TAX COURT OPINION

Case: Judith A. Madden
Docket Number: 17104-04
Judge: Jacobs
Opinion Type: memo
Filed: 01/05/2006
Pages: 11

. T.C. Memo. 2006-4 (cid:16)042 (cid:16)042 UNITED STATES TAX COURT ADM. RECORDED SE$VICE CAL. STAT. . JUDGE JUDITH A. MADDEN, Petitioner M. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 17104-04. Filed January 5, 2006. Donald L. Herskovitz, for petitioner. Michele A. Yates, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION JACOBS, Judge: Respondent determined that petitioner is not entitled to relief from joint liability under section 6015(f)¹ for $141,302 of unpaid Federal income tax for 2000 that ¹Unless otherwise specified, section references are to the Internal Revenue Code. T SEWED UAN 5 2006 1989, $6,885 in 1990, $2,795 in 1995, $4,419 in 1996 and $32,796 - 3 - in 1997. During 2000, petitioner was self-employed as a systems developer, operating under the name of Nikken Distributorship. In 2000, Nikken Distributorship had gross receipts of $500 and incurred $450 of business expenses which petitioner reported on Schedule C, Profit or Loss from Business, of the joint return. Before and for part of 2000, Mr. Sturges worked for Cisco Systems Sales & Services, Inc. (Cisco), as a software engineer. Mr. Sturges terminated his employment with Cisco in 2000. -Mr. Sturges began working as a software.engineer for Tiburon Networks, Inc. (Tiburon), after he left Cisco. Tiburon was an affiliate of Nortel Networks, a Canadian telecommunications company. Tiburon paid Mr. Sturges wages of $31,286.40 in 2000. Tiburon also gave Mr. Sturges options to purchase 192,000 shares of Tiburon stock over a =3-year period. During his employment.with Cisco, Mr. Sturges acquired stock options to purchase Cisco stock. From 1997 until he terminated his employment in 2000, Mr. Sturges exercised a small number of. options each month. When Mr. Sturges left Cisco, Cisco required him to exercise (or lose) his remaining Cisco stock options. Petitioner and Mr. Sturges engaged Paine Webber, a professional financial advisement firm, to assist and advise them with respect to the exercise of the Cisco stock options. Mr. - 5 - Petitioner and Mr. Sturges received a combined income of $1,714,931 during 2000. The price of Cisco stock declined, and by late December 2000 Paine Webber informed petitioner and Mr. Sturges that the price of Cisco shares had dropped to $34 or $35, precipitating a margin call. Petitioner and Mr. Sturges sold some of the Cisco shares to pay the margin call. Petitioner and Mr. Sturges held the remaining Cisco shares. Petitioner and Mr. Sturges lost most of the funds invested in the stock. Petitioner and Mr. Sturgis own a four-bedroom, 2½-bath residence. Before April 2001, a mortgage on the residence dated December 15, 1998, secured a $377,550 debt. In April 2001, petitioner and Mr. Sturges refinanced the residence. The new mortgage secured a debt of $358,000. In April 2001, petitioner's accountant informed petitioner that her and Mr. Sturges's 2000 Federal income tax would exceed the amount withheld by Cisco by approximately $141,000. Petitioner called both Cisco and Paine Webber because she thought there was an error regarding the amount withheld and/or set aside to pay taxes. Petitioner and Mr. Sturges filed for an automatic extension to August 15, 2001, to file their 2000 return. They filed a joint Form 1040, U.S. Individual Income Tax Return, for 2000 on August 15, 2001. On the 2000 return, they reported a total tax - 7 - Petitioner and Mr. Sturges filed an offer-in-compromise in an attempt to compromise their 2000 tax liability for $1 on October 22, 2001. On January 17, 2002., petitioner informed the revenue officer who was considering the offer-in-compromise that she had unsuccessfully tried to refinance the residence in order to raise the money to pay the tax. On January 23, 2002, with the offer-in-compromise still under consideration, petitioner and Mr. Sturges borrowed $115,000, increasing the mortgage debt to (cid:16)042$477,000. They used the borrowed funds to pay the debt on their credit cards and their daughter's college tuition. The IRS rejected the offer-in-compromise ..on or about April 23, 2002. On June 19, 2002, petitioner filed a Form 8857, Request for Innocent Spouse Relief, and petitioner and Mr. Sturges filed separate offers in compromise offering to compromise their 2000 tax liability for $200 and $1,000, respectively. The offers in compromise were rejected on August .19, 2002. On August 9, 2002, respondent sent petitioner a letter acknowledging receipt of petitioner's request for innocent spouse relief and providing information on the claim process. Respondent included Publication 971, Innocent Spouse Relief,. which explained the requirements for relief in detail, and a questionnaire to be completed by petitioner. The letter also informed petitioner that respondent was required to inform Mr. Sturges that petitioner had requested relief and that a separate Appeals Officer issued petitioner a final notice of determination denying her relief from liability. Petitioner and Mr. Sturges own land in Colorado, and they are income beneficiaries of a charitable remainder trust. Petitioner and Mr. Sturges created and funded the charitable remainder trust in D.ecember 1999. Petitioner and Mr. Sturges are entitled to 5 percent of the valüe of the trust property annually. The remainder goes to the "education system" of the Commonwealth of Massachuset~ts. The record does not contain any information as to the amount contributed to the charitable remainder trust in 1999. Petitioner owns a three-bedroom, single-bath house in mid- State New York that she inherited from her parents. Petitioner rents the property for an amount equal to the expenses related to maintaining the property. There is no mortgage on the property. . Mr. Sturges has earned approximately $115,000 each year for the past several years. Petitioner and Mr. Sturges have filed Federal income tax returns and paid all taxes owed for all years since 2000. OPINION Petitioner requested relief under section 6015(f) from liability for the payment of the tax reported on the 2000 joint return but not paid when the return was filed. Respondent - 11 - As directed by section 6015(f), the Commissioner has prescribed guidelines in Rev. Proc. 2000-15, 2000-1 C.B. 447, that are to be used in determining whether it would be inequitable to hold a requesting spouse liable for all or part of the liability for any unpaid tax or deficiency. The requesting spouse must satisfy seven conditions (threshold conditions) before the Commissioner will consider a request for relief under section 6015(f). Rev. Proc. 2000-15, sec. 4.01, 2000-1 C.B. at 9 . 448. Respondent agrees that in this case those threshold conditions are satisfied. Where,.as here, the requesting spouse satisfies the threshold conditions, Rev. Proc. 2000-15, sec. 4.02(1), 2000-1 C.B. at 448, sets forth the circumstances under which relief under section 6015(f) will ordinarily be granted in a case where a liability is reported in a joint return but not paid. Relief under section 6015(f) will be granted for an unpaid tax liability reported on a joint return if all of the following elements are satisfied: (a) At the time relief is requested, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse * * *; (b) 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 (c) The requesting spouse will suffer economic hardship if relief is not granted. * * * - 13 - attributable to the nonrequesting spouse. Rev. Proc. 2000-15, sec. 4.03(2), 2000-1 C.B. at 449, lists the following six factors as weighing against granting relief for an unpaid liability: (1) The unpaid liability is attributable to the requesting spouse; (2) .the requesting spouse knew or had reason to know at the time the return was signed that the reported liability would be unpaid; (3) the requesting spouse significantly benefited (beyond normal support) from the unpaid liability; (4) thearequesting spouse will not suffer economic hardship if relief is denied; (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 year 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. In addition, Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448, states: "No single factor will be determinative of whether equitable relief will or will not be granted in any particular case. Rather, all factors will be considered and weighed appropriately." Furthermore, the list of aforementioned factors is not intended to be exhaustive. In deciding whether respondent's determination that petitioner is not entitled to relief under section 6015(f) was an abuse of discretion, we consider evidence relating to all the facts and circumstances. - 15 - assets and liabilities, age, ability to earn,. and responsibility for dependents. Petitioner is 64 years of age and has been unemployed for many years. Because Massachusetts is not a community property State, Coolev v. Commissioner, 27 B.T.A. 986., 988 (1933), affd. 75 F.2d 188 (1st Cir. 1935); Richman v. Richman, 555 N.E.2d 243, 664 (Mass. App. Ct. 1990), petitioner is not the owner of any of Mr. Sturges's earnings. Her only income is her share of the income (the amount of which is unknown) from the charitable remainder trust. Petitioner and Mr. Sturges are still married, however, and Mr. Sturges continues to support petitioner. Petitioner owns the New York house she inherited from her parents and has assets that she owns jointly with Mr. Sturges; i.e., the residence and the land in Colorado. Those assets are available for payment of the tax liability. Petitioner asserts that since 2001 her family's expenses have exceeded their income by $3,500 each month. She testified that she has used her credit cards to make up the difference and that at the time of the trial she had $30,000 of credit card debt. She testified that at the time of the trial there was only $15,000 remaining in the charitable remainder trust. Petitioner testified that a four-bedroom, 2½-bath house in her neighborhood sold for approximately $940,000 in April or May 2005. She asserts that her residence, subject to mortgages - 17 - liabilities from which she seeks relief would result in economic hardship within the meaning of section 301.6343-1(b)(4), Proced. & Admin. Regs. Because petitioner has failed to establish that she will suffer economic hardship, we conclude that this factor does not weigh in favor of granting her relief. The fact that petitioner has failed to establish that she will suffer economic hardship,.however, does not necessarily establish that she will not suffer economic hardship. It is not clear from the record that petitioner will not suffer economic hardship if she is not relieved of her liability to pay the tax. Consequently, this factor does not weigh against granting petitioner relief. Economic hardship is a neutral factor in this case. 3. Abuse by Nonrequesting Spouse Petitioner was not abused by Mr. Sturges, and she does not assert that Mr. Sturges coerced her into executing the 2000 joint return. This factor does not weigh in favor of granting relief to petitioner. See Ewing v. Commissioner, 122 T.C. at 46;. Washington v. Commissioner, 120 T.C. 137, 149 (2003). 4. Requesting Spouse's or Nonrequesting Spouse's Legal Obligation Because petitioner and Mr. Sturges are not separated or divorced, this factor does not weigh in favor of or against granting relief to petitioner. See Abelein v. Commissioner, T.C. Memo. 2004-274. - 19 - weighing in favor of granting relief. Rev. Proc. 2000-15, sec. 4.03(1)(d), .2000-1 C.B. at 449. By contrast, the fact that the requesting spouse knew or had reason to know that the reported liability would be unpaid is a strong factor weighing against relief. Id. sec. 4.03(2) (b). When petitioner' signed the 2000 joint return in August 2001, $13,000 remained in the Paine Webber account. Petitioner knew that she and Mr. Sturges did not have funds available at that (cid:16)042time to pay the $141,302 tax liability shown as unpaid on the return. We do not think that petitioner honestly believed that Mr. Sturges could pay the tax from proceeds from the Tiburon options. The section 83(b) election attached to the return states that Mr. Sturges paid $57,050.10 (30 cents per share) for 190,167 shares of Tiburon restricted stock on October 23, 2000. Petitioner produced no evidence that the stock had increased in value since the purchase date. Petitioner testified that by October 2001 Tiburon was failing and that in November 2001 Mr. Sturges left Tiburon. Petitioner and Mr. Sturges attached to the return a statement signed by Mr. Sturges that he would be filing an offer- in-compromise. Petitioner and Mr. Sturges filed their first offer-in-compromise offering to compromise their 2000 tax liability for $1 on October 22, 2001. We conclude that I To reflect the foregoing, - 21 - Decisi.on will be entered for respondent.