TAX COURT OPINION

Case: Arline L. Hillestad
Docket Number: 25585-11S
Judge: Holmes
Opinion Type: bench
Filed: 06/14/2013
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 SEC ARLINE L. HILLESTAD, Petit ioner v. COMMISSIONER OF INTERNAL REVENUE, Respcndent ) ) ) ) ) ) ) - O R D E R Docket No. 25585-11S. Pursuant to Rule 152 (b), Tax Court Rules of. Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and tc respondent a copy of transcript of Holmes at St.' Paul, Minnesota, containing his oral fact and opinion rerdered at was heard. the trial in the above case before Judge Mark V. findings of the trial session at which the case the pages of the In accordance with the oral findings of fact and opinion, a decision will be entered for pondent. (Signed) Mark V. Holmes Judge Dated: Washington, D . C. June 14, 2013 SERVED Jun 18 2013 Capital Reporting Company 1 2 Bench Opinion by Judge Mark V . Holme s . May 8, 2013 3 Arline L. Hillestad v. 'Commissioner 3 · 4 5 6 7 Docket No. 25585-11S THE COURT: IN THE CASE OF ARLINE L. HILLESTAD, THE COMMISSIONER DOCKET NUMBER. 25585-11S, THE CO RT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT 8 . AND OP INION, AND' TH E FOLLOWING RE PRE SENTS THE COURT ' S 9 ORAL· FIlNDINGS OF FACT. AND OPINION. 10 11 12 This Bench Opinion is made pursuant to the. authority granted by. section 7459 (b) of the Internal Code of 1986, as amended, and Rule.152 of the Tax 13 Court's Rules of Practice and Procedure. 14 15 16 17 18 19 20 21 22 23 24 25 . Ms. Hillestad was a resident of Wisconsin when she filed her Petition. She reached a stipulation with the. Commissioner and, together with her entirely credible testimony, that constitutes the record of this case. The case arises from the tragic circumstan.ces of her husband' s death, who died much too young, and.left Ms. Hillestad, who had not previo sly been much invo.lved in the family's tax returns, in charge of preparing three years· of overduel returns; the returns for 2006, 2007, and 2008. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 The 2006 return, she did file jointly, in the usual course, with her soon-to-be deceased husban . He actually signed the .return less than a 4 month before he died. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 For the 2007 and 2008 tax returns, she filed them noting that her husband had died. He died on ·September 14th, 2009, and those tax returns, therefore, included his income for the last two years of his life, but she filed them late, only on March 10th of 2010. They are still, however, technically joint returns. Moreover, the IRS did not audit her and did not assert a deficiency against her. So since there is no understatement of tax for any of the three years at issue, Ms . Hillestad is not eligible for relief under Internal Revenue Code sections 6015(b) or (c) . Internal section 6015(f), however, provides for relief from liability to an individual to whom relief is not available under subsections (b) or (c) if, taking into account all the facts and circums ances, it would be inequitable to hold the spouse liable for any unpaid tax. .That's the section, in other words, that Ms . Hillestad is pointing me towards in saying that she should be 866.488.DEPO wwwÇggitgl¼portingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 relieved for joint liability for her 2006 through 2008 returns. The IRS argues that the proper standard of review is abuse of discret=ion, and the proper scope of review is the administrative rec.ord. Oddly, there was no explanation, whatsoever, in the Notice of 7 Determination denying Ms. Hillestad relief for those 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 three years, and this would constitute an abuse discretion if my review were limited to the administrative record in-as-much as the Commissioner is obliged under the Chenery Rule to explain his decision, and not explaining his decision, at all, is a classic abuse of discretion. However, Tax Court has now ruled in cases called Porter v. Commissioner, 130 T.C. 115 (2008)., Porter I, and Porter v. Commissioner, 132 T.C. 203 (2009)., Porter II, that it will make a de novo determination regarding whether a requesting spouse is entitled to relief under section 6015 (f) and will not be limited to evidence in the administrative record. Ms. Hillestad bears the burden to show that she's entitled to relief. See Porter II, 132 T.C. at 210. As directed by Internal Revenue Code 25 · section 6015(f), the Commissioner prescribed 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 procedures to be used in determining whether the requesting spouse qualifies for relief from joint and several liability under Internal Revenue Code section 6015(f). The procedures applicable to this case are set forth in Notice 2012-8, which supersedes Revenue Procedure 2.003-61, but specifies that . if a taxpayer concludes the threshold. conditions and factors contained in Revenue Procedure 2003-61 are more favorable, they may be applied. The distinction between·these Revenue Procedure doesn't really matter here ·because, on the disputed points, they are identical. The 2006..and 2007 and '8 returns are a little bit different because, as I. said, Mr. 15 Hillestad was able to sign the 2006 return. His 16 business lost money that year, for the 2006 tax year, 1.7 18 19 20 21 22 23 24 25 and almost all the income of $57, 000 is attributable to Ms.·|H.illestad's nearly =$50,000 in wages from her own job. · In other words, she is asserting that it would b inequitable for the government to determine that sh owes tax on her own income. This is a highly unlikely conclusion. One of the threshold conditions for Innocent Spouse Relief, at all, is set forth in -- here, I'll cite the old Revenue 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 Procedure,. 2003-61, section 4 . 01 (7) , that, "The income tax liability from .which the requesting spouse seeks relief is attributable to an item of the individual with whom the requesting spouse filed the j.oint return, unless one of the following exceptions applies . " In other words, the general rule is you 8 still have to pay income tax on the income that you 9 earn. lAnd so, because in 2006 nearly all the income 10 11 12 13 14 15 16 17 18 that the HÀ.llestads earned was attributable to her ,job, s e doesn't meet this threshold requirement unless one of four exceptions to the general rules applie s . Those four exceptions are that the bulk of the income from which she seeks relief is attributable to her solely by the operation of community property law. Though Wisconsin is a community-property stat-e, these wages were earned by 19. her, dilrectly. 20 21 22 23 24 25 The second exception is nominal ownership, if those wages were only hers, nominally. That's not the case. The third is .if the funds intended for the payment of tax were misappropriated by her late husband which, of course, they were not. . . www.CapitalReportingCompany.com 866.488.DEPO Capital Reporting Company 8 And the fourth is whether there was abuse not amounting to duress in their marriage, which she specifScally disclaimed. Theirs seemed to be a harmon ous marriage, as I said, interrupted only by his untimely death. So for the 2006 tax year, I have to rule against her. For the.2007 and 2008 returns, the facts are a little bit different, largely because her husband had already died, and so although the section 6013 of the Code'makes her return a joint return, in some sense, the income that would otherwise be attributable to him, because of his death, was still rollin in, but it went to hér as surviving . So, in some sense, that income, too, although it constitutedµ perhap% a fourth of her earnings in 2007 a d a third of her earnings in 200, is, n in some sense, attributable to her, as well, ilÄss much as her husband had, at the time they filed the returns, already passed. Moreover, sh¶herself,signed the returns on behalf of the couple for 2007 and 2008, as I said; and this colors my conclusions about the various factors that I do have to consider in determining whether she's eligible for relief under 6015(f). Those factors include her marital status I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 which, again, does not contemplate the death of a 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 spouse. It says, instead, whether the requesting spouse is separated, whether legally separated or living apart or divorced from the non-requesting spouse. I'll give this to her in the sense that, in a way, one is separated by death from a spouse. Economic hardship is a factor which weighs agains her given the assets that she described, if not the income over expenses that she described. But perhaps the most important factor, for me here, is the knowledge or reason to know factor. For purposes of this factor, the Revenue Procedure says, "In determining whether the requesting spouse had reason to know, the service will consider the.requesting spouse's level of education, any deceit or evasiveness of the non- requesting spouse, the requesting spouse's degree of involvement in activity generating the income tax. liability, the requesting spouse's involvement in business and household financial matters, the requesting spouse's business and f1nanclal expertise and any lavish or unusual expenditures ·compared with pas t spending levels . " All of that is.seen in the background of when I have to measure Ms. Hillestad.'s knowledge. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 The answer to that question is in the Revenue Procedure section 4.02 (b), which says, "On the date the requesting spouse signed the joint return, the requestling spouse had no knowledge or reason to know that the non-requesting spouse would not pay the income tax liability. " Of course, in the peculiar facts of this case, the non-requesting spouse did not, himself, sign the return, much less take money intended to pay the tax and use it for his own personal purposes, so I find it difficult to find inequitable, in this peculiar situation, that the income from winding up 13 Mr. Hillestad's insurance business is not 14 15 16 attributable to his widow because she, after all, receives the money after he died; and moreover, he certainly did not misappropriate funds, and she had 17. full knowledge of what the tax bill was for 2007 and· 18 19 20 21 22 23 24 25 2008 inasmuch as she prepared and signed the returns. So I- ha e to deny her Innocent Spouse Relief. The point of Innocent Spouse Relief, of course, is to come up with some way of allocating between two spouses who are transitioning from one household to two an equitable allocation of the taxes owed. Ín the case of one spouse who dies when the other spouse remains, that transition is really a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 different kind of transition, not from one household to two, but rather, from being married to being single again. Again, in these situations, Innocent Spouse 5 Relief is not quite what will solve Ms. Hillestad's 6 7 8 problems, and she alluded to two other things in her testimony that I want to highlight, even though this opinion concerns only her request for Innocent Spouse 9 Rel'ief.. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 The first is that she and her husband, overwhelmed by healthcare debts towards the end of his life, had filed for bankruptcy. This, of course, raises the concern that I might not have had jurisdiction or that these taxes might have been discharged from bankruptcy, and so I checked, just to make sure, although neither .party had raised the issue, and, of course, the Bankruptcy Code provides that there will be no discharge of tax liability for taxes owed within three years of filing. The earliest year of the three years at issue here, 2006, had a filing deadline of April 15th, 2007, which is less than three years before July 23, 2009, when the bankruptcy case was resolved. 24 Moreover, Ms. Hillestad filed her case with me after 25 the bankruptcy action was ended, so I did have 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company jurisdiction throughout. Bankruptcy, in other words, does not provide the relief Ms. Hillestad really 12 needs. Her basic concern, and this is a sincere.sA concern, based on my direct observation of her, is that there is ,currently a mismatch between her income and expenses, particularly her own health ·expenses in the couple of years that remain before she qualifies for Medicare. I urge the IRS to contact her and arrange an installment agreement, which will give her the ability to pay her taxes over time on the income that, again, is really attributable to her. Her concern is one of a mismatch between income and the need to pay her taxes, not one about relief from joint and several liability for those taxes. In other words, I will enter a decision for the Respondent, and this concludes the Court's 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Oral Findings of Fact and Opinion in the case. 19 20 21 22 23 24 25 (Whereupon, at 9:50 a.m., 'the above- entitled matter was concluded.) 866.488.DEPO www.CapitalReportingCompany.com