TAX COURT OPINION

Case: Traci Newburn
Docket Number: 24737-17L
Judge: Buch
Opinion Type: bench
Filed: 02/11/2019
Pages: 17

UNITED STATES TAX COURT WASHINGTON, DC 20217 TRACI NEWBURN, Petitioner, v. ) ) ) CT ) Docket No. 24737-17 L. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Phoenix, Arizona, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Ronald L. Buch Judge Dated: Washington, D.C. February 11, 2019 SERVED Feb 11 2019 Bench Opinion by Judge Ronald L. Buch January 18, 2019 Traci Newburn v. Commissioner of Internal Revenue Docket No. 24737-17L 3 Tnm ennnT- The fnllnwinn ronromonem the nnnrr's oral findings of fact and opinion. The oral findings of idCL dIlu Upin1UIl Illdy IlUL Uë 1elleu LtpVII dö pleUëuellL 111 any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or the Treasury regulations in effect during the year at 1 2 3 4 c 6 8 9 10 11 12 13 issue, and all Rule references are to the Tax Court Rules 14 of Practice and Procedure. 15 In this case, we are asked to decide whether 16 Traci Breinholt is entitled to relief from joint and 17 18 19 ?n several liability under section 6015(f) for liabilities relating to 2012 and 2013. We conclude that she is not. Background The Breinholts were toaether since hiah school, 21 where Ms. Breïnholt was one year ahead of her future 23 Community College and, later, Arizona State University 24 wnere sne maJorea in psycnology. ms. creinnU1 nevel 25 graduated from college, and married Mr. Breinholt in 1988. Cribers (973J406.2250|operation(cid:0)541@estdbersalet|wwwesaíbeitnet Mr. Breinholt also attended Mesa Community College and Arizona State University. He did not complete his degree 4 before he married, but years later, he completed his degree online. nafnro 1446. Mr nrainhnle nnarataa a huminamm called Elite Hood & Filter. The business specialized in cooking surfaces in commercial kitchens. These hood and filter systems often include fire suppression systems. 1 2 3 4 c 6 8 9 10 In 1996, with the help of his brother Garin, Mr. 11 Breinhart formed State Fire Protection. State Fire 12 Protection complemented the business of Elite Hood & 13 Filter in that, through State Fire Protection, Mr. 14 Breinhart serviced the same types of fire suppression 15 16 17 systems that are found in the hood and filter systems in commercial kitchens. Ms. Breinholt had no meaningful role in the management, operation, or bookkeeping of State Fire 18 Protection. It is unclear whether Ms. Breinholt directly 19 owned an interest in State Fire Protection, but Arizona, ?n where the business ooerated and the Breinholts lived, is a 21 community property state. 23 Protection was questionable. He did not maintain files 24 we11. invoices were orten stacxea or scatterea witn no 25 discernable pattern to how they were kept. The bank cribers (9733406-2250foperationúpekribers.netlwww.escribers.net account for State Fire Protection was used to pay both personal and business expenses ranging from ovo rentals to 5 airline tickets. Household finances were not handled much better. Protection account. Mr. and Ms. Breinholt maintained separate oaux accounts, ne1 ner ut wuicu näu a signiticau balance during 2012 or 2013. Mr. Breinholt occasionally wrote checks to Ms. Breinholt on the State Fire Protection account. She would deposit those checks into her personal account and use the funds for family expenses. Ms. 1 2 3 4 6 8 9 10 11 12 Breinholt, at the direction of her husband, also wrote 13 14 15 checks on the State Fire Protection account. Perhaps as a result of the poor record keeping, tax returns were not managed well. For many years, the 16 Breinholts were nonfilers. It is not clear that Ms. 17 Breinholt was aware that they had not been filing returns. 18 She would gather household records and provide them to Mr. 19 Breinholt with the understanding that the information 9n would then be orovided to their accountant. For both 2012 21 and 2013, the Breinholts filed returns showing balances 23 not specifically aware that the taxes were not being paid. 24 tor une years at issue, une same accountant wno 25 prepared the Breinholt's personal returns also prepared 1973}406-2250|operati ns@escribermet|www.escríbers.net the State Fire Protection returns. Indeed, 6 the State Fire Protection returns are the source of one item of confusion. According to the Form 1065 and accompanying schedules for the years in issue, State Fire Protection was owned 50-50 by Mr. and Ms. Breinholt. There is very little other evidence to support the notion that Ms. Breinholt held an interest, other than a state community property law interest, in State Fire Protection. We need not resolve the ownership issue to decide this case. 1 2 3 4 5 6 7 8 9 10 During 2012 and 2013, the Breinholts were not 11 affluent. Their separate, personal bank accounts held 12 little. The same was true of the State Fire Protection 13 account. The Breinholts did not own a home; they had sold 14 15 their prior home as part of a "short sale" because the liabilities associated with the home exceeded its fair 16 market value. They also scaled back household 17 18 expenditures. They owned a piece of property in Show Low and a residence that Mr. Breinholt used as an office and 19 workshop which doubled as a residence for some of the 20 people who worked for State Fire Protection. Although 21 they did not lead a lavish lifestyle, they were able to 22 afford vacations. 23 24 In May 2015, Mr. Breinholt passed away. His passing was, in effect, the end of State Fire Protection. 25 Neither Mr. Breinholt nor State Fire Protection had much cribers pngos-22so lpheratÉnseeseribirsnet i vrawashibersmet 7 in the way of assets. The few assets -- small bank account balances, two old trucks, and miscellaneous business supplies -- were of little value. Those assets all passed to Ms. Breinholt. Ms. Breinholt was also the beneficiary of a $1 million life insurance policy. Ms. Breinholt has invested the life insurance proceeds, but the record does not establish the current balance of her investment account. In the time since Mr. Breinholt's passing, Ms. 1 2 3 4 5 6 7 8 9 10 Breinholt has purchased a home and a car. She invested 11 the life insurance proceeds, and Ms. Breinholt borrowed 12 against her investments to finance the home purchase. 13 14 There is no credible evidence in the record establishing how much Ms. Breinholt holds in assets today. Although 15 Ms. Breinholt borrowed against her investments to purchase 16 17 18 19 a home, we do not know what else has happened to those investments, for example, how much they might have appreciated between 2015 and today. Since Mr. Breinholt's passing, Ms.. Breinholt's 20 tax compliance has been inconsistent. She filed her 2014 21 return showing no income. She submitted her 2015 through 22 23 24 25 2017 returns just weeks before the trial session. As a result of the government shutdown, those returns have not been processed as of the time of trial. In July 2015, the Commissioner issued a notice Cribers (9733406.2250{operationseescrbersmet[www.escíbersnet 8 of intent to levy to Ms. Breinholt. In September 2015, the Commissioner sent a notice of Federal tax lien to Ms. Breinholt, Ms. Breinholt, through counsel, submitted a Form 12153, Request for a Collection Due Process or Equivalent Hearing. On that form, Ms. Breinholt indicated an inability to pay the balance and requested lien withdrawal. In the course of the collection proceeding, Ms. Breinholt did not provide a Form 433-A, Collection Information Statement, which the Commissioner requested, 1 2 3 4 5 6 7 8 9 10 and she did not suggest collection alternatives. During 11 that process, however, Ms. Breinholt requested relief from 12 joint and several liability under section 6015(f). The 13 Commissioner denied relief. 14 15 16 17 I. General Rules Discussion Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). Upon 18 electing to file jointly, each spouse is jointly and 19 severally liable for the entire tax due for that year. 20 Sec. 6013(d)(3). In certain circumstances, however, a 21 22 23 24 25 spouse who filed a joint return may seek relief from joint and several liability under the procedures in section 6015. Sec. 6015(a). section 6015(a) allows a spouse to seek relier from joint and several liability under subsection (b) or, Ø73)406-2250]operations@escrkers.tvet[www.escrílaersn t if eligible, to allocate the liability according to provisions set forth in subsection (c). If a taxpayer 9 does not qualify for relief under either subsection (b) or (c), the taxpayer may be eligible for equitable relief under subsection (f). Except as otherwise provided in section 6015, the taxpayer bears the burden of proving that he or she is entitled to section 6015 relief. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff'd, 101 Fed. Appx. 34 (6th Cir. 2004). Both the scope and standard of our review in cases requesting relief from joint and several income tax 1 2 3 4 5 6 7 8 9 10 11 12 liability are de novo. Porter v. Commissioner, 132 T.C. 13 14 15 203, 210 (2009). 11. section 6015(b) or (c) nelief Under section 6015(b), a taxpayer can obtain 16 relief from joint and several liability for an 17 18 understatement of tax attributable to an erroneous item of the taxpayer's spouse. There is no understatement at 19 issue in this case, so section 6015(b) is inapplicable. 20 Under section 6015(c), a divorced or separated spouse may 21 elect to limit liability for a deficiency on a joint 22 return to the portion of the deficiency that is allocable 23 to her. There is no deficiency at issue in this case, so 24 25 section 6015(c) is inapplicable. III. Section 6015(f) Relief cribers 9733406-2250|operations@esaibers.net(wwwásdibermet Section 6015(f)(1) gives the Commissioner 10 discretion to grant equitable relief from joint and several liability if, "taking into account all the facts . and circumstances, it is inequitable to hold the inA4 uidn21 li2ble fnv anu nnnnid env nr 2nu deficiencu (nr any portion of either)". This Court has jurisdiction to review responaent's aenlal or an lnalvlaual s request ror equitable relief under section 6015(f). See sec. 6015(e)(1). In doing so, we apply a de novo standard of 1 2 a 4 c 6 7 8 9 10 review, as well as a de novo scope of review. Porter v. 11 Commissioner, 132 T.C. 203, 210 (2009). The requesting 12 spouse bears the burden of proving that she is entitled to 13 relief under section 6015(f). See Rule 142(a); see also 14 Porter v. Commissioner, 132 T.C. at 210. 15 The Commissioner has outlined procedures for 16 determining whether a requesting spouse qualifies for 17 equitable relief under section 6015(f). We consider those 18 quidelines, but we are not bound to them; our 19 determination ultimately rests on an evaluation of all the on facts and cirrnmstances. Rep Pullins v. Commissioner. 136 21 T.C. 432, 438-439 (2011); Porter v. Commissioner, 132 T.C. 23 24 25 These procedures, set forth in Rev. Proc. 2013- 34, sec. 4.U1, outilne seven tnresnola conaltions tnat a spouse must meet to qualify for relief under section (9733406-2250lopmtions@escribersmet(wwwascribersaet 6015(f): (1) the requesting spouse filed a joint return for the taxable year for which relief is sought; (2) the 11 relief is not available to the requesting spouse under section 6015(b) or (c); (3) the claim for relief is timely filed; (4) no assets were transferred between the spouses as part of a fraudulent scheme; (5) the nonrequesting spouse did not transfer disqualified assets to the requesting spouse; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint 1 2 3 4 5 6 7 8 9 10 return; and (7) absent certain enumerated exceptions, the 11 12 13 14 15 tax liability from which the requesting spouse seeks relief is attributable to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse's income. The only item from this list of seven that the 16 parties dispute is whether the item from which Ms. 17 Breinholt seeks relief is attributable to Mr. Breinholt. 18 19 The income giving rise to the Breinholts' tax liability arose from State Fire Protection. It is unclear whether 20 Ms. Breinholt owned an interest in State Fire Protection, 21 22 but regardless of whether she owned an interest, this element is satisfied. If Ms. Breinholt owned an interest 23 merely as a result of Arizona community property law, 24 Revenue Procedure 2013-34 instructs that we treat the 25 interest as held by the nonrequesting spouse. If Ms. )BEElB $73)406-2250|operations@escritærsmet|wwwescibersmet Breinholt was a mere nominal owner, Revenue Procedure 12 2013-34 again instructs that we treat the interest as held by the nonrequesting spouse. Here, Ms. Breinholt was not involved in the business, and the principal evidence indicating that she owned an interest in State Fire Protection is the tax returns showing the Breinholts' holding 50-50 interests. It appears that these returns 1 2 3 4 5 6 7 8 merely reflect the community property interests. But if 9 10 11 Ms. Breinholt was an owner, she was merely a nominal one; she was not aware that she owned an interest, and she had no involvement in the business. Thus, the income from 12 State Fire Protection is attributable to Mr. Breinholt. 13 Thus, the threshold conditions are satisfied and we move 14 on to consider the next set of factors. 15 16 17 18 19 20 In addition to the threshold conditions the revenue procedure lays out three streamlined conditions that, if fulfilled, will result in relief under section 6015(f). Those conditions are that: (1) the requesting spouse is no longer married to the nonrequesting spouse; (2) the requesting spouse would suffer economic hardship 21 if relief were not granted; and (3) the requesting spouse 22 did not know or have reason to know of the understatement 23 or underpayment. Rev. Proc. 2013-34, sec. 4.02, 2013-43 24 1.R.B. at 400. 25 Ms. Breinholt satisfies the first factor; she is 733406-2250[operations@escribets.net|wwwäsoibers.net 13 1 2 3 4 5 6 7 no longer married to Mr. Breinholt. The revenue procedure, at section 4.03(2)(a)(iii) specifically addresses how to evaluate the "no longer married" factor in the case of a deceased spouse. If the requesting spouse is a widow and the nonrequesting spouse's estate did not have sufficient assets to pay the tax liability, then the requesting spouse is considered to be no longer 8 married. Mr. Breinholt's estate did not hold sufficient 9 assets to pay the liability, and thus Ms. Breinholt 10 satisfies this factor. 11 12 Ms. Breinholt fails the economic hardship factor. Ms. Breinholt was the beneficiary of a $1 million 13 life insurance policy. She failed to put into evidence 14 sufficient information establishing the balance remaining 15 of the life insurance proceeds, however, her own 16 17 18 (sometimes self-contradictory) testimony indicates that she continues to hold nearly the entire balance amongst her assets. Indeed, investment returns since 2015 may 19 have her current balance greater than the initial $1 20 million benefit; the record simply doesn't disclose this. 21 For reasons set forth below, we also conclude that Ms. 22 Breinholt had reason to know of the underpayment. As a 23 24 25 result, Ms. Breinholt does not meet the factors for streamlined relief. A requesting spouse who satisfies the threshold (973}406-2250|Mti nseesáribers.net|vmwesöíb hàet conditions but not the streamlined conditions may still 14 qualify for relief under the facts and circumstances test. The revenue procedure lists various factors to be considered, and no single factor is determinative. Rev. prnc . .- -., 9n17_2a --. con ..- , --.- ~ .. a na .-. 9n17_a7 T p n 2e ann_ana mwo Court considers these factors in the light of all the racts ano circumstances. dee ru111ns v. commissioner, iao T.C. 432, 448 (2011). The factors "are the requesting spouse's (1) 1 2 3 4 6 7 8 9 10 marital status; (2) economic hardship if relief is not 11 12 13 granted; (3) knowledge or reason to know that the tax liability would not be paid; (4) legal obligation to pay the outstanding income tax liability; (5) receipt of a 14 significant benefit from the unpaid income tax liability; 15 (6) compliance with income tax laws; and (7) mental and 16 physical health." Boyle v. Commissioner, T.C. Memo. 2016- 17 87, at *12-*13. See also Rev. Proc. 2013-34, sec. 18 4.03(2). 19 We've already addressed marital status. This on factor weichs in favor of relief. 21 Economic hardship weighs against relief. The cvv11vm1v 11atuo121p ucot uono vv11cuircL vv11cuulv11 vt LAlc 23 liability would prevent the requesting spouse from 24 arroralng easic 11ving expenses. Altnougn we ao not Know 25 the exact extent of her assets, the record establishes cribers (973)406-22501operations@estribers.tietj wwwescríbers.net : that Ms. Breinholt has substantial assets, and more 15 importantly, does not establish that she could not afford basic living expenses if she paid the outstanding liability. In an underpayment case, the "knowledge or reason to know" factor requires that we ask whether the requesting spouse knew or had reason to know that the non- requesting spouse would not or could not pay the liability shown on the return. This factor is difficult to apply on 1 2 3 4 5 6 7 8 9 10 these facts, but on these facts, we conclude that it 11 weighs against relief. Ms. Breinholt had no actual 12 knowledge of whether the liability shown on the return 13 would -- or would not -- be paid. She paid little 14 attention to the return; she made no inquiry. But she had 15 reason to know that the liabilities would not get paid. 16 She knew that the household had recent financial 17 difficulties, resulting in the short sale of their home 18 19 20 21 22 23 24 25 and the scaling back of household expenditures. Facing recent financial difficulty, she had reason to know that liabilities of several thousand dollars shown on the returns would not be paid, yet chose not to inquire. Legal obligation is neutral, because neither spouse had a particular legal obligation to pay the liability. The significant benefit factor is either neutral (9733406-2250lopnaMQemibennet|www.escríbers.net 16 1 2 3 4 5 6 7 8 9 or weighs in favor of relief. This factor asks whether the requesting spouse received any benefit in excess of normal support. Although Ms. Breinholt took vacations, the record does not indicate that these vacations were lavish or that she otherwise had a lavish lifestyle. Next, we must consider Ms. Breinholt's compliance with the income tax laws. This facLor focuses solely on tax compliance for the period beginning after the years for which the requesting spouse is seeking 10 relief and asks whether the requesting spouse has made a 11 12 13 14 15 good faith effort to comply with the tax laws. As this relates to Ms. Breinholt, we ignore the years of not filing returns because that nonfiling occurred before the years for which she is seeking relief. But even after those years, she has not demonstrated good faith 16 compliance with the tax laws. After filing a 2014 return 17 18 19 showing no income from State Fire Protection, she did not file returns for 2015, 2016, or 2017 until the eve of trial. While she is current in compliance in the sense 20 that she has filed returns for all open years, mere 21 compliance is insufficient. Compliance must be in good 22 faith, and her compliance has been untimely and appears to 23 have been done solely to qualify her for relief from joint 24 25 and several liability. This does not indicate good falLh and weighs against relief. (973)406-2250|operation5@escrbers.net|www.esenbers.net The mental and physical health factor is 17 neutral. There is no evidence of any health issues that would tilt this factor in either direction. We do not simply count up factors. If we were to do so, the factors would weigh against relief. But we take a more holistic approach and consider the seven factors in their totality, and taking all of the factors into account. In doing so, we conclude that Ms. Breinholt has not established that she qualifies for equitable 1 2 3 4 5 6 7 8 9 10 relief under section 6015(f). Ms. Breinholt does not 11 qualify for relief from joint and several liability. 10 Thim matter honan am a onllection camp. hnt 13 petitioner conceded the collection issues on the record d11U d LCCU L11dL L11C U111g 1DOUC LCllid111111 LU UC UCL1UCu WOO 15 whether Ms. Breinholt qualifies for relief from joint and several liability. Because we have decided that matter, Decision will be entered for the Commissioner. (Whereupon, at 10:28 a.m., the above-entitled matter was concluded.) 16 17 18 19 20 21 22 23 24 25 (973J4062250|operations@esaibersnet|wwvt.escribersmet. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 17 18 19 20 23 24 25 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 18 CASE NAME: Traci Newburn v. Commissioner DOCKET NO.: 24737-17L We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 18 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Deborah Gonzalez on January 18, 2019, before the United States Tax Court at its session in Phoenix, AZ, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Aliza Blumenfeld, CET-634 Transcriber 1/24/19 Date Jessica Hernandez Proofreader 2/04/19 Date (973}406-2250|operationseescribers.net|wwwäsaíbers.net