T.C. Memo. 2016-169
UNITED STATES TAX COURT
ADETUTU CANTY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 28483-14. Filed September 13, 2016.
Thomas F. Decaro, Jr., for petitioner.
Han Huang, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: This case arises from respondent’s denial of petitioner’s
request for relief from joint and several liability under section 6015 for the taxable
years 2010 and 2011.1
1
In her pretrial memorandum petitioner concedes that she does not satisfy
the requirements of sec. 6015(c) because she is still married to and living with the
(continued...)
-2-
[*2] Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for all relevant years, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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.
Petitioner resided in Maryland at the time she filed her petition.
Petitioner married Charles Canty in July 1986 and was married to Mr. Canty
throughout the taxable years 2010 and 2011. Petitioner and Mr. Canty are still
married and live together.
Petitioner has a bachelor’s degree in economics and a master’s degree in
business and public administration. Since 2008 petitioner has been employed by
the Nuclear Regulatory Commission as a financial management analyst. Petitioner
earned $88,241 and $84,999 in taxable wages and salary for the taxable years
2010 and 2011, respectively. Petitioner is currently still employed as a financial
management analyst with an annual salary of $107,000.
1
(...continued)
nonrequesting spouse. See sec. 6015(c)(3)(A).
-3-
[*3] During the taxable years 2010 and 2011 Mr. Canty owned and operated the
Charles Canty Law Office (law office) in Washington, D.C. Mr. Canty prepared
his and petitioner’s joint Forms 1040, U.S. Individual Income Tax Return, for the
taxable years 2010 and 2011. A Schedule C, Profit or Loss From Business, was
attached to the 2010 and 2011 returns reporting the activity of the law office. The
2010 Schedule C reported gross receipts of zero, returns and allowances of
$66,981, net gross receipts of $123,334, and net profit of $39,452. The 2011
Schedule C reported gross receipts of $148,119, returns and allowances of
$42,100, net gross receipts of $106,019, and net profit of $3,512. Neither
petitioner nor Mr. Canty made estimated tax payments with respect to the law
office activity for the taxable years 2010 and 2011.
Petitioner did not ask to review the returns for the taxable years 2010 and
2011 before they were filed. Petitioner was not forced to sign the returns for the
taxable years 2010 and 2011 under duress, threat of harm, or other form of
coercion. At the time she signed the tax returns for 2010 and 2011 petitioner had
no mental or physical health problems which prevented her from understanding
the contents of the tax returns. Petitioner was not a victim of spousal abuse or
domestic violence during her marriage to Mr. Canty.
-4-
[*4] On September 9, 2013, a notice of deficiency was mailed to petitioner and
Mr. Canty for their taxable years 2010 and 2011. In the notice of deficiency
respondent made adjustments to the Schedule C income and expenses as follows:
Income/Expense TY 2010 TY 2011
Business use of home $7,553.01 $4,379.28
Other 8,602.00 8,602.00
Utilities 1,219.00 1,277.00
Meals and entertainment 2,634.00 3,450.00
Travel 1,363.00 2,893.00
Rent/lease (other business property) 27,600.00 27,600.00
Office 8,763.00 9,354.00
Insurance (not health) 3,600.00 4,200.00
Depreciation and sec. 179 2,339.00 3,853.00
Contract labor 5,325.00 5,635.00
Advertising 2,092.00 3,300.00
Car and truck --- 13,769.51
Gross receipts/sales 8,000.00 ---
In the notice of deficiency respondent made adjustments to non-Schedule C
income, deductions, and credits as follows:
Item TY 2010 TY 2011
Taxable interest $94 ---
Self-employed health insurance 3,470 ---
Student loan interest deduction 1,590 $2,113
Itemized deductions 17,811 20,594
Tuition/fees deduction 4,000
Education credit 3,000 2,000
Making work pay &
Government retiree credits 800 ---
Refundable education credit 2,000 ---
-5-
[*5] Neither petitioner nor Mr. Canty petitioned the Court in response to the notice
of deficiency.
On March 24, 2014, respondent assessed against petitioner and Mr. Canty
with respect to the taxable year 2010: (1) additional taxes of $37,483; (2) interest
of $4,700.15; (3) an accuracy-related penalty under section 6662 of $8,056.60; and
(4) a failure to pay timely addition to tax of $476. On the same date respondent
assessed against petitioner and Mr. Canty with respect to the taxable year 2011:
(1) additional taxes of $36,297; (2) interest of $2,602.08; and (3) an accuracy-
related penalty under section 6662 of $7,259.40.
On October 23, 2013, respondent received from petitioner a Form 8857,
Request for Innocent Spouse Relief, requesting relief from joint and several
liability for the taxable years 2010 and 2011. Petitioner explained in an
attachment to the Form 8857 as follows:
The Taxpayer was not involved in the operating of Spouse’s
legal practice and had now [sic] knowledge of the finances of the
business. Therefore, Taxpayer had no way to determine the accuracy
of the figures reported on the 2010 and 2011 tax returns with regard
to the business. The Taxpayer and Spouse have separate finances.
The Taxpayer was not involved in the preparation of either the 2010
or 2011 tax returns. The Taxpayer gave her documentation to
Spouse, and he prepared the returns and filed them electronically
without the Taxpayer having reviewed them. * * *
-6-
[*6] Petitioner also indicated in the Form 8857 that (1) she did not maintain a joint
account with Mr. Canty for the taxable years 2010 and 2011, and (2) there were
large expenses made during 2010 and 2011, such as family vacations, a trip to
Nigeria, and the purchase of a vehicle for petitioner’s daughter. Petitioner’s Form
8857 further states that she has: (1) monthly household income of $13,208.08;
(2) monthly household expenses of $10,113.87; and (3) assets with a net value of
$152,411.68.
On May 8, 2014, respondent issued to petitioner a preliminary
determination denying petitioner relief from joint and several liability for the
taxable years 2010 and 2011. On May 28, 2014, petitioner submitted a Form
12509, Statement of Disagreement, which petitioner signed and dated May 20,
2014. On November 5, 2014, the Internal Revenue Service (IRS) Office of
Appeals issued a Final Appeals Determination (final determination) denying
petitioner’s request for relief from joint and several liability in full. The final
determination listed the following reasons for denial: (1) petitioner knew, or had
reason to know, of the income or deductions that caused the additional tax;
(2) petitioner is not eligible because of her current marital status; and (3) petitioner
did not show that it would be unfair to hold her responsible. Petitioner timely
petitioned the Court for review of the final determination.
-7-
[*7] Petitioner filed her income tax return for the taxable year 2012 on April 29,
2014, and was assessed additions to tax for late filing and late payment.
Petitioner’s account balance for the taxable year 2012 is currently satisfied.
Petitioner is currently compliant with all Federal income tax obligations for the
taxable years 2013 and 2014.
OPINION
Petitioner asks this Court to review respondent’s final determination
denying her relief from joint and several liability for the taxable years 2010 and
2011. A married taxpayer may elect to file a joint Federal income tax return with
his or her spouse. Sec. 6013(a). Generally, after making the election, each spouse
is jointly and severally liable for the entire tax shown on the return or otherwise
determined to be due. Sec. 6013(d)(3). However, section 6015 provides relief
from joint and several liability for spouses who meet the conditions of subsection
(b), and it provides for equitable relief in subsection (f) when the relief provided
for in other subsections is not available. Olson v. Commissioner, T.C. Memo.
2009-294, 2009 Tax Ct. Memo LEXIS 300, at *12.
The Tax Court has jurisdiction to review respondent’s denial of petitioner’s
request for relief under section 6015. See sec. 6015(e)(1). Both the scope and
-8-
[*8] standard of review in cases requesting relief from joint and several income
tax liability are de novo. Porter v. Commissioner, 132 T.C. 203, 210 (2009).
Except as otherwise provided in section 6015, the spouse requesting relief bears
the burden of proof. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002),
aff’d, 101 F. App’x 34 (6th Cir. 2004).
I. Section 6015(b)
Section 6015(b)(1) authorizes the Commissioner to grant relief from joint
and several liability for tax if the taxpayer requesting relief satisfies each of the
following five requirements:
(A) a joint return has been made for a taxable year;
(B) on such return there is an understatement of tax attributable
to erroneous items of 1 individual filing the joint return;
(C) the other individual filing the joint return establishes that in
signing the return he or she did not know, and had no reason to know,
that there was such understatement;
(D) taking into account all the facts and circumstances, it is
inequitable to hold the other individual liable for the deficiency in tax
for such taxable year attributable to such understatement; and
(E) the other individual elects * * * the benefits of this
subsection not later than the date which is 2 years after the date the
Secretary has begun collection activities with respect to the individual
making the election * * *
-9-
[*9] The requirements of section 6015(b)(1) are conjunctive, and therefore the
failure of a requesting spouse to satisfy any one of the elements precludes relief.
Alt v. Commissioner, 119 T.C. at 313. Respondent concedes that petitioner
satisfies the requirements of section 6015(b)(1)(A) and (E) but asserts that
petitioner does not meet the requirements of section 6015(b)(1)(B), (C), or (D).
Section 6015(b)(1)(C) provides that in order to obtain relief the requesting
spouse must establish that she did not know, and had no reason to know, that there
was an understatement. A requesting spouse has reason to know of an
understatement “if a reasonable person in similar circumstances would have
known of the understatement.” Sec. 1.6015-2(c), Income Tax Regs. The facts and
circumstances that are considered include, among other things, whether the
requesting spouse failed to inquire, at or before the time the return was signed,
about items on the return or omitted from the return that a reasonable person
would question. Id. Petitioner bears the burden of proving that she satisfies the
requirements of section 6015(b)(1)(C). See Rule 142(a); Bokum v.
Commissioner, 94 T.C. 126, 138 (1990), aff’d, 992 F.2d 1132 (11th Cir. 1993).2
2
The no-knowledge-of-the-understatement requirement in sec.
6015(b)(1)(C) is virtually identical to the requirement of former sec.
6013(e)(1)(C); therefore, cases interpreting sec. 6013(e) remain instructive to our
analysis. Jonson v. Commissioner, 118 T.C. 106, 115 (2002), aff’d, 353 F.3d
(continued...)
- 10 -
[*10] Petitioner claims that she had “no knowledge” of the erroneous information
on the law office’s Schedules C. Even if we were to believe petitioner that she
had no knowledge of the income and expenses attributable to the law office, a
reasonable person in similar circumstances would have reviewed the tax returns
before filing and inquired about certain items reported on the return. See sec.
1.6015-2(c), Income Tax Regs. The Schedule C for the taxable year 2010 reported
gross receipts of zero, returns and allowances of $66,981, net gross receipts of
$123,334, and net profit of $39,452. In her posttrial brief petitioner acknowledges
that the zero gross receipts “is an obvious error, since the Schedule C for 2010
reflects gross income.” Petitioner is a highly educated individual who works as a
financial management analyst, and a cursory review of the 2010 tax return would
have revealed this “obvious error”.
The law office’s 2011 Schedule C reported gross receipts of $148,119,
returns and allowances of $42,100, net gross receipts of $106,019, and net profit
of $3,512. Petitioner acknowledged at trial that the net profit for 2011 attributable
to the law office “looked to me like it was low”; however, the record before us
does not establish that petitioner inquired about this unusually low amount as a
2
(...continued)
1181 (10th Cir. 2003).
- 11 -
[*11] reasonable person would. Petitioner testified that she asked Mr. Canty about
the low profit figure and that he assured her it was accurate, however, we do not
find petitioner’s testimony credible. Throughout the proceedings, petitioner has
provided inconsistent and evolving explanations regarding her review of the 2010
and 2011 tax returns. In her Form 8857 petitioner states that Mr. Canty “prepared
the returns and filed electronically without * * * [petitioner] seeing or reviewing
the return.” In the typewritten attachment to the Form 8857 petitioner similarly
states that Mr. Canty “prepared the returns and filed them electronically without
* * * [petitioner] having reviewed them.” Petitioner stipulated that she did not ask
to review the returns for 2010 and 2011 before they were filed. In her petition,
petitioner states that Mr. Canty “presented * * * [the returns] to * * * [her] for
signature” and she “asked him specifically if the return was accurate.” At trial
petitioner testified that she took a “brief look” at the tax returns but did not “study
or review any other pages.” During cross-examination petitioner testified that she
reviewed more than the first page of the Forms 1040 but “did not study the
numbers that were there to determine whether those numbers were accurate or how
those numbers were calculated.” On the basis of petitioner’s inconsistent and
vague testimony we are not persuaded that she reviewed the tax returns or inquired
as a reasonable person would do. Section 6015(b)(1)(C) “was not designed to
- 12 -
[*12] protect willful blindness or to encourage the deliberate cultivation of
ignorance.” Doyel v. Commissioner, T.C. Memo. 2004-35, 2004 Tax Ct. Memo
LEXIS 35, at *29 (quoting Friedman v. Commissioner, 53 F.3d 523, 525 (2d Cir.
1995), aff’g in part, rev’g in part, and remanding T.C. Memo. 1993-549).
Accordingly, we hold that petitioner has failed to prove that she did not know or
have reason to know about the understatements. Petitioner has therefore failed to
satisfy the requirements of section 6015(b)(1)(C).
Section 6015(b)(1)(D) provides that in order for a requesting spouse to
obtain relief, it must be inequitable to hold her liable for the deficiency in tax
attributable to such understatement. “All of the facts and circumstances are
considered in determining whether it is inequitable to hold a requesting spouse
jointly and severally liable for an understatement.” Sec. 1.6015-2(d), Income Tax
Regs. The regulation specifies that some of the relevant factors are: (1) whether
the requesting spouse significantly benefited, directly or indirectly, from the
understatement; (2) whether the requesting spouse has been deserted by the
nonrequesting spouse; and (3) whether the spouses have been divorced or
separated. Id.
Section 1.6015-2(d), Income Tax Regs., provides that a relevant factor in
this determination is whether the requesting spouse significantly benefited,
- 13 -
[*13] directly or indirectly, from the understatement. Normal support is not
considered a significant benefit. See Flynn v. Commissioner, 93 T.C. 355, 367
(1989). The record does not indicate whether petitioner significantly benefited
from the understatements.
We may consider whether the requesting spouse was deserted, divorced, or
separated from the nonrequesting spouse. See Alt v. Commissioner, 119 T.C. at
315; sec. 1.6015-2(d), Income Tax Regs. Petitioner is still married to Mr. Canty,
and they still live together in Maryland.
The Court has also held that a material factor is whether the failure to report
the correct tax liability on the joint return results from concealment, overreaching,
or any other wrongdoing on the part of the nonrequesting spouse. See Alt v.
Commissioner, 119 T.C. at 314 (citing Jonson v. Commissioner, 118 T.C. 106,
119 (2002), aff’d, 353 F.3d 1181 (10th Cir. 2003)). Nothing in the record
indicates that Mr. Canty hid or concealed financial or tax information from
petitioner, and therefore we find that Mr. Canty did not hide or conceal from her
any information relating to their income tax returns for the taxable years 2010 and
2011.
Petitioner bears the burden of establishing that it is inequitable to hold her
liable for the deficiencies in tax attributable to the understatements. See Rule
- 14 -
[*14] 142(a); Flynn v. Commissioner, 93 T.C. at 359. Petitioner has failed to meet
her burden. We find that under section 6015(b)(1)(D) it is not inequitable to hold
petitioner liable for the deficiencies in tax for 2010 and 2011. Since petitioner
failed to satisfy the requirements of section 6015(b)(1)(C) and (D), she does not
qualify for relief under section 6015(b)(1).3 See Alt v. Commissioner, 119 T.C. at
313.
II. Section 6015(f)
Section 6015(f) allows for an alternative means of relief for a requesting
spouse who does not otherwise qualify for relief under section 6015. Pursuant to
section 6015(f), the Commissioner is authorized to grant equitable relief from joint
and several liability if “taking into account all the facts and circumstances, it is
inequitable to hold the individual liable for any unpaid tax or any deficiency (or
any portion of either)”.
A. Threshold Conditions
A requesting spouse must satisfy seven threshold conditions before a
request under section 6015(f) will be considered. See Rev. Proc. 2013-34, sec. 4,
2013-43 I.R.B. 397, 399-403, modifying and superceding Rev. Proc. 2003-61,
3
Accordingly, we need not discuss whether petitioner satisfies the
requirements of sec. 6015(b)(1)(B).
- 15 -
[*15] 2003-2 C.B. 296. Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. at 399-400,
sets forth the following threshold conditions: (1) the requesting spouse filed a
joint return for the year in which relief is sought; (2) relief is not available to the
requesting spouse under section 6015(b) or (c); (3) the claim for relief is timely
filed; (4) no assets were transferred between the spouses as part of a fraudulent
scheme; (5) the nonrequesting spouse did not transfer disqualified assets to the
requesting spouse; (6) the requesting spouse did not knowingly participate in the
filing of a fraudulent joint return; and (7) absent certain exceptions, the income tax
liability from which the requesting spouse seeks relief is attributable, either in full
or in part, to an item of the nonrequesting spouse. Respondent concedes that
petitioner meets all seven threshold requirements.
B. Streamlined Relief
When, as here, the seven threshold conditions have been met, the guidelines
allow a requesting spouse to qualify for a streamlined determination for relief
under section 6015(f) if all of the following conditions are met: (1) the requesting
spouse is no longer married to the nonrequesting spouse on the date the IRS makes
its determination; (2) the requesting spouse will suffer economic hardship if relief
is not granted; and (3) on the date the joint return was filed, the requesting spouse
did not know or have reason to know that there was an understatement or
- 16 -
[*16] deficiency. Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. at 400. Petitioner
does not qualify for a streamlined determination because she was married to Mr.
Canty when the IRS made its final determination.
C. Facts and Circumstances
Where a requesting spouse meets the threshold conditions but fails to
qualify for a streamlined determination, she may still be eligible for equitable
relief if, taking into account all the facts and circumstances, it would be
inequitable to hold her liable for the deficiency. See id. sec. 4.03. The guidelines
list the following nonexclusive factors that the Commissioner takes into account
when determining whether to grant equitable relief: (1) marital status;
(2) economic hardship; (3) in the case of an understatement, knowledge or reason
to know of the items giving rise to the understatement or deficiency; (4) legal
obligation; (5) significant benefit; (6) compliance with income tax laws; and
(7) mental or physical health. Id. In making our determination under section
6015(f), we consider these factors as well as any other relevant factors. No single
factor is determinative, and all factors shall be considered and weighed
appropriately. See Pullins v. Commissioner, 136 T.C. 432, 448 (2011); Molinet v.
Commissioner, T.C. Memo. 2014-109, at *10.
- 17 -
[*17] The first factor is whether the requesting spouse is separated or divorced
from the nonrequesting spouse. Rev. Proc. 2013-34, sec. 4.03(2)(a). Petitioner is
still married to and living with Mr. Canty. Accordingly, this factor is neutral.
The second factor is whether the requesting spouse will suffer economic
hardship if relief is not granted. Id. sec. 4.03(2)(b), 2013-43 I.R.B. at 401. A
requesting spouse suffers economic hardship if the satisfaction of the tax liability,
in whole or in part, would cause her to be unable to pay reasonable basic living
expenses. Id. In her Form 8857 petitioner reported monthly household income of
$13,208.08 and monthly household expenses of $10,113.87. We cannot find that
petitioner would suffer economic hardship if we deny her relief. Accordingly, this
factor is neutral.
The third factor is whether the requesting spouse knew or had reason to
know of the items giving rise to the understatement as of the date the joint return
was filed. Id. sec. 4.03(2)(c)(i)(A). We found above that, under section
6015(c)(1)(C), petitioner failed to prove that she had no reason to know of the
understatements. Rev. Proc. 2013-34, sec. 4.03(2)(c)(iii), 2013-43 I.R.B. at 402,
provides that the facts and circumstances that are considered in determining
whether the requesting spouse had reason to know of an understatement include:
(1) the requesting spouse’s level of education; (2) any deceit or evasiveness by the
- 18 -
[*18] nonrequesting spouse; (3) the requesting spouse’s degree of involvement in
the activity generating the income tax liability; (4) the requesting spouse’s
involvement in business or household financial matters; (5) the requesting
spouse’s business or financial expertise; and (6) lavish or unusual expenditures
compared with past spending levels.
Petitioner has a bachelor’s degree in economics and a master’s degree in
business and public administration. No evidence was presented that Mr. Canty
was deceitful or hid any information from petitioner in regard to the tax returns.
Although petitioner was not involved with the law office, she had the opportunity
to question Mr. Canty regarding the items reported on the Schedules C but chose
not to do so. Petitioner is a financial management analyst, and she testified that
she “take[s] care of most of the household expenses.” We find that petitioner
failed to prove that she did not know and had no reason to know of the
understatements. Accordingly, this factor weighs against relief.
The fourth factor is whether the requesting spouse or the nonrequesting
spouse has a legal obligation to pay the outstanding Federal income tax liability.
Id. sec. 4.03(2)(d). This factor will be neutral if the spouses are not separated or
divorced. Id. Accordingly, this factor is neutral.
- 19 -
[*19] The fifth factor is whether the requesting spouse significantly benefited
from the understatement. Id. sec. 4.03(2)(e). We have not found that petitioner
significantly benefited from the understatements. Petitioner provided no
testimony or other evidence that the family vacations and vehicle purchase
benefited her or to what extent. This factor is neutral.
The sixth factor considers whether the requesting spouse has made a good-
faith effort to comply with the income tax laws in the taxable years following the
years for which relief is requested. Rev. Proc. 2013-34, sec. 4.03(2)(f), 2013-43
I.R.B. at 402-403. Petitioner filed her 2012 income tax return more than a year
late and did not timely pay her 2012 income tax liability. Accordingly, this factor
weighs against granting relief.
The seventh factor is whether the requesting spouse was in poor physical or
mental health. Id. sec. 4.03(2)(g), 2013-43 I.R.B. at 403. This factor will weigh in
favor of relief if the requesting spouse was in poor physical or mental health at the
time the returns to which the request for relief pertains were filed or at the time the
requesting spouse requested relief. Id. This factor is neutral if the requesting
spouse was in neither poor physical nor poor mental health. Id. Petitioner
stipulates that she had no physical or mental health problems at the time she
signed the 2010 and 2011 tax returns. Petitioner did not offer any testimony or
- 20 -
[*20] other evidence regarding her physical or mental health at the time she
requested innocent spouse relief. Accordingly, this factor is neutral.
On the basis of the foregoing facts and circumstances, we find that it would
not be inequitable to deny petitioner relief under section 6015(f).
In reaching our decision, we have considered all arguments made by the
parties, and to the extent not mentioned or addressed, they are irrelevant or
without merit.
To reflect the foregoing,
Decision will be entered
for respondent.