TAX COURT OPINION

Case: Fredrick Michael Young, Petitioner and Rasheda O. Donner, Intervenor
Docket Number: 16400-13
Judge: Holmes
Opinion Type: bench
Filed: 01/05/2015
Pages: 18

UNITED STATES TAX COURT WASHINGTON, DC 20217 Frederick Michael Young, Petitioner and Rasheda O. Donner, Intervenor v. ) ) ) ) ) ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent O R D E R Docket No. 16400-13. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith the pages the transcript of the trial intervenor and to respondent a copy of to petitioner, of Mark V. Holmes on November, 19, 2014 at Los Angeles, California, containing his oral the trial session at which the case was heard. in the above case before Judge findings of fact and opinion rendered at In accordance with the oral findings of fact and opinion, a decision for Respondent and Interv,enor will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. January 5, 2015 SERVED JAN - 6 2015 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Bench Opinion by Judge Mark V. Holmes November 19, 2014 Frederick Michael Young, Petitioner, & Rasheda O. Donner, Intervener v. Commissioner Docket No. 16400-13 THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended, and Rule 152 of the Tax Court's Rules of Practice and Procedure. This is an innocent spouse case in which everyone testified truthfully and credibly, unlike 16 many innocent spouse cases. They may disagree but 17 18 19 20 21 22 23 24 25 there has been g blatant dishonesty that plagues this particular area of tax law. Also notable is the business success of this couple working together. Mr. Young and Ms. Donner met at Southern Illinois University and Mr. Young received a B.A. in mass communication and media arts. He and Ms. Donner started a Schedule C business together doing post production work out of their home here in Southern California. They filed a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 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 Schedule C with their returns each year, and both of them are listed as producers on the return. They truly worked together to start a small business that then began to thrive. As with many small businesses, however, they had good years and bad years. They fell behind in their taxes for the '04 and '05 years, and again during the recession. anr1 the begi-aai-ng of the rcccasico in 2008. Nobody challenges any of their returns; they reported accurately but they didn't pay for those three years, so they have an accumulated and somewhat growing tax debt that is hanging over their heads. Nevertheless, and again, unlike many people they recognize their problem and they agreed to an installment agreement when they started falling behind in '04 and '05. Unfortunately in 2008, the couple separated and the installment agreement lapsed, but they did negotiate a new one that was in effect for a while. Then in 2012 the separation became a divorce, and the question becomes what happens to these joint tax liabilities. They anticipated the problem somewhat and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 Exhibit 5-J, which is the divorce decree, includes a 2 3 4 5 6 7 8 9 10 11 12 provision that Mr. Young would be solely responsible for 50 percent of the 2005 unpaid taxes, and Ms. Donner would be responsible for 50 percent of those taxes as well, with each side to indemnify the other for amounts paid in excess of their share. Now, the normal rule for the joint debts contracted in marriage, like these tax obligations, is that both parties are responsible for the full amount, and the divorce decree changed this only a little bit for the 2005. The parallels that are used for many 13 married couples is like roommates who agree to share 14 15 16 17 18 19 20 21 22 23 24 25 the utility bill; one side paying the electric bill, one month and the other roommate paying the bill the second month. That may be a legally binding contract between those two roommates, but the utility company, if both names are on the bill, has the right to come after you both and the IRS is a little bit like the electric company in this regard. There are exceptions to this, and that's what this case is about. Section 6013(a) of the Internal Revenue Code lets married couples file their federal tax return jointly, but if they do both spouses are then 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 responsible for the returns accuracy, and both are generally liable for the entire tax due. Section 6013(d)(3). In some cases, however, Section 6015 can relieve one spouse from this joint liability. That relief comes in three varieties. Relief under Section 6015(b) or (c), which requires either an understatement or a deficiency, and relief under Section 6015(f) which requires only that the requesting spouse be "liable for any unpaid tax or any deficiency". If the liability is neither an understatement or a deficiency the only possibly relief is under subsection 6015(f). In the Young's case the Commissioner never asserted a deficiency against either one, so this is a case where relief is possible only under Section 6015(f). In filing his petition seeking innocent spouse relief, which is relief from this joint 20 liability, Mr. Young stated in his petition that, "In 21 22 23 24 25 my divorce decree it states the tax debt should be divided between myself and my ex-wife. I'd like to make arrangements to pay half of the tax debt". So we know what he wanted; he wants to pay half the joint liability, and have his former wife 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 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 pay the other half of the joint liability, which seems perfectly reasonable, except of course, because the IRS can take either party's assets and income to pay for a joint debt, might object to this private agreement between the two former spouses. Indeed, what Mr. Young is seeking is not, something the Tax Court can give him because the effect of being relived from joint liability for half of the combined tax debt would not be to assign half the tax debt to his ex-wife and half the tax debt to himself, it would be to assign the entire tax debt to his ex-wife with only half of it to himself, and that would be unfair to his ex, which is presumably why she intervened stating that she thought that the tax debt should be shared equally between them. Nevertheless, Mr. Young filed for relief and it was denied him by the IRS. In doing so, the IRS was acting in kind of a bizarre fashion,on this enen The reason the IRS gave for denying relief included such things as listed in Exhibit 1-J as, "you received transferred assets from your spouse or ex-spouse as part of a fraudulent scheme", and, "you filed the return fraudulent intent". This is bizarre. There's just no evidence 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 of that in the record, there was no evidence at the trial. The Commissioner's lawyers in this case didn't defend this bizarre conclusion, and no doubt it offended Mr. Young and may have been one of the reasons that prompted him to file this petition seeking appeal. I want to assure him that I certainly don't find any hint of wrongdoing. They simply fell behind in their taxes while they were married, and want to untangle themselves from joint liability now that they no longer are. Both Mr. Young and his ex are residents of 13 California when he filed the petition and during the 14 15 16 17 18 19 20 21 22 23 24 25 time of the trial. They reached a stipulation with each other and with the Government and together with their testimony that constitutes the record of this case. Let me move on to the analysis applying the relevant law to these facts, which are largely unchallenged. I begin by noting the standard and scope of review that applied to a case like this. In determining whether Mr. Young is entitled to relief under Section 6015(f) I have to apply a de novo standard of review, and a de novo scope of review. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 See Porter v. Commissioner, 132 T.C. 202 (2009); Porter v. Commissioner 130 T.C. 115 (2008). What this means is that I make my decision on the basis of the trial record, the testimony, and the stipulation that I just described, and not on the basis of what happened before the IRS. It's a clean slate when you come to Tax Court, in other words. Moreover, the de novo scope of review means that I don't defer to what the IRS did, as bizarre as it is in this case, but instead look at it and apply the law in facts as I found them, without deferring to the IRS's conclusion in administratively denying 13 Mr. Young relief. 14 So how do I do that? Typically the Tax 15 Court will use the Revenue Procedure that's in effect 16 17 18 19 20 21 22 23 24 25 for the year in question. This is a series of general guidelines that the IRS releases every so often that guides the discussion of which factors to look at, and what circumstances justify relief. The Revenue procedure that applies in this case is the Revenue procedure 2013-34. It was released last year. That Revenue procedure divides the analysis into two parts. The first part, conditions that have to be present for relief to be granted, the second are conditions which if they 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 exist will lead to a grant of relief, and the third is for cases in-between a set of factors that need to be balanced in one way or another so that under the facts and circumstances of the case somebody making a decision, whether a judge or the IRS, can reach a reasonable conclusion that's consistent from case to case. So I'll be applying this Revenue procedure. The first part of the Revenue procedure, as I said, are what are called the threshold conditions. These are conditions that have to be met for anybody to get relief from a joint liability. The first is that the requesting spouse, in this case Mr. Young, filed a joint return. He clearly did for each of the three years at issue. The second is that relief is not available to him under Section 6015(b) or (c). As I described already, those sections relate to people who don't file their tax returns accurately, not people like 19 Mr. Young and Ms. Donner who filed accurate returns 20 21 22 23 24 25 but simply didn't have the money to pay at the time. The third is that the claim for relief is timely filed, which it was here. The fourth is that no assets were transferred between the spouses as part of a fraudulent scheme; again, this is not present here. That Mr. Young did not transfer 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 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 disqualified assets to the requesting spouse; there's no evidence of that, and that he did not knowingly participate in the filing of a fraudulent return, which he clearly did not. The last of these threshold factors is that the income tax liability from which Mr. Young seeks relief is attributable either in full or in part to an item of Mr. Donner's, or an underpayment resulting from Ms. Donner's income. Here their income was the result of their joint efforts. They both owned this Schedule C business that had become successful, though it did have some off years. The fruits of that business; however, wef equally the product of both spouses here. So it is in this sense that the threshold test is met because Ms. Donner did contribute to the production of all the income, which became taxed in '04, '05, and '08. So having passed through the threshold factors, Mr. Young then comes to the streamlined condition for relief. If he meets all of these factors that are listed in Section 4.02 he would normally be entitled from relief from joint liability for his taxes for those three years. One of the factors, however, is knowledge 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 or reason to know. This factor focuses my attention on whether Mr. Young knew or had reason to know that Ms. Donner would not and could not pay the underpaying of tax reported on the joint income tax return. Well, it's perfectly clear that Mr. Young knew that these taxes weren't going to be paid. He admitted as much on his application for relief from joint liability. Attached is Exhibit 4-J to the stipulation, where he stated that, "The plan was to pay back the taxes based off of our income forecast that never came to fruition". In other words, they knew they were short of money but they expected the business to succeed in later years to enable them to pay. This shows that he had knowledge at the time that he filed the tax returns with his ex for '04, '05, and '08, that the taxes were not going to be paid right then, or very shortly thereafter. So he fails on the knowledge factor here, which means he is not entitled to the streamlined relief that would otherwise be available to a spouse in his situation. That then leads to the balancing test of 24 many factors. Contained in Section 4.03 of the 25 Revenue procedure, these factors require me to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 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 consider all the facts and circumstances of the case and the degree or importance of each factor depends on those facts and circumstances. It's something of a loosey-goosey balancing test but when is applied to enough cases that certain patterns start to emerge. So I will go through each of the factors and the Revenue procedure tells me whether a particular factor will then be in favor or relief, against relief, or neutral as to relief. The first of these factors is marital status. If a requesting spouse is still married to a non-requesting spouse this factor is neutral. For purposes of the section a requesting spouse will be treated as no longer married to a non-requesting spouse as of the date the IRS makes its determination; however the Court makes its determination of marital status as of the time of trial, which was just this week. See Wilson v. Commissioner, T.C. Memo 2010-134, affirmed 705 F3d 980 (9th Circuit 2013). Mr. Young and Ms. Donner were divorced in 2012 so this factors weighs in favor or relief. The second factor is economic hardship. This is more or less a math factor and requires me to look at Mr. Young's income, his expenses, and the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 current status of his household. There's a little 2 bit of conflict here. Exhibit 22, which Mr. Young 3 4 5 6 7 8 9 prepared for trial to show his current income and expenses showed about $8,000 in gross income, $6,810 in expenses for net income each month of about $1,190. In applying for relief a couple years ago he said that his expenses were $5,799. So his expenses back then were a little bit lower. I don't 10 find any fraud here, or anything, he was just being 11 more precise on his current expenses. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In any event, none of this makes any difference because the Revenue procedure tells me that when considering the economic hardship factor, I have to first determine his household size; he's living by himself now, and then find what the Federal Poverty Guidelines would be for that household size and then calculate 2.5 times that. In this case 250 percent of the Federal Poverty Guidelines would be $29,175 a year, which is substantially below what Mr. Young with his now growing business that he founded after the divorce, is earning. Moreover, his net surplus each month is $300 or more. The Revenue procedure says, "If the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 requesting spouses income exceeds 250 percent of the Federal Poverty Guidelines and his monthly income exceeds monthly expenses by more $300 the Service 4 will consider all the facts and circumstances in 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 determining the requesting spouse would suffer economic hardship.". That's Revenue procedure 2013- 24 4.03(b). In this case there's no evidence of economic hardship and he did not say as much, we do have trial testimony and (inaudible 17:28) before the IRS, so this factor is neutral if there's no economic hardship the Revenue procedures tells me to consider it a neutral factor. The next factor is knowledge, and this is knowledge that the tax would not be paid at the time, or near the time, the return was filed. As I've already concluded, Mr. Young did have knowledge that the tax wouldn't be paid. This factor weighs against relief. The fourth factor is legal obligation. Under Section 4.03(2)(d) a legal obligation is an obligation arising from the divorce decree that is present here in part. But the Revenue procedure goes on to say this factor will weigh in favor of relief if the non-requesting spouse has the sole legal 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 obligation to pay the outstanding income tax liability pursuant to a divorce decree. This factor 3 will weigh against relief if the requesting spouse 4 5 6 7 has the sole legal obligation. As I've already noted in the background section of this bench opinion, Mr. Young and Ms. Donner agreed to split the 2005 liability down the 8 middle, but they didn't provide for the '04 or '08 9 liabilities. This means that neither of them had a 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sole legal obligation to pay the outstanding tax debt. In this situation, this legal obligation factor is neutral. The next factor is significant benefit, and this tells me to consider whether the requesting spouse, again, that's Mr. Young, significantly benefitted from the unpaid income tax liability or understatement. A significant benefit is defined as any benefit in excess of normal support. For example, think here of leading a lavish lifestyle, owning luxury assets, taking expensive vacations. Neither Mr. Young nor Ms. Donner did any of these things. They were struggling in a business at a time when they were cash poor trying to keep it afloat. So there's no significant benefit for either one of them here. That means this factor too is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 neutral. On the next factor is compliance with the income tax laws. Mr. Young is compliant with his obligations. He's always been compliant. He's had problems with having enough money to pay, but he does file his returns on time, seemingly accurately. This factor weighs in favor of relief for him. The next factor is mental and physical health. He had no serious mental or physical health problems as he credibly and honestly testified. The Revenue procedure tells me if the requesting spouse has neither poor physical nor poor mental health, this factor is neutral. Accordingly, that factor too is neutral. So to summarize here we have a couple that's divorced and a former husband who is compliant 17 with his ongoing tax obligations. These factors 18 19 20 21 22 23 24 25 weigh in favor of relief. The fact that he knew the taxes weren't getting paid at the time that he filed the returns, weighs against relief, and all the other factors are neutral. What is the judge to do in a situation where there's a multiple factor test, some of which weigh in favor or relief, some of which weigh against relief, and some of which are in the middle? 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 2 3 4 5 6 7 8 9 Well, as in any multiple factor balancing test, I have to have something in mind as the appropriate fulcrum when there are factors weighing down on both sides of the imaginary lever. Here I think that the appropriate fulcrum is the extent to which the economic unity of the household created by Mr. Young and his ex when they filed the joint return had been broken down by the actions of the non-requesting spouse, here Ms. 10 Donner, in a way that did not allow Mr. Young a 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reasonable exit from the entanglement of joint liability. As the Third Circuit once wrote, the innocence we look for "within the meaning of the statute is innocent vis-à-vis a guilty spouse whose has been sealed from the innocent and.spent outside the family". Bliss v. Commissioner, 59 F2d 374, 380, note 3, (2nd Circuit, 1995). Discussed in former Section 6013. There was just none of that here. Mr. Young and Ms. Donner were a hardworking couple with a business that they both were a part of. They both helpedfgrow. They both shared in the expenses, and they both shared in the resulting income. Almost all their income was joint, almost all their assets were 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 2 3 4 5 6 7 8 9 held jointly until the breakup of their marriage. They were a couple that had an economically unified household. Now, Mr. Young naturally wants to disentangle himself from his ex-wife and the joint liabilities that they had during their marriage, but this Court and innocent spouse relief aren't quite the way that he can go about getting it. I do note that in the divorce decree the 10 California court stated, "The Court shall retain 11 12 13 14 jurisdiction over the issue of joint debts". It's to that forum, state court, the divorce court, that Mr. Young needs to look if he wants to get out of joint liabilities, or split the joint liabilities, with his 15 wife as they agreed to do for the '05 tax return. 16 17 18 19 20 21 22 23 24 25 The Tax Court and innocent spouse relief aren't the way that he can get this. So I have to rule against him and in favor of the Government in this matter. A decision will be entered for the Respondent and Interven r in this case. /' This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 2:24 a.m., the above- entitled matter was concluded.) 866.488.DEPO www.CapitalReportingCompany.com