Innocent Spouse - section 6015(f) - duty to inquire
Suzanne E. Barrera, a.k.a. Suzanne E. Battle v. Commissioner.Docket No. 254-04S . Filed October 24, 2007.[
Code Sec. 6015]
Tax Court: Summary opinion: Innocent spouse relief: Equitable relief. --
An individual was not entitled to innocent spouse relief for the three tax years at issue. She failed to qualify for equitable relief under
Code Sec. 6015(f) because, by choosing to remain purposefully ignorant of the contents of the returns she filed with her husband, she failed in her duty to inquire, even though she was aware of their financial difficulties; thus, she did not establish that she did not know or have reason to know that the tax liabilities reported on the returns would not be paid. Additionally, she failed to substantiate her income and expenses; therefore, it was not possible to determine if she would suffer economic hardship if she were held liable for the taxes. --
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Noel W. Burns, for petitioner. Timothy Maher, for respondent.
PANUTHOS, Chief Special Trial Judge:
1 This case was heard pursuant to the provisions of
section 74632 of the Internal Revenue Code in effect when the petition was filed. Pursuant to
section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.
Petitioner seeks equitable relief from joint and several liability under
section 6015(f) for unpaid Federal income taxes arising from joint returns filed with Roberto E. Barrera (Mr. Barrera) for taxable years 1998, 1999, and 2000.
3Background
Petitioner resided in Miami-Dade County, Florida, at the time she filed her petition.
Petitioner and Mr. Barrera were married in June 1995. Petitioner was not abused by Mr. Barrera at any time during their marriage.
For the taxable years 1995 through 2002, petitioner and Mr. Barrera filed joint Forms 1040, U.S. Individual Income Tax Return. Petitioner did not prepare the joint returns; they were prepared by a professional return preparer engaged by Mr. Barrera.
At some point prior to her marriage to Mr. Barrera but not further disclosed in the record, petitioner married for the first time, and she divorced sometime in 1993 or 1994. Petitioner and her first husband filed joint Federal income tax returns during their marriage. Petitioner did not prepare the joint returns. Petitioner signed the joint returns, but she did not review them. Petitioner never had any kind of tax problems with the Internal Revenue Service (IRS) prior to 1995, and she believed she was fully compliant with her tax filing and payment obligations up until that time.
At the time of her marriage to Mr. Barrera in 1995, petitioner was a college graduate, having earned a degree in business management from Florida International University in 1991. Her course work for this degree included classes in accounting, finance, and business law.
While in college, petitioner worked as a mortician for a local funeral home. After graduation in 1991, she started working in the mortgage business as a loan officer for a mortgage brokerage company called Financial Research Services. Petitioner's duties as a loan officer primarily consisted of helping individuals apply for mortgage loans by preparing a form "1003", which is a Federal National Mortgage Association residential mortgage loan application. Petitioner's preparation of these applications included ensuring that required documents such as the applicant's bank statements were included and that the application was properly assembled and complete. Petitioner would then follow each application until the mortgage loan closed.
At the time petitioner married Mr. Barrera, he was the owner of Financial Research Services, the mortgage brokerage company where petitioner was employed. Petitioner was never an officer of Financial Research Services, nor did she have an ownership interest in the company separate from that of Mr. Barrera's interest. After her marriage to Mr. Barrera, petitioner stopped working as a loan officer at Financial Research Services. Thereafter, up until her pregnancy with her daughter in 1996, petitioner occasionally worked at Financial Research Services, going in to perform filing or other clerical work on an as-needed basis.
During the first years of their marriage, petitioner and Mr. Barrera lived a very nice and comfortable life. They lived in what petitioner considered a "fabulous" house in a community in Miami-Dade County known as Pine Bay Estates (Pine Bay Estates house). They had two children, a daughter born in 1997 and a son in 1998, and petitioner was a stay-at-home mother. The family traveled, often in a plane owned and piloted by Mr. Barrera, to places including the Carribean and New York.
Mr. Barrera was the primary earner in the marriage. He was responsible for the family's finances, and he paid the family bills. Petitioner did not discuss the payment of bills with Mr. Barrera, nor did she question Mr. Barrera about money. Petitioner felt that, in her family, Mr. Barrera's job was to pay the bills, and her job was to raise the children.
Petitioner and Mr. Barrera maintained separate bank accounts and credit cards throughout their marriage. During the first years of their marriage, when petitioner needed spending money for herself or for the household, she would ask Mr. Barrera for money. He would then write her a check, which she deposited into her bank account. Mr. Barrera never refused petitioner's requests for money, and there was always money available whenever petitioner requested it.
In June 1996, petitioner and Mr. Barrera timely filed (under extension) their joint return for taxable year 1995. The 1995 joint return reported adjusted gross income of $199,170, and tax due of $42,149, which amount was paid by petitioner and Mr. Barrera.
In 1997, Financial Research Services and Mr. Barrera became the subject of a Federal criminal investigation. As a result of this investigation, Mr. Barrera lost his mortgage broker license and Financial Research Services went out of business some time in late 1997 or early 1998. Despite the loss of his mortgage broker license, Mr. Barrera was able to work with Federal Housing Administration "Title I" home improvement loans, and, in 1998, he continued this activity in a new business venture called Tropical Funding.
In December 1997, petitioner and Mr. Barrera untimely filed their joint return for taxable year 1996. The 1996 joint return reported adjusted gross income of $149,446, and tax due of $27,389, which amount was paid by petitioner and Mr. Barrera.
After the closure of Financial Research Services, petitioner's lifestyle began to change, and from 1998 onwards, she and her family were living less comfortably. Throughout 1998 and 1999, Mr. Barrera was paying living expenses and family bills with credit cards or early distributions from his individual retirement account (IRA), though he did not tell petitioner he was doing this. Mr. Barrera ran the household the same way, and petitioner never asked Mr. Barrera about money during this time, as she continued to feel it was "just not * * * [her] concern."
At some point in 1998, respondent began an examination that included petitioner and Mr. Barrera's joint Federal income tax returns for taxable years 1995 and 1996. As a result of this exam, petitioner and Mr. Barrera agreed to respondent's determination of a deficiency for taxable year 1995 in the amount of $14,340,
4 which amount was assessed by respondent on February 8, 1999. At some point in 1998 or 1999, Mr. Barrera explained to petitioner that the tax problems with the IRS stemmed from expenses of his mortgage brokerage business that the IRS reclassified as personal expenses and disallowed as business expense deductions.
By late 1999 and into 2000, petitioner saw that Mr. Barrera was working "less and less" at his successor home improvement loan business, that cash was not coming in from Mr. Barrera's business as it had been earlier in their marriage, and that Mr. Barrera did not have the same type of income anymore. Petitioner felt that, although Mr. Barrera continued to act like "everything was fine", their financial situation was changing.
In late 1999, petitioner and Mr. Barrera put their Pine Bay Estates house on the market. Petitioner did not want to sell the Pine Bay Estates house and was not happy that it had to be sold. When the Pine Bay Estates house had to be sold, petitioner knew there were financial problems facing her family.
Around this same time, Mr. Barrera approached petitioner about withdrawing money from her IRA, and she initially refused Mr. Barrera's request. By the time she and Mr. Barrera were trying to sell their Pine Bay Estates house, however, petitioner knew things were "not well" financially and that she had to get the distribution from her IRA. After some argument with Mr. Barrera, petitioner finally agreed to her husband's request and, in 2000, received a $20,000 distribution from her IRA. Petitioner knew at the time there would be tax consequences as a result of this $20,000 distribution from her IRA.
In 2000, Mr. Barrera quit renting commercial office space for his home improvement loan business and moved the office into his and petitioner's home. At that time, petitioner realized that Mr. Barrera could no longer pay the rent for his commercial office space and further realized that he was not earning any substantial sums of money.
Also in 2000, petitioner took a part-time job as a sales clerk at Capretto Shoes, a local shoe store. This was petitioner's first employment outside the home since her pregnancy with her daughter in 1996. Thereafter, petitioner began paying family expenses.
In October 2000, the Pine Bay Estates house sold after about a year on the market. Petitioner believed the net proceeds of the sale to be approximately $150,000. Thereafter, she and Mr. Barrera purchased a house in the West Kendall area of Miami-Dade County (West Kendall house) for approximately $234,000 to $236,000. The West Kendall house was smaller and less expensive than the Pine Bay Estates house, and petitioner considered it to be "mediocre" compared to the Pine Bay Estates house.
On May 30, 2000, petitioner and Mr. Barrera untimely filed their joint return for taxable year 1998, 9 months past the extended due date of August 15, 1999. The 1998 joint return reported negative adjusted gross income of "-9,161", "total tax" due of $4,237, "total payments" of $500 (which had been paid on April 15, 1999, with a timely filed Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return), and a balance due of $3,737 on the line stating "AMOUNT YOU OWE". The entire $3,737 tax balance reported as owing for 1998 was attributable to self-employment tax on income earned by Mr. Barrera from his activities as a "business consultant", which he reported on a Schedule C, Profit or Loss From Business, attached to the 1998 joint return. Petitioner did not report any income on the 1998 joint return. The $3,737 tax liability (plus additions to tax and interest) for taxable year 1998 has not been paid and is still outstanding.
Discussion
In general, married taxpayers filing a joint Federal income tax return are each fully responsible for the accuracy of the return and jointly and severally liable for the entire tax due.
Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000).
Section 6015, however, may provide relief from joint and several liability under certain limited circumstances. Because the relief sought in this case is from liabilities for taxes reported on petitioner's joint returns for taxable years 1998, 1999, and 2000 and assessed based on those returns, but not paid, only
section 6015(f) is applicable. See
sec. 6015(b)(1) and (c)(1); Washington v. Commissioner, 120 T.C. 137, 146-147 (2003).
Section 6015(f) provides, in pertinent part, that a taxpayer may be relieved of liability for any unpaid tax (or any portion thereof) if, taking into account all the facts and circumstances, it would be inequitable to hold the taxpayer liable. If the Commissioner denies a taxpayer's request for equitable relief under
section 6015(f), this Court has jurisdiction to determine the appropriate relief available to the taxpayer under that section.
Sec. 6015(e). The taxpayer seeking equitable relief under
section 6015(f) bears the burden of proving his or her entitlement to such relief. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).
As directed by
section 6015(f), the Commissioner has prescribed procedures for use in determining whether a taxpayer qualifies for equitable relief from joint and several liability under
section 6015(f). The procedures applicable to the instant case are set forth in
Rev. Proc. 2000-15, 2000-1 C.B. 447.
11 This Court has upheld the use of these procedures and has analyzed the factors listed therein in reviewing a negative determination under
section 6015(f). See, e.g., Washington v. Commissioner, supra at 147-152; Jonson v. Commissioner, 118 T.C. 106, 125-126 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).
Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 448, lists seven threshold conditions that must be satisfied before the Commissioner will consider a request for relief under
section 6015(f). Respondent agrees that these threshold conditions are satisfied for taxable years 1999 and 2000, but he contends that petitioner fails to satisfy the condition enumerated at Rev. Proc. 2000-15, sec. 4.01(3), 2000-1 C.B. at 448, for taxable year 1998.
The threshold condition at
Rev. Proc. 2000-15, sec. 4.01(3), 2000-1 C.B. at 448, requires that the "requesting spouse applies for relief no later than two years after the date of the Service's first collection activity after July 22, 1998, with respect to the requesting spouse".
12 According to respondent, the 1998 collection notice issued to petitioner and Mr. Barrera on July 24, 2000, was a collection due process notice issued under
section 6330, and it thus constituted a "collection activity" for taxable year 1998. Because petitioner filed her request for relief on September 13, 2002, approximately 26 months after this first collection activity for taxable year 1998, respondent contends that petitioner's request is untimely and she does not qualify for relief with respect to taxable year 1998.
We agree with respondent that a
section 6330 notice, which is a notice sent providing a taxpayer notice of the Commissioner's intent to levy and of the taxpayer's right to a
section 6330 collection due process hearing, constitutes a "collection activity" for purposes of
section 6015. See
sec. 1.6015-5(b)(2)(i) and (ii), Income Tax Regs. Under the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3501(b), 112 Stat. 770, the Commissioner must include in such collection-related notices a description of a taxpayer's right to relief under
section 6015. The 1998 collection notice sent to petitioner and Mr. Barrera was not in respondent's administrative record and was not presented as evidence at trial. There is no evidence that the 1998 collection notice informed petitioner of her right to apply for relief under
section 6015, as required by RRA 1998 sec. 3501(b). See McGee v. Commissioner, 123 T.C. 314, 317-319 (2004); see also Nelson v. Commissioner, T.C. Memo. 2005-9. Petitioner's testimony indicates that she was not aware of her right to request relief under
section 6015 until her husband presented her with Form 8857 to sign in September 2002. In addition, respondent did not deny petitioner's request for relief for taxable year 1998 based upon the 2-year time limit but instead appears to have evaluated petitioner's request under the list of factors provided in
Rev. Proc. 2000-15, secs. 4.02 and 4.03, 2000-1 C.B. at 448-449. Under these circumstances, we do not find it necessary to decide whether the 2-year limitation period bars petitioner's request for relief for taxable year 1998.
13 Accordingly, we include that year in our determination of the appropriate relief available to petitioner under
section 6015(f).
If a requesting spouse has satisfied the seven threshold conditions of
Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 448, then
Rev. Proc. 2000-15, sec. 4.02, provides that, in cases where a liability reported on a joint return is unpaid, relief under
section 6015(f) will ordinarily be granted where all of the following elements are satisfied: (1) At the time relief is requested, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date relief was requested; (2) at the time the return was signed, the requesting spouse had no knowledge or reason to know that the tax would not be paid; and (3) the requesting spouse will suffer economic hardship if relief is not granted.
14Petitioner and Mr. Barrera were still married and living in the same household when petitioner filed her Form 8857 in September 2002, and petitioner concedes that she does not meet the first element listed above. Accordingly, we conclude that petitioner does not qualify for relief under
Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. at 448.
Where a requesting spouse satisfies the threshold conditions of
Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 448, but does not qualify for relief under
Rev. Proc. 2000-15, sec. 4.02, equitable relief may still be granted under
section 6015(f) if, taking into account all the facts and circumstances, it would be inequitable to hold the requesting spouse liable for all or part of the unpaid liability.
Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. 448, provides a list of positive factors and negative factors that may be considered in determining whether it would be inequitable to hold the requesting spouse liable for all or part of the unpaid liability.
The positive factors that, if present, weigh in favor of relief include: (1) The requesting spouse is separated or divorced from the nonrequesting spouse; (2) the requesting spouse would suffer economic hardship if relief were not granted; (3) the requesting spouse was abused by the nonrequesting spouse; (4) the requesting spouse did not know or have reason to know that the reported liability would not be paid; (5) the nonrequesting spouse has a legal obligation pursuant to a divorce decree or agreement to pay the unpaid liability;
15 and (6) the unpaid liability is attributable solely to the nonrequesting spouse.
Rev. Proc. 2000-15, sec. 4.03(1), 2000-1 C.B. at 449.
The negative factors that, if present, weigh against relief include: (1) The unpaid liability is attributable to the requesting spouse; (2) the requesting spouse knew or had reason to know that the reported liability would be unpaid at the time the return was signed; (3) the requesting spouse significantly benefited (beyond normal support) from the unpaid liability; (4) the requesting spouse will not experience economic hardship if relief is not granted; (5) the requesting spouse has not made a good faith effort to comply with Federal income tax laws in the tax years following the tax years to which the request for relief relates; and (6) the requesting spouse has a legal obligation pursuant to a divorce decree or agreement to pay the unpaid liability.
Rev. Proc. 2000-15, sec. 4.03(2), 2000-1 C.B. at 449.
As
Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448, makes clear, no single factor is to be determinative in any particular case, all factors are to be considered and weighed appropriately, and the list of factors is not intended to be exhaustive.
Respondent contends that petitioner has not demonstrated that any of the factors weighs in favor of equitable relief. Accordingly, we examine each factor in turn.
1. Marital Status
Petitioner and Mr. Barrera were still married when petitioner filed her Form 8857 in September 2002, which fact disqualified petitioner under
Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. at 448. The following month, however, in October 2002, Mr. Barrera was sentenced to a 27-month term in a Federal correctional facility, which he began serving in April 2003. Thereafter, in March 2004, petitioner filed for dissolution of her marriage to Mr. Barrera, and the action was pending at the time this case was tried.
16 Thus, petitioner has lived apart from Mr. Barrera since April 2003 and has instituted divorce proceedings. Given the overall record, we view this factor as weighing in favor of relief.
2. Economic Hardship
A requesting spouse would suffer economic hardship if payment of the liability, in whole or in part, would cause the taxpayer to be unable to pay his or her reasonable basic living expenses.
Rev. Proc. 2000-15, sec. 4.03(1)(b) and (2)(d), 2000-1 C.B. at 448-449; see also sec. 301.6343-1(b)(4), Proced. & Admin. Regs.
17 In determining a reasonable amount for basic living expenses, we consider, among other things: (1) The taxpayer's age, employment status and history, ability to earn, and number of dependents; (2) the amount reasonably necessary for food, clothing, housing, medical expenses, transportation, current tax payments, alimony, child support or other court-ordered payments, and expenses necessary to the taxpayer's production of income; (3) the cost of living in the geographic area where the taxpayer resides; (4) the amount of property which is available to pay the taxpayer's expenses; (5) any extraordinary circumstances such as special education expenses, a medical catastrophe, or a natural disaster; and (6) any other factor that the taxpayer claims bears on economic hardship. See sec. 301.6343-1(b)(4)(ii), Proced. & Admin. Regs.
In the instant case, the outstanding taxes, additions to tax, and assessed interest for the 3 years in issue totaled approximately $13,182 as of the date of trial. Petitioner contends that she will suffer a substantial economic hardship if she is not relieved of liability for this sum. Petitioner cites her work as a sales clerk at Capretto Shoes while raising two young children without support from Mr. Barrera due to his imprisonment, her monthly mortgage payment, and the children's daycare expenses in support of her contention.
On the record before us, we do not think that petitioner has provided evidence sufficient to support a finding of economic hardship. Petitioner provided no information about her household income and expenses in either the request for innocent spouse relief or the questionnaire she submitted to respondent. At trial, petitioner testified with specificity only with respect to her monthly mortgage payment of $1,000 (not including taxes and insurance), preschool expenses of $400 a month for her son (although this expense was expected to end the following school year when her son starts kindergarten), and payments to a live-in nanny of $270 a week. Petitioner stated that her monthly expenses also include food, clothing for her and the children, vehicle expenses, and homeowners' association dues, but she did not testify to or otherwise establish the dollar amounts she pays for these expenses.
On the matter of her income, petitioner's testimony was similarly vague and incomplete. Petitioner earns approximately $15 an hour from her full-time job as a sales clerk at Capretto Shoes, which she testified translated to take-home earnings of "maybe $1,200, $1,300 a month." Petitioner testified she is "hardly" able to pay her expenses with her salary and that she uses credit cards to pay her expenses. Petitioner also receives monetary assistance from her family "Every blue moon" when she needs help, but she did not state the amount of money she receives from her family, nor did she provide any clear indication as to the frequency of the assistance.
Regarding petitioner's assets, the record shows that petitioner is the sole owner of the West Kendall house where she and her children reside, which was purchased after she and Mr. Barrera sold their Pine Bay Estates house in October 2000. Petitioner testified she paid approximately $234,000 or $236,000 for the West Kendall house, with a mortgage of about $210,000, but petitioner gave no evidence about the source of the cash for the downpayment on the home. There is evidence that the net proceeds from the sale of the Pine Bay Estates house were about $150,000, but there is no indication whether or not petitioner had control over or access to these proceeds or any portion thereof. Additionally, petitioner at one point had an individual retirement account from which she received a $20,000 distribution in taxable year 2000, but she presented no evidence regarding the balance of the account after the distribution or whether she has any other savings, retirement or otherwise.
Other than the mortgage on the West Kendall house, petitioner presented no specific evidence regarding the existence or amount of any debts she may have. Petitioner stated she currently pays household expenses with credit cards, but she did not testify to or otherwise establish the amount, if any, of her credit card debt. The record indicates that Mr. Barrera was paying household expenses with his credit cards after the failure of his mortgage company, but it appears that petitioner is not liable for this credit card debt, as petitioner and Mr. Barrera maintained separate credit cards during their marriage.
Petitioner has a bachelor's degree in business management, work experience in a professional capacity, and gainful employment with the same employer for several years. Although payment of the outstanding liabilities will certainly reduce petitioner's expendable income, petitioner has not demonstrated that payment of the liabilities would prevent her from paying reasonable basic living expenses. See sec. 301.6343-1(b)(4), Proced. & Admin. Regs. Petitioner's references to most of her expenses are broad, generalized, and afford no meaningful way to arrive at a monthly outlay. Absent more specific evidence regarding her basic living expenses, as well as her income, her current debts, and all of her current assets, we do not think that petitioner has met her burden of establishing that she would suffer economic hardship if she were denied equitable relief from the liabilities in issue.
Although petitioner has failed to establish that she will suffer economic hardship, we recognize that, if relief is not granted, petitioner will remain liable for paying the outstanding liabilities of $13,182, plus related interest. The facts before us are inconclusive as to whether petitioner's payment of the outstanding liabilities would not cause her to experience economic hardship. See
Rev. Proc. 2000-15, sec. 4.03(2)(d), 2000-1 C.B. at 449. Consequently, we find that economic hardship is a neutral factor in this case. See Fox v. Commissioner, T.C. Memo. 2006-22; Madden v. Commissioner, T.C. Memo. 2006-4.
3. Abuse
Petitioner was not abused by Mr. Barrera at any time during their marriage. Therefore, this factor is neutral.
4. Knowledge or Reason To Know
The relevant knowledge in the case of a reported but unpaid liability is whether the taxpayer knew or had reason to know that the tax would not be paid at the time the return was signed. Rev. Proc. 2000-15, sec. 4.03(1)(d) and (2)(b), 2000-1 C.B. at 448-449; see also Washington v. Commissioner, 120 T.C. at 150. Accordingly, for this factor to weigh in favor of relief, petitioner must establish that, at the time she signed the 1998 joint return on May 23, 2000, the 1999 joint return on November 2, 2000, and the 2000 joint return on July 24, 2001,
18 she did not know and had no reason to know that Mr. Barrera would not pay the liabilities reported on the returns.
Petitioner contended at trial that she did not know and had no reason to know that the liabilities reported on the joint returns for taxable years 1998, 1999, and 2000, would not be paid because she did not know that the returns showed any taxes due when she signed them. In support of her contention, petitioner testified that she did not prepare the returns in issue, never reviewed or looked through the returns when she signed them, and never asked Mr. Barrera about paying the reported liabilities.
For purposes of our analysis herein, we are willing to accept petitioner's contention that she did not see the balance due amounts reported on the 1998, 1999, and 2000 joint returns and thus did not have actual knowledge that Mr. Barrera would not pay those liabilities when she signed the respective returns. Nonetheless, petitioner must still establish that she had no reason to know that Mr. Barrera would not pay the reported liabilities at the times she signed the joint returns.
In order to satisfy the reason to know factor, a taxpayer must establish that it was reasonable for the taxpayer to believe that his or her spouse would pay the reported liability at the time the taxpayer signed the return. See, e.g., Hopkins v. Commissioner, 121 T.C. 73, 88-89 (2003); Knorr v. Commissioner, T.C. Memo. 2004-212; Morello v. Commissioner, T.C. Memo. 2004-181; Keitz v. Commissioner, T.C. Memo. 2004-74; Ogonoski v. Commissioner, T.C. Memo. 2004-52; Wiest v. Commissioner, T.C. Memo. 2003-91; see also Rev. Proc. 2000-15, sec. 4.02(1)(b), 2000-1 C.B. at 448.
Additionally, if a taxpayer knows enough facts to be put on notice of the possibility of an underpayment, the taxpayer has a duty to inquire further to determine the amount of his or her tax liabilities. See Chou v. Commissioner, T.C. Memo. 2007-102; Motsko v. Commissioner, T.C. Memo. 2006-17; Feldman v. Commissioner, T.C. Memo. 2003-201, affd. 152 Fed. Appx. 622 (9th Cir. 2005). A taxpayer is not relieved of this duty of inquiry solely because the taxpayer relied on his or her spouse to take care of the tax returns. See Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228; Morello v. Commissioner, supra. A taxpayer cannot obtain the benefits of relief from joint and several liability simply because the taxpayer turned a "blind eye" by not reviewing the contents of a joint return and then failed to make further inquiry into the ultimate tax liability shown on the return. Price v. Commissioner, 887 F.2d 959, 965 (9th Cir. 1989), revg. an Oral Opinion of this Court; Levin v. Commissioner, T.C. Memo. 1987-67.
In the instant case, Mr. Barrera never physically or otherwise prevented petitioner from paging through the joint returns for the years in issue, and petitioner admitted in her testimony that she was "sure" she could have looked through the returns had she wanted to do so. Yet petitioner never reviewed the joint returns before she signed them, and she never asked Mr. Barrera about paying the reported liabilities because, as she admitted, she "wouldn't have even looked at the tax return[s] to see if anything was due, to begin with." Petitioner testified that she "signed blindly" because she trusted that Mr. Barrera "would do the best" for her and her family. Based on the instant record, we find that petitioner essentially, and admittedly, turned a "blind eye" toward the filing of the 1998, 1999, and 2000 joint tax returns and the failure to pay the taxes shown thereon.
A taxpayer who signs a return without reviewing it is charged with constructive knowledge of its contents, including the tax due shown on that return. Hayman v. Commissioner, supra at 1262; see also Park v. Commissioner, 25 F.3d 1289, 1299 (5th Cir. 1994), affg. T.C. Memo. 1993-252; Castle v. Commissioner, T.C. Memo. 2002-142; Cohen v. Commissioner, T.C. Memo. 1987-537. Thus, despite the fact that petitioner signed the 1998, 1999, and 2000 joint returns without reviewing them or discussing them with Mr. Barrera, she should have known of the taxes shown due thereon.
Having found that petitioner had constructive knowledge of the taxes shown due on the 1998, 1999, and 2000 joint returns, we further find that, under the facts of this case, it was not reasonable for petitioner to believe Mr. Barrera would pay the reported liabilities at the times she signed the returns. The record shows that when petitioner signed the joint returns for taxable years 1998, 1999, and 2000 on May 23, 2000, November 2, 2000, and July 24, 2001, respectively, she was well aware of the financial difficulties facing her family. Mr. Barrera's mortgage brokerage business had, in petitioner's words, "failed" in 1998 as a result of a Federal criminal investigation, and Mr. Barrera, the sole earner in the family at that time, lost the necessary mortgage licenses to continue with that line of work. Thereafter, in late 1999, petitioner and Mr. Barrera put their "fabulous" Pine Bay Estates house on the market and, after its eventual sale a year later in October 2000, purchased the less expensive "mediocre" West Kendall house. Petitioner was "sick to sell" the Pine Bay Estates house and was not "a happy party" to its sale, and she admitted that, when the Pine Bay Estates house had to be sold, she knew there were financial problems facing her family. Petitioner further testified that by 2000, Mr. Barrera was working "less and less" at his successor home improvement loan business, and when he quit renting commercial office space for the business and moved the office into their home, petitioner realized that Mr. Barrera could no longer pay the rent for the commercial office space. Petitioner testified that she also knew by 2000 that she had to agree to Mr. Barrera's repeated requests that she take a $20,000 early withdrawal from her IRA or, as she testified, she would "end up under a bridge". Also in 2000, petitioner returned to work at a job outside the home for the first time in her marriage to Mr. Barrera since her pregnancy with their first child in 1996.
In light of the foregoing, we cannot conclude that it was reasonable for petitioner to believe that Mr. Barrera would pay three income tax bills in the approximate amounts of $3,700, $2,900, and $3,700. Although these unpaid amounts may have not been significant enough to cause petitioner concern in the early years of her marriage to Mr. Barrera, when his yearly adjusted gross income was approximately $199,000 and his mortgage brokerage business was operating, by the time she signed the 1998, 1999, and 2000 joint returns in May 2000, November 2000, and July 2001, respectively, when petitioner and Mr. Barrera's reported adjusted gross income for a family of four was down to $14,165 for 1999, $24,446 for 2000, and $2,108 for 2001, the unpaid amounts were significant enough to put a reasonable person in petitioner's circumstances on notice that further inquiry about their payment was warranted.
At trial, petitioner testified that had she seen the tax amounts reported as due on the returns for the years in issue, she would have assumed that Mr. Barrera would pay them. We have no reason to doubt petitioner's truthfulness on this matter. Despite her assumption, however, we cannot find that, at the time the returns were signed, petitioner had no reason to know that the reported taxes would not be paid. Petitioner completed courses in accounting, finance, and business law, among others, in the process of earning her bachelor's degree in business management. She has work experience in a professional capacity, most notably as a loan officer assisting individuals with the completion of their residential mortgage loan applications. Thus, petitioner is neither uneducated nor unsophisticated as to financial matters. Additionally, nothing in the record suggests that Mr. Barrera deceived petitioner or concealed information from her regarding family finances. Although petitioner contends on brief that, after the close of his mortgage brokerage business, Mr. Barrera was paying family living expenses with credit cards without her knowledge, we do not find this indicative of any deceit or concealment on Mr. Barrera's part, particularly in light of petitioner's consistent testimony that she never asked Mr. Barrera about family finances because "it was just not * * * [her] concern", and she never discussed paying bills with Mr. Barrera because "[t]hat was his job, and my job was to raise my children." Moreover, petitioner admitted in her testimony that, although Mr. Barrera "always lived the life that everything was fine", she knew things were changing financially by at least 1999.
This Court has consistently applied the principle that the provisions providing relief from joint and several liability are "'designed to protect the innocent, not the intentionally ignorant'". Morello v. Commissioner, T.C. Memo. 2004-181 (quoting Dickey v. Commissioner, T.C. Memo. 1985-478). In petitioner's case, the joint returns for taxable years 1998, 1999, and 2000 each showed a balance due on the line stating "AMOUNT YOU OWE". Petitioner was aware of the financial difficulties facing her family at the respective times she signed these returns, yet she did not even look at each return to determine whether she and Mr. Barrera owed tax or were due a refund of overpaid tax. Under the circumstances of this case, we cannot find that petitioner had no reason to know that Mr. Barrera would not pay the balances shown as owing. At a minimum, petitioner did not meet her well-established duty of inquiry with respect to payment of those balances.
On the record before us, we conclude that petitioner has not established that she did not know, nor did she have reason to know, that the liabilities reported on the joint returns for taxable years 1998, 1999, and 2000 would not be paid at the respective times she signed returns. This factor weighs against relief.
5. Nonrequesting Spouse's Legal Obligation To Pay Tax
At the time this case was tried, petitioner had filed a petition for dissolution of her marriage to Mr. Barrera, but a final judgment of dissolution had not been issued by the court. Petitioner argues, however, that the legal obligation factor weighs in favor of relief because, as part of the dissolution proceedings, she and Mr. Barrera had entered into a marital settlement agreement under which Mr. Barrera had assumed the obligation to pay the outstanding joint Federal income tax liabilities for taxable years 1998, 1999, and 2000 in their entirety.
Because petitioner had not yet obtained a final judgment of dissolution, it is not clear that the marital settlement agreement imposed a legal obligation upon Mr. Barrera to pay the outstanding liabilities at the time this case was tried. Even taking the marital settlement agreement into consideration, however, we do not think that this factor favors relief in this case. The legal obligation factor weighs in favor of relief only if the requesting spouse did not know or have reason to know that, at the time the divorce decree or agreement was entered into, the nonrequesting spouse would not pay the liability. Rev. Proc. 2000-15, sec. 4.03(1)(e), 2000-1 C.B. at 449. On the facts of this case, petitioner had reason to know that Mr. Barrera would not pay the outstanding liabilities at the time she and Mr. Barrera entered into the marital settlement agreement. At the time petitioner and Mr. Barrera entered into the marital settlement agreement, Mr. Barrera was approximately 1 year into serving his 27-month sentence for conspiring to defraud the United States in connection with his mortgage brokerage business. In the years prior to his conviction on this charge, Mr. Barrera had lost his mortgage broker license, his mortgage brokerage business had failed, and his and petitioner's reported adjusted gross income had fallen from approximately $199,000 in 1995 to $2,108 in 2001. By the time of his conviction in October 2002 and subsequent incarceration in April 2003, Mr. Barrera was not working and had no income, and petitioner admitted that Mr. Barrera was living with her and the children because "he had no money" and "nowhere to go". The facts and circumstances of this case thus establish that petitioner knew or had reason to know that, at the time she entered into the marital settlement agreement, Mr. Barrera would not pay the liabilities at issue. Accordingly, this factor is neutral.
6. Attributable to Nonrequesting Spouse
The balance due on the joint return for taxable year 1998 was attributable to self-employment tax on income earned by Mr. Barrera from his Schedule C activity as a business consultant. The balance due on the joint return for taxable year 1999 was attributable to the 10-percent additional tax on early distributions under
section 72(t) imposed on a $38,261 distribution from Mr. Barrera's IRA.
19 The balance due for taxable year 2000 was attributable to the 10-percent additional tax under
section 72(t) imposed on IRA distributions totaling $37,119, of which $20,000 was distributed from petitioner's IRA.
On these facts, it appears that the unpaid taxes for taxable years 1998 and 1999 are solely attributable to Mr. Barrera and thus would weigh in favor of relief for those years, but the unpaid tax for taxable year 2000 is almost equally attributable to petitioner and Mr. Barrera and thus would not weigh in favor of relief for that year. This is not the end of our inquiry, however, as we believe several additional facts should be considered under the particular circumstances of this case.
First, Mr. Barrera's self-employment income in 1998 and the funds distributed from his IRA in 1999 were used in great part for living expenses of both petitioner and Mr. Barrera, as was the $20,000 distributed from petitioner's IRA in 2000. Petitioner testified, however, that she took the $20,000 IRA distribution in 2000 at the insistence of Mr. Barrera, and we thus recognize Mr. Barrera's influence with respect to this income. Ultimately, though, petitioner agreed to Mr. Barrera's request for the distribution because she knew that she and her family needed the money or, as she testified, she would "end up under a bridge", and she further knew there would be tax consequences to the distribution.
We next note that the unpaid additions to tax and interest for taxable years 1998 and 1999 are the result of petitioner and Mr. Barrera's failure to timely file their joint income tax returns, and the unpaid additions to tax and interest for those years and for taxable year 2000 are the result of petitioner and Mr. Barrera's failure to pay their income taxes when they were due. All taxpayers have a duty to file timely and accurate returns and to pay the amounts shown as due on those returns. See generally
secs. 6001,
6011(a),
6012(a)(1),
6072(a),
6151(a). Petitioner's reliance on Mr. Barrera, therefore, to handle the preparation and filing of their joint returns for taxable years 1998, 1999, and 2000 does not establish that the additions to tax and interest for those years are solely attributable to Mr. Barrera.
Under these circumstances, we find that the attribution factor weighs somewhat in favor of relief for taxable years 1998 and 1999, but it does not weigh in favor of relief for taxable year 2000.
7. Significant Benefit
The record shows that the funds from the unpaid liabilities were used by Mr. Barrera to pay his family's household and living expenses during taxable years 1998, 1999, and 2000. We thus find that petitioner did not significantly benefit "beyond normal support" from the unpaid liabilities for taxable years 1998, 1999, and 2000. This factor is neutral.
8. Noncompliance With Federal Income Tax Laws
Petitioner has complied with Federal income tax laws for the years following taxable year 2000, the last year in issue. This factor is neutral.
Conclusion
A factor favoring relief for all three of the years in issue is that petitioner and Mr. Barrera are separated and petitioner is seeking dissolution of their marriage. Also somewhat favoring relief, at least for taxable years 1998 and 1999, is that the underpayments are attributable to income earned by Mr. Barrera, though we note that petitioner, who had no or minimal income during these years, enjoyed the use of Mr. Barrera's income.
The factors favoring relief are strongly outweighed by petitioner's knowledge or reason to know that the reported liabilities would not be paid at the respective times she signed the 1998, 1999, and 2000 joint returns --especially because knowledge or reason to know that a tax would be unpaid is "an extremely strong factor weighing against relief."
Rev. Proc. 2000-15, sec. 4.03(2)(b), 2000-1 C.B. at 449. We are also mindful of petitioner's failure to demonstrate that she would suffer economic hardship if relief were not granted, and that the tax balances due for the years in issue are partly attributable to late filing and failure to pay additions to tax and related interest and, for taxable year 2000, petitioner's $20,000 distribution from her IRA.
On the basis of the facts and circumstances presented, we find that it would not be inequitable to hold petitioner liable for the outstanding liabilities for taxable years 1998, 1999, and 2000. We, therefore, conclude that petitioner is not entitled to equitable relief from joint and several liability under
section 6015(f). In reaching this conclusion, we have considered all arguments made by the parties and, to the extent not mentioned above, we conclude that they are irrelevant or without merit.
To reflect the foregoing,
Decision will be entered for respondent.
1 With the consent of the parties, the Chief Judge reassigned this case, after the death of Special Trial Judge Carleton D. Powell, to Chief Special Trial Judge Peter J. Panuthos, for disposition on the existing record.
2 Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
3 Pursuant to Rule 325 and
sec. 6015(e)(4), petitioner's former husband, Roberto E. Barrera (Mr. Barrera), was served with notice of the filing of the petition in this case and his right to intervene. Respondent represented at trial that Mr. Barrera notified respondent, in a letter dated Mar. 16, 2004, and received by respondent on Apr. 30, 2004, that he does not intend to intervene in this matter. Petitioner did not dispute respondent's representation.
4 No deficiency was determined by respondent with respect to petitioner and Mr. Barrera's joint return for taxable year 1996.
5 Petitioner, in her individual capacity, received interest income of $79 in taxable year 1999, but no part of the $2,905 balance reported as owing on the 1999 joint return was attributable to petitioner's interest income.
6 Petitioner, in her individual capacity, received interest income of $19 in taxable year 2000, but no part of the $3,712 tax balance reported as owing on the 2000 joint return was attributable to petitioner's interest income.
7 The 1998 collection notice was not in respondent's administrative record and was not presented as evidence at trial. Respondent introduced Form 4340, Certificate of Assessments, Payments, and Other Specified Matters, dated May 4, 2004, for taxable year 1998 to show that the 1998 collection notice was issued to Mr. Barrera and petitioner on July 24, 2000.
8 In her Form 8857, petitioner also sought relief under
sec. 6015 with respect to taxable years 1994, 1995, 1996, 1997, and 2001. As discussed infra, the IRS granted petitioner relief under
sec. 6015(c) with respect to taxable year 1995, and that year is not at issue in the instant case. Taxable year 1994 was not further considered because petitioner was not married to Mr. Barrera in 1994 and did not file a joint return with him for that year. Taxable years 1996, 1997, and 2001 were also not further considered because petitioner and Mr. Barrera did not have outstanding tax liabilities for those years.
9 The Oct. 7, 2003, final notice of determination did not state or otherwise indicate whether respondent evaluated petitioner's claim using the applicable procedures outlined in
Rev. Proc. 2000-15, 2000-1 C.B. 447.
10 The outstanding tax liabilities for taxable years 1998, 1999, and 2000 remained unpaid as of Dec. 20, 2006. Accordingly, this Court has jurisdiction under
sec. 6015(e)(1) to determine the appropriate relief available to petitioner under
sec. 6015(f) with respect to those liabilities. See Tax Relief and Health Care Act of 2006, Pub. L. 109-432, div. C, sec. 408, 120 Stat. 3061.
11 Rev. Proc. 2000-15, 2000-1 C.B. 447, has been superseded by
Rev. Proc. 2003-61, 2003-2 C.B. 296, effective for requests for relief filed on or after Nov. 1, 2003, and for requests for relief pending on Nov. 1, 2003, as to which no preliminary determination letter had been issued as of that date. Petitioner's request for relief was filed on Sept. 13, 2002, and respondent's notice of determination denying relief was issued on Oct. 7, 2003. Accordingly, petitioner's request is subject to
Rev. Proc. 2000-15, supra.
12 See also
sec. 1.6015-5(b)(1), Income Tax Regs., which is applicable for all elections under
sec. 6015 filed on or after July 18, 2002.
Sec. 1.6015-9, Income Tax Regs.
13 We also note that respondent granted petitioner relief under
sec. 6015(c) for taxable year 1995, which petitioner requested in her Form 8857 filed on Sept. 13, 2002, even though respondent's Form 4340 for that year, dated May 5, 2004, indicates that a collection notice for the 1995 liability was issued on Oct. 14, 1999, which was similarly more than 2 years before the date petitioner filed her Form 8857.
14 Relief under
Rev. Proc. 2000-15, sec. 4.02, 2000-1 C.B. at 448, is available only to the extent that the unpaid liability is allocable to the nonrequesting spouse.
15 According to
Rev. Proc. 2000-15, sec. 4.03(1)(e), 2000-1 C.B. at 449, however, "This will not be a factor weighing in favor of relief if the requesting spouse knew or had reason to know, at the time the divorce decree or agreement was entered into, that the nonrequesting spouse would not pay the liability."
16 On the issue of her marital status, petitioner relies on a document that she attached to her posttrial memorandum and that is not part of the instant record. The Court has disregarded that document. See Rule 143(b).
17 Rev. Proc. 2000-15, sec. 4.02(1)(c), 2000-1 C.B. at 448, provides, in pertinent part, that "the determination of whether a requesting spouse will suffer economic hardship * * will be based on rules similar to those provided in § 301.6343-1(b)(4) of the Regulations on Procedure and Administration."
18 In the instant case, the joint return for 1998 was stamped as received by the IRS on May 30, 2000, the joint return for 1999 was stamped as received on Nov. 15, 2000, and the 2000 joint return was stamped as received on Aug. 6, 2001. There is no dispute that these were the dates the joint returns were filed. Petitioner's testimony, however, raises an issue as to when she signed the joint returns. Petitioner admitted that she signed the returns, but she did not know the dates she signed them, nor did she recall whether a particular return was timely or late when she signed it. The joint return for taxable year 1998 shows a handwritten signature date for both petitioner and Mr. Barrera of "5-23-00", the 1999 joint return shows a typed signature date for both petitioner and Mr. Barrera of "11-02-00", and the 2000 joint return shows a typed signature date for both petitioner and Mr. Barrera of "7/24/01". Petitioner testified that she did not write the dates shown on the returns next to her signatures and that she was not sure she signed the returns on the particular dates listed. Petitioner further testified that she had "no clue" if she signed a particular return "three months earlier and * * * [Mr. Barrera's] just turning it in at whatever time he wants to turn it in."Although we accept petitioner's testimony that she did not write the signature dates on the 1998, 1999, and 2000 joint returns, this fact does not convince us that petitioner signed the returns on dates other than those shown next to her signatures. There is no dispute that petitioner voluntarily signed each of the returns, and there is no indication in the record that these returns were not fully completed by the return preparer when she signed them. Other than her testimony, petitioner presented no persuasive evidence that the 1998, 1999, and 2000 returns were not, in fact, signed on the dates following her signatures. Given that petitioner does not know and does not recall when she signed the returns or whether the returns were timely or late when she signed them, coupled with the fact that the returns in evidence are each stamped as having been received by respondent within 2 weeks of the dates shown next to petitioner's and Mr. Barrera's signatures, we find that petitioner signed the returns on the dates shown following her signatures.Although we have no reason to find that petitioner did not sign the joint returns for the years in issue on dates other than those shown next to her respective signatures, for the sake of completeness, we address an issue raised with respect to the joint return for taxable year 1998. As we note above, there is no indication that the joint returns for taxable years 1998, 1999, and 2000 were not completed by the return preparer at the time petitioner signed them. Presumably, because the joint returns were completed and signed by the return preparer, petitioner signed each return, at the earliest, on the date following the return preparer's signature. In Biller v. Commissioner, T.C. Memo. 1976-97, affd. 544 F.2d 1343 (5th Cir. 1977), the Court found that although no date appeared next to petitioner's signature on a joint return, the return showed a date of Oct. 8, 1971, next to the signature of the return preparer and was "obviously signed by petitioner on or after that date". Petitioner's 1999 and 2000 joint returns each show the same date next to her and Mr. Barrera's signatures and next to the signature of the return preparer, and thus support a finding that petitioner signed the 1999 and 2000 returns on Nov. 2, 2000, and July 24, 2001, respectively.The 1998 joint return, however, shows a handwritten signature date of May 25, 1999, for the return preparer, which, if accurate, is almost a full 12 months prior to the handwritten signature dates of May 23, 2000, shown for both petitioner and Mr. Barrera. Petitioner did not proffer any specific evidence relating to this discrepancy, and we are not persuaded by the return preparer's signature date or by petitioner's testimony that she signed the 1998 joint return on a date other than the date of May 23, 2000, shown next to her and Mr. Barrera's signatures.
19 In 1999 and 2000, petitioner, in her individual capacity, received interest income of $79 and $19, respectively. However, respondent stipulates that the "entire balances due" on the 1999 and 2000 joint returns arose from the 10-percent additional tax under
sec. 72(t) imposed on the early distributions from Mr. Barrera's and petitioner's IRAs. Accordingly, petitioner's small amounts of interest income in 1999 and 2000 do not affect our analysis of the attribution factor.
Innocent Spouse Relief: Knowledge of Understatement: Reason to know of understatementsThe Tax Court properly denied an individual's request for innocent spouse relief under
Code Sec. 6015(b)(1)(C) and
Code Sec. 6015(b)(1)(D) in connection with disbursements from her ex-husband's retirement account and interest income that were omitted from their joint return. The taxpayer had actual knowledge of the retirement distributions and interest when she signed her return. She also knew or had reason to know that the deductions would give rise to an understatement. Ignorance of the tax law was insufficient to establish an innocent spouse defense.K. Cheshire, CA-5,
2002-1 USTC ¶50,222, 282 F3d 326.The wife of an investor in a gold mine was an innocent spouse entitled to relief from the couple's joint tax liability. Although the wife knew that a large deduction from the mining venture had been claimed, she did not know or have reason to know that the couple's joint return contained a substantial understatement of tax. The wife had little involvement in the couple's financial affairs, had no involvement in the investment and was misled by her husband.P.A. Price, CA-9,
89-2 USTC ¶9598, 887 F2d 959.An attorney was entitled to innocent spouse relief because she did not know, or have reason to know that deductions claimed on a joint return for the losses of her husband's S corporation would give rise to a substantial understatement of tax and she proved the other elements of the defense. When the wife signed the return, she believed that enough funds had been invested in the company to provide sufficient basis to support the claimed deductions. Further, she had no special tax knowledge, was not involved in the S corporation's business, and did not make lavish or unusual expenditures. P.A. Price CA-9,
89-2 USTC ¶9598, followed.R.J. Reser, CA-5,
97-1 USTC ¶50,416.The Tax Court's finding that an attorney's ex-wife was not entitled to innocent spouse relief because she knew or had reason to know of a substantial understatement of income was not clearly erroneous. Despite the taxpayer's claims that she never saw the financial statements indicating that her husband received substantially more compensation than was reported on their joint return and that, in any event, the material was too complicated for her to understand; credible testimony and documentary evidence indicated that the financial information was passed on to the taxpayer. Moreover, the taxpayer benefited from the understatement by splitting a refund with her ex-husband instead of paying the substantial tax liability that was anticipated during her divorce proceedings.J. Bliss, CA-2,
95-2 USTC ¶50,370, 59 F3d 374.The wife of an options trader was entitled to innocent spouse relief because she neither knew nor have reason to know that losses on their return produced a substantial understatement. She was not aware of the transactions and did not participate in the management and day-to-day operations of the husband's business. Moreover, even though she controlled the family finances for a short time during her husband's illness, the husband had generally controlled their financial affairs during their marriage. The wife had a rational basis for believing that they had no taxable income, and it was reasonable for her to rely on her husband and an accountant. Further, there was no increase in their standard of living that would have led her to believe that there was a substantial understatement. Although the husband did not conceal their tax returns, she was unaware of several investments made by the husband, and the complexity of the transactions was a consideration.M.B. Resser, CA-7,
96-1 USTC ¶50,045.The spouse of a president and major stockholder of a corporation was not jointly liable for income tax deficiencies arising from the omission of substantial constructive dividends received through the corporation's payment of the couple's personal expenses, because she was an innocent spouse. The taxpayer did not know or have reason to know of the substantial understatement of income because she had been living affluently for many years, had no involvement in the corporation's affairs, had been deliberately denied access to the financial records by her husband and had been threatened with violence if she questioned the tax returns at issue.L. Kistner, CA-11,
94-1 USTC ¶50,059, 18 F3d 1521.Innocent spouse status was denied to a college educated nurse because although she did not know the exact amount, she knew her husband earned income from a dental practice. She also knew that he was financially irresponsible, but she failed to question him or their accountant about whether a return had been filed.D.D. McGee, CA-5,
93-1 USTC ¶50,015, 979 F2d 66.A wife was entitled to innocent spouse relief because she did not know or have reason to know of the substantial understatement of the couple's tax liability. She had a high school level education, no formal training in accounting or finance, a very limited role in the family finances, and during the year at issue her lifestyle did not change. She relied on her husband and a certified public accountant to prepare their tax returns, and she did not know about his business problems. Mere knowledge of her husband's investment in a particular business venture did not result in her having knowledge or a reason to know that deduction of a loss on that investment would give rise to a substantial understatement.H.J. Lesnick, BC-DC Ohio,
96-2 USTC ¶50,513, 202 BR 82.A widower who knew that his deceased wife had engaged in a real estate transaction during the year at issue was denied innocent spouse relief from the tax liability that resulted from the unreported income stemming from such transaction. He was denied innocent spouse relief because he knew of the transaction as a result of having signed the deeds.B. Meier, DC Va.,
93-2 USTC ¶50,482.A debtor in bankruptcy did not qualify as an innocent spouse and was liable for tax deficiencies for failure to report income from rental properties and interest-bearing accounts. The debtor failed to establish that substantial understatements of tax were solely attributable to her spouse and that she did not know or have reason to know of the understatements.C.Z. Clark, BC-DC Mo.,
89-2 USTC ¶9673, 106 BR 602.The debtor's knowledge of the transactions underlying erroneous credits precluded her from obtaining innocent spouse status. The debtor was aware of the transactions, approved of them, and claimed that they had a reasonable basis in law when taken.L.C. Stevens, DC Ohio,
96-1 USTC ¶50,238.An ex-wife was not entitled to innocent spouse relief under
Code Sec. 6015(b) because she had reason to know of a substantial understatement attributable to her former husband's investment, during the marriage, in a tax shelter limited partnership that passed through substantial losses that the couple claimed on their joint returns for two tax years. While the documentary evidence supported the wife's contention that she had no involvement in the partnership, the partnership losses were too large in relation to the couple's joint income for a reasonably prudent person with the wife's level of education to ignore.P.M. Mora, 117 TC 279,
Dec. 54,565.A wife was disqualified from innocent spouse status because she either knew or had reason to know of the sale of ranch property, which was the underlying circumstance giving rise to the substantial understatement.R.D. Bokum II, 94 TC 126,
Dec. 46,408. Aff'd on another issue, CA-11,
93-2 USTC ¶50,374, 992 F2d 1132.An ex-wife was eligible for innocent spouse relief in connection with her joint income tax liability that arose from her former husband's failure to report taxable amounts distributed from an individual retirement account (IRA) in her name and from disallowed deductions stemming from her husband's horse-showing activity. The record indicated that her husband opened the IRA in her name and concealed the account and the distributions from her. Moreover, the wife's participation in the horse activity was minimal and purely social in nature and she had no actual knowledge that the activity was not engaged in for profit.J.A. Rowe, 82 TCM 1020,
Dec. 54,582(M), TC Memo. 2001-325.The wife of a real estate developer was not entitled to innocent spouse relief with respect to joint tax liabilities because she knew, or had reason to know, of her husband's substantial understatements of tax. Although she was not involved in the day-to-day operation of his business, she had a practical education in business, and a reasonably prudent person would have inquired as to how she could receive distributions of valuable real estate free of encumbrances without reporting them as income.C.E. Jones, 74 TCM 473,
Dec. 52,233(M), TC Memo. 1997-400. Aff'd, per curiam, CA-11 (unpublished opinion),
99-1 USTC ¶50,389.Although a wife had no actual knowledge of omissions from income, she did not qualify as an innocent spouse because her knowledge of family finances gave her reason to know of the omissions. The return that she signed reported AGI of $13,983; the correct amount was $86,291. The family purchased a new home, furnishings and several new vehicles. Despite her limited education, lack of actual knowledge of her husband's illegal activities and physical abuse by her husband; a reasonably prudent person in her position would know of the omissions.Jackson Est., 72 TC 856,
Dec. 36,074, TC Memo. 1994-328.An individual who did not know that her ex-husband had a money market account was granted innocent spouse relief for underreported income that arose from the account. The omission was solely attributable to the taxpayer's ex-husband, who controlled the family's finances, and the amount of underreported income was relatively small in comparison to the couple's income.L.S. Dillon, 75 TCM 1518,
Dec. 52,506(M), TC Memo. 1998-5.A wife was entitled to innocent spouse relief because she did not know, or have reason to know, that there was a substantial understatement of tax on the joint return filed with her husband. Although she was educated, she lacked the training and experience to be knowledgeable in tax matters and in her husband's business.M. Veglia, DC Ill.,
97-2 USTC ¶50,700.A wife was granted innocent spouse relief with respect to the portion of the deficiency attributable to her husband's unreported income because she had no reason to know that her husband underreported his income, and her standard of living did not significantly increase as a result of the understatement. However, she was denied innocent spouse relief with respect to unreported income arising from her own business and with respect to disallowed itemized deductions absent proof that the deductions were solely attributable to her husband or that they qualified as grossly erroneous items.A.J. Marzullo, 73 TCM 2993,
Dec. 52,082(M), TC Memo. 1997-261.Although a wife had no actual knowledge of omissions of business income by her husband, she did not qualify as an innocent spouse because a reasonably prudent person in her position would have reason to know that the modest amount of reported income would not support the life style they maintained. The fact that she granted power of attorney to her husband to execute some of the returns did not allow her to escape liability. Further, her knowledge of an IRS investigation should have put her on notice that amounts on subsequent returns may be questionable.R.K. Ayer, 58 TCM 681,
Dec. 46,155(M), TC Memo. 1989-614.Although an ex-wife did not know of an understatement, nor review a joint return before signing it, she was not entitled to innocent spouse relief from an understatement resulting from omitted income attributable to her ex-husband's law practice. She did not know or have reason to know of the omitted income because she had a separate checking account, did not live with her ex-husband, and was not involved in his law practice during the year at issue. However, it was not inequitable to hold her liable for the deficiency because she did not present any evidence that her receipt and ownership of a car bought by her ex-husband was consistent with the lifestyle to which she was accustomed.R.D. Wilson, 72 TCM 1337,
Dec. 51,664(M), TC Memo. 1996-520.Although a wife did not know and had no reason to know of any substantial understatements of income, it was not inequitable to hold her liable for the portions of the deficiency attributable to an understatement from which she benefited or a tax year for which she failed to produce joint checking account records. Innocent spouse relief was granted for an understatement of income attributable to a condemnation award which her husband reinvested in his business, and from which she received no more than normal support. She had no reason to know of the understatements because she had limited education, no meaningful business experience, no participation in the family business and her affluent lifestyle in the years in question was considered normal for the family. It was reasonable in these circumstances that she not question her husband about involuntary conversion proceeds or corporate distributions because she had reason to distrust her husband and the accountant who prepared the return.F. Acquaviva, 72 TCM 1487,
Dec. 51,688(M), TC Memo. 1996-542.A wife was entitled to innocent spouse relief with respect to substantial understatements attributable to disallowed loss deductions relating to her husband's commodities trading activities because she neither knew nor had reason to know of the substantial understatements. She was not trained in any financial or business disciplines, played no role family's business or investments, did not control the income from assets that she owned, and there was no evidence that she benefited from the understatements.I.C. Hemmings, 73 TCM 2266,
Dec. 51,928(M), TC Memo. 1997-121.A wife was not entitled to innocent spouse relief because she knew or should have known that the joint returns contained substantial understatements. Even if she did not know of her husband's activities, when she signed the returns she knew about the underlying transactions that generated omitted commission, interest and dividend income. The wife was intelligent and actively involved in the family's business and financial affairs. She knew that the magnitude of the couple's spending during the years at issue were lavish and unusual for the income they reported on their returns.C.L. Fields, 72 TCM 675,
Dec. 51,560(M), TC Memo. 1996-425.A wife who lived apart from her husband and did not receive any support from him did not know and had no reason to know of substantial understatements attributable to her husband's unreported income. She had no knowledge of her husband's business and did not handle any of the business's finances. Therefore, she did not know whether the information that her husband reported in the return was accurate.H. Edwards, 70 TCM 161,
Dec. 50,773(M), TC Memo. 1995-335.A teacher who reasonably relied on her husband for financial matters, including taxes, was entitled to innocent spouse relief from the couple's joint liability for a tax deficiency and penalties. She questioned her husband about a tax shelter deduction and, after noting that a preparer had already signed the return, had no reason to doubt his response that the deduction was proper or to have knowledge of the understatement.M.R. Foley, 69 TCM 1661,
Dec. 50,418(M), TC Memo. 1995-16.A divorced woman was entitled to innocent spouse relief because she had no reason to know of tax understatements due to the disallowance of business expenses and charitable deductions claimed by the taxpayer's former husband. The husband handled their joint returns without consulting the taxpayer, and he kept all of their financial records at his office. She took reasonable steps to check the accuracy of the returns by questioning her husband, who assured her that they were accurately prepared by an accountant. The taxpayer was not trained in financial matters and had no lavish or unusual expenses.C.H. Cook, III, 69 TCM 2822,
Dec. 50,679(M), TC Memo. 1995-247.A dentist knew or should have known at the time he signed returns that they contained substantial understatements. He failed to include amounts paid directly to associate dentists by insurance companies even though those amounts were turned over to the dentist and deposited into his bank account. He was intimately involved in the practice's daily operations and in the compiling of the records given to his return preparer. His wife, who was employed by the practice and recorded business receipts, made no efforts to deceive the dentist about their finances.E. Taylor, 69 TCM 2932,
Dec. 50,701(M), TC Memo. 1995-269. Aff'd on another issue, CA-10 (unpublished opinion),
97-1 USTC ¶50,310.A husband reasonably believed that his wife's income from a janitorial business was reported on a separate tax return. However, innocent spouse relief did not apply to the tax and penalties attributable to a disallowed deduction for interest expenses incurred in connection with residential rental properties. The taxpayer's failure to substantiate the deduction was due to the fact that his wife would not grant him access to the records and not because there was no basis in fact or law for the disallowed deduction.S. Robinson, Sr., 68 TCM 1158,
Dec. 50,226(M), TC Memo. 1994-557.Innocent spouse relief was denied to the wife of a man who owned several garment industry business entities, pleaded guilty to tax evasion and subsequently disappeared. Her spouse's studied evasiveness gave her reason to know that there was a substantial understatement of tax on their joint returns. She refused to investigate further when he required her and her children to sign documents they knew nothing about or when she received Forms W-2 issued to her during a period when she did not work outside the home. She also failed to prove that it would be inequitable under all the circumstances to hold her liable for the deficiencies.F. Pappadio, 64 TCM 892,
Dec. 48,534(M), TC Memo. 1992-568.A wife did not qualify as an innocent spouse because she had access to the relevant records and accounts and, therefore, knew or should have known of the understatements on her return. She also knew of deposits that were made to the couple's joint account that were apparently free and available for their general use.L.W. Morris, 64 TCM 1192,
Dec. 48,611(M), TC Memo. 1992-635. Aff'd, CA-5 (unpublished opinion 2/4/94).The spouse of a shareholder in a corporation that operated a chain of newsstands was granted innocent spouse relief from unreported income. The wife, who during her 42-year marriage had always been unfamiliar with her husband's business dealings, had no reason to know of the substantial understatements of tax on their joint return. Further, nothing new or unusual occurred during the years in issue to put her on notice of the substantial understatements.A. Weissbart Est., 63 TCM 1845,
Dec. 47,944(M), TC Memo. 1992-38.On a pretrial motion, the opinion of the IRS's expert witness regarding the truthfulness of a witness was found unnecessary. Noting that what the claimant knows or should have known is an element of innocent spouse relief, the court found that the witness's expertise was unnecessary because the trier of fact is presumed to possess such expertise and ability.P.H. Friedman, 63 TCM 2058,
Dec. 48,002(M), TC Memo. 1992-89.A wife qualified for innocent spouse relief with respect to unreported community income from her husband's business because she did not know of the existence of a secret bank account.G.R. Porter, 62 TCM 1217,
Dec. 47,743(M), TC Memo. 1991-561.Although the IRS failed to present a credible argument that the taxpayer's wife was liable for fraud penalties, the wife was denied innocent spouse relief from the deficiencies. Considering the bank account balances and the purchase of assets, the wife should have known that the income was underreported on the joint returns filed with her husband.A.C. Licari, 58 TCM 1119,
Dec. 46,305(M), TC Memo. 1990-4. Aff'd on another issue, CA-9,
91-2 USTC ¶50,494, 946 F2d 690.A taxpayer was relieved from liability for an excessive interest deduction because the deduction was tied to a loan taken by her husband. Although she guaranteed the loan, she had no knowledge of the nature of the guarantee. She also did not know or have reason to know of the excessive deduction or gross omissions of income on the return since her husband omitted the income, had control over the return's preparation and excluded her from family business and financial affairs.C.A. Bell, 56 TCM 1467,
Dec. 45,536(M), TC Memo. 1989-107.A divorced taxpayer failed to qualify for innocent spouse relief with respect to a joint return that he filed with his wife prior to their divorce. The husband had reason to know of the substantial understatement of tax attributable to unreported income from his wife's disability pension payments, employee stock ownership plan withdrawals and certificate of deposit interest.G.F. Brearton, 56 TCM 1544,
Dec. 45,561(M), TC Memo. 1989-126.The wife of an attorney, who purportedly invested in a videotape venture which had no basis in fact or law, was not responsible for the income tax liability attributable to the venture's disallowed loss deductions, investment credits and carrybacks. The wife, who had no knowledge of her husband's income and who was not consulted or informed about the family's financial matters, investments or about the preparation and filing of the couple's joint income tax returns, qualified as an innocent spouse. The wife did not know, and had no reason to know, of the substantial understatement.R.M. McRae, 55 TCM 1560,
Dec. 44,978(M), TC Memo. 1988-374.A wife who did not participate in her husband's business activities and only had access to a checking account that her husband had established for her and into which her husband deposited her monthly allowance qualified for innocent spouse relief. Noting that she had no involvement in her husband's business or in the family's finances, the court ruled that she did not know, or have reason to know, of the understatements of tax. Moreover, there were no unusual or lavish expenditures made that should have alerted her that "something was amiss." Finally, the court held that it would be inequitable to hold her liable for the deficiencies because there was no evidence that she had received anything beyond normal support.J. Bouskos, 54 TCM 1117,
Dec. 44,332(M), TC Memo. 1987-574.A wife who was in charge of the family finances and was fully aware of her husband's involvement in business ventures which produced disallowed losses had reason to know of a substantial understatement made on their joint return.R.H. Gorman, 52 TCM 26,
Dec. 43,240(M), TC Memo. 1986-344.Based on the evidence, it was held that the taxpayer was not entitled to innocent spouse relief because he or she knew, or had reason to know, of a substantial understatement of tax liability made by the other spouse on their joint return.M. Sawczak Est., CA-11 (unpublished opinion),
95-1 USTC ¶50,100.L.H. Dube, BC-DC Ill.,
94-2 USTC ¶50,377.J. Kline, 71 TCM 2990,
Dec. 51,335(M), TC Memo. 1996-220.J.A. Alvarez, 70 TCM 518,
Dec. 50,861(M), TC Memo. 1995-414.B.R. House, 69 TCM 2005,
Dec. 50,502(M), TC Memo. 1995-92.J. Kline, 68 TCM 425,
Dec. 50,048(M), TC Memo. 1994-397.R. Lax, 68 TCM 115,
Dec. 49,970(M), TC Memo. 1994-329. Aff'd on another issue, CA-3 (unpublished opinion),
95-2 USTC ¶50,639.D.J. Jackson, 68 TCM 112,
Dec. 49,969(M), TC Memo. 1994-328.A.A. Kleinman, 67 TCM 1973,
Dec. 49,620(M), TC Memo. 1994-19.R. Carsendino, 67 TCM 2248,
Dec. 49,689(M), TC Memo. 1994-79.A. Ferrarese, 66 TCM 596,
Dec. 49,257(M), TC Memo. 1993-404.C. Coutsoubelis, 66 TCM 934,
Dec. 49,314(M), TC Memo. 1993-457.W.F. Falligan III, 66 TCM 1673,
Dec. 49,486(M), TC Memo. 1993-606.R.S. Adcock, 66 TCM 1103,
Dec. 49,352(M), TC Memo. 1993-488.D. Jensen, 66 TCM 543,
Dec. 49,245(M), TC Memo. 1993-393. Aff'd on another issue, CA-9 (unpublished opinion),
96-1 USTC ¶50,048.M.B. Butler, 114 TC 276,
Dec. 53,869.F.L. Charlton, 114 TC 333,
Dec. 53,879.F. Dalton, 84 TCM 571,
Dec. 54,941(M), TC Memo. 2002-288.H.L. Richardson, 91 TCM 981,
Dec. 56,475(M), TC Memo. 2006-69.Based on the evidence, it was held that the taxpayer was entitled to innocent spouse relief because he or she did not know, and did not have reason to know, of a substantial understatement of tax liability made by the other spouse on their joint return.D.J. Dopps, 68 TCM 326,
Dec. 50,019(M), TC Memo. 1994-371.J.R. Laird, 68 TCM 1191,
Dec. 50,236(M), TC Memo. 1994-564.S. Worthington, DC N.C.,
94-2 USTC ¶50,551.V. Boyle, 68 TCM 633,
Dec. 50,096(M), TC Memo. 1994-438.A divorced wife who had filed for bankruptcy protection was denied innocent spouse relief from tax deficiencies, interest, and penalties that resulted from a tax fraud perpetrated by her ex-husband. A reasonably prudent taxpayer in her position, with her education and knowledge of the husband's business and finances, should have been placed on notice that there were substantial understatements of tax on the joint returns filed for the tax years at issue. The opulent lifestyle that she and her ex-husband led should have suggested to her that business funds were being commingled with personal funds, but she chose not to inquire as to whether tax returns had been filed for those years. The taxpayer's contentions that she did not sign a joint tax return for one of the tax years at issue and that her signature was forged on a return for another year were rejected because she failed to inquire about the returns. With respect to the third tax year, she signed the joint return upon the advice of her former attorney and had actual knowledge of its contents. Thus, it was not inequitable to hold her liable for the tax debts.N.R. Capasso, BC-DC N.Y.,
99-1 USTC ¶50,416, 225 BR 573.The wife of a taxpayer who controlled the disbursement of a fuel transportation company's funds was not entitled to innocent spouse relief with respect to unreported income that the taxpayer received in connection with his personal use of a car that he purchased with company funds. She failed to testify as to that issue, and merely offered a self-serving denial of knowledge as to her husband's other unreported income. She also failed to show that any inequity arose from holding her liable.D.C. Montgomery, CA-10,
2000-1 USTC ¶50,117, affirming an unreported Tax Court decision.A graduate student in finance was denied innocent spouse relief because he had actual knowledge of an understatement in connection with distributions from his wife's retirement account, on the joint return that he filed with his wife. The record showed that the taxpayer urged his wife to withdraw the funds in order to pay for his tuition and that he was responsible for organizing and presenting the couple's tax records to their accountant.A. Amankwah, 78 TCM 823,
Dec. 53,631(M), TC Memo. 1999-382.A wife was entitled to innocent spouse relief because she had no reason to know that her husband's net income from his activites as a memorabilia salesman exceeded the amount reported on their returns for the tax years at issue.R.F. Kling, 81 TCM 1448,
Dec. 54,292(M), TC Memo. 2001-78.The estate of a wife who died while still married to, and living with, her husband was denied innocent spouse relief under
Code Sec. 6015(b)(1)(C) from the deficiencies that arose when the IRS disallowed losses claimed on the couple's joint returns with respect to the husband's tax shelter investment. The wife, who was highly educated, significantly involved in the family's financial affairs, and informed as to the tax benefits and risks associated with the tax shelter investment, had reason to know of the understatements on the tax returns.D.C. Jonson, 118 TC 106,
Dec. 54,641. Aff'd on another issue, CA-10,
2004-1 USTC ¶50,122, 353 F3d 1181.An individual who had no knowledge of her spouse's understatements of tax attributable to his omitted medical practice income was deemed to have had constructive knowledge of the information reported in their joint returns, even though she did not review them before signing them. The Tax Court noted that the omitted income was used largely to finance their family's substantial personal expenditures during the tax years at issue, of which the taxpayer was well aware. Although she may have been excluded from her husband's business affairs, she should have known that her family expenditures, which contributed to an affluent lifestyle, greatly exceeded their reported income.P. Barranco, 85 TCM 778,
Dec. 55,021(M), TC Memo. 2003-18.Denial of innocent spouse relief to an individual was an abuse of discretion because the IRS's findings that the individual knew or had reason to know that the tax liability of the individual and his wife would not be paid and that approximately 40 percent of the unpaid liability was attributable to him were arbitrary and without sound basis in fact. The taxpayer had entrusted his wife with filing their joint return. His signing of the return did not establish his actual or constructive knowledge that the tax due would not be paid. The wife earned significantly more than her husband but had significantly less withheld. It was reasonable for him to believe that his wife would pay the difference between the amount of their tax liability and their withholding. M.S. Wiest, 85 TCM 1082,
Dec. 55,099(M), TC Memo. 2003-91.The Collection Due Process (CDP) determination denying innocent spouse relief to a wife who, with her family, engaged in a systematic plan to place assets beyond the reach of the IRS was upheld. The deficiencies at issue arose in connection with spurious tax shelter investments made by the taxpayer and her husband. She did not qualify as an innocent spouse under
Code Sec. 6015(b)(1) because she knew of the understatement generated by the improper tax shelter deductions, significantly benefited from the unpaid liabilities, and attempted to conceal family assets.N.B. Doyle, 85 TCM 1108,
Dec. 55,104(M), TC Memo. 2003-96.A divorced individual who had actual knowledge of his then wife's unreported pension income was not entitled to innocent spouse relief. His claim that mental health problems prevented him from being involved in and understanding financial matters and that he did not know about his wife's pension distribution were rejected. Evidence was presented that, during the year in question, the taxpayer had maintained his own business, that he had discussed his wife's pension account frequently, that the couple had actually met with a financial adviser regarding the account, and that the distribution was deposited in their joint account.C.A. Penfield, 84 TCM 424,
Dec. 54,900(M), TC Memo. 2002-254.A divorced wife was not entitled to spousal relief with respect to her husband's unreported income and a
Code Sec. 401(k) withdrawal. Evidence indicated that the taxpayer knew of the unreported compensation and the withdrawal. The taxpayer unsuccessfully argued that her former husband was responsible for the tax due pursuant to a provision of their divorce decree that allocated joint debts to the party who incurred the debt.D.M. Orsino, 85 TCM 1492,
Dec. 55,189(M), TC Memo. 2003-174.An individual was not entitled to innocent spouse relief on the ground that she did not have reason to know of the tax understatement reflected on a joint return she filed with her husband. Although she was unsophisticated in business, lacked a formal business education and had a relatively insignificant role in the business and financial affairs of a corporation for which she served as secretary and its related entities, her lack of business acumen was not an impediment to her knowledge and understanding of the facts underlying the transaction that gave rise to the tax understatement. M.C. Pierce, 85 TCM 1553,
Dec. 55,205(M), TC Memo. 2003-188.An individual was not entitled to relief from joint and several liability arising from his former wife's failure to report a lump-sum, retroactive payment of social-security benefits. The taxpayer had actual knowledge of the benefits that gave rise to the underpayment. He assisted his former wife in applying and reapplying for the benefits at issue. Moreover, after the taxpayer lost his job, his former wife used the benefits to make the monthly mortgage payments.A.J. Zoglman, 86 TCM 370,
Dec. 55,295(M), TC Memo. 2003-268.A divorced individual was not entitled to innocent spouse relief for deficiencies resulting from her and her spouse's investments in tax shelter limited partnerships. Relief was not available under
Code Sec. 6015(b) based on the Tax Court's determination that the understatements were not attributable to erroneous items of one individual filing the joint returns for the years in issue and that the taxpayer had reason to know of the understatements on the returns. V. Doyel, 87 TCM 960,
Dec. 55,540(M), TC Memo. 2004-35.An ex-wife was not entitled to innocent spouse relief under
Code Secs. 6015(b),
(c) or
(f) because she had reason to know of substantial understatements attributable to her former husband's tax shelter business activities. The individual was aware of the business activities of her former husband and was a participant in the expenditure of funds far exceeding any amounts reported on their joint tax return. She also knew that she had significant earnings during the years in issue and that no income was withheld from her earnings.R.T. D'Aunay, 87 TCM 1134,
Dec. 55,591(M), TC Memo. 2004-79.An individual was not entitled to innocent spouse relief. She failed to establish that the understatements at issue, which arose from claims made on the individual's joint return regarding partnership investments, were attributable to her husband only. She knew that she was listed as a partner in the partnership and signed investment documents. Further, her substantial involvement in the investment process showed that she had reason to know of the understatements. Her ignorance of the tax consequences resulting from the investments did not negate her knowledge of the facts pertaining to the investments.A.E. Bartak, 87 TCM 1152,
CCH Dec. 55,596(M), TC Memo. 2004-83. Aff'd, CA-9 (unpublished opinion),
2006-1 USTC ¶50,111.A widower was entitled to innocent spouse relief pursuant to
Code Sec. 6015(f), allowing for a refund of taxes. The taxpayer established that she did not have knowledge of the unreported income. The taxpayer did not learn of the IRA distribution until 14 months after the original return, which failed to report the distribution, was filed. The fact that the taxpayer later filed an amended return to report the IRA distribution did not establish that she had knowledge of the unreported income at the time the original return was filed. Finally, because the couple had separate accounts and never discussed the distribution, it was unclear where the proceeds from the distribution ended up. It appeared as if the taxpayer's deceased husband opened a different account with the funds, which was later bequeathed to his grandchildren.C. Rosenthal, 87 TCM 1183,
Dec. 55,603(M), TC Memo. 2004-89.A teacher failed to show that she did not know or have reason to know of understatements on her delinquent joint returns, especially in light of her advanced education and her representation by an attorney and an accountant when the returns were filed.A. Barriga, 87 TCM 1236,
Dec. 55,617(M), TC Memo. 2004-102.A taxpayer who had knowledge of his spouse's unreported income could not claim innocent spouse relief. Even though she failed to tell him how much she made that year or provide him with the Form 1099, he was on notice regarding the income and had a duty to inquire into the amount of the income. He did not qualify for innocent spouse relief under
Code Sec. 6015(b) since he had actual knowledge of her earnings and constructive knowledge of the amount. Nor could he qualify under
Code Sec. 6015(c), which allows relief even if the taxpayer knew about an understatement, but only if the taxpayer had no reason to know the extent of the understatement.P. Cullen, 88 TCM 68,
Dec. 55,708(M), TC Memo. 2004-176.The IRS did not abuse its discretion in denying innocent spouse relief under the equitable relief provisions of
Code Sec. 6015(f) to a woman married to a Korean War veteran diagnosed with a combat-related psychological disorder that caused him to be secretive and uncommunicative. Although her husband had exclusive control of the family finances and related records (the taxpayer allegedly never wrote a check from their joint account in their 40 years of marriage), she had reason to know that the large tax liabilities listed as due on their returns would not be paid, given the relatively small amounts shown on the returns as income tax withheld.N.A. Sjodin, 88 TCM 221,
Dec. 55,743(M), TC Memo. 2004-205. Vac'd and rem'd on another issue, per curiam, CA-8 (unpublished opinion),
2006-1 USTC ¶50,357, 174 FedAppx 359.The spouse of a tax shelter investor was correctly denied innocent spouse relief because she had "reason to know of the understatement" of the joint tax liability. Although the taxpayer filed joint returns with her husband, she was not involved in the preparation of the returns and she signed all of the returns without reading or examining them. However, the circumstances were such that a reasonably prudent person would have at least looked at the returns she signed. In the years at issue, the taxpayer and her husband reported large amounts of income, large losses, and little or no tax liability, but the taxpayer was so unconcerned about her tax obligation that she took no steps to assure herself that the returns were filed properly.W.H. Albin, 88 TCM 340,
Dec. 55,772(M), TC Memo. 2004-230.The IRS did not abuse its discretion by denying innocent spouse relief under
Code Sec. 6015(f) to a widowed taxpayer who sought relief from joint and several liability. While the taxpayer satisfied the seven threshold conditions of
Rev. Proc. 2000-15, 2000-1 CB 447 for the IRS to consider equitable relief, she knew or had reason to know that the liabilities would not be paid because her husband was deceased at the time she signed the tax returns.M.A. George, 88 TCM 1078,
Dec. 55,804(M), TC Memo. 2004-261.A divorcee who invested in a sheep breeding tax shelter partnership with her ex-husband was not eligible for innocent spouse relief under
Code Sec. 6015(b). Since the taxpayer was an investor, she was not entitled to innocent spouse relief under
Code Sec. 6015(b) because the understatement was not attributable to her ex-spouse's investment in the tax shelter. In addition, the taxpayer knew or had reason to know that the deductions generated by the investment were invalid.D.J. Barnes, 88 TCM 479,
Dec. 55,809(M), TC Memo. 2004-266.The IRS abused its discretion when it denied a homemaker relief from joint and several liability under
Code Sec. 6015(b)(1). The evidence showed that the taxpayer did not have actual knowledge of the partnership investment that generated the understatement when she signed the return. In addition, there was nothing in her education or experience that could have alerted her to question the tax liability for the year at issue. The taxpayer also did not have a duty to inquire about the losses, because the partnership's losses were combined with the income and expenses of all of the husband's other properties, and nothing on the face of the return alerted the taxpayer to inquire about the partnership's losses. Finally, it was inequitable to hold the taxpayer liable for the deficiency attributable to the understatement on the couple's joint return. The taxpayer did not benefit from the husband's investment, and the taxpayer would experience considerable economic hardship if relief was not granted.P.A. Hendricks, 89 TCM 1004,
Dec. 55,982(M), TC Memo. 2005-72.The IRS abused its discretion when it denied a divorced individual equitable innocent spouse relief for several tax years. The taxpayer did not know or have reason to know, at the time she signed the tax returns, that her ex-husband would not pay the tax liabilities. In fact, her ex-husband concealed his nonpayment of the tax liabilities and his serious gambling problem from her for many years. Moreover, those liabilities were solely attributable to the ex-husband and the couple were separated at the time she filed her request for innocent spouse relief. Further, the ex-husband had the legal obligation to pay the liabilities according to the couple's marital settlement agreement.J.P. Levy, 89 TCM 1101,
Dec. 56,004(M), TC Memo. 2005-92.A divorced taxpayer was entitled to innocent spouse relief under Code Sec. 6015(b) for tax deficiencies related to an incorrect interest paid deduction taken by an S corporation in which the taxpayer and her ex-husband had a 50-percent interest. The taxpayer had no knowledge or reason to know the interest deduction was improper, nor did she have a duty to inquire into it. The taxpayer was not sophisticated in financial matters; her involvement in the family's financial affairs was limited; she was unaware of the details of the corporations affairs; and there was no evidence that the family changed their lifestyle as a result of the incorrect deduction.E. McClelland, 89 TCM 1329,
Dec. 56,036(M), TC Memo. 2005-121.A high-school educated wife was entitled to innocent spouse relief from tax deficiencies that resulted from failing to report her husband's embezzlement income on a joint return because she did not know or have reason to know about the income. The husband deposited the embezzled income in five bank accounts that he alone had signatory authority over and that were kept hidden from the wife. Although the wife was aware that her husband received mail from various financial institutions and wrote checks on two different accounts, it was not enough for a reasonable person to conclude that he was hiding money. The couple did have large expenses, but their spending was in line with their reported income for the years at issue. Finally, despite the husband's actions to hide the embezzlement from the wife, once she learned that investigators had raided the husband's office, she took steps to stay on top of the family finances. The wife was liable for tax on small amounts she earned but failed to report as income on the couple's returns.L.K. Haltom, 85 TCM 1234,
Dec. 56,133(M), TC Memo. 2005-209.The IRS did not abuse its discretion when it denied a taxpayer innocent spouse relief under
Code Sec. 6015(f) because the taxpayer failed the safe harbor and the balancing tests set forth in
Rev. Proc. 2000-15, 2000-1 CB 447. The taxpayer had reason to know or actually knew at the time he signed the joint returns that the tax liabilities would not be paid. Although the taxpayer's wife paid the taxes in the past, he knew that several tax returns were being audited, one of the returns was filed more than a year late, and his wife, who was indicted for tax evasion, was going to jail.M.R. Motsko, 91 TCM 711,
Dec. 56,423(M), TC Memo. 2006-17.A spouse qualified for relief from joint and several liability with respect to a tax deficiency arising from a joint federal income tax return because, in addition to satisfying the other requirements for relief, she did not have reason to know that, at the time of signing the joint return, there was an understatement of tax on the return attributable to her husband's participation in a sham straddle transaction. The spouse was only a nominee on a trading account in her name and had no control over the funds; her husband was evasive about the family finances; the transaction initiated by her husband that resulted in the deficiency was extremely complex; and her standard of living deteriorated, rather than improved, after the transaction.P.E. Campbell, 91 TCM 735,
Dec. 56,430(M), TC Memo. 2006-24.The IRS's denial of equitable innocent spouse relief to a requesting ex-spouse was not an abuse of discretion. The requesting spouse knew or had reason to know of the tax liability on the joint return and that such liability would not be paid.J.H. Krasner, 91 TCM 765,
Dec. 56,437(M), TC Memo. 2006-31.A 69-year-old research scientist was entitled to innocent spouse relief from deficiencies that resulted from her husband's investment in a tax shelter partnership. During the marriage, the husband was responsible for making all of the financial decisions for the family, including paying all of the family's bills, and he did so without consulting the taxpayer. The husband made the investment in the tax shelter partnership without the taxpayer's knowledge, using money from a separate private investment account that he kept for investment purposes. Thus, at the time she signed the joint return for the year at issue, the taxpayer had no knowledge of the investment that resulted in the erroneously claimed losses and investment tax credits.H.M. Korchak, 92 TCM 199,
Dec. 56,609(M), TC Memo. 2006-185.The IRS abused its discretion in denying a divorced taxpayer innocent spouse relief under
Code Sec. 6015(f); based on an application of the factors set forth in
Rev. Proc. 2000-15, 2001 CB 447 (which, although superseded, applied to the IRS's determination), to hold her liable would be inequitable. All of the factors either favored the taxpayer or were neutral. She did not know or have reason to believe that the tax at issue would not be paid. Although her former husband submitted an offer-in-compromise, there was no evidence that the taxpayer knew about it. Also, although she signed and filed balance due returns, her husband had underpaid his estimated taxes, and the couple habitually owed money they could not pay, her husband intentionally mislead her into thinking he was fulfilling their tax obligations. At the times the returns at issue were filed, the taxpayer expected her husband to pay their taxes after their returns were filed. Any knowledge about his intent to pay his taxes that she gleaned from her discovery of tax liens on their house and their bankruptcy filing occurred after they filed the returns at issue.D. Van Arsdalen, 93 TCM 953,
Dec. 56,852(M), TC Memo. 2007-48.A divorced wife was granted an innocent spouse relief with respect to unreported income from her ex-husband's businesses because she did not have actual knowledge of the understatement of the income. The abusive ex-husband, who intervened to object to his former wife's being relieved from liability, had absolute authority over the financial aspects of the marriage and maintained control over all aspects of the businesses. He exercised complete control over a bank account opened in the ex-wife's name by telling her what to deposit into the account and when, and instructing her to sign blank checks that he later filled in. He also did not allow his former wife to review the business records and the tax returns, which he prepared, and forged her signature on the returns.J.M. Wilson, 93 TCM 1242,
Dec. 56,941(M), TC Memo. 2007-127.A former wife was denied innocent spouse relief because she was aware at the time the couple signed their joint return that a charitable contribution claimed on the return had not been made. The wife questioned the contribution at the time but chose to take no further action. Her request for innocent spouse relief under
Code Sec. 6015(b) or
(c) was denied because she was aware of the understatement at the time she signed the return. C.R. Schwendeman,
Dec. 57,047(M), TC Memo. 2007-227.The IRS abused its discretion in denying a husband's claim for equitable innocent spouse relief under
Code Sec. 6015(f) based on the factors set forth in
Rev. Proc. 2000-15, 2001 CB 447. The husband had no knowledge of funds that his wife admittedly embezzled from her employer but failed to report at the time their original 1999 income tax return was filed. The IRS acted arbitrarily in measuring the taxpayer's knowledge at the time he signed the amended return, even though the husband knew at that time that they were not able to pay the increased tax. D.B. Billings,
Dec. 57,056(M), TC Memo. 2007-234.An individual was not entitled to innocent spouse relief from a deficiency attributable to a partnership in which both she and her husband were limited partner. The partnership generated losses for the couple that were later disallowed. The individual was college-educated and was responsible for balancing the couple's checkbook. She should have had knowledge that she was in the partnership and should have known that the claimed losses from the partnership were reported in the joint return that she signed.R.H. Golden,
Dec. 57,126(M), TC Memo. 2007-299.
Alvin S. Brown, Esq.
Tax Attorney
703 425-1400
www.irstaxattorney.comTo provide IRS transparency, upload your IRS experiences to www.irsforum.org
Labels: Innocent spouse - section 6015(f) - duty to inquire
