel or know she had the
right to seek independent counsel to ensure her interests were
being represented and to avoid the apparent conflict of interest.
Petitioner signed the divorce decree pro se, as neither party
felt it was necessary to incur additional legal fees.
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receipt.6 In addition to obtaining a divorce, both petitioner
and intervenor filed for bankruptcy that month.7
The 2004 Income Tax Return
On February 8, 2005, the parties signed an engagement letter
to hire a certified public accountant (C.P.A.) to prepare their
joint 2004 income tax return (2004 return) and promised to
present the C.P.A. with the complete and correct information
necessary for him to prepare the 2004 return. In April 2005
intervenor and petitioner timely requested an extension of time
to file their 2004 return. The return was untimely filed on
October 17, 2005.
Because of the strains of their relationship, petitioner was
unaware of the contents of the 2004 return. Intervenor was the
sole party responsible for gathering and reviewing the documents
to be presented to the C.P.A. who prepared the 2004 return. In
fact, petitioner had no idea of the contents of the 2004 return
and knew only that intervenor had promised that he would expedite
their divorce if she promptly signed the tax return. Intervenor
6
On the 2004 return an $8,000 credit from an overpayment on
the tax year 2003 return was applied to their 2004 return to
reduce their 2004 tax liability. Petitioner and intervenor
received neither the refund nor the credit because they were
never entitled to the credit. Upon audit, it was conceded that
the tax calculations for tax years 2003, 2004, and 2005 were
erroneous, and petitioner and intervenor never had an
overpayment.
7
Intervenor paid the costs of both his and petitioner’s
bankruptcies.
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and petitioner were divorced just 4 days before petitioner’s
signing the tax return.
2004 Tax Audit
The 2004 return was selected for an audit, which began in
2007 and concluded on July 7, 2008. The 2004 return reported no
tax due, with the only items on the return being a $274 State
income tax refund and a loss on Schedule C, Profit or Loss from
Business, of $25,912 from the company totaling an overall loss
for that year of $25,638. The auditor, however, determined that
tax was due and made adjustments to the 2004 return, including
the disallowance of Schedule C deductions of $32,564 which were
claimed for interest, car and truck expenses, insurance, repairs,
and other miscellaneous expenses. The auditor also determined
that Schedule C income of $95,961 was unreported as was a capital
gain of $19,682 related to foreclosure of a business property.
In total, the auditor determined that petitioner and intervenor
owed $25,575 in taxes for 2004 and $6,861.05 in interest as of
August 2008. Petitioner and intervenor both agreed to the
assessment of the deficiency by signing a Form 870, Waiver of
Restrictions on Assessment and Collection of Deficiency in Tax
and Acceptance of Overassessment.
On July 8, 2008, intervenor and petitioner signed a Form
4549, Income Tax Examination Changes, and consented to the
assessment of the tax deficiency of $25,575 as a result of the
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audit. Intervenor provided all of the information to the auditor
for the examination, including all of the information regarding
the business activities. However, the record reflects that the
auditor contacted petitioner regularly and unsuccessfully for
records or information regarding the company.8 Petitioner was
unable to produce any records as she never was responsible for or
knew of the details of the company’s finances. Assessment was
made on October 6, 2008.
Petitioner seeks relief under section 6015 from joint and
several liability for the deficiency determined by audit. On
August 19, 2008, petitioner submitted timely to respondent a Form
8857, Request for Innocent Spouse Relief, seeking relief from
joint and several liability under section 6015 for tax year 2004.
On October 3, 2008, intervenor signed and submitted a completed
Form 12508, Questionnaire for Non-Requesting Spouse, to
respondent. On January 21, 2009, respondent made a preliminary
determination that relief would be denied under section 6015(f)
for that year. Petitioner then sought Appeals review of that
determination, and Appeals determined that the case should have
been reviewed for relief under section 6015(b) or (c) since the
8
Petitioner alleged and the audit income adjustments reflect
that intervenor made kickbacks on insurance fraud relating to
cars that received hail damage while in his possession. When
asked about the income he received from hail damage on the 39
vehicles, intervenor said that he and the auto repair shop worked
out a “deal” in which he did not have to pay the $1,000
deductible for each car fixed.
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tax resulted from an understatement of tax and an assessed
deficiency. On August 6, 2009, a second determination was made
that relief was not appropriate under section 6015(b) or (c).
Petitioner then submitted a Form 12509, Statement of
Disagreement, which was received by respondent on September 3,
2009, but was not forwarded to the appropriate office. However,
unbeknownst to petitioner, respondent had issued a final
determination letter on September 11, 2009, without considering
the information submitted with petitioner’s Appeals request. On
December 15, 2009, after review of the Appeals request, the
innocent spouse unit issued a revised preliminary determination
granting petitioner innocent spouse relief under section 6015(c).
On December 22, 2009, without the knowledge that respondent had
reversed his position and granted petitioner innocent spouse
relief, petitioner filed a petition with this Court. After
receiving notice, intervenor filed timely a notice of
intervention on April 19, 2010.
OPINION
In general, spouses who elect to file a joint Federal income
tax return for a taxable year are jointly and severally liable
for the entire amount of tax reported on the return, as well as
for any deficiency subsequently determined, even if all of the
income giving rise to the tax liability is allocable to only one
of them. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276,
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282 (2000). Section 6015, however, provides exceptions to the
general rule of joint and several liability in limited
circumstances. Alt v. Commissioner, 119 T.C. 306, 311 (2002),
affd. 101 Fed. Appx. 34 (6th Cir. 2004).
One of those circumstances is provided for in section
6015(c). Upon the election of its application by the taxpayer,
that section limits a spouse’s liability for a deficiency to the
portion of the deficiency properly allocable to that spouse under
section 6015(d). In general, an item that gives rise to a
deficiency on a joint Federal income tax return will be allocated
to each individual who files the joint return in the same manner
as that item would have been allocated had those individuals
filed separate returns. Sec. 6015(d)(3)(A). Respondent concedes
petitioner’s entitlement to relief under section 6015(c). The
concession presumably contemplates a section 6015(d) allocation
satisfactory to both of them. However, intervenor challenges
petitioner’s entitlement to section 6015(c) relief.
According to intervenor, petitioner knew about the items
giving rise to the 2004 deficiency, that is, the financial
position of the company, including all income, deductions, and
expenditures, and that knowledge disqualifies her from section
6015(c) relief. He contends that the evidence that he offered
might support a finding that petitioner had “reason to know”
about the understatement of tax shown on the return. See, e.g.
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Price v. Commissioner, 887 F.2d 959 (9th Cir. 1989); King v.
Commissioner, 116 T.C. 198, 204 (2001); Wiener v. Commissioner,
T.C. Memo. 2008-230. But a requesting spouse’s “reason to know”
of the item is not sufficient to deny relief under section
6015(c). If, as here, all of the other requirements of that
section have been satisfied, then, as relevant here, the burden
of proof is shifted to the Commissioner and relief is denied to
the requesting spouse only if the Commissioner “demonstrates that
* * * [the requesting spouse] had actual knowledge, at the time
such individual signed the return, of any item giving rise to a
deficiency”. Sec. 6015(c)(3)(C); Charlton v. Commissioner, 114
T.C. 333, 341 (2000); Martin v. Commissioner, T.C. Memo. 2000-
346.
An issue arises where the burden of proof shifts to the
Commissioner in cases when the Commissioner favors granting
relief and the nonrequesting spouse intervenes to oppose it. The
Court has resolved this conflict of burden shifting by
determining whether actual knowledge has been established by a
preponderance of the evidence as presented by all three parties.
See Knight v. Commissioner, T.C. Memo. 2010-242; McDaniel v.
Commissioner, T.C. Memo. 2009-137; Stergios v. Commissioner, T.C.
Memo. 2009-15.
To determine whether the requesting spouse had actual
knowledge, the Court looks to the surrounding facts and
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circumstances for “an actual and clear awareness (as opposed to
reason to know)” of the items giving rise to the deficiency. See
Cheshire v. Commissioner, 115 T.C. 183, 195 (2000), affd. 282
F.3d 326 (5th Cir. 2002).
Other than matters stipulated, respondent offered no
evidence at trial. Petitioner and intervenor each testified on
his or her own behalf, and numerous documents were introduced
into evidence on intervenor’s behalf. Petitioner worked for the
company which intervenor ran for the tax year at issue; however,
she never owned any interest in the company and performed only
limited tasks. Intervenor was solely responsible for maintaining
the checking account from which the finances of the company and
the home were handled. He was the only signatory to checks drawn
off of that account; had actual knowledge of the time and the
manner in which the hail-damaged cars were “fixed”; was
responsible for hiring and helping the C.P.A. who prepared the
2004 return using the information that intervenor prepared and
gathered from the company and his and petitioner’s personal
records; was responsible for maintaining the financial health of
the company; and was responsible for running the company.
Petitioner had no actual knowledge of the items on which the
deficiency was based.
In fact, petitioner had moved out of intervenor’s house and
had been separated from him for months when the hail-damaged cars
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were fixed and for over a year when the tax return was filed.
Petitioner testified that she had absolutely no idea of
intervenor’s business affairs at the time she signed the tax
return and that her signature on the return was the only part she
took in the tax return preparation.
Conclusion
Because petitioner did not have actual knowledge of the
items that resulted in the deficiency during tax year 2004, she
is entitled to relief from joint and several liability for the
deficiency under section 6015(c).
The Court has considered the remaining arguments of all
parties for results contrary to those expressed herein and, to
the extent not discussed above, finds those arguments to be
irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered
for petitioner.