United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 4, 2001 Decided June 14, 2002
No. 01-1045
Herbert L. Mitchell, et al.
Appellants
v.
Commissioner of Internal Revenue Service,
Appellee
Appeal from the United States Tax Court
(No. IRS-15953-95)
Richard B. Treanor argued the cause and filed the briefs
for appellants.
Joan I. Oppenheimer, Attorney, U.S. Department of Jus-
tice, argued the cause for appellee. With her on the brief was
David English Carmack, Attorney.
Before: Sentelle and Rogers, Circuit Judges, and
Williams, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge Sentelle.
Sentelle, Circuit Judge: This case is before us on appeal
by the taxpayer from a decision of the Tax Court denying
"innocent spouse" relief under 26 U.S.C. s 6015. We affirm
that decision for the reasons that follow.
I. Background
The facts necessary to this decision are not in dispute. See
Mitchell v. Commissioner, 80 T.C.M. (CCH) 590 (2000). Ap-
pellant Ella Marie Mitchell was married to Herbert L. Mitch-
ell for many years before his death in 1992. In 1991, Mr.
Mitchell received a distribution from the Teacher's Retire-
ment System of the State of Maryland in two checks dated
June 30, 1991 totaling $666,564.51. He also received two
form 1099-R information returns aggregating the total and
showing $629,083.14 of it as taxable, and the parties stipu-
lated that amount was taxable. Mr. Mitchell did not roll over
the distribution into an individual retirement account or other
exempt trust or arrangement. He purchased Treasury secu-
rities with the distribution.
After Mr. Mitchell's sudden death in March 1992, Mrs.
Mitchell filed a joint return for 1991. The return as filed with
the Internal Revenue Service ("IRS") reported the entire
$666,564.51 gross distribution to Mr. Mitchell accurately, but
reported that only $1,083.14 was taxable. In explanation, an
attachment claimed, accurately, $39,633.27 in employee contri-
butions and, inaccurately, $628,000.00 as an excluded rollover
into a qualified plan.1 As a matter of fact, there was no
effective rollover. The IRS determined a deficiency, and in
due course Mrs. Mitchell appeared in the Tax Court, seeking
"innocent spouse" relief under 26 U.S.C. s 6015.
The Tax Court found as fact that Mrs. Mitchell did know of
the receipt, amount, and nature of the distribution to Mr.
Mitchell but that she did not know that its treatment on the
1991 return was incorrect. Relying upon his finding of Mrs.
Mitchell's knowledge and on the Tax Court's decision in
__________
1 We note that the taxable amount shown on the forms 1099-R
exceeds the gross distribution less contributions, but there is no
issue before us relating to the taxable amount.
Cheshire v. Commissioner, 115 T.C. 183 (2000), aff'd, 282 F.3d
326 (5th Cir. 2002), the presiding judge held that Mrs.
Mitchell was not entitled to relief under either of subsections
(b) or (c) of 26 U.S.C. s 6015. Mitchell, 80 T.C.M. at 593. In
addition, the judge held that the IRS had not abused its
discretion in denying equitable relief under 26 U.S.C.
s 6015(f). Mitchell, 80 T.C.M. at 594. Mrs. Mitchell, a
resident of the District of Columbia, appealed to this court.
26 U.S.C. s 7482(a)(1).
II. Analysis
A. Subsection (b) Relief, 26 U.S.C. s 6015(b)
There are three grounds for relief under section 6015, set
out respectively in subsections (b), (c), and (f) thereof. Mrs.
Mitchell sought relief under each, and we address each in
turn.
Subsection (b) provides in pertinent part:
Under procedures prescribed by the Secretary, if--
(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 one individual filing
the joint return;
(C) the other individual filing the joint return estab-
lishes that in signing the return he or she did not know,
and had no reason to know, that there was such under-
statement;
(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 (in such form as the
Secretary may prescribe) 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,
then the other individual shall be relieved of liability for
tax (including interest, penalties, and other amounts) for
such taxable year to the extent such liability is attribut-
able to such understatement.
26 U.S.C. s 6015(b)(1). The parties agreed that subpara-
graphs (A) and (E) were satisfied, but the IRS contested (B),
(C), and (D). The Tax Court decided the issue on the basis
that subparagraph (C) was not satisfied because of Mrs.
Mitchell's knowledge of the facts, and therefore did not
address subparagraphs (B) and (D).
We find no error in the Tax Court's determination of this
issue. The Tax Court found as fact that, although Mrs.
Mitchell did not know the tax consequences, she did know
that her husband had received the distribution from the
retirement system, when he had received it, the amount of
the distribution, and what he had done with it. It was she
who informed the tax return preparer that Mr. Mitchell had
not rolled over the funds and provided accurate forms 1099-R
to the preparer. (There was some indication in the record
that the distribution could not have been rolled over in any
event, but that is irrelevant as neither Mr. Mitchell nor Mrs.
Mitchell attempted a rollover within any otherwise applicable
time period.) Accordingly, it is clear that she knew every
fact necessary to determine that the distribution, less Mr.
Mitchell's investment, was fully taxable and not excludable.
Thus, although the Tax Court found she did not know in fact
of any understatement, the facts that she did know gave her
"reason to know" of the understatement of tax on the 1991
joint return within the meaning of 26 U.S.C. s 6015(b)(1)(C).
Our holding on this point, although apparently one of first
impression in this circuit, is consistent with the holdings of
other circuits under current subparagraph (b)(1)(C), see Che-
shire v. Commissioner, 282 F.3d 326, 332-35 (5th Cir. 2002),
and under its predecessor, 26 U.S.C. s 6013(e)(1)(C). See
Buchine v. Commissioner, 20 F.3d 173, 180-81 (5th Cir.
1994); Bokum v. Commissioner, 992 F.2d 1132, 1133-35 (11th
Cir. 1993); Clevenger v. Commissioner, 826 F.2d 1379, 1382
(4th Cir. 1987); Shea v. Commissioner, 780 F.2d 561, 566-67
(6th Cir. 1986). The current version differs from its prede-
cessor only in the replacement of the former "spouse" by the
current "individual filing the joint return" and of the former
"substantial underpayment" by the current "underpayment"
simpliciter. Accordingly, decisions interpreting the former
subparagraph 6013(e)(1)(C) that do not turn on these differ-
ences remain persuasive, if not controlling, under the current
subparagraph 6015(b)(1)(C). Butler v. Commissioner, 114
T.C. 276, 283 (2000). Cf. Madley v. U.S. Parole Comm'n, 278
F.3d 1306, 1309 (D.C. Cir. 2002) (same re: 28 U.S.C. s 2253).
Mrs. Mitchell observes that many of these cases are so-
called omitted income cases applying what is called the
"knowledge of the transaction" test. She contends that we
should instead follow the Ninth Circuit's decision in Price v.
Commissioner, 887 F.2d 959 (9th Cir. 1989), and its progeny,
which she argues employ a different standard of knowledge in
innocent spouse cases involving erroneous deductions. Fun-
damentally the standard for which Mrs. Mitchell argues is
that her lack of knowledge of the tax consequences of the
income received, or of its proper treatment on the return,
establishes that she did not have reason to know of the
underpayment. No decision, not even Price, has gone that
far. Price itself expressly stated that it was not addressing
an ignorance of law defense. The Price court opened its
discussion of whether the claimant there "had reason to
know" with the following:
Of itself, ignorance of the attendant legal or tax conse-
quences of an item which gives rise to a deficiency is no
defense for one seeking to obtain innocent spouse relief.
In [Bernadette P. Price v. Commissioner, 53 T.C.M.
(CCH) 1414 (1987)], for example, the tax court denied
"innocent spouse" protection to a joint return taxpayer
who admitted she knew about unreported funds her
husband had embezzled despite the fact she did not know
that embezzled funds constitute taxable income. [Berna-
dette P.] Price, 53 T.C.M. at 1416. Thus, if a spouse
knows virtually all of the facts pertaining to the transac-
tion which underlies the substantial understatement, her
defense in essence is premised solely on ignorance of law.
Id. In such a scenario, regardless of whether the spouse
possesses knowledge of the tax consequences of the item
at issue, she is considered as a matter of law to have
reason to know of the substantial understatement and
thereby is effectively precluded from establishing to the
contrary.
Here, while the tax court properly concluded that
Patricia [Price, no relation to Bernadette] knew certain
facts about the CCM investment [for which her husband
claimed an erroneous deduction], it cannot be said that
Patricia was so intimately involved with the investment
such that she knew virtually all of the facts of the
transaction underlying the deduction, leaving her no
option but to rely solely upon ignorance of law as a
defense and therefore leaving us no option but to con-
clude that she had reason to know of the understatement.
Because Patricia's ignorance extends beyond the legal
consequences of the deduction, we proceed to determine
on the facts before us whether Patricia had reason to
know that the return contained a substantial understate-
ment.
887 F.2d 959, 964-65 (9th Cir. 1989) (citations omitted) (em-
phasis added). On the facts before us, however, it is perfectly
clear that Mrs. Mitchell knew every fact necessary to deter-
mine the legal consequences of the income, and that her
defense is simply that she did not know those consequences.
We hold that Mrs. Mitchell's complete factual knowledge gave
her reason to know of the underpayment within the meaning
of subparagraph 6015(b)(1)(C). Nothing in Price undermines
our determination. Ignorance of the law, standing alone, as it
does here, is not a defense under any test. Accord Cheshire,
282 F.3d at 335.
B. Subsection (c) Relief, 26 U.S.C. s 6015(c)
Unlike subsection (b), subsection (c) has no statutory ante-
cedent. Together with the revisions of former subsection
6013(e) enacted as 6015(b) and new subsection (f), subsection
(c) was enacted in 1998 to liberalize and expand innocent
spouse relief. Cheshire, 115 T.C. at 189. Subsection (c)
provides relief to eligible electing taxpayers by allocating any
deficiency relating to the joint return between the spouses
much as though they had filed separately. 26 U.S.C.
s 6015(c)(1), (d)(3)(A). The Tax Court did not consider this
mechanism, however, because it determined that an exception
barred such relief for Mrs. Mitchell. Mitchell, 80 T.C.M. at
593-94. That exception is as follows:
If the Secretary demonstrates that an individual mak-
ing an election under this subsection had actual knowl-
edge, 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). This subparagraph shall not apply where the
individual with actual knowledge establishes that such
individual signed the return under duress.
26 U.S.C. s 6015(c)(3)(C). The burden of proof under this
subparagraph is on the IRS. 26 U.S.C. s 6015(c)(2). The
distribution in question is "not allocable" to Mrs. Mitchell
under subsection (d), and the parties stipulated that Mrs.
Mitchell is deemed to have made any necessary elections.
There is no question of duress involved. The only question is
whether the IRS has shown that Mrs. Mitchell "had actual
knowledge, at the time [she] signed the [1991] return, of any
item giving rise to a deficiency." 26 U.S.C. s 6015(c)(3)(C).
The Tax Court found as fact that Mrs. Mitchell knew that
Mr. Mitchell had received the distribution, when he received
it, its amount, and how he invested it. See Part II.A, supra.
She also knew when she sold the Treasury securities her
husband had purchased with the distribution and deposited
the proceeds in individual retirement and other accounts. As
to her lack of knowledge, the Tax Court found only that she
did not know the tax consequences of these acts. We hold
that the knowledge that she had was actual knowledge of the
"item giving rise to a deficiency," within the meaning of the
statute. 26 U.S.C. s 6015(c)(3)(C).
In so holding, we have considered and rejected Mrs. Mitch-
ell's argument that the proper interpretation of the statutory
phrase "actual knowledge * * * of any item giving rise to a
deficiency" is that knowledge is required, not just of the item,
but of deficiency causation--knowledge that the item caused a
deficiency in whole or in part. Mrs. Mitchell has not per-
suaded us that this is the interpretation Congress intended.
First, it is a strained interpretation of the sentence read as a
whole. It depends for its force on treating the entire phrase
"any item giving rise to a deficiency" as the indivisible object
of knowledge. The more natural reading of the sentence is
that it refers to a person who has knowledge of an item, and
that that item gives rise to a deficiency without regard to
whether the person who knows of the item knows of that
consequence. Not only is Mrs. Mitchell's proposed interpre-
tation semantically awkward, it is unlikely that Congress
would have employed such subtle and ambiguous phrasing to
overrule the well-established principle that ignorance of tax
law is not a defense to liability. E.g., Hayman v. Commis-
sioner, 992 F.2d 1256, 1261-63 (2d Cir. 1993); Bokum, 992
F.2d at 1134-35; Price, 887 F.2d at 964-66 (finding of legal
ignorance not sufficient for relief; other facts considered);
Purcell v. Commissioner, 826 F.2d 470, 473-74 (6th Cir.
1987), cert. denied, 485 U.S. 987 (1988); McCoy v. Commis-
sioner, 57 T.C. 732, 734 (1972).
Mrs. Mitchell protests that one can not know of an "item"
unless one knows its tax treatment. Thus, by not knowing
the tax consequences, she did not know the distribution was
an "item" within the meaning of subsection 6015(c). Al-
though the Internal Revenue Code is full of definitions,
including definitions in subsection (c) itself, definitions that
use the word item, and definitions of various types of items,
what constitutes an item itself is nowhere defined. Mrs.
Mitchell contends it is defined circumstantially by its consis-
tent usage as something with tax consequences. This may
well be true, but if so it appears utterly unremarkable, given
the generality of the term and the purposes of the Internal
Revenue Code. What would be remarkable would be for
Congress to rely upon such an obscure and imprecise device
to make ignorance of law a defense to voluntarily incurred
joint and several liability. Cf. Cheshire, 282 F.3d at 335-37
(dismissing substantially similar argument). Nothing in the
plain language of the statute compels such a result, nor
suggests that to know of an item, one must understand its
legal significance.
Finally, in this regard, Mrs. Mitchell contends that Con-
gress implied a requirement of knowledge of the tax conse-
quences by referring to "knowledge, at the time such individ-
ual signed the return, of any item." 26 U.S.C.
s 6015(c)(3)(C) (emphasis added). Mrs. Mitchell submits, in
effect, that the emphasized phrase, focusing as she believes it
does on a particular time, and not before, shows congressional
concern with the electing individual's state of mind when it is
likely most focused on the tax consequences of the return.
Again, we conclude that Mrs. Mitchell has offered an implau-
sible argument. We interpret the emphasized language as
simply limiting the time after which acquisition of knowledge
is irrelevant.
Our interpretation of the knowledge requirement of sub-
paragraph (c)(3)(C) does not deprive this new provision of
force. Mrs. Mitchell is correct that Congress intended to
expand the scope of innocent spouse relief. Subsection (c)
does so in several ways, including requiring proof of actual
knowledge of an item, not just reason to know, and putting
that heavy burden on the IRS. Even as we interpret subsec-
tion (c), it is a material liberalization of the former subsection
6013(e) test, carried forward with its own lesser liberaliza-
tions in subsection (b).
For the reasons given, we hold that subparagraph
6015(c)(3)(C) does not require the IRS to show that an
individual seeking subsection (c) relief had actual knowledge
of the improper tax treatment of an item with respect to
which the individual seeks relief, and that Mrs. Mitchell's
actual knowledge of the receipt, amount, timing, nature, and
use of the distribution bars her from such relief notwithstand-
ing her ignorance of its proper tax treatment.
C. Subsection (f) Relief, 26 U.S.C. s 6015(f)
Mrs. Mitchell also seeks the third and last form of relief
under section 6015, subsection (f) equitable relief. Subsection
(f) provides in full as follows:
Under procedures prescribed by the Secretary, if--
(1) 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);
and
(2) relief is not available to such individual under
subsection (b) or (c), the Secretary may relieve such
individual of such liability.
26 U.S.C. s 6015(f). Subsection (f) has no statutory anteced-
ent as a stand alone provision, but has roots in the equity test
of former subparagraph 6013(e)(1)(D) carried forward into
subparagraph 6015(b)(1)(D). The roots of this provision also
include a Treasury regulation promulgated in support of that
subparagraph:
(b) Inequitable defined. Whether it is inequitable to
hold a person liable for the deficiency in tax, within the
meaning of paragraph (a)(4) of this section, is to be
determined on the basis of all the facts and circum-
stances. In making such a determination a factor to be
considered is whether the person seeking relief signifi-
cantly benefitted, directly or indirectly, from the items
omitted from gross income. However, normal support is
not a significant "benefit" for purposes of this determina-
tion. Evidence of direct or indirect benefit may consist of
transfers of property, including transfers which may be
received several years after the year in which the omit-
ted item of income should have been included in gross
income. Thus, for example, if a person seeking relief
receives from his spouse an inheritance of property or
life insurance proceeds which are traceable to items
omitted from gross income by his spouse, that person will
be considered to have benefitted from those items. Other
factors which may also be taken into account, if the
situation warrants, include the fact that the person seek-
ing relief has been deserted by his spouse or the fact that
he has been divorced or separated from such spouse.
Treas. Reg. s 1.6013-5(b) (promulgated 1974). (The refer-
enced paragraph (a)(4) is simply a concise restatement of the
statutory equity test.) The applicability of parts of the
regulation have been eroded by subsequent statutory
changes, particularly the 1984 expansion of innocent spouse
relief to deduction items, but the regulation never has been
withdrawn and this portion has provided some guidance to
the IRS in using its discretion under subsection (f) pending
development of newer resources. See I.R.S. Notice 98-61,
1998-2 C.B. 756, 757 (referencing quoted provision).
As the decision whether to grant this equitable relief is
committed by its terms to the discretion of the Secretary, the
Tax Court and this Court review such a decision for abuse of
discretion. See Flores v. United States, 51 Fed. Cl. 49, 51 &
n.1 (2001); Butler, 114 T.C. at 291-92. We conclude that
there was no such abuse, for the reasons given by the Tax
Court in its decision:
In this case, petitioner significantly benefitted from the
omitted income. Among other things, she made repairs
and improvements to her residence; she paid down the
mortgage; she paid her and Mr. Mitchell's medical bills;
and she paid her children's loans and college expenses.
She also established a trust for her children in the
amount of $132,000. Her spending over the 3 years 1992
through 1994, including the trust fund, totaled more than
$570,000. In short, she used the money from the transfer
refund to the considerable benefit of herself and her
family. These expenditures, while no doubt generous
and well intentioned, nevertheless indicate the receipt of
income far in excess of that previously available as
normal support. We therefore conclude that respondent
did not abuse his discretion in denying petitioner relief
under section 6015(f).
Mitchell, 80 T.C.M. at 594 (citations omitted). This determi-
nation is supported by appropriate findings of fact, none of
which Mrs. Mitchell has challenged. The use of the "signifi-
cant benefit" test in this context is well established. Silver-
man v. Commissioner, 116 F.3d 172, 174-75 (6th Cir. 1997);
Reser v. Commissioner, 112 F.3d 1258, 1270 (5th Cir. 1997);
Purificato v. Commissioner, 9 F.3d 290, 293-95 (3d Cir.
1993); Pietromonaco v. Commissioner, 3 F.3d 1342, 1347-48
(9th Cir. 1993); Clevenger, 826 F.2d at 1382; Estate of
Gryder v. Commissioner, 705 F.2d 336, 339 (8th Cir. 1983)
(benefit by inheritance of proceeds of omitted income); Busse
v. United States, 542 F.2d 421, 427 (7th Cir. 1976); Sanders v.
United States, 509 F.2d 162, 170-71 (5th Cir. 1975); Dakil v.
United States, 496 F.2d 431, 433 (10th Cir. 1974). The
arguments that Mrs. Mitchell makes in opposition to the
determination of the IRS and affirmation of the Tax Court
are without merit. In particular, she first argues that there
was no "significant benefit" to her because the expenditures
of the distribution funds were only normal support, payment
of obligations of her husband, or both. Despite her charac-
terization of the nature of her expenditures, the facts found
by the Tax Court concerning the expenditures during 1992-
1994 as stated above amply support a conclusion that she
significantly benefitted. It is hardly erroneous to style those
facts as "significant benefit."
Mrs. Mitchell's next argument, that she had "suffered from
the sudden death of her husband and it would be doubly
inequitable to hold her responsible for taxes attributable to
her husband's income," is also unavailing. The loss of her
spouse is not only not the sort of circumstance that makes it
inequitable to collect tax, it is a normal condition of many of
the taxpayers covered by the provisions of the innocent
spouse rule. The loss of one's husband or wife, even a
sudden loss, is a sad but normal condition of life. Cf.
Purificato, 9 F.3d at 297 (rejecting personal tribulations in
considering inequity under the innocent spouse exception).
The widowed, even the recently widowed, pay various sorts of
taxes. This is generally thought no more inequitable to them
than to other taxpayers. Presumably Congress could exempt
from specified provisions of the Tax Code the recently or
suddenly bereaved, but it has not done so in the provisions
that we consider today.
While the taxpayer raises other arguments, we have consid-
ered them and determine that none warrants further separate
discussion. In short, appellant has not established that the
IRS abused its discretion in denying equitable relief.
III. Conclusion
For the reasons set forth above, the judgment of the Tax
Court is affirmed.
Judgment accordingly.