TAX COURT OPINION

Case: Sara Kay Michael, Petitioner and Derek C. Michael, Intervenor
Docket Number: 16761-17S
Judge: Buch
Opinion Type: bench
Filed: 12/06/2018
Pages: 17

BD UNITED STATES TAX COURT WASHINGTON, DC 20217 SARA KAY MICHAEL, PETITIONER AND DEREK C. MICHAEL, INTERVENOR, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 16761-17S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioner, intervenor, and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Oklahoma City, Oklahoma, 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) Ronald L. Buch Judge Dated: Washington, D.C. December 6, 2018 SERVED Dec 13 2018 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 IN THE UNITED STATES TAX COURT 1 In the Matter of: SARA KAY MICHAEL, And DEREK C. MICHAEL, petitioner, y, Intervenor, COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 16761-17S ) > ) ) ) ) ) ) ) ) ) ) Federal Building and Courthouse 200 NW 4th Street Room 402, 4th Floor Oklahoma City, Oklahoma 73102 November 7, 2018 The above-entitled matter came on for bench opinion, pursuant to notice at 9:01 a.m. BEFORE: HONORABLE RONALD L. BUCH Judge APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance Eiillills (973)406-2250|operations@escribers.netlwwwascribersmet P R O C E E D I N G S 2 (9:01 a.m.) THE CLERK: Recalling docket number 16761-17S, Sara Kay Michael, Petitioner and Derek C. Michael, Intervenor. (Whereupon, a bench opinion was rendered.) 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 .(973)406-2250|operationsøescribersnet|www.esaibers et 3 Bench Opinion by Judge Ronald L. Buch November 7, 2018 Sara Kay Michael, Petitioner, and Derek C. Michael, Intervenor v. Commissioner of Internal Revenue Docket No. 16761-17S THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or 1 2 3 4 5 6 7 8 9 10 11 12 13 the Treasury regulations in effect during the year at 14 issue, and all Rule references are to the Tax Court Rules 15 of Practice and Procedure. 16 This case was heard pursuant to section 7463. 17 Under section 7463(b), the decision to be entered in this 18 case is not reviewable by any other court, and this 19 opinion may not be treated as precedent for any other case. 20 21 The only remaining issue in this case is whether 22 Sara Michael is eligible for relief from joint and several 23 liability under section 6015(b), (c), or (f) for 2014, a 24 year for which she filed a joint return with her ex- 25 husband, Derek Michael, cribers (9733406-2250|oparations@escribetsmet{wwwescribers.net Background 4 The Michaels married in 2008. The former spouses dispute much about the nature of their relationship. Both allege physical abuse by the other, both allege infidelity by the other. Ms. Michael alleges significant emotional abuse and, as it relates to tax 1 2 3 4 5 6 7 matters, that her ex-husband controlled the household 8 9 finances and her ability to access them. It is clear that the marriage was difficult. The record establishes that 10 the Michaels accounts generally were held jointly and that 11 Ms. Michael had access to the family's accounts. The 12 funds deposited into those accounts, principally Mr. 13 Michael's earnings, were used by both of the Michaels for 14 both family and individual purposes. 15 The year in dispute is 2014. During that year, 16 the Michaels continued to be married and resided together. 17 Mr. Michael changed jobs mid-year. Mr. Michael earned 18 taxable wages of $44,898 during the first half of the year 19 from LifeCare. That income, net of taxes was deposited 20 into the Michaels' joint account, and Ms. Michael was 21 aware of both Mr. Michael's job with LifeCare and those 22 deposits. During the year, Mr. Michael had gambling 23 winnings of $1,440 from Riverwind Casino. Ms. Michael was 24 not aware of those winnings. In late 2014, Mr. Michael 25 took retirement distributions in excess of $53,000, the (9733406-2250|operation5@escribers.tiet|www.escribers.net taxable portion of which was $40,460. The retirement distributions (net of withheld taxes) were deposited into the Michaels' joint account, and Ms. Michael was aware of the deposit and that Mr. Michael had taken distributions 5 from his retirement accounts. The parties separated and Ms. Michael filed for divorce in 2015, before they had filed their 2014 federal income tax return. The Michaels filed their return on extension. On the day the return was due, Ms. Michael spoke with the return preparer and followed up with her then-husband about getting the return timely filed. 1 2 3 4 5 6 7 8 9 10 11 12 Communications between the spouses show that they knew 13 information was missing at the time of filing the return. 14 Although their communications express their intent to 15 amend their return to include those missing items, they 16 never did so. Their return also showed a balance due, 17 which they did not pay with their return. That amount has 18 19 20 since been paid and the allocation of that amount is not in dispute. On May 8, 2017, the Commissioner issued a notice 21 of deficiency to the Michaels. That notice contained 22 adjustments for three omitted items, the LifeCare wage 23 income, the gambling income, and the retirement 24 distribution, plus an accuracy-related penalty. Ms. 25 Michael filed a petition alleging that she is entitled to (973)406-2250|operations@escribetsmet|www.escribers.net· innocent spouse relief under section 6015. Mr. Michael 6 intervened, opposing relief. Discussion I. General Rules Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). Upon electing to file jointly, each spouse is jointly and severally liable for the entire tax due for that year. Sec. 6013(d)(3). In certain circumstances, however, a spouse who filed a joint return may seek relief from joint and several liability under the procedures in section 6015. Sec. 6015(a). Section 6015(a) allows a spouse to seek relief from joint and several liability under subsection (b) or, if eligible, to allocate the liability according to 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 provisions set forth in subsection (c). If a taxpayer 17 18 does not qualify for relief under either subsection (b) or (c), the taxpayer may be eligible for equitable relief 19 under subsection (f). Except as otherwise provided in 20 21 22 section 6015, the taxpayer bears the burden of proving that he or she is entitled to section 6015 relief. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), 23 aff'd, 101 Fed. Appx. 34 (6th Cir. 2004).Both the scope 24 25 and standard of our review in cases requesting relief from joint and several income tax liability are de novo. (9733406-22$0|operations@esaibers.net{wwwascribers.net Porter v. Commissioner, 132 T.C. 203, 210 (2009). II. Section 6015(b) Relief 7 Under section 6015(b), a taxpayer seeking relief from joint and several liability must meet five conditions: (1) a joint return was filed for the taxable year; (2) there was an understatement of tax attributable to an erroneous item of the taxpayer's spouse; (3) at the time of signing the return, the spouse seeking relief did not know and did not have reason to know of the 1 2 3 4 5 6 7 8 9 10 understatement; (4) the requesting spouse sought relief 11 within two years of the first collection activity relating 12 13 14 to the liability; and (5) taking into account all the facts and circumstances, it is inequitable to hold the spouse seeking relief liable for the deficiency in tax 15 attributable to the understatement. A taxpayer must 16 satisfy all five requirements to qualify for relief. See 17 Alt v. Commissioner, 119 T.C. 306, 313 (2002). 18 For 2014, the Michaels filed a joint return. 19 There was an understatement relating to three income items 20 that are attributable to Mr. Michael. As to the gambling 21 22 income only, Ms. Michael did not know or have reason to know of the understatement. Ms. Michael timely sought 23 relief, and it would be inequitable to hold her liable for 24 the tax attributable to the gambling income. She is 25 entitled to relief under section 6015(b) as to the (9733406-2250|operations@escribers.netlwww.esaíbers.net gambling income, only. III. Section 6015(c) Relief 8 Under section 6015(c), a divorced or separated spouse may elect to limit liability for a deficiency on a joint return to the portion of the deficiency that is allocable to her under subsection (d). The election may be filed at any time after the deficiency is asserted but not later than two years after the Secretary has begun collection activities. Sec. 6015(c)(3)(B). Additionally, the electing individual: (1) must no longer be married to or must be legally separated from the individual with whom the joint return was filed or (2) must not have been a 1 2 3 4 5 6 7 8 9 10 11 12 13 member of the same household with the individual with whom 14 the joint return was filed during the 12-month period 15 before the election was filed. Sec. 6015(c)(3) (A). 16 17 Subject to certain limitations, any item giving rise to a deficiency on a joint return is generally 18 allocated to the individuals filing the return in the same 19 manner as it would have been if the individuals had filed 20 21 separate returns. Sec. 6015(d)(3) (A). An election under section 6015(c) is invalid 22 with respect to all or part of a deficiency if it can be 23 demonstrated that the individual making the election had 24 actual knowledge, at the time of signing the joint return, 25 of any item giving rise to the deficiency (or portion (973)406-2250|operationsøescribersmet[www.escríbersnet thereof) that is not allocable to that individual under section 6015(d). Sec. 6015(c)(3)(C). Actual knowledge must be demonstrated by a preponderance of the evidence. Culver v. Commissioner, 116 T.C. 189, 196 (2001). The 9 actual knowledge standard is narrower than the "reason to know" standard applied under section 6015(b) and (f). McDaniel v. Commissioner, T.C. Memo. 2009-137. If an item of income is omitted and the requesting spouse has actual knowledge of the income, which includes knowledge of the 1 2 3 4 5 6 7 8 9 10 receipt of the income, then relief under section 6015(c) 11 12 13 is not allowed. Harrington v. Commissioner, T.C. Memo 2012-285; sec. 1.6015-3(c)(2)(i)(A), Income Tax Regs. Ms. Michael had knowledge of Mr. Michael's job 14 with LifeCare and his distribution from the retirement 15 account. She also was aware of the deposits relating to 16 those items that were made into the Michaels' joint 17 18 account. Because of this knowledge she is not entitled to relief under section 6015(c) for these items. But Ms. 19 Michael did not have knowledge regarding Mr. Michael's 20 gambling income, and she is entitled to relief under 21 section 6015(c) as to this item. Allocation of the 22 accuracy-related penalty follows the tax to which it 23 relates. Sec. 1.6015-3(d)(4)(iv)(B), Income Tax Regs. 24 Because Ms. Michael is entitled to relief from Mr. 25 Michael's understated gambling income she is also entitled cribers (9733406-2250loperations@escribers.net|www.escribers.net to relief from the section 6662(a) penalty as it relates 10 to this item of income. IV. Section 6015(f) Relief Section 6015(f)(1) gives the Commissioner discretion to grant equitable relief from joint and several liability if, "taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either)". This Court has jurisdiction to 1 2 3 4 5 6 7 8 9 10 review respondent's denial of petitioner's request for 11 equitable relief under section 6015(f). See sec. 12 13 6015(e)(1). In doing so, we apply a de novo standard of review, as well as a de novo scope of review. Porter v. 14 Commissioner, 132 T.C. 203, 210 (2009). Petitioner bears 15 the burden of proving that she is entitled to relief under 16 section 6015(f). See Rule 142(a); see also Porter v. 17 Commissioner, 132 T.C. at 210. 18 The Commissioner has outlined procedures for 19 determining whether a requesting spouse qualifies for 20 equitable relief under section 6015(f). We consider those 21 guidelines, but we are not bound to them; our 22 determination ultimately rests on an evaluation of all the 23 24 facts and circumstances. See Pullins v. Commissioner, 136 T.C. 432, 438-439 (2011); Porter v. Commissioner, 132 T.C. 25 at 210. Cribers (973)406-2250|operations@escribers.net|www.escñbers.net 11 These procedures, set forth in Rev. Proc. 2013- 34, sec. 4.01, outline seven threshold conditions that a spouse must meet to qualify for relief under section 6015(f): (1) the requesting spouse filed a joint return for the taxable year for which relief is sought; (2) the relief is not available to the requesting spouse under section 6015(b) or (c); (3) the claim for relief is timely filed; (4) no assets were transferred between the spouses as part of a fraudulent scheme; (5) the nonrequesting spouse did not transfer disqualified assets to the requesting spouse; (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the nonrequesting 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 spouse or an underpayment resulting from the nonrequesting 17 18 19 20 21 22 spouse's income. Ms. Michael satisfies the threshold requirements. In addition to the threshold conditions the revenue procedure lays out three streamlined conditions that, if fulfilled, will result in relief under section 6015(f). Those conditions are that: (1) the requesting 23 spouse is no longer married to the nonrequesting spouse; 24 25 (2) the requesting spouse would suffer economic hardship if relief were not granted; and (3) the requesting spouse cribes (973)406-2250|operations@escribetsnetlwwwescribersáet. 12 did not know or have reason to know of the understatement or underpayment. Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. at 400. Because Ms. Michael knew or had reason to know of the understatement, she does not meet the criteria for streamlined relief. A requesting spouse who satisfies the threshold conditions but not the streamlined conditions may still qualify for relief under the facts and circumstances test. The revenue procedure lists various factors to be considered, and no single factor is determinative. Rev. 1 2 3 4 5 6 7 8 9 10 11 12 Proc. 2013-34, sec. 4.03, 2013-43 I.R.B. at 400-403. The 13 Court considers these factors in the light of all the 14 15 16 facts and circumstances. See Pullins v. Commissioner, 136 T.C. 432, 448 (2011). The factors "are the requesting spouse's (1) 17 marital status; (2) economic hardship if relief is not 18 granted; (3) knowledge or reason to know that the tax 19 liability would not be paid; (4) legal obligation to pay 20 the outstanding income tax liability; (5) receipt of a 21 significant benefit from the unpaid income tax liability; 22 (6) compliance with income tax laws; and (7) mental and 23 physical health." Boyle v. Commissioner, T.C. Memo. 24 2016-87, at *12-*13. See also Rev. Proc. 2013-34, sec. 25 4.03(2). Applying these factors to Ms. Michael is no easy 5E|||H|| $733406-2250|operation5@escribers.net|wwwescribersÃet 13 1 2 3 4 5 6 7 8 9 10 11 12 task. Marital status is easy; she and Mr. Michael are no longer married and this factor weighs in favor of relief. Economic hardship is more difficult. The decree of dissolution of marriage shows that substantial assets (assets that might have otherwise been used to pay the tax liability) were divided between Mr. and Ms. Michael. Her statement of monthly income and expenses, as she reported them on her Form 8857 Request for Innocent Spouse Relief, shows that she spends more than she earns, and that same form shows that she has been borrowing from her parents to 13 make ends meet. This factor weighs in favor of relief. 14 Knowledge or reason to know is not difficult. 15 We have already concluded for purposes of sections 6015(b) 16 and (c) that Ms. Michael had actual knowledge of the items 17 of income that gave rise to the deficiency. For section 18 19 6015(f) purposes, "If the requesting spouse knew or had reason to know of the item giving rise to the 20 understatement, this factor will weigh against relief." 21 Accordingly, this factor weighs against relief. 22 Ms. Michael established that she had a difficult 23 marriage and that she was, at a minimum, bullied by her 24 ex-husband. But the record is also clear that she had a 25 role in the household finances. She actively deposited (9733406-2250|operations@escdbef55det|WWW£5Cribers.net and withdrew from the household bank account. 14 And on the day the Michaels' 2014 return was to be filed, Ms. Michael spoke to the return preparer and emailed her then-husband about not getting information to the return preparer. Their emails back-and-forth show that she was engaged in the return-filing process. The emails show someone who, even though perhaps intimidated, was able to challenge and question her husband about the return. This factor is neutral. Legal obligation is likewise neutral. The decree of dissolution of marriage places liability for the underpayment of tax shown on the original return on Mr. 1 2 3 4 5 6 7 8 9 10 11 12 13 Michael, and he has satisfied that liability. The decree 14 15 is silent as to any possible deficiency of tax. It is clear that Ms. Michael did not receive any 16 significant benefit from the unpaid income tax liability. 17 We will assume that any amount not paid as tax increased 18 the marital net worth, which was ultimately divided 19 between the spouses in the subsequent divorce with Ms. 20 Michael getting her fair share. That share, even if she 21 22 received it, would not be a significant benefit. "Significant benefit" is defined as "benefit in excess of 23 normal support." Rev. Proc. 2013-34 sec. 4.03(2)(e). 24 There is no evidence that either spouse received a 25 significant benefit as a result of the unpaid tax. (We 733406-2250loperations@escribers.net(www.escribers.net note that Ms. Michael speculates that the reduced income 15 shown on the 2014 return might have resulted in less alimony having been awarded to her in the divorce. But this is mere speculation and there is no evidence in the record establishing this to be the case.) Because neither spouse received a significant benefit, this factor is neutral. Compliance with income tax laws weighs in favor of relief; Ms. Michael has complied with the tax laws since her divorce. Lastly, mental and physical health is neutral. There is no evidence of any health issues that would tilt this factor in either direction. We do not simply count up factors, but we 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 consider them in their totality, and taking all of the 16 factors into account, Ms. Michael did not prove that she 17 18 is entitled to equitable relief under section 6015(f). In conclusion, we find that Ms. Michael is 19 entitled to relief from joint and several liability to the 20 extent of the unreported gambling winnings and the 21 accuracy-related penalty attributable to that item. 22 23 24 25 Decision will be entered under Rule 155. (Whereupon, at 9:17 a.m., the above-entitled matter was concluded.) (9733406-2250|opwations@escribetsmet|vmw.escribers.net CERTIFICATE OF TRANSCRIBER AND PROOFREADER 16 CASE NAME: Sara Kay Michael, Petitioner, and Derek C. Michael, Intervenor v. Commissioner DOCKET NO.: 16761-17S We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 16 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Roger Meyers on November 7, 2018 before the United States Tax 1 2 3 4 5 6 7 8 9 10 Court at its session in Oklahoma City, OK, in accordance 11 with the applicable provisions of the current verbatim 12 13 14 15 16 17 18 19 20 21 24 25 reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Meribeth Ashley, CET-507 Transcriber 11/19/18 Date Jessica Hernandez Proofreader 11/19/18 Date sham t973J406-2250|operations@escribersnet{wwwescribers.net