TAX COURT OPINION

Case: Todd M. Bowers, Petitioner, and Nicole D. Bowers, Intervenor
Docket Number: 15321-12
Judge: Gustafson
Opinion Type: bench
Filed: 02/07/2013
Pages: 21

CLC UNITED STATES TAX COURT WASHINGTON, DC 20217 TODD M. BOWERS, Petitioner, AND NICOLE D. BOWERS, Intervenor, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) Docket No. 15321-12. ) ) ) ) OR D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Winston-Salem, North Carolina, on January 29, 2012, containing his oral findings of fact and opinion, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner, to intervenor, and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Gustafson at Winston-Salem, North Carolina, 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 under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. February 7, 2013 SERVED Feb 08 2013 Capital Reporting Company Bench Opinion by Judge David Gustafson January 29, 2013 Todd M. Bowers, Petitioner, and Nicole D. Bowers, Intervenor, v. Commissioner Docket No. 15321-12 THE COURT: The Court has decided to render the following, as its oral Findings of Fact and 1 2 3 4 5 6 7 8 9 Opinion in this case. This Bench Opinion shall not 10 11 12 13 14 15 16 17 18 19 20 21 be relied on as precedent in any other case. It is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, (26 U.S.C.), and Tax Court Rule 152. By a "Final Determination" dated April 23, 2012 (Petition Exhibit), the IRS denied the request of Petitioner Todd M. Bowers, pursuant to section 6015, for relief from joint liability for 2009 income tax. On June 11, 2012, he timely filed his petition in this Court (see sec. 6015(e) (1) (A) (ii)), seeking review of the IRS's adverse determination. At that time he resided in 22 North Carolina. On September 28, 2012, Mr. Bowers' 23 24 25 ex ife Nicole Bowers filed a notice of intervention pursuant to Rule 325(a). Trial of this case was conducted on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 January 28, 2012, in Winston-Salem, North Carolina. 2 Mr. Bowers represented himself and Respondent was 3 4 5 6 7 8 9 10 11 12 represented by J. Craig Young. Intervenor resides in Arizona, and for financial reasons she was unable to appear at the trial in North Carolina. For similar reasons, Mr. Bowers would have been unable to appear if trial had been held in Arizona. Section 7446 provides that this Court shall schedule its sessions "with a view to securing reasonable opportunity to taxpayers to appear before the Tax Court...with as little inconvenience and expense to taxpayers as is practicable". Neither the statute nor our rules 13 explicitly provides where a trial should take place 14 when there are two interested taxpayers (such as a 15 petitioner and an intervenor in a section 6015 case). 16 17 18 19 20 21 22 23 However, Rule 140 (a) does provide, "The Petitioner, at the time of filing the petition, shall file a request for place of trial showing the place at which the Petitioner would prefer the trial to be held. The Court will make reasonable efforts to conduct the trial at the location most convenient to that requested". The rule therefore indicates that the 24 Petitioner's convenience has priority. However, to 25 maximize Ms. Bowers' ability to participate, the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 Court encouraged the other parties to consent to the admission into evidence of her written statement (with attachments), and they so consented. That statement was admitted into evidence (as Ex. 6-J), and the Court (though by no means acting as or substituting for the Intervenor) did ask Mr. Bowers questions prompted by Ms. Bowers' statement. The parties' Stipulation of Facts, with attached 9 Exhibits, was admitted into evidence. Petitioners' 10 Exhibits 7-P through 18-P were also admitted into 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 evidence. FINDINGS OF FACT Mr. and Ms. Bowers were married in 1994 and have two daughters. During 2009 Mr. Bowers earned wages from work in construction, and Ms. Bowers earned wages from American Express. In July 2009 she was laid off by American Express, and thereafter she received a total of $7,560 in unemployment compensation. Mr. Bowers knew of her termination and that she received unemployment, but he did not know how much. Ms. Bowers also received a $1,000 distribution from a Health Savings Account established for her through American Express. Mr. Bowers did not know about that distribution. In September, 2009 the Bowerses paid $1,800 for Nicole 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting Company 6 to attend an online college. In 2009 the Bowerses also received a state tax refund of $925 (presumably from tax overpaid for 2008). Mr. Bowers offered no testimony about what that refund arose from nor whether he knew about it. At least as early as May 2009, the Bowerses began to have marital difficulties. In late 2009 and early 2010 he concluded that his wife had withdrawn $12,000 from a Janus account they owed jointly and had transferred title in their jointly owned truck to her sole name. In February 2010 Mr. Bowers filed a petition for divorce and began residing with his parents. Nonetheless, in March 2010 the Bowerses met together at the office of their regular return preparer to give the preparer information for their filing a joint return for 2009. Ms. Bowers still resided at the marital home, and she assembled some or all of the information that was given to the preparer. That information included their wages but did not include Ms. Bowers' unemployment compensation. The information also evidently included information to the effect that Ms. Bowers had incurred $1,800 of qualified education expenses. Mr. Bowers was aware that the information given to the return preparer included his wages, but 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 2 3 he did not know what else it included or excluded. In late March 2010 the Bowerses received the return from the preparer and signed and filed it. 4 Mr. Bowers did not review the return before signing 5 6 7 8 9 10 11 12 it, because he depended on Ms. Bowers to provide the information and depended on the return preparer to fill out the return. Mr. Bowers felt he had no way of evaluating the accuracy of the return. Because of his absence from the marital home and his estrangement from Ms. Bowers, he did not have access to information to confirm or correct the turn, and he was so discouraged about the circumstances of their 13 marriage that he did not want to prolong the 14 15 16 17 18 19 20 21 22 23 24 25 transaction. The return as filed (Ex. 1-J) claimed a refund of $5,896. The address on the return was that of the marital home where only Ms. Bowers now resided (see Ex. 18-P, divorce decree at 6), so we infer that Ms. Bowers received the refund. The divorce was finalized, and the decree was issued, in December 2010. Mr. Bowers was required to pay alimony (spousal maintenance) and child support. The spousal maintenance totaled $15,600, which Mr. Bowers paid first (and Ms. Bowers alleges no arrears). The court ordered that Mr. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 ! 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 Bowers pay child support of $679 per month. The IRS examined the Bowerses' 2009 return. As to items pertaining to Ms. Bowers in particular, the IRS determined that Ms. Bowers' unemployment income and HSA distribution should be included in income, that her education credits must be disallowed (stating, "Your eligible educational institution did not verify the amount claimed on your tax return, on Forms 1098-T, Tuition Statement. Please provide copies of the document(s) used to support the amount(s) claimed"). As to items not evidently particular to either spouse, the IRS determined that the $925 state tax refund should be included in income and that $382 of their medical expenses claimed as an itemized deduction should be disallowed. As a result of these adjustments, on January 23, 2012, the IRS issued to the Bowerses a notice of deficiency, finding a deficiency of $2,717 in 2009 income tax. Neither of the Bowerses filed a petition in Tax Court contesting that deficiency (which petition would have been due in April 2012). However, on November 17, 20ll--while the IRS's examination of their 2009 return was still ongoing--Mr. Bowers filed a Form 8857, "Request for Innocent Spouse Relief". At that time he had been 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 unemployed since June 2011. His only income was unemployment compensation, and he had no assets. His financial statement attached to his Form 8857 (corroborated by his trial testimony) showed monthly income of only $960 and monthly living expenses (not including child support) of $-1-t990-. Nonetheless, on 7 April 23, 2012, the IRS issued its adverse "Final 8 Determination," and Mr. Bowers commenced this suit by 9 filing his petition on June 11, 2012. 10 11 12 13 14 Mr. Bowers is currently unemployed. Since June 2011 his only employment was from September 11, 2012, through the end of December 2012. Other than from that brief employment, his only income has been unemployment compensation. Since some time in 2011 .15 he has lived with, and has obtained some financial 16 17 18 19 20 21 22 23 24 25 help from, a girlfriend who has multiple sclerosis and receives disability payments. Ms. Bowers is employed but she alleges (and we assume) that she is in financial difficulty. Mr. Bowers estimates he is in arrears to the extent of about $13,000 in child support; but according to Ms. Bowers' exhibit, Mr. Bowers has been making weekly payments since March 2012; and he paid $1,781 on March 12, 2012, $3,000 on August 21, 2012, and $1,000 on September 4, 2012, to help reduce his arrearages. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 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 I. Standard and scope of review. OPINION When determining whether a taxpayer is entitled to relief under section 6015 (whether under subsection (b), (c),or(f)), we conduct a trial de novo, in which we may consider evidence introduced at trial which was not included in the administrative record. Porter v. Commissioner, 130 T.C. 115,117(2008). For all claims under section 6015 (including claims for equitable relief under section 6015(f), we do not review for abuse of discretion but instead employ a de novo standard of review. Porter v. Commissioner, 132 T.C. 203,210 (2009) ("Porter II"). II. Joint and several liability and section 6015 relief Section 6013(d) (3) provides that if a joint return is filed, the tax is computed on the taxpayers' aggregate income, and liability for the resulting tax is joint and several. That is, each spouse is responsible for the entire joint tax liability. However, section 6015 provides for relief from joint liability. Except as otherwise provided in section 6015, the Petitioner bears the burden of proof. See sec. 6015(c) (2); Rule 142 (a). Section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 6015 grants relief for spouses who meet the conditions of subsection (b) and for divorced and separated persons under subsection (c), and provides equitable relief in subsection (f) when the relief provided in subsections (b) and (c) is not available. We hold that Mr. Bowers is largely eligible for relief under subsection (b) or, in the alternative, subsection (f). A. Subsection (b) relief Section 6015(b) (1) provides that an electing taxpayer shall be relieved from joint liability arising from an understatement of tax if he meets five criteria: 1. "[A] joint return has been made for a taxable year". There is no dispute that the Bowerses filed a joint return for 2009. 2. "[0]n such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return". The facts show that the $2,717 understatement was attributable to income and deduction items of Nicole Bowers, except to the extent it was attributable to a $925 state tax refund and $382 of medical expenses, as to which the evidence does not show whether they related to either spouse in particular. 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 12 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 3. The requesting spouse "establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement". As to Ms. Bowers' erroneous items, since she was the one who assembled and provided to the return preparer the information related to those items, and since Mr. Bowers had no access to her financial information, he has established this point as to those items. Mr. Bowers admits he knew she received unemployment income; but he did not know how much she received; and under section 85(c) her unemployment compensation was taxable only to the extent it exceeded $2,400. Thus, even if he had looked carefully at the return, he could not have known of the errors on it that gave rise to the deficiency. 4. "[T]aking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement." We discuss this factor in connection with section 6015(f) below and hold that Mr. Bowers has shown it would be inequitable to hold him liable for the tax attributable to Ms. Bowers' erroneous items. 5. The requesting spouse elects this relief "not later than the date which is two years after the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 date the Secretary has begun collection activities 2 with respect to the individual making the election." 3 4 5 6 7 8 There is no dispute that Mr. Bowers' November 2011 request met this deadline. Therefore, Mr. Bowers meets the criteria for relief under section 601(b), except to the extent that the joint liability is attributable to the unreported $925 state tax refund and $382 of the 9 medical expenses deduction. 10 11 B. Subsection (c) relief Section 6015 (c) is entitled "Procedures to Limit 12 Liability for Taxpayers No Longer Married or 13 14 15 16 17 18 19 20 21 22 23 24 25 Taxpayers Legally Separated or Not Living Together." This provision does not apply where the requesting spouse "had actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency." This "actual knowledge" standard is different from that of section 6015(b) (1) (C), which requires the requesting spouse to establish that he "did not know, and had no reason to know, that there was such understatement." As we stated above, Mr. Bowers did show that he did not know of the errors concerning the reporting of Ms. Bowers' items and therefore did not know that there was an understatement of tax. However, he did not show that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company he did not know of the items of income and expense; rather, he admitted that he knew (at least in a general way) of her unemployment income, for example. We therefore do not further consider his entitlement 14 under subsection (c). C. Subsection (f) relief Section 6015 (f) provides relief from joint liability if "taking into account all the facts and circumstances, it is inequitable to hold the individual liabil+t,y for any unpaid tax or any deficiency (or any portion of either)". The Tax Court has been given express authority to review the IRS's denial of equitable relief under section 6015(f). Section 6015(e) (1) provides: [I]n the case of an individual who pm..,onta equitable relief under subsection (f), [i]n addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section. That is, upon reviewing the IRS's action, the Court "determine[s] the appropriate relief". 1. IRS Analysis In accord with the statutory provision of section 6015(f) relief is to be granted "[u)nder 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 15 1 2 3 4 5 6 procedures prescribed by the Secretary," the Commissioner has issued revenue procedures to guide IRS employees in determining whether a requesting spouse is entitled to relief from joint and several liability. See IRS Notice 2012-8, modifying and superseding Rev. Proc. 2003-61, 2003-2 C.B. 296, 7 modifying and superseding Rev. Proc. 2000-15, 2000-1 8 9 10 11 12 13 14 15 16 C.B. 447. The current guidelines provide a three-step analysis for IRS employees to use in deciding whether to grant relief: Section 4.01 lists seven threshold conditions that must be met for any relief to be granted; section 4.02 lists circumstances in which relief will ordinarily be granted as to underpayments; and section 4.03 sets out eight non- exclusive factors to be considered in determining 17 whether equitable relief should be granted. 18 In "determin[ing] the appropriate relief", this 19 Court reviews the IRS's three-step analysis 20 prescribed in its revenue procedure, see Washington 21 22 v. Commissioner, 120 T.C. 137, 147-152 (2003), but our review is not circumscribed by that matrix. 23 Rather, we consider "all the facts and circumstances" 24 25 in determining whether the taxpayer is entitled to "innocent spouse" relief. Sec. 6015(f) (1); see 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 Porter II, 132 T.C. at 210; Lantz v. Commissioner, 132 T.C. 131, 140 (2009), rev'd on other grounds, 607 F.3d 479 (7th Cir. 2010). In doing so, however, it is helpful to follow initially the IRS's analysis. 2. Threshold eligibility IRS Notice 2012-8 sets out, in section 4.01, seven threshold conditions that all requesting spouses must meet in order for the IRS to grant relief pursuant to section 6015(f). On our record, questions could be raised only as to two of these conditions--the second and the seventh. Condition (2) is: "Relief is not available to the requesting spouse under section 6015 (b) or (c)." Thus, to the extent we have held Mr. Bowers eligible for relief under section 6015(b), he is not eligible under subsection (f). However, we consider subsection (f) in the alternative, to show his clear 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 eligibility for relief. 19 20 21 22 23 24 25 Condition (7) is: "The income tax liability from which the requesting spouse seeks relief is attributable (either in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse's income." We have found that the liability is attributable to Ms. Bowers' erroneous items, except to the extent it 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 arises from the $925 state tax refund and $382 of 2 medical expenses; so as to the remainder of the 3 4 5 6 7 8 9 liability, this condition is met. 3. Streamlined determination Where a claimant has satisfied the IRS's threshold requirements (as Mr. Bowers has), then the IRS undertakes to grant a "streamlined determination" of eligibility for section 6015(f) relief if he: (1) Is no longer married to the non-requesting 10 spouse; 11 12 13 14 15 (2) Would suffer economic hardship if relief were not granted; and (3) Did not know or have reason to know that there was an understatement or deficiency on the joint return. [See Notice 2012-8, sec. 4.02.] 16 Mr. Bowers meets these conditions and therefore, 17 18 19 20 21 22 23 24 25 under the IRS's guidelines, would be entitled to relief. Only as to the second of these criteria, economic hardship, does Intervenor dispute him. But it is clear that Mr. Bowers is in difficult financial circumstances, both at the time he made s request and at present. Since June 2011 he has been employed for less than four months and has lived on unemployment compensation. He has a daunting liability for child support, against which he is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 making payments. To add $2,717 to his obligations 18 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 would indeed pose a hardship. Ms. Bowers expresses skepticism about his financial difficulties: She points to the fact that he has multiple bank accounts, but he shows that their balances are near zero. She shows that he offered to fly his daughters to North Carolina for a visit, but he plausibly explains that it was his girlfriend's parents who were willing to pay for the airline tickets. His contention of economic hardship is well established. Ms. Bowers' main point in this regard, however, is her contention, which we assume true, that she too faces financial hardship, aggravated by the arrearages in child support. This contention is not irrelevant under section 601 but section 6015 was not enacted to address all the difficulties and inequities that may arise from divorce. The issue here is: Should Mr. Bowers be required to pay the tax arising from Ms. Bowers' unreported income and her unsubstantiated deductions. The answer "Yes, because he is behind on his child support" may have visceral appeal, but it ignores the dominant considerations of tax liability under the Code and instead would use the Code to address a child support 25 problem. If Ms. Bowers' economic difficulties would 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 warrant relief under section 6015 (it does not seem 2 3 4 5 6 7 that they would) or would justify an Offer in Compromise or other collection alternative, then she may pursue those remedies in her own proceedings, but they are not before us now. For our purposes, it is sufficient to observe that Ms. Bowers is employed and that Mr. Bowers is unemployed (and thatsto an extent, ) 8 Mr. Bowers is contributing financially to the 9 household of Ms. Bowers and their daughters). On the 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 facts before us, the relative financial situations of the two edhibiÊ-spouses do not compel the conclusion that Mr. Bowers ought to bear a tax liability attributable to Ms. Bowers. 4. Multiple factors Even if we assume that the "streamlined" analysis would not yield relief and look at the alternative multiple factors that the IRS considers, we would hold that they justify relief for Mr. Bowers: Marital status. The Bowerses were divorced at the time Mr. Bowers requested relief. This factor is in favor of relief. Economic hardship. We have shown that imposing this liability on Mr. Bowers would aggravate his already difficult circumstances and cause financial 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 9 10 11 12 hardship. This factor is in favor of relief. Knowledge or reason to know of the items. Although Mr. Bowers knew that Ms. Bowers received unemployment compensation, he did not know the amount of that compensation nor the details of any of the other items attributable to Ms. Bowers; and he did not know that the tax was understated on the return. We believe this counsels in favor of relief. Legal obligation. The Bowerses' divorce decree is silent as to either spouse's obligation to pay any federal income tax. This factor is neutral. Significant benefit. There is no evidence that 13 Mr. Bowers significantly benefitted from the unpaid 14 15 16 17 18 19 20 21 22 23 24 25 tax, and it is clear that he did not live a lavish lifestyle. This factor is neutral. Compliance with federal income tax laws. Mr. Bowers testified that he is up to date on his income tax filings, and neither Respondent nor Intervenor contends otherwise. This factor is in favor of relief. Mental or physical health. No evidence was introduced as to Mr. Bowers' mental or physical health. This factor is neutral. Thus employing the IRS's matrix, we find four factors in favor of relief and three neutral, 866.488.DEPO www.CapitalReportingCompany.com I Capital Reporting Company 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 yielding a decision in favor of relief. That matrix is illuminating, but we would describe the situation in these more general terms: Mr. Bowers reported all his income and, apparently through withholding, paid all the tax on it. Unbeknownst to him, his ex-wife left some of her income unreported and claimed credits she was later unable to substantiate, thereby obtaining a refund of tax withholding that should have been left with the IRS to cover the tax attributable to those items of hers. After the IRS identified her errors and determined the tax attributable to them, it is only fair that she and not Mr. Bowers should pay that tax. If, contrary to appearances, he has been deliberately paying less than he should in child support, Ms. Bowers cannot use the tax system as her child support enforcement mechanism. She should pay her 2009 income.tax liability (unless she can persuade the IRS to accept a collection alternative), and he should 20 pay his child support arrearages. 21 22 23 24 25 In sum, we find that Mr. Bowers is entitled to relief under section 6015(b) or, in the alternative, section 6015(f), from joint liability for income tax for 2009 to the extent of the tax deficiency determined by the IRS that is attributable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 to all the audit adjustments, except the state tax refund and the disallowed medial expenses. The precise amount of that relief will be determined under Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 10:27 a.m., the above- entitled matter was concluded . ) 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