TAX COURT OPINION

Case: Ounkham Luangrath
Docket Number: 27981-11
Judge: Gustafson
Opinion Type: bench
Filed: 02/26/2013
Pages: 25

UNITED STATES TAX COURT WASHINGTON, DC 20217 OUNKHAM LUANGRATH, ET AL., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent DRB 2741-12. ) ) ) ) ) Docket No. 27981-11, ) ) ) ) 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 Boston, Massachusetts, on February 7, 2013, containing his oral findings of fact and opinion, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above cases before Judge Gustafson at Boston, Massachusetts, containing his oral findings of fact and opinion rendered at the trial session at which these cases were heard. In accordance with the oral findings of fact and opinion, decisions will be entered under Rule 155. Dated: Washington, D.C. February 26, 2013 (Signed) David Gustafson Judge SERVED Feb 27 2013 Capital Reporting Company 3 Bench Opinion by Judge David Gustafson February 7, 2013 Ounkham Luangrath, et al. v. Commissioner Docket Nos. 27981-11, 2741-12 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in these consolidated cases. This Bench Opinion shall not 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 notice of deficiency dated October 27, 2011, the Internal Revenue Service (IRS) determined a deficiency in the Federal Income tax of petitioners Ounkham and Jane Luangrath for the years 2008, 2009, and 2010 and in each year an accuracy-related -- ciud )( --i-e-ea-e.h---ysar an '°°"''°1'-rM'ted enalty under ' 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 section 6662 (a) . The deficiency arose from ,19 disallowance of deductions and from other items 20 either not in dispute or computational in nature. By 21 22 the time the notice of deficiency was issued, the Luangraths were divorced. On December 7, 2011, Mr. 23 Luangrath filed a timely petition (in No. 2700 - 2#----9&---- 981-11) seeking "innocent spouse" relief under 25 section 6015 for the joint liability for the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 . deficiencies the IRS determined. Ms. Luangrath did not intervene in Mr. Luangrath's case; but on January 25, 2012, she timely mailed her own petition asking this Court to redetermine the deficiencies. At the time they filed their petitions, the -Luaii- -- Luangraths each resided in Massachusetts. (Stip. 2- 3.) Trial of this case was conducted on February 6 and 7, 2013, in Boston, Massachusetts. Mr. and Ms. 10 Luangrath represented themselves, and respondent was ,11 represented by Molly Donohue. Before and during 12 13 14 15 16 17 18 19 20 21 22 23 24 25 trial, the parties stipulated various dollar amounts relevant to this case (including medical and dental expenses), leaving in dispute the following issues: (1) Ms. Luangrath's entitlement to deductions for expenses incurred in her day care business, including car expense, home office expense, and contract labor expense, and rent expense; (2) the Luangraths' liability for accuracy-related penalty under section 6662(a); and (3) Mr. Luangrath's entitlement to relief from joint liability under section 6015. When the case was called for trial, Ms. Luangrath also seemed to attempt to raise two new issues -- i.e., her own claim for relief from joint liability under section 6015, and a claim of net operating loss 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 carryforwards from prior years -- but because those issues were not raised timely and would prejudice respondent, we ruled that she could not assert them at trial. For the reasons explained hereafter, we 5 will sustain the IRS' s adjustments· in part, and we 6 will grant Mr. Luangrath the relief he seeks. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 FINDINGS of FACT The Luangraths and their household Mr. Luangrath was born in Laos in 1960 and moved to Hawaii in 1982 and to Massachusetts in 1983. The Luangraths were married in 1983. (Stip. 1. ) Each of them has a high school education and no specialized financial training. (Stip. 8. ) They have four children, all four of whom lived with them during part of all of 2008 through 2010. During those years they owned their home, for which they paid a mortgage and did not pay rent. During those years, -M:,. Lua11- - Mr. Luangrath worked long hours outside the house as a machinist (Stip. 4), usually leaving home at 6:00 or 6:30 a.m. and returning home at 9:00 or 10:00 p.m. Ms. Luangrath operated a licensed day care operation out of the Luangraths' home (Stip. 5), +ha-t she had for many years . During 2008, 2009, and the first five months of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 2010, Ms. Luangrath handled the household bills and finances. Mr. Luangrath handed his paycheck to Ms. Luangrath, and she deposited it into their joint account and paid the bills. (Stip. 9.) Ms. Luangrath'·s day care operation Ms. Luangrath enjoyed caring for children and did not make every decision with a view toward 8 maximizing profit, but we find that she did conduct 9 the business to make a profit. Ms. Luangrath did not 10 maintain a separate bank account for her day care 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 operation (Stip. 10), but the parties have stipulated some expenditures that Ms. Luangrath made in connection with the day care operation for office expense, supplies, taxes and licenses, cell phone, food, and memberships (and those expenses are deductible) . Mr. Luangrath was not involved in any aspect of the day care operation (Stip. 6) and did not review any of its financial information (Stip. 7) . "Home office" expenses Ms. Luangrath conducted her day care operation in her home every Tuesday through Thursday. She also operated on some Mondays and Fridays -- equal, we find, to a fourth day each week. The day care hours varied but were generally 7:00 a.m. to 6:00 p.m. -- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 i.e., 11 hours a day for four days a week, or 44 hours a week, or 26 percent of a 168-hour week. The Luangraths' house consisted of (a) an unfinished basement (which we ignore in the following analysis), (b) a first floor (kitchen, dining room, bathroom, living room, and sun room) of 906 square feet, (c) a second floor (three bedrooms, a side-room used as a family office, and two bathrooms) of 914 square feet, and (d) a finished attic of about 337 10 square feet. The day care children did not use the .11 attic or the basement (which were not licensed for 12 13 14 15 16 17 18 19 20 21 22 23 24 25 use by the children), and the children were in the second floor only incidentally, as when they followed Ms. Luangrath upstairs when she put away laundry in the bedrooms or straightened up her children's bedrooms. We, therefore, find that only the first floor (906 of the 2,157 square feet, or 42 percent of the house) was actually used for the day care operation. Thus the day care operation used 42 percent of the house 26 percent of the time, and thus used 11 percent of the house. The parties have stipulated or not disputed that some of the expenses of the house, to which that 11- percent ratio can be applied -- i.e., mortgage interest, real estate taxes, homeowner's insurance, 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 repairs and maintenance, and some utilities (gas and electric, water and sewer) -- and at trial Ms. Luangrath withdrew her contention that we should include other expenses listed for Schedule 8829, line 24 (b), on Exhibit 18-P. The household expense of cable TV was of some benefit to the day care operation; but that service was purchased in a bundle from Comcast, along with telephone (which was a personal expense in view of the business use of the cell phone) and Internet service (which did not bear any obvious relation to the day care operation). The record does not provide a basis for isolating the cost of Cable TV from phone service and Internet service, so we find that Ms. Luangrath did not prove that the Comcast expense 1s business-related. "Contract labor" Ms . Luangrath' s children helped her from time to time with the day care operation and with household chores and errands that benefited the operation. She and her husband sometimes gave cash to and made expenditures for the children in amounts the parties have stipulated, but these amounts were not paid or spent for hourly work or by any other discernible 24 measure; and the child who worked more did not 25 receive more than the child who worked less. Ms. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 Luangrath did not report these amounts as wages and pay payroll taxes on them, and the children did not report them as income. The amounts paid to or for her children were not compensation for labor. 5 Minivan expenses 6 7 Ms. Luangrath purchased a minivan in 2006 that she used in connection with day care. She used the 8 minivan to take her older charges to school and pick 9 them up, to take children on frequent and numerous 10 outings, and to run errands that benefited the day 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 care operation. She testified that her use of the van was exclusively for business; but Ms . Luangrath did not maintain any log or other records of the use of the minivan; and we find that the business use was substantial but not exclusive. Bearing heavily against Ms. Luangrath on this point (see part I of the opinion below), we use her four-day work week to find that four-sevenths of the van usage is the starting point of what could be claimed as business use, and that her failure to allocate carefully between business and personal use calls for us to grant her only half of that maximum -- so that two- sevenths, or 29 percent of the minivan usage was business-related. The parties have stipulated certain amounts that the Luangraths expended on the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 minivan (appearing on Exhibit 18-P as car and truck 2 3 4 5 6 7 8 9 expenses and repairs and maintenance). At trial Ms. Luangrath argued for the deductibility of a category of insurance expense that may include car insurance for the minivan, but we find that she did not prove these amounts. (This "insurance" category also included life insurance, but we are aware of no provision in the Code that would permit Ms. Luangrath to deduct the cost of life insurance as a business 10 expense.) During trial she raised for the first time 11 12 13 14 15 16 a claim of depreciation on the minivan (not claimed on her returns nor raised in the petition), and since the issue was thus raised too late, we did not permit her to put on evidence supporting depreciation. Tax return preparation At the end of each year, Ms. Luangrath obtained 17 Mr. Luangrath's Form W-2 showing his wages; and she 18 19 20 21 22 23 24 assembled and totaled the supporting documentation for the family's medical and dental expenses in amounts greater than those the parties have now stipulated. She also assembled the receipts and other supporting documentation for expenses from her day care operation, categorized them, manually added up the totals for each category, and put the 25 documents related to each category into separate 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 large yellow envelopes. (Stip. 13.) She then went to her tax return preparer and provided the Form W-2 and the envelopes of receipts to the preparer (Stip. 14-15). The return preparer included W. ' Mr. Luangrath's wages on the returns. The return preparer generally put on the returns the medical expense and day care expense amounts that Ms. Luangrath had tallied, including minivan expenses . However, the return preparer also suggested (1) that Ms. Luangrath claim a deduction, as ontract labor for amounts she had given to or paid for her children, and (2) that Ms. Luangrath claim a rent deduction for the value of the home, as if the business were entitled to deduct hypothetical rent (even though the Luangraths' paid no rent on the house, and the day care operation paid no rent to the family). Ms. Luangrath agreed to follow the advice. Ms. Luangrath provided her return -- het preparer with a published tax guide for day care providers, so that the preparer would know how to prepare their return. She also gave her preparer a diagram of their house prepared by real estate agents at the time of their purchase so that she could devise the ratio to be used in deducting household expenses. However, the preparer omitted to include 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 with the return a Form 8829 on which deductions are 2 3 4 5 6 computed and reported for business use of one's home -- an oversight that is surprising, given that day care businesses can deduct home-related expenses in circumstances that other businesses cannot -- and in several instances acem seems to have claimed 7 wholesale deductions for.expenditures that should 8 9 have been allocated by ratio between personal and business (such as utilities, homeowner's insurance, 10 and household repairs and maintenance). The return 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 as prepared did not include any depreciation of the house or the minivan. Ms. Luangrath electronically filed the returns for herself and her husband. (Stip. 16.) Mr. Luangrath did not file a separate return for any of the years. (Stip. 17.) Separation and divorce Ms. Luangrath left Mr. Luangrath at some point during 2010 and began to reside elsewhere, although she maintained the day care operation at the family home until sometime in 2011. The Luangraths legally separated in October 2010 and were divorced in March 2011. (Stip. 19; Exhibit 19-P.) The marital separation agreement incorporated into their divorce decree provides that if there is any deficiency 866.488.DEPO www.CapitaIReportingCompany.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 assessment" against them, then the amount due "shall be paid equally by the Husband and the Wife" and that they shall indemnify each other "against any assessments." (Stip. Exhibit 19-P.) IRS examination, notice of deficiency, and petition The IRS examined the Luangraths' returns for 2008, 2009, and 2010. The IRS requested documentation to substantiate the deductions claimed on Schedules A and C of the Luangraths' returns, but the Luangraths did not provide documentation. (Stip. 20.) The records that Ms. Luangrath had assembled for the tax returns had originally made their way back to the house and had been either in the family office, a drawer in the downstairs, or the attic. However, because the family office was converted to a bedroom for a time in 2010 and because of upheaval in the family during the divorce and Ms. Luangrath's departure from the family home, those records were lost or scattered; and Ms. Luangrath could not obtain them during the IRS's examination. She was later able to reconstruct them in large part, thereby facilitating stipulations of many of the amounts originally in dispute. Consequently, the IRS disallowed in total the medical expenses on Schedule A, and most of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 day care deductions claimed on Schedule C -- including the contract labor expense, rum he rent expense, the minivan expenses, and the expenses for the use of home -- and issued the Notice of 5 Deficiency (Exhibit 7-J). The Luangraths then filed 6 their petitions in this Court. Mr. Luangrath's 7 petition requested relief from joint liability under 8 section 6015; and Ms. Luangrath's petition disputed 9 all of the IRS's disallowances. Ms. Luangrath did 10 11 12 13 14 15 16 17 18 not assert any entitlement to depreciation in her petition nor at any other time prior to trial. OPINION I. Disallowed deductions A. Burden of proof The IRS's determination is presumed correct, and the taxpayer generally bears. the burden to prove her entitlement to any deductions she claims. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). 19 Deductions are strictly a matter of legislative 20 21 22 23 24 25 grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 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 1(a). If a taxpayer establishes that a deductible expense has been incurred but cannot establish the precise amount of the deductible expense, then the Court should estimate the amount on the basis of less-than-optimal evidence. In making the estimate, the Court "bear[s] heavily if it chooses upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). This case requires allocating some expenses between business (i.e., day care) and personal. Ms. Luangrath's testimony concern1ng such allocations was sincere but not convincing. She more than once characterizes an activity or expenditure such as driving to the store, purchasing cleaning supplies, and cleaning the kitchen floor as being a day care expense as long as it bore any relation to or had any benefit on that·operation, even if personal or family benefit equaled or predominated over the day care benefit. She even attempted to characterize as business expenses money that she gave to or paid for her children quite apart from any work they did for the day care business. Consequently, we were not convinced by her testimony that the minivan was used exclusively for day care or that the second floor of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 the house was used in the day care operation. B. Daý care expenses Ms. Luangrath may deduct the office expense, supplies, taxes and licenses, cell phone, food, and 5 membership expenses that the parties have stipulated. 6 7 8 9 10 11 12 13 14 15 We discuss here the unagreed expenses. . 1. Home office expense Section 280A(c) (4) allows a taxpayer to deduct expenses for the use of her residence in providing day care services, and (c) (4) (C) provides that the expenses must be allocated according to the portion of the house that is so used and the number of hours the portion is used. In this case that ratio is 11 percent, so Ms. Luangrath is entitled to deduct, on Schedule C, 11 percent of the stipulated amounts of 16 mortgage interest, real estate taxes, homeowner's 17 18 19 20 21 22 23 24 25 insurance, repairs and maintenance, and utilities other than Comcast. The amounts of mortgage interest and real estate taxes claimed and allowed on Schedule A must be concomitantly reduced. As for the Comcast bundled expenses, section 262 (b) provides, "in the case of an individual, any charge (including taxes thereon) for basic local telephone service with respect to the 1" telephone line provided to any residence of the taxpayer shall 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company be treated as a personal expense.'' The Comcast phone service is thus disallowed, and the business relation 17 of the other services in the bundle was not established or distinctly identified. 2. Minivan expenses Certain business expenses described in section 274 (d) are subject to strict substantiation rules. Sanford v. Commissioner, 50 T.C. 823,. 827-828 (1968), affd. 412 F.2d 201 (2d Cir. 1969); see 1.274-5T(a), 1 2 3 4 5 6 7 8 9 10 Temporary Income Tax Regs. Section 274 (d) applies 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to, among other things, the use of listed property, as defined in section 280F(d) (4), which includes passenger automobiles. To deduct such expenses, the taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony: (1) the amount of the expenditure of use; (2) the time and place of the travel; and (3) its business purpose. Sec. 274 (d) (flush language). For some of the pertinent expenses such as car insurance, (for which the document is lacking) and depreciation, which Ms. Luangrath did not plead until trial, in violation of our Standing Pretrial Order, the amounts have not been established; so we give no further consideration to those expenses. For others of the pertinent expenses, the amount(sl have been stipulated; 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company but the time and place of the travel and its business 18 purpose have not been. The only corroborating evidence for her usage of the van for the day care business is the very credible but general testimony of her son. For the reasons explained above, we conclude that her day care business accounts for 29 percent of the usage of the minivan, and she may, therefore, deduct 29 percent of the stipulated 1 2 3 4 5 6 7 8 9 minivan expenses. 10 11 12 13 14 15 3. Rent Ms. Luangrath's deduction for rent is fictitious. She paid no rent for her day care operation and is entitled to no rent deduction. 4. Contract labor Ms. Luangrath did not pay her children for their 16 work. She attempts after ·- abe de'empts di-Le1 he ·17 fact, at the suggestion of her return preparer, to 18 19 transform cash that she gave to her children and expenses she paid on their behalf into wages -- i.e., 20 wages on which she did not pay employment tax and 21 22 23 24 which her children did not report as income. She is entitled to no contract labor deduction. II. Accuracy-related penalty Section 6662 imposes an ccuracy-related penalty 25 of 20 percent of the portion of the underpayment of 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting Company 19 tax that is attributable to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. Here the IRS asserts both that the Luangraths' understatement was substantial and that is was attributable to negligence. Under section 7491(c), the Commissioner bears the burden of production and must produce sufficient evidence that the imposition of the penalty is appropriate in a given case. Once the Commissioner meets this burden, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). A. "Substantial understatement" By definition, an understatement of income tax for an individual is substantial if it exceeds the greater of $5,000 or 10 percent of the tax required to be shown on the return. Sec. 6662(d) (1). Because we have upheld the IRS's determinations only in part and will, therefore, instruct the parties to recompute the deficiencies pursuant to Rule 155, we 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 I 22 23 cannot tell, until they have done so, whether the 24 25 Luangraths' understatements were substantial by this standard. If the deductions we allow here do not 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting Company 20 have the result of reducing the tax deficiencies to an amount below $5,000, then the Luangraths' returns would appear to have reflected bstantial understatements and they would owe the accuracy-related penalty on the entire amounts (absent a showing of reasonable cause and good faith, discussed below). This remains to be seen. B. Negligence For purposes of section 6662, the term negligence includes a .failure to exercise ordinary and reasonable care in the preparation of a tax return. Sec. 1.6662-3(b) (1), Income Tax Regs. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Negligence is defined as a lack of due care or 15 16 17 18 19 20 21 22 23 24 25 failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934 (1985). The term disregard includes any careless, reckless, or U - intentional disregard of the rules or regulations. Sec. 6662 (c) . It also "includes any failure by the taxpayer to keep adequate books and records to substantiate items properly." 26 C.F.R. sec. 1.6662- 3 (b) (1) . By this standard, we find the Luangraths' underpayments to be negligent to the extent they 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company arise from the disallowance of the rent and "contract labor" deductions, but not otherwise. Ms. Luangrath 21 was not fully entitled to the amounts of deductions she claimed for the minivan, the business use of their home, or medical expenses; but those expenses were not concocted but rather were substantiated and allowed to a substantial extent. However, the rent and contract labor were claims for deductions that she had to know were contrary to fact. The parties' computations under Rule 155 will determine the amount of underpayments attributable to these deductions. C. Reasonable cause and good faith A taxpayer who is otherwise liable for the accuracy-related penalty may avoid the liability if she successfully invokes section 6664 (c) (1), which provides that, if the taxpayer shows, first, that , there was reasonable cause for a portion of an underpayment and, second, that she acted in good faith with respect to such portion, then no accuracy- related penalty shall be imposed with respect to that 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 portion. Whether the taxpayer acted with reasonabl 22 23 24 25 cause and in good faith depends on the pertinent facts and circumstances, including her efforts to assess her proper tax liability, her knowledge and experience, and the extent to which she relied on the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 1 2 3 4 5 6 7 8 9 , 10 11 12 13 14 15 advice of a tax professional. 26 C.F.R. sec. 1.6664- 4 (b) (1). For the same reason that we found most of the disallowed deductions non-negligent, we also find that they reflected reasonable cause and good faith on Ms. Luangrath's part. We cannot say the same for rent and contract labor. Ms. Luangrath did have the assistance of a return preparer in preparing her tax returns, and it is true that the preparer did recommend these deductions. Ms. Luangrath argues that she was entitled to rely on the advice of a professional return preparer about tax law; but here the error of the advice concerned not the law but the facts of Ms. Luangrath's own day care business. Ms. Luangrath knew that she had paid no rent; and she knew that her 16 gifts to her children were not guid pro quo for day 17 18 19 20 21 22 23 24 25 care work. She must have known that someone recommending such deductions was recommending fictions or worse. She had no reason to rely on advice that contradicted facts she knew. She will, therefore, be liable for the penalty, to the extent her underpayments arise from the tax attributable to those fictitious deductions. III. Mr. Luangrath's claim for relief under section 6015 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company A. Standard and scope of review When determining whether a taxpayer is entitled 23 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, we do not review for abuse of discretion but instead employ a de novo standard of review. Port r v. Commissioner, 132 T.C. 203, 210 (2009) ("Porter II"). B. 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 6015 grants relief for spouses who meet the conditions of subsection (b) and for divorced and 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 separated persons under subsection (c), and provides 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 24 1 2 3 4 5 equitable relief in subsection (f) when the relief provided in subsections (b) and (c) is not available. We hold that Mr. Luangrath is eligible for relief under subsection (c) . Section 6015 (c) is entitled "Procedures to Limit 6 Liability for Taxpayers No Longer Married or 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Taxpayers Legally Separated or Not Living Together." This provision is available where (a) a joint return was filed, (b) the spouses are no longer married, and (c) the requesting spouse timely elects the relief -- conditions that Mr. Luangrath meets -- but 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." Ms. Luangrath virtually admits that Mr. Luangrath had no knowledge of the deductions claimed on the return, and we find that he did not. His wages were fully reported on their returns, and it was Ms. Luangrath who was responsible for the excessive deductions. Mr. Luangrath is thus entitled to relief under subsection (c) . That being the case, it is beside the point to observe that he could also qualify for relief because he meets the five criteria of Section 6015 (b) (1) . However, we will! address one of those criteria -- 866.488.DEPO www.CapitalReportingCompany..com Capital Reporting Company 25 1 2 3 4 5 6 7 8 9 "Taking into account all the facts and circumstances, it is inequi able to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement" -- as to which Ms . Luang ra th made two contentions : First, she contends that Mr. Luangrath withheld documentation that she needed in order to establish her deductions; but the amounts of the particular deductions she points to -- 2010 medical expenses and utilities for 10 the house -- were eventually stipulated; so it does 11 12 13 14 15 16 17 18 19 20 not appear that he committed any material failure. Second, she points out that the marital separation agreement incorporated into their divorce decree provides that they should bear tax liabilities jointly. However: (1) The decree of a state court cannot overrule Federal law, so we apply section 6015(c) by its terms. (2) The subject of the provision she cites is "any deficiency assessment, " whereas the deficiencies at issue here have yet to be assessed. (3) We do not purport to overrule the 21 agreement nor the decree incorporating it. If she 22 23 24 has rights under the divorce decree to be reimbursed by him for any of the liabilities that result from our redetermination of the deficiency that the IRS 25 has determined, then she can presumably pursue such 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting Company 26 relief; and she can do so in a court that, unlike this one, has jurisdiction to adjudicate such claims under the divorce decree. Thus, we do not find that granting relief to Mr. Luangrath under subsection (b) would be inequitable. Section 6015 (f) provides relief from joint liability where subsections (b) and (c) do not apply. Since we hold Mr. Luangrath eligible for relief under subsection (c), we do not consider subsection (f) . Decision will be entered under Rule 155, so the parties will conduct the necessary computations. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 12:30 p.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.CapitaIReportingCompany.com