T.C. Memo. 2017-169
UNITED STATES TAX COURT
BETHLYN BUSCH, Petitioner, AND BRETT FERRIGAN, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4665-16. Filed August 30, 2017.
Kelly A. Gibson, for petitioner.
Brett Ferrigan, pro se.
Brandon S. Cline and John T. Arthur, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Petitioner seeks review of respondent’s determination that
she is not entitled to relief from joint and several liability for tax year 2012 (year at
issue). The issues for decision are:
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[*2] (1) whether petitioner qualifies for relief from joint and several liability
under section 6015(b)1 for the year at issue. We hold she does not;
(2) whether petitioner qualifies for relief from joint and several liability
under section 6015(c) for the year at issue. We hold she does partially;
(3) whether petitioner qualifies for relief from joint and several liability
under section 6015(f) for the year at issue. We hold she does not;
(4) whether petitioner is liable for an accuracy-related penalty under section
6662(a). We hold she is to the extent stated herein.
FINDINGS OF FACT
Petitioner resided in Florida at the time she petitioned this Court.
Petitioner and intervenor remained married during the year at issue and
divorced in 2014. Before their marriage, petitioner owned real property in West
Palm Beach (marital property). Intervenor’s name was later added to the title of
the marital property.
Petitioner also owned rental property (rental property), which was rented
first to individuals and then to a church during the year at issue. Petitioner and
intervenor deposited the income from the rental property into their joint bank
1
All section references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
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[*3] account. Petitioner and intervenor jointly managed renting out the rental
property. During the year at issue petitioner was the sole legal owner of the rental
property.
Petitioner initially purchased the rental property for $200,000. She
refinanced the marital property to purchase the rental property. At the time of trial
petitioner had equity of $179,000 in the rental property. No adjustment was made
to account for the value of the land when depreciating the rental property. The
nondepreciable nature of land created an inflated depreciation deduction.
The marital property was refinanced multiple times after the purchase of the
rental property. Some of the proceeds from the refinancing were used to cover the
couple’s monthly expenses. The mortgage on the marital property was paid from
petitioner and intervenor’s joint bank account.
Petitioner and intervenor filed joint returns for taxable years 2003 through
2013. In the first years of their marriage, petitioner and intervenor had a certified
public accountant (C.P.A.) prepare their tax returns. Eventually, the couple
decided to rely solely on intervenor to prepare their returns. Intervenor had no
background in taxes or tax return preparation. When preparing their tax returns,
intervenor relied upon the software TurboTax.
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[*4] Petitioner knew that intervenor prepared their 2012 tax return. Petitioner
orally supplied intervenor with the relevant tax information each year. Petitioner
did not provide intervenor with any books or records for the tax information she
gave him. Neither did she review their 2012 tax return. Intervenor never withheld
information about their tax returns from petitioner. Included with the 2012 tax
return was petitioner’s Schedule C, Profit or Loss from Business, intervenor’s
Schedule C, and a Schedule E, Supplemental Income and Loss, reporting income
and expenses from the rental property.
Petitioner is a practitioner of oriental medicine; she was self-employed
during the year at issue. Using QuickBooks software, petitioner prepared profit
and loss statements on her own.
Intervenor had multiple jobs during his marriage to petitioner, including
acupuncturist and financial adviser. These various positions gave rise to Schedule
C income, Schedule C expenses, and wages reported on Forms W-2, Wage and
Tax Statement. Intervenor was a financial adviser for the year at issue. He has a
bachelor’s degree in journalism and a Series 7 securities license.
Petitioner and intervenor regularly discussed intervenor’s business,
including his income and expenses. Petitioner knew of, and frequently attended,
intervenor’s business dinners with clients.
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[*5] In the later half of their marriage, petitioner and intervenor began taking
distributions from their retirement accounts to cover their expenses. The couple’s
expenses totaled around $6,000 per month.
Petitioner and intervenor eventually started divorce proceedings. On
August 5, 2014, their divorce was finalized. Petitioner received the marital
property and the rental property in the divorce settlement.
On December 3, 2015, respondent mailed separate statutory notices of
deficiency (notices) determining a deficiency of $32,188 and a section 6662
accuracy-related penalty of $6,841.80 for the year at issue. Petitioner had
preemptively filed Form 8857, Request for Innocent Spouse Relief, with
respondent on September 22, 2014, for tax years 2011, 2012, and 2013. In the
notices, respondent denied petitioner’s relief request for the year at issue.
Petitioner timely petitioned this Court under section 6213. The only issue before
the Court at trial was relief from joint and several liability.
OPINION
I. Jurisdiction
The Tax Court is a court of limited jurisdiction and can exercise its
jurisdiction only to the extent provided by Congress. Sec. 7442; Judge v.
Commissioner, 88 T.C. 1175, 1180-1181 (1987); Naftel v. Commissioner, 85 T.C.
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[*6] 527, 529 (1985); see also Rules 13(a), 320(b). With respect to claims for
relief from joint and several liability, the Court has three jurisdictional bases for
reviewing a claim: (1) as an affirmative defense in a deficiency redetermination
proceeding pursuant to section 6213(a); (2) as a stand-alone petition pursuant to
section 6015(e) where the Commissioner has issued a final determination denying
the electing spouse’s claim for relief or the Commissioner has failed to rule on the
claim within six months of its filing; and (3) in the context of a petition for review
of a lien or levy action pursuant to section 6320(c) or 6330(d). See secs. 6015(e),
6213, 6214, 6320(c), 6330(c)(2)(A)(i), (d); Maier v. Commissioner, 119 T.C. 267,
270 (2002), aff’d, 360 F.3d 361 (2d Cir. 2004); see also Corson v. Commissioner,
114 T.C. 354, 363 (2000); Baumann v. Commissioner, T.C. Memo. 2005-31; Hale
Exemption Tr. v. Commissioner, T.C. Memo. 2001-89.
Petitioner timely filed a petition with this Court contesting the
determination in the notices that she was not entitled to relief from joint and
several liability for the year at issue. Consequently, this Court has jurisdiction to
review petitioner’s claim for relief under section 6213(a) as an affirmative defense
in this deficiency proceeding.
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[*7] II. Section 6015
Three types of relief are available under section 6015. Section 6015(b)
provides full or partial relief from joint and several liability if specific
requirements are met. Section 6015(c) allows the deficiency to be allocated to the
nonrequesting spouse in the event the couple is no longer married. Section
6015(f) is available when both section 6015(b) and (c) are unavailable and, if
under all facts and circumstances, we conclude that it is inequitable to hold the
requesting spouse liable for any portion of an unpaid tax.
A. Section 6015(b) Relief
Section 6015(b) requires a taxpayer seeking relief from joint and several
liability to satisfy five conditions: (1) a joint return was filed for the taxable year,
(2) there is an understatement of tax attributable to erroneous items of the
taxpayer's spouse, (3) the taxpayer establishes that in signing the return, he or she
did not know, and had no reason to know, that there was an understatement,
(4) taking into account all facts and circumstances, it would be inequitable to hold
the taxpayer liable for the deficiency in tax for such taxable year attributable to
such understatement, and (5) the taxpayer timely elects relief under section
6015(b). These conditions are stated in the conjunctive, and the taxpayer must
satisfy all five in order to be awarded relief. See Alt v. Commissioner, 119 T.C.
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[*8] 306, 313 (2002), aff’d, 101 F. App’x 34 (6th Cir. 2004). As stated, the failure
of a taxpayer to satisfy any one of the elements precludes relief. Haltom v.
Commissioner, T.C. Memo. 2005-209. The burden of proof is on the party
electing the application of section 6015. Rule 142(a) (1).
Petitioner and respondent agree that petitioner and intervenor filed a joint
return for the year at issue and petitioner timely elected relief. Accordingly,
petitioner must also show that (1) the understatement of tax is attributable to
erroneous items of intervenor, (2) petitioner did not know nor have reason to know
of the understatement, and (3) it would be inequitable to hold her liable for the
deficiency attributable to the understatement. See Alt v. Commissioner, 119 T.C.
at 313.
1. Attribution Requirement
Under section 6015(b)(1)(B), petitioner is eligible for relief only if the
understatement of tax is attributable to erroneous items of intervenor. A spouse’s
ownership or activity relating to the erroneous item determines whether the
understatement is attributable to only one spouse. See Olson v. Commissioner,
T.C. Memo. 2009-294.
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[*9] a. Intervenor’s Schedule C
The record shows that the items reported on intervenor’s Schedule C are
attributable to him and not petitioner. Therefore the Court finds that those items
are attributable to the nonrequesting spouse, and the second element of section
6015(b) is satisfied as to those items.
b. Schedule E
Petitioner purchased the rental property, and her name was the only name on
the title. Petitioner and intervenor jointly managed renting out the rental property,
and the proceeds were deposited in a joint bank account. Petitioner currently
resides at the rental property. On the basis of these facts the Schedule E income
and deductions are attributable to both petitioner and intervenor. See Gaitan v.
Commissioner, T.C. Memo. 2012-3 (erroneous items were attributable to both
spouses when both were involved in the business).
2. Knowledge Requirement
A spouse can have neither actual knowledge of, nor a reason to know of the
understatement giving rise to the adjustment. A spouse has reason to know if a
reasonably prudent taxpayer could have been expected to know that the return
contained an understatement. Kistner v. Commissioner, 18 F.3d 1521 (11th Cir.
1994), rev’g T.C. Memo. 1991-463; Stevens v. Commissioner, 872 F.2d 1499
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[*10] (11th Cir. 1989), aff’g T.C. Memo. 1988-63. When determining whether
there was “reason to know”, the Court of Appeals in Stevens noted certain factors:
(1) the requesting spouse’s level of education, (2) the requesting 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 other
spouse’s evasiveness or deceitfulness concerning the family’s finances. Stevens v.
Commissioner, 872 F.2d at 1505.
Although petitioner has no background in tax, ignorance of the tax
consequences of an item which gives rise to a deficiency is no defense for one
seeking innocent spouse relief. Price v. Commissioner, 887 F.2d 959, 964 (9th
Cir. 1989). Petitioner used QuickBooks to keep business records. Petitioner
frequently attended intervenor’s business dinners. Intervenor would discuss his
business, including his income, with petitioner regularly. While petitioner did not
review the tax returns, nothing in the record shows that this was a result of deceit
by intervenor. It is clear that petitioner had knowledge of the underlying items
and how to keep track of business expenses. The facts are sufficient to show that
petitioner had actual knowledge, or reason to know, of the understatement giving
rise to the adjustment, pursuant to Stevens and Price.
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[*11] In sum, petitioner is not entitled to section 6015(b) relief for the
adjustments to the Schedule E because she fails the attribution requirement.
Neither is petitioner entitled to section 6015(b) relief from the adjustments to
intervenor’s Schedule C because she has failed to prove that she should not have
reasonably understood those items.
B. Section 6015(c) Relief
Section 6015(c) allows a qualifying requesting spouse who is no longer
married to the person with whom the joint return was filed to receive proportionate
relief from joint liability in accordance with section 6015(d). Section 6015(d)
generally provides that items giving rise to a deficiency shall be allocated between
the spouses as though they had filed separate returns--with the requesting spouse
liable only for the proportionate share of the deficiency resulting from the
allocation. Sec. 6015(d)(1), (3)(A). Section 6015(c) does not apply to any portion
of a deficiency if the Commissioner proves by a preponderance of the evidence
that the requesting spouse had actual knowledge, when signing the return, of an
item giving rise to the portion of the deficiency otherwise allocable to the
nonrequesting spouse. Sec. 6015(c)(3)(C).
In the case of erroneous deductions, “knowledge of the item means
knowledge of the facts that made the item not allowable as a deduction or credit.”
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[*12] Sec. 1.6015-3(c)(2)(i)(B)(1), Income Tax Regs. In the case of a fictitious or
inflated deduction, knowledge means that the requesting spouse actually knew that
the expenditure was not incurred, or not incurred to the extent claimed. Id. subdiv.
(i)(B)(2).
1. Intervenor’s Schedule C
The adjustments made to intervenor’s Schedule C relate to overstated
expenses. Petitioner spoke with intervenor about his business and attended some
of his business dinners. While this shows that petitioner was aware of the
existence of these items, she did not have actual knowledge of the facts that made
the items not allowable as a deduction or credit. Petitioner did not know that
intervenor’s expenses were overstated. In the absence of petitioner’s actual
knowledge, section 6015(c) grants her relief from joint and several liability with
respect to intervenor’s Schedule C adjustments.
2. Schedule E
As stated by the regulations, there must have been actual knowledge that the
deduction was not incurred to the extent claimed on the return. According to the
testimony at trial, no one is sure how the original depreciation amount was reached
in 2003 when the rental property was purchased. We do know that TurboTax was
used during most years of the marriage. This Court has previously held that the
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[*13] use of tax software is not a “get out of jail free card” for taxpayers.
Bulakites v. Commissioner, T.C. Memo. 2017-79. The fact that intervenor entered
the information into TurboTax for the couple is not enough to insulate petitioner
from liability. Petitioner supplied the information to intervenor, and “tax
preparation software is only as good as the information one inputs into it.” Id. at
*9. Because petitioner was the owner of the rental property, she had actual
knowledge of the price paid for it. Her failure to review the tax return does not
relieve her of responsibility. It was her rental income, and she does not qualify for
section 6015(c) relief regarding the erroneous depreciation deduction.
In sum, petitioner is entitled to section 6015(c) relief relating to intervenor’s
Schedule C adjustments, but not the Schedule E adjustments relating to the rental
property she owned.
3. Section 6015(d) Allocation
Once it has been determined that the requesting spouse is entitled to relief
under section 6015(c), subsection (d) specifies the appropriate allocation of the
deficiency. It provides that erroneous items “shall be allocated to each spouse as
though each had filed a separate return for the taxable year”. Estate of Capehart v.
Commissioner, 125 T.C. 211, 215 (2005). The requesting spouse is then liable
“only for his/her proportionate share of the deficiency”. Id.
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[*14] The regulations provide guidance as to the allocation of specific items.
“Erroneous 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. “Erroneous deductions
related to a business or investment are allocated to the spouse who owned the
business or investment.” Id. subdiv. (iv). Accuracy-related penalties “are
allocated to the spouse whose item generated the penalty.” Id. subpara. (4)(iv)(B).
Under these standards, we conclude that the deficiency and penalty for the
year at issue should be allocated as follows.
The miscalculated depreciation and the underreported rental income remain
joint liabilities.
Intervenor claimed Schedule C expense deductions in excess of those he
was entitled to, resulting in a total adjustment of $15,874. Intervenor was the
source of his Schedule C income and deductions; thus the related portion of the
deficiency is attributable to him.
Any items which were not specifically discussed shall be allocated 50% to
each spouse.
C. Section 6015(f) Relief
Section 6015(f) provides equitable relief from joint and several liability if,
taking into account all facts and circumstances, it is inequitable to hold the
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[*15] requesting spouse liable for any unpaid tax or any deficiency, and relief is
not available under subsection (b) or (c). As previously discussed, petitioner is
not eligible for relief under subsection (b) or (c) for the Schedule E adjustments.
Having found that petitioner is due relief from joint and several liability
under section 6015(c) relating to intervenor’s Schedule C adjustments, relief under
section 6015(f) is inapplicable.
In regard to the Schedule E adjustments, petitioner’s ownership of the rental
property and the facts and circumstances of the reporting error on depreciation do
not demonstrate that it would be inequitable to hold petitioner liable for the
underpayment.
III. Section 6662(a) Accuracy-Related Penalty
Respondent determined that petitioner is liable for a 20% accuracy-related
penalty under section 6662(a) and (b)(1) and (2) for an underpayment attributable
to both negligence and a substantial understatement of income tax. Petitioner
claims no penalty is appropriate because: (1) she did not prepare the return and
lacked the knowledge to do so, (2) she had a good track record for paying taxes,
and (3) the largest adjustment was related to property that she was “persuaded” to
buy.
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[*16] Negligence includes any failure to make a reasonable attempt to comply
with the provisions of the internal revenue laws. Sec. 6662(c). This encompasses
any failure to maintain adequate books and records or to substantiate items
properly. Sec. 1.6662-3(b)(1), Income Tax Regs. There is a “substantial
understatement of income tax” if the amount of the understatement exceeds the
greater of 10% of the tax required to be shown on the return or $5,000. Sec.
6662(d)(1)(A).
Under section 7491(c), the Commissioner bears the burden of production
with regard to penalties and must come forward with sufficient evidence
indicating that it is appropriate to impose penalties. See Higbee v. Commissioner,
116 T.C. 438, 446 (2001). However, once the Commissioner has met the burden
of production, the burden of proof remains with the taxpayer, including the burden
of proving that the penalties are inappropriate because of reasonable cause and
good faith under section 6664. See Rule 142(a); Higbee v. Commissioner, 116
T.C. at 446-447.
Respondent has satisfied his burden of production regarding the imposition
of the accuracy-related penalty. Petitioner and intervenor’s understatement of
income tax for 2012 of $32,188, which equals the deficiency, exceeds $5,000,
which is greater than 10% of tax required to be shown on petitioner’s 2012 return.
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[*17] Petitioner has failed to provide persuasive evidence that she acted with
reasonable cause or good faith with regard to determining her tax liability.
Although petitioner had a good track record paying her taxes, that is not relevant
for determining whether the penalty is appropriate for the year at issue.
Furthermore, petitioner did not provide books or records to substantiate the
income reported or deductions claimed. Lastly, petitioner did not review the 2012
tax return. Petitioner has not demonstrated that she acted with reasonable cause or
in good faith when attempting to assess her tax liability; thus the 20% accuracy-
related penalty applies to the extent the tax liability is attributable to petitioner.
To reflect the foregoing,
Decision will be entered under
Rule 155.