2004 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit
4-20-2004 

# D o y le v . C ommi s sione r IR S P r e c e de n t i al or N on-P r e c e de n t i al : N on-P r e c e de n t i al D ocke t N o . 03-2907

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Thi s de c i sion i s br ou gh t t o you for f r e e a nd ope n a c c e s s b y the O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit at V i l l a no va U nive r sit y S choo l of L a

w Di g it al Re posit or y

. It h as be e n a c c e pt e d for inclusion in 2004 D e c i sion s b y a n author i z e d a dmini s tr at or of V i l l a no va U nive r sit y S choo l of L a

w Di g it al Re posit or y

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w . v i l l a no va . e du/thir dc ir c uit_2004/803* Honorable Milt on I. Shadur , Senior Distri ct Judge for

the Unite d States Distri ct Court for t

he Northern Dis tri ct of Il linoi s, si tti ng by des ignati on. NOT PRECEDENTIAL

UNIT ED S TAT ES COU RT OF A PP EALS FOR THE THIR D CIR CUIT

___________ No. 03-2907

___________ NANCY B. DOYLE, Appellant
v. COMMISSIONER OF

INTERNAL

REVENUE,

___________ ON APPEAL FROM THE DECISION OF THE UNITED S TATES TAX COURT (Tax Court No. 01-9137) Tax Court Judge: Honorable Robert P. Ruwe

___________ Submitte d Under Third Circ uit LAR 34.1(a)

March 12, 2004 BE FO RE : SL OV ITE R, N YG AA RD , Circu it Judges
.

and SHADUR, * Distri ct Judge
. (Fil ed: April20, 2004) OPINI ON OF THE COURT
SH AD UR , Distri ct Judge
.

Nancy Doyl e (“Nancy” ) has appeal ed a ruli ng by the United States Tax1 All furt her cit ations to the Code wil l take the form “Section-- ,” el iminating the nee d fo r rep eate d re fere nce s to “ 26 U .S.C .” 2 Co urt that th e Co mm issione r of In ternal R even ue (“C om missio ner”) ( 1) w as co rrect to deny Nancyreli ef under 26 U.S. C. §6015(b)( 1), part of the Internal Revenue Code (“Cod e”), 1 from her join t and s evera l tax liability w ith her h usba nd R ichard and ( 2) did not abuse hi s discretion when he deni ed her rel ief under Section 6015( f). Becaus e the Tax Co urt did n ot com mit clea r error in mak ing eith er dete rmina tion, w e aff irm its decision in both respects.

Nancy and the Commissioner s tipul ated t o a set of fa cts ( App. 21-37) befo re the T ax C ourt. W e discu ss thos e fac ts here only as the y are nec essary to underst and our rul ing.

Nancy and Richard file d joint federal income tax returns for the y ears 1980 through 1983 t

hat inc luded large deductions for horse bre eding and hors e raci ng taxshelt ered inve stments (Sti p. ¶6). After audi ting t hose returns, the Commissione r iss ued notice s of d eficien cy alerting N ancy an d R ichard that the y owe d up wa rds of $10 0,000 in additi onal taxes (Stip.¶¶7-8) . That l iabil ity was upheld by two Tax Court determinati ons that c omputed the aggregate defi ciency(incl uding interest ) at wellover $300,000 ( Stip. ¶¶10-12 ). Although the Commissi oner has r ecouped some of the a mount due by levy ing on Richar d's wages a nd by r etai ning overpayments and ref unds due to Nancyand2 Section 6015 ha s repl aced the former Secti on 6013(e), general ly liber aliz ing

when relie f would be avail able for “innocent

spouses. ” But where part s of the new provisi on are comparabl e to the old one, casela w pertaini ng to Secti on 6013(e) i s helpful in const ruing Section 6015 ( Chesh ire , 282 F.3d at 331 n.9 & 332 n.15). This opini on follows that interpretive guide line when appl icabl e and appropri ate. 3 Rich ard, ne ither N ancy no r Rich ard h as ev er ma de a v olun tary payme nt on their liab ility (Stip. ¶¶ 50-5 3). N ancy su bm itted a “R eque st for In noce nt Sp ouse Relie f” pu rsuan t to Section 6015 i n October 2000 (Stip. ¶61) , but t he Tax Court denie d Nancy' s request and up he ld th e C om m iss io ne r's r ig ht to co nt in ue co lle cti on ac tiv ity (A pp . 18 ). O n N an cy's appeal, we now review that deci sion.

We ha ve pl en ar y re vi ew o ve r t he Tax Cou rt ' s l eg al co nc lu si ons , and w e review anyfactualfindings not based on t he parti es' sti pulati on for cle ar err or ( N eo na to lo gy A ss oc s., P .A . v. C om m 'r , 299 F.3d 221, 227 (3d Cir. 2002)). Because the Tax Court' s ultimate determination that Nancy is not enti tled to reli ef under Section 6015 is a finding of fact, it too is reviewed for clear error ( C he sh ire v. C om m 'r , 282 F.3d 326, 332 (5 th Cir. 2002) ). Moreover, Section 6015 c omports with the gener al rul e that taxpa yers bear the bu rden of d emo nstrating that a d eterm ination by the C om missio ner is incorr ect ( Neonatology Assocs. , 299 F .3d at 2 28; Pu rif ica to v. C om m 'r , 9 F.3d 290, 292 (3d Cir. 199 3)). 2

To begin with, the Tax Court di d not commit cl ear err or when it determined that Nancyhad not met her burden of est ablis hing each of t he five conj unctive requir ements (A) t

hrough (E) of Sect

ion 6015(b) (1). Only i f a taxpay er can prove all f ive3 Although publi cati on page refer ences to Jonson are n ot yet a vaila ble, the

opi ni on m aybe re trie ve d on Wes tl aw. 4 requir ements willshe “be rel ieved of l iabil ity .” Here the Tax Court found that Nancy fail ed to show (1) t

hat “she di d not know, and had no re ason to know, t hat the re was such underst atement” ( requir ement (C)) and (2) that “t aking into account al l the f acts and circumst ances, i t is inequit able t o hold the ot her indi vidual [ here Nancy] liabl e for the deficiency...” (requiremen t (D)).

As to the f irst of those failures, cou rts are divided ab out the prop er standard to use i n erroneous -deducti on scenari os to determine whether a taxpay er knew or had
reaso n to k now of an und erstatem ent ( see Chesh ire , 282 F .3d at 3 33 n .18; Jonson v. C om m 'r , 118 T.C . 106 (200 2)). 3 As for the Tax C ourt, it consistentl y applies a knowledge-of-t

he-tr ansacti on test

to both i ncome-omissi on and erroneous -deducti on situati ons ( see , e.g. , Jonson , citi ng among other cases B ok um v. C om m 'r , 94 T.C. 126, 150 -51 (19 90) , aff'd on another gr ound , 992 F.2d 1132 ( 11 th Cir. 1993) ). Under t hat approach a t axpaye r does not sati sfy Section 6015( b)(1)( C) if she has reason t o know about the underly ing tr ansacti on that resulted in the underst atement at issue ( id .). In contras t, manycircui ts hol d that i n the erroneous-deduction conte xt mere awarenes s of the underlyi ng transaction that gave rise to an erroneous deduction does not alone cause the ta xpayer

to flunk Sec tion 6015( b)(1)( C)(that view was firs t expounded i n Price v. C om m 'r , 887 F.2d 959, 964 -65 (9 th Cir. 19 89)). T hose circuits a sk w hethe r a reas onab ly4 Nancy te sti fied that she di d not know about anyinvestments Richar d may have

ha d d ur in g t he pe rio d i n q ue sti on (A pp . 40 -4 1, 4 3- 45 ). B ut it w as th e T ax C ou rt's responsi bili ty and prerogat ive to a ssess and weigh confli cting e vidence and t o make the factu al find ing as to w hethe r Na ncy kne w o f the tra nsac tions (A pp. 13 ; Wilmington Trust Co. v. Helvering , 316 U .S. 164, 168 (1942)).5 prudent t axpaye r could be e xpected t o know that the re was an err oneous deducti on at the time she s igned the return ( id .). Any “y es” answer t o that que sti on tri ggers a duty of inquiry, and a taxpay er who then does not inquire furthe r is de nied rel ief under Section 6015(b )(1)(C)( id .). As th e ens uing discu ssion re flects, w e nee d no t stake o ut a po sition in that de bate. As for the fi rst of those appr oaches, t

he Tax Court found that Nancy kne w of the under ly ing horse breeding a nd horse ra cing inve stments because she wrote the checks f or the transactions p ertaining to them (App . 13, 44-45). 4 A nd as in di ca ted ea rly, that a lone is enough to defeat Nancy under t

he Tax Court' s approach t o “knew or had
reas on t o kn ow .”

As for the se cond and more leni ent te st fi rst arti culat ed in Price , we h old that Nancydid not ade quatel y di scharge t he dutyto inqui re furt

her into the possibili ty of
an erro neou s or im prop er ded uction . Tho ugh the disc ussion of tha t conc ept is ne cessa rily
mor e pr ol ong ed, our

con cl usi on a dve rs e t o Nan cyis equ al lyfi rm. Va rious f actors cons istently play into th e thres hold determ ination as to
w he th er a d ut y of in qu iry a ris es as en vi sio ne d b y Price and other c ases fol lowing the same line ( see , e.g. , B lis s v . C om m 'r , 59 F.3d 3 74, 378 (2 d Cir. 199 5)). Those f actors5 W illiam Sh ake spe are, Hamlet act 1, sc. 4, line 90. 6 in clu de su ch m att er s a s th e ta xp aye r's l ev el o f e du ca tio n a nd in vo lv em en t in th e f am ily's financi al affai rs, the si ze and natur e of the deduction (particul arlyin rel ation to the couple' s tax l iabil ity

and gross i ncome), the presence of comparati velylarge e xpenditures or an abru pt lifestyle change, and d eception o r evasion b y the spouse w ith primary respo nsibility for th e cou ple's fina nces (26 C .F.R. § 1.601 5-2(C ); see also Hayman v. C om m 'r , 992 F.2d 1256, 12 61-62 (2 d Cir. 199 3)).

Several of

those i ngredient s confirm Nancy's clear duty to inqui re about t

he deducti ons. For one thing, although s he had onlya high schooleducati on, her wri ting of all t he household che cks and handli ng of household expe nses invol ved her in an acti ve role in th e fam ily's finance s (Ap p. 38, 4 4-45 ). M ore sig nifica ntly, Nan cy certainly sh ould have been ale rted t o the pros pect that “[s] omething i s rotten in the state of Denmark” 5 when she si gne d a t ax r etur n t hat ded ucted a lmo st

70% of th e co upl e' s gross in come (App. 3 n.2) --something that on its face reduced t

he family 's apparent i ncome to a leve l total ly at odds wit

h the coupl e's life sty le. And finall y, as the Tax Court noted, there i s no indication t

hat Richar d was deceivi ng Nancy such t hat her oppor

tunit y t o learn about the deduc tions or their propriety was thw arted (Ap p. 13).

But in theface of thos e things Nancy si mply pl ayed os tri ch, hi ding her hea d in the p rove rbial san d. Sh e adm its that she neve r review ed or discu ssed th e return s with Richard or a nyone el se, nor did she pr esent any

evidence t o the Tax Court i ndicating that6 Alth oug h that P roced ure (late r supe rsede d by R ev. Pr oc. 20 03-6 1) actu ally

addresse d equitable fact ors in terms of Secti on 6015(f) and not specifi call y as to Secti on 6015(b)(1) (D), we see no r eason why the consider ations would be any di fferent for the who lly comparable co ncepts set ou t in Sections 60 15(b)(1)(D ) and 60 15(f).

7 Again the Tax Court was ent itl ed to dis count Nancy 's testi mony that her stand ard o f living stayed the sam e and that she did n ot “rea lize in [h er] m ind an y benef it from the deductions, ” in li ght of the substant ial obj ecti ve evidence to the contrary(App. 46). 7 she attempted to di sentangl e the t ax knot that she had to know about (App. 41-43) . That totallack of i nquiryforecl oses her abili ty to satisfySection 6016( b)(1)( C), even under the less de manding Price formulation.

That inabi lit

y al one scotche s the avai labil ity of reli ef under Section 6015(b )(1) ( Fr ied m an v. C om m 'r , 53 F.3d 5 23, 532 (2 d Cir. 199 5)). But the T ax Co urt had a second st

ring t o its bow: It al so determined that Nancy coul d not show it would be inequit able t o hold her l iable under allthe fact s and circumstances, as requi red by Section 601 5(b)(1 )(D)(A pp. 13 -16). W e agre e on th at scor e as w ell.

That equit able eval uation a lso i mplicates a number of poss ible f actors (Rev. Proc. 200 0-14 §4 .02 to .03 (fou nd at 200 0W L 420 26)). 6 Here the Tax Court foc used primari ly on two of those fac tors i n reachi ng the concl usion that it would not be inequit able t o hold Nancy l iable on her joi nt ret urn. First , the Tax Court noted t hat Nancy recei ved signi ficant benefit s over and above norma l support (thoug h som e of those benefits w ere realized seve ral years later) (Ap p. 15; Hayman , 992 F.2d at 1262; R ev. Proc. 20 00-15 § 4.03(2)(c)). 7 For e xam ple, in8

1993 (just as the Com missioner w as filing tax liens again st them) N ancy and R ichard to ok tw o E ur op ea n v ac ati on s in th e s pa n o f a fe w m on th s (S tip . ¶¶ 26 -2 8) . A dd itio na lly, af ter th e ta x ye ar s a t is su e N an cy a nd R ich ar d f re qu en tly tr an sf er re d s ub sta nt ial m on eys (funds they coul d have appli ed towards their t ax liabili ty ) to t heir chi ldren, but they

then regularly withdrew that money for t

heir own li ving expenses --i ncluding t hose vacations (App . 14-18, 21-2 2, 29-30, 34 -35, 50).

Next the Tax Court e mphasized that Nancy 's c ontinuous atte mpts to hi nder colle ction of

the taxes at i ssue al so cuts a gainst her argument

that relie f would be appropri ate base d on a good faith effort to comply wit h federalincome tax l aws (App. 15- 16; Rev. Proc . 2000-15 §4. 03(2)(e )). As Nancy plai nly sti pulate d, while she has not made any vol untarypayment s on her t ax liabili ties , she has liqui dated numerous a ssets , taken out li ens on previ ouslyunencumbered propertyand--as alrea dy di scussed- -“tr ansferr ed” to her c hildren large s um s of m oney tha t she an d R ichard then re captu red to s upp ort their own lifestyl e (Sti p. ¶¶13-24, 28-30, 34- 35, 50). Given that factualbackdrop, t

he Tax Court sure ly committed no e rror, let a lone cl ear err or, when it charact erize d Nancy' s and Richard 's activities as a systematic ploy to hinde r collection (Ap p. 16).

Finally , the Tax Court did not err when it concluded that it was not an abuse of the Commissi oner' s discretion to deny Nancyequitable rel ief under Section 6015( f) (Ap p. 17; M itc he ll v . C om m 'r , 292 F.3d 800, 807 (D.C. Cir. 2002)). That statute t racks verbati m the language of Section 6015( b)(1)( D). Because Nancy was ineli gible f or rel ief9

under Secti on 6015(b) pre cisel y because she fai led to s atis fy Sect ion 6015(b) (1)(D)( even apart f rom her shortfall under Secti on 6015(b)(1) (C), i t necess aril y fol lows that the Com missioner did not abuse his discretion by withho lding relief und er Section 6 015(f).

For all these reasons we AFFIR M the T ax Court's decision i n all respects.