dissenting: I have joined with Judge Colvin in his dissenting opinion, because I believe the language of section 6015(c)(3)(C) is ambiguous and that we should consult legislative history for guidance in resolving that ambiguity. I write separately only to express my concern about the Court’s application of section 6013(e) case law to the case at hand.
Section 6015 is a remedial statute; therefore, its provisions should be construed and applied liberally in favor of those whom the statute was designed to benefit. Cf. Helvering v. Bliss, 293 U.S. 144, 150-151 (1934); Allen v. Commissioner, 514 F.2d 908, 915 (5th Cir. 1975). Moreover, it is apparent that Congress intended section 6015 to provide broader relief than that provided by section 6013(e).
In its discussion of section 6015(f), the majority has found — and I agree — that, considering the facts and circumstances of this case, it is not inequitable to hold petitioner liable for the deficiency. Since equitable consideration is also a requirement for relief under section 6015(b)(1)(D), the majority’s discussion of section 6015(b)(1)(C) is unnecessary. The word “understatement” used in section 6015(b)(1)(C) is different from the word “item” construed in the discussion of section 6015(c)(3)(C). Yet the majority treats both as synonymous with “transaction”. I would defer this discussion to a case that required it.1
Accordingly, I respectfully dissent.
Colvin and Marvel, JJ., agree with this dissenting opinion. Colvin, J.,dissenting: Section 6015(c)(3)(C) provides that the separate liability election is not available if the Commissioner proves that the putative innocent spouse “had actual knowledge * * * of any item giving rise to a deficiency”. The majority holds that in omitted income cases:
Section 6015(c)(3)(C) does not require actual knowledge on the part of the electing spouse as to whether the entry on the return is or is not correct. [Majority op. p. 195.]
I respectfully dissent because the majority’s construction of section 6015(c)(3)(C) squarely conflicts with the legislative history of section 6015(c). I also dissent because the majority fails to discuss Charlton v. Commissioner, 114 T.C. 333 (2000), and relies on Wiksell v. Commissioner, 215 F.3d 1335 (9th Cir. 2000), affg. without published opinion T.C. Memo. 1999-32, which did not present the issue we face here.
I. The Phrase “Item Giving Rise to a Deficiency” Is Ambiguous
Section 6015(c)(3)(C) provides in pertinent part that
If the Secretary demonstrates that an individual making an election under this subsection 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), such election shall not apply to such deficiency (or portion). * * * [Emphasis added.]
Thus, section 6015(c) relief is not available if the Commissioner proves that the putative innocent spouse had actual knowledge of any “item giving rise to a deficiency”. That phrase is ambiguous; the “item” of which the putative innocent spouse must have had actual knowledge could be either of two things. First, it might refer to a transaction or activity. If so, then, as respondent contends, see majority op. p. 195, a putative innocent spouse would not qualify for the separate liability election under section 6015(c) if the Commissioner showed that he or she knew that an income-producing transaction or activity had occurred.
Alternatively, knowledge of an “item giving rise to a deficiency” might refer to knowledge that an entry on a tax return was incorrect. Under this interpretation, the putative innocent spouse would not be disqualified under section 6015(c) merely because he or she knew that the income-producing transaction or activity giving rise to the deficiency had occurred. Instead, the Commissioner would be required to show that the electing spouse had actual knowledge that the treatment of the item on the tax return was incorrect.1
II. Statutory Context and Legislative History Make Section 6015(c) Clear
A. Section 6015(c) Compared to Former Section 6013(e)(1)(C)
In an unreported income case, a taxpayer failed to qualify for innocent spouse relief under former section 6013(e)(1)(C) if the taxpayer had knowledge of the transaction which led to the understatement. See Reser v. Commissioner, 112 F.3d 1258, 1267 (5th Cir. 1997). The instant case is also an unreported income case, and respondent contends we should apply the same standard here. See majority op. p. 195.
Congress enacted sweeping changes to the innocent spouse provisions in 1998. In addition to liberalizing section 6013(e)(1)(C) in new section 6015(b), Congress also provided two additional forms of innocent spouse relief: The separate liability election (section 6015(c)) and authority for the Secretary to grant relief on equitable grounds (section 6015(f)). Congress also enacted a different knowledge requirement in section 6015(c)(3)(C) than had applied in former section 6013(e)(1)(C). First, section 6015(c)(3)(C) places the burden of proof on the Commissioner; under former section 6013(e) it was on the taxpayer. Second, section 6015(c)(3)(C) requires that the putative innocent spouse’s knowledge be actual; former section 6013(e)(1)(C) required only that the putative innocent spouse “know or have reason to know”. Third, section 6015(c) requires that the putative innocent spouse have the requisite knowledge “at the time such individual signed the return”; former section 6013(e)(1)(C) required that he or she have the requisite knowledge “in signing the return”. Fourth, section 6015(c) requires that the putative innocent spouse have the requisite knowledge of “any item giving rise to a deficiency”; former section 6013(e)(1)(C) required that the putative innocent spouse know “that there was such substantial understatement”. These broad structural changes, and the specific changes to the knowledge requirement, dictate that we be cautious in applying interpretations of former section 6013(e)(1)(C) to section 6015(c).
B. Legislative History
As stated, the knowledge requirement in section 6015(c) is reasonably subject to different interpretations. We may consider legislative history to resolve statutory ambiguity. See Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997); Golden Rod Farms, Inc. v. United States, 115 F.3d 897, 899 (11th Cir. 1997). We especially should respect legislative history where there is unequivocal evidence of legislative purpose. See Huntsberry v. Commissioner, 83 T.C. 742, 747-748 (1984).
The separate liability election provisions originated in the Senate version of section 6015.2 The legislative history consistently shows that Congress intended “actual knowledge” to be knowledge that the return is incorrect.
First, the Senate Committee on Finance report states that a putative innocent spouse will not qualify for relief under section 6015(c) if the Commissioner shows that he or she had actual knowledge that any item on the return was incorrect. The Senate Committee on Finance report provides that
if the IRS proves that the electing spouse had actual knowledge that an item on a return is incorrect, the election will not apply to the extent any deficiency is attributable to such item. [S. Rept. 105-174, at 59 (1998); emphasis added.]
Second, the Senate Committee on Finance report, in the “Reasons for Change” section, stated the following with respect to the separate liability election:
The Committee intends that this election be available to limit the liability of spouses for tax attributable to items of which they had no knowledge. The Committee is concerned that taxpayers not be allowed to abuse these rules by knowingly signing false returns, or by transferring assets for the purpose of avoiding the payment of tax by the use of this election. The Committee believes that rules restricting the liability of taxpayers to limit their liability in such situations are appropriate. [S. Rept. 105-174, at 55-56 (1998); emphasis added.]
Thus, the Senate Committee on Finance equated “actual knowledge” with “knowingly signing [a] false [return]”.
Third, Senator Graham said the following in offering amendments to section 6015(c) (unanimously adopted by the Senate) on behalf of himself and other Senate Committee on Finance members:
The primary exception [to allocable liability under section 6015(c)] was that if the Secretary of the Treasury could demonstrate — and the burden is on the Secretary of the Treasury to demonstrate — that an individual making this election to be taxed only for their proportional share of the deficiency of the return, that if they had actual knowledge of the conditions within that return which led to this deficiency, then they would be 100 percent responsible. [Senate Floor Debate for Amendment No. 2369, 144 Cong. Rec. 56, S4474 (1998); emphasis supplied.]
Senator D’Amato, also a member of the Senate Committee on Finance, said:
There were concerns, and rightly so, that some taxpayers may try to abuse the innocent spouse rules by knowingly signing false returns, or transferring assets for the purpose of avoiding the payment of tax, and then claim to be innocent. Obviously, no one would want to open the door to that type of fraud. As such, language was included in the bill that would prevent an individual from electing the innocent spouse provision if they had “actual knowledge of any item giving rise to a deficiency.” [Id.; emphasis added.]
Fourth, using language identical to that used by the Senate Committee on Finance, the conference report states that a putative innocent spouse will not qualify for relief under section 6015(c) if he or she had actual knowledge that any item on the return was incorrect. The conference report states that
if the IRS proves that the electing spouse had actual knowledge that any item on a return is incorrect, the election will not apply to the extent any deficiency is attributable to such item. [H. Conf. Rept. 105-599, at 253 (1998); emphasis added.]
Thus, the legislative history unequivocally shows that Congress intended to require the Commissioner to prove that the putative innocent spouse knew that his or her tax return was incorrect.3
The passage from the legislative history on which the majority relies relates to the allocation of items between the two spouses when one qualifies for the separate liability election. See majority op. p. 196. It does not describe the knowledge requirement, interpretation of which is at issue here, and thus does not address this issue. Further, statutory language in the allocation rule undermines the majority’s position. Section 6015(d)(3)(A) provides that
(A) In GENERAL. — Except as provided in paragraphs (4) and (5), any item giving rise to a deficiency on a joint return shall be allocated to individuals filing the return in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year. [Emphasis added.]
The text of section 6015(d)(3)(A) implies that an “item giving rise to a deficiency” is an item on the return rather than an underlying transaction or activity because an amount on a return can be allocated, i.e., split, but an underlying transaction or activity cannot.
Thus, the legislative history accompanying enactment of section 6015(c) clearly shows that Congress intended the knowledge requirement to mean knowledge that the return is incorrect, not knowledge that there was an income-producing activity or transaction. See S. Rept. 105-174, supra at 59; H. Conf. Rept. 105-599, supra at 253. The majority fails to apply that standard. See majority op. p. 195.
The majority’s reliance on the tefra partnership rules (sections 6231 and 6245) to construe “item” is not persuasive because those sections do not speak to the interpretative issue we face under section 6015(c)(3)(C).
III. The Majority Disregards the Requirement in the Conference Report That the Commissioner Prove That the Putative Innocent Spouse Knew That an Item on the Return Was “Incorrect”
As stated above, the majority holds that, in omitted income cases, section 6015(c)(3)(C) does not require actual knowledge on the part of the electing spouse as to whether the entry on the return is or is not correct. See majority op. p. 195.4
The majority concludes that petitioner inquired in good faith as to whether her return was correct, she was assured that it was correct, and she had no obligation to inquire further. See majority op. p. 199. In explaining its holding that it was an abuse of discretion for respondent not to grant equitable relief under section 6015(f) as to petitioner’s liability for the section 6662(a) accuracy-related penalty, the majority states:
we are satisfied that at the time she signed the 1992 tax return, petitioner believed that the portion of retirement distribution proceeds used to pay off the mortgage on the family residence would be nontaxable. Further, we believe petitioner acted in good faith in reaching this erroneous conclusion.
[Petitioner] asked Mr. Cheshire about the potential tax ramifications of the retirement distributions, and Mr. Cheshire assured petitioner that he had consulted with a certified public accountant and had been advised that the payment of the outstanding mortgage on the family residence and any amount rolled over into a qualified account reduced the taxable amount of the retirement distributions. Mrs. Cheshire had no reason to doubt the truthfulness of Mr. Cheshire’s statement, and in fact believed him. Under these circumstances, we do not believe petitioner had an obligation to inquire further.
[Majority op. pp. 198-199.]
In short, the majority holds that petitioner thought the reporting of the distributions on her tax return was correct. Thus, in holding for respondent, the majority disregards the requirement in the Senate Committee on Finance report and the conference report that the putative innocent spouse know something was “incorrect”. See majority op. p. 195.
IV. Wiksell v. Commissioner
The taxpayer in Wiksell v. Commissioner, 215 F.3d 1335 (9th Cir. 2000), affg. without published opinion T.C. Memo. 1999-32, knew that checks she received from her husband’s business had not been reported on their 1994 and 1995 tax returns. See id. She also had actual knowledge that the return was incorrect. See the findings of fact in Wiksell v. Commissioner, T.C. Memo. 1994-99.
The issue in Cheshire is whether knowledge of an “item giving rise to a deficiency” refers to the putative innocent spouse’s knowledge of the underlying activity, or knowledge that the income, deduction, loss, or credit from the activity is incorrectly reported on the tax return. The opinion of the U.S. Court of Appeals for the Ninth Circuit in Wiksell v. Commissioner, supra, does not discuss the “knowledge that any item on the return is incorrect” language from the legislative history. The opinion of the Court of Appeals does not say the parties disputed, or that the Court of Appeals considered, whether the actual knowledge of “any item giving rise to a deficiency’ required by section 6015(c) is knowledge of an income-producing transaction, or knowledge that it was reported incorrectly. In fact, since Mrs. Wiksell knew her return was wrong, the Court of Appeals had no need to consider that issue.
V. Charlton v. Commissioner
In Charlton v. Commissioner, 114 T.C. 333 (2000), the putative innocent spouse knew of and had access to correct information about his then-wife’s income-producing activity. See id. at 341. Even though the putative innocent spouse in Charlton knew that his wife had an income-producing Schedule C business, we concluded that the Commissioner failed to show that the putative innocent spouse had knowledge, when he signed the return, of any item giving rise to a deficiency. See id. Thus, Charlton may be cited for the proposition (contrary to respondent’s position in Cheshire, majority op. p. 194) that knowledge of the income-producing activity does not bar relief under section 6015(c).
The majority finds that petitioner knew that Mr. Cheshire received retirement distributions and interest on the Austin Telco account in 1992, and that she knew the amounts of the retirement distributions and interest. See majority op. pp. 185-186, 193, 196-197. However, the majority’s failure to discuss Charlton will inevitably cause confusion because, both here and in Charlton, we found that the putative innocent spouse knew of the activity which gave rise to the deficiency. Under the doctrine of stare decisis we generally follow the holding of a previously decided published opinion of the Tax Court or explain why we are not doing so. This is especially true when our prior published opinion involves statutory construction. See Hesselink v. Commissioner, 97 T.C. 94, 99-100 (1991).
The majority concludes that the knowledge requirement of section 6015(c) does not require the electing spouse to know that the item on the return is incorrect, see majority op. p. 194, and points out that petitioner knew the amount of the unreported income. See majority op. pp. 196-197. In contrast, the putative innocent spouse in Charlton did not know the amount of unreported income from his then-wife’s business. This might be how the majority would distinguish Charlton from the instant case; i.e., that knowledge of an income-producing transaction or activity does not cause a putative innocent spouse to fail to qualify for the separate liability election unless the putative innocent spouse knew the amount of income involved. If the majority is promulgating this factual distinction as a new standard, it should so state.
Parr, Gale, and Marvel, JJ., agree with this dissenting opinion.The facts of Charlton v. Commissioner, 114 T.C. 333 (2000), are distinguishable, and the discussion of sec. 6015(b) therein is thus not determinative.
That “item giving rise to a deficiency” could be reasonably construed in either of these ways is demonstrated by the fact that the Internal Revenue Code uses the term “item” to refer both to an underlying activity and to the tax return treatment of an activity. As an example of the former, sec. 61(a) provides that
SEC. 61(a). * * * Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
As an example of the latter, sec. 57(a) refers to various “items of tax preference”, all of which are defined by reference to tax consequences. Thus, the phrase “item giving rise to a deficiency” in sec. 6015(c)(3)(C), actual knowledge of which causes a putative innocent spouse to fail to qualify under sec. 6015(c), is reasonably subject to more than one interpretation.
Under the Senate version of sec. 6015(c), the separate liability election was a complete substitute for innocent spouse relief under sec. 6013(e). Under the conference agreement and as enacted, sec. 6013(e) was repealed and reenacted in liberalized form as sec. 6015(b), and the separate liability election was provided as an alternative, available only to individuals no longer married, legally separated, or living apart for at least 12 months.
Contrary to the suggestion that this language might merely be an example of a situation where relief is not warranted, the above-quoted passage from the conference report and the identical language from the Senate Finance Committee report are explanations of the statutory rule, not examples. The Senate Finance Committee report and the conference report have a specific way to present examples. First, they state a general point; then they state “For example,” to illustrate the point. This pattern is repeated seven times in the Senate Finance Committee’s explanation of sec. 6015 and seven times in the conference report’s explanation of sec. 6015.
The majority also suggests another standard; i.e., that “the electing spouse must have an actual and clear awareness of the omitted income.” See majority op. p. 195. If sec. 6015(c)(3)(C) is unambiguous, we need not create another standard; if it is ambiguous, legislative history provides the standard; i.e., that relief is not available if the Commissioner proves that the electing spouse had actual knowledge that any item on a return is incorrect.