TAX COURT OPINION

Case: Annette E. Hagemeyer, Petitioner, and Jeffrey R. Hagemeyer, Intervenor
Docket Number: 17476-10S
Judge: Holmes
Opinion Type: bench
Filed: 07/22/2011
Pages: 13

UNITED STATES TAX COURT WASHINGTON, DC 20217 ANNETTE E. HAGEMEYER, PETITIONER, AND JEFFREY R. HAGEMEYER, INTERVENOR, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Re spondent . ) ) ) ) ) ) ) ) ) Docket Nos. 17476-10S O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of transcript of Holmes at Aberdeen, South Dakota, on June 7, 2011, containing his oral of trial. fact and opinion rendered after the conclusion the above case before Judge Mark V. the pages of the the trial of findings of In accordance with the oral findings of fact and opinion, a decision under Rule 155 will be entered. Dated: Washington, D.C. July 22, 2011 (Signed) Mark V. Holmes Judge SERVED JUL 2 5 2011 BENCH OPINION BY JUDGE MARK V. HOLMES June 7, 2011 3 Hagermeyer v. Commissioner Docket No.: 17476-10S THE COURT: In the case of Annette E. Hagemeyer, 1 2 3 4 5 Petitioner, and Jeffrey R. Hagemeyer, Intervenor v. 6 7 8 9 10 11 Commissioner, 17476-10S, the Court has decided to render oral.findings of fact and opinion,.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 12 Court's Rules of Practice and Procedure. 13 14 15 16 In this somewhat unusual case, the IRS agrees that Mrs. Hagemeyer is entitled to relief. It is Mr. Hagemeyer who disagrees and has intervened to oppose relief. The case arises from their 2004 joint return. 17 Mr. and Mrs. Hagemeyer filed their joint return in a 18 19 20 21 22 23 24 25 timely fashion. The tax shown on the return was $8,496, but no payments were made with the return. Most of that balance, however, was from Mr. Hagemeyer's own Schedule C trucking business. During that year, he was a self- employed long-haul truck driver. He also had a gambling problem and would take money from his paychecks before sending the rest home for Mrs. Hagemeyer to spend on household expenses. I believe her that those finances Heritage Reporting Corporation (202) 628-4888 1 were always a concern for her in the dying years of her 2 marriage. 3 4 5 6 7 8 9 10 11 12 13 Her involvement in the tax preparation was limited to preparing W-2s and -- or bringing W-2s and 1099s to the couple's accountant and then signing the returns. Mr. Hagemeyer told Mrs. Hagemeyer that he had made his estimated tax payments, but she did not confirm that any payments had been made and the accountant apparently would not speak to her. Mr. Hagemeyer would repeatedly tell her that he would take care of the problem, but, of course, he never did. Nor had he in the past: the couple had filed returns in 2000, 2002, and 2003 that also showed balances owing and included no payments 14 with the returns. 15 16 On a personal level, Mrs. Hagemeyer has some college education, but she currently makes a little bit 17 more than $10 an hour working at a hospital in Sioux 18 Falls. She filed her return for the subsequent year, 19 20 2005, while they were still married, using married filing separate status. She evidently was fleeing this 21 particular sinking ship. She was entitled to a refund 22 23 24 25 that year. She did file her 2006 through 2009 returns late, but she was also entitled to refunds in each of those years and was qualified for the earned income credit because her income was so small and she still had at least Heritage Reporting Corporation (202) 628-4888 5 1 2 3 4 5 6 7 8 9 one minor child still in the house. She also did not allege that she was abused during the marriage, nor did she claim that she was suffering from any mental or physical health problems either at the time she filed the returns or at the time of trial. As I said, the IRS counsel reviewed Mrs. Hagemeyer's case and determined that she met all the factors to be granted relief under IRC section 6015(f), except that she was not tax compliant when she filed her 10 request for relief and that she did not have a reasonable 11 belief that the taxes would be paid at the time she signed 12 13 14 15 16 17 18 19 20 21 the return. The IRS initially denied relief on the basis of those two factors. When the case was ready for trial, IRS counsel switched sides and concluded that relief was available to Mrs. Hagemeyer under these same circumstances. If somebody, say a deputy commissioner, is looking at this bench opinion in Washington after it gets transcribed, it might be interesting to inquire whether the IRS position is that it is their counsel's office or the IRS appeals office to which the Court owes deference. But that is, as of now, an academic question, because my 22 Court has concluded, in Porter v. Commissioner, 132 T.C. 23 24 203, that the Court will review a request for innocent spouse relief under section 6015(f) de novo. Moreover, it 25 will do so on the basis of the record assembled at trial Heritage Reporting Corporation (202) 628-4888 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 or admitted into evidence. That too is Porter v. Commissioner, 130 T.C. 115. My analysis follows the general analysis that is almost always followed in innocent spouse cases. Section 6015(f) provides an individual relief from joint and several liability if after taking into account all the facts and circumstances it is inequitable to hold the individual liable for any unpaid tax or deficiency. Revenue Procedure 2003-61 prescribes the guidelines for determining whether an individual qualifies for relief under section 6015(f). That revenue procedure sets forth seven threshold conditions that the requesting spouse must satisfy in order to be eligible. If a requesting spouse satisfies the threshold requirements of that revenue procedure, a taxpayer may be entitled to a safe harbor 16 wherein equitable relief under 6015(f) will ordinarily be granted. 17 18 Nobody.disputes here that Mrs. Hagemeyer meets 19 all seven threshold conditions, so she is at least 20 eligible, but does not meet the three safe-harbor 21 22 23 24 25 conditions. That leads us to the eight nonexclusive- factor tests set forth in the revenue.procedure at section 4.03(2) that the Commissioner and the Court will consider in determining whether, in taking into account all the facts and circumstances, relief under section 6015(f) Heritage Reporting Corporation (202) 628-4888 7 1 should be granted. These nonexclusive factors include 2 whether: (1) the requesting spouse is separated or 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 divorced from the nonrequesting spouse; (2) the requesting spouse will suffer economic hardship without relief; (3) the requesting spouse did not know or have reason to know that the nonrequesting spouse would not pay the liability; (4) the requesting spouse had a legal obligation to pay the outstanding liability; (5) the requesting spouse received a significant benefit from the item giving rise to the deficiency; (6) the requesting spouse had made a good-faith effort to comply with income tax laws in subsequent years; (7) the requesting spouse was abused by the nonrequesting spouse; and (8) the requesting spouse was in poor mental or physical health when signing the return or requesting relief. No single factor is determinative, and the Court and the IRS are supposed to consider all relevant factors. See Downs v. Commissioner, T.C. Memo. 2010-165. Going through these factors, the first is 20 marital status: whether the requesting spouse was divorced 21 22 23 24 25 from the requesting spouse. Nobody disputes that the Hagemeyers were divorced. That factor counts in her .favor. Second factor is economic hardship: whether the requesting spouse.would suffer economic hardship if the Heritage Reporting Corporation (202) 628-4888 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Service does not grant relief from the income tax liability. The appeals office concluded that given the extremely small income that Mrs. Hagemeyer makes she would suffer economic hardship if she suddenly had to cough up nearly a third of her gross income in the form of past due taxes. The Court agrees with this determination as well. The third factor is knowledge or reason to know. And in a case like this, called an underpayment case because there was no notice of deficiency and no deficiency, there was just a failure to pay the tax that was shown on the Hagemeyer's return, in such a case the revenue procedure tells us that the knowledge factor that counts is whether the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the income tax liability. Here again I agree with the IRS and IRS counsel that this is a factor that weighs against Mrs. Hagemeyer. The couple had been in tax trouble for several years prior, with Mr. Hagemeyer not sufficiently 19 withholding money from his small business to be paid or to 20 21 22 23 24 25 have sufficient money paid for their taxes in each year. She knew this. Mrs. Hagemeyer knew this. And I find actual knowledge in this case. However, the fourth factor gets back in Mrs. Hagemeyer's favor. That factor is the nonrequesting spouse's legal obligation. And the revenue procedure Heritage Reporting Corporation (202) 628-4888 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 states: "Whether the nonrequesting spouse had a legal obligation to pay the outstanding income tax liability pursuant to a divorce decree. This factor will not weigh in favor of relief if the nonrequesting spouse knew" -- I'm sorry -- "This factor will not weigh in favor of relief if the requesting spouse knew or had reason to know, when entering into the divorce decree, that the nonrequesting spouse would not pay the income tax liability." Here the divorce decree was entered into evidence both below and in this Court, and it clearly shows that it was Mr. Hagemeyer who agreed to assume the couple's IRS debts. And there is no indication, and I believe Mrs. Hagemeyer when she says it, that that divorce decree was entered into because the couple knew that Mr. Hagemeyer did not have sufficient resources to pay the outstanding tax debt. So, again, this factor favors Mrs. Hagemeyer. The next factor is significant benefit: whether 19 Mrs. Hagemeyer received a significant benefit beyond 20 normal support from the unpaid income tax liability. 21 Given the couple's precarious economic situation, in part 22 23 24 25 caused by Mr. Hagemeyer's personal habits, I find no significant benefit here, again agreeing with the IRS below and with IRS counsel in this case. Finally, there is the compliance with income tax Heritage Reporting Corporation (202) 628-4888 10 1 laws: whether the requesting spouse made a good-faith 2 effort to comply with income tax laws in the taxablë years 3 4 5 6 7 following the taxable year for which the request for relief relates. Here again I agree with IRS counsel, if not the Government below. Mrs. Hagemeyer did not file all her tax returns on time from 2006 to 2009, but in each case she had overwithheld from her wage income so the 8 Government wasn't out any money. Moreover, she qualified, 9 when she finally did file those returns, for the earned 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 income tax credit, so small was her income in relation to her family needs. So I do not weigh that factor, tax compliance, at all heavily, and agree with IRS counsel, if not IRS Appeals, on that point. That leaves us with one negative factor, a key factor for relief in many cases, the degree. of knowledge that Mrs. Hagemeyer had at the time she signed the return back in 2005. Here, as to the weight that I need to give this, I look to the case called DeMattos v. Commissioner -- this is D-E-M-A-T-T-O-S -- T.C. Memo. 2010-110, a useful comparison to Mrs. Hagemeyer's case. In the DeMattos case, the requesting spouse, the wife in that couple, knew of a deficiency that was on the return. She did not prepare the return herself, but she knew about the deficiency. In that case, the Court concluded that the Heritage Reporting Corporation (202) 628-4888 11 1 2 3 revenue procedure in section 4.03(2) (a) (iii) (B) provided that in a deficiency case the reason to know of the item giving rise to the deficiency will not be given more 4 weight than other factors but that actual knowledge of the 5 6 7 8 9 item weighs heavily against relief. So, in that case, the Court, following the revenue procedure, found that actual knowledge precluded relief in a situation remarkably similar on the other factors to Mrs. Hagemeyer's. But, of course, this is not 10 a deficiency case. It is an underpayment case. And that 11 makes a difference. The IRS having concluded in its 12 13 14 15 16 17 18 19 20 21 revenue procedure that actual knowledge is a factor that weighs heavily against relief in the case of a spouse who knows of a deficiency but doesn't report it, the Court concludes that in underpayment cases the factor of actual knowledge weighs less against relief. That being the case, all the other factors weigh in Mrs. Hagemeyer's favor. And as.with all multiple- factor tests, the Court is faced with the question of what do I.really look at to determine if relief is appropriate. And as with all multiple-factor tests, different judges 22 will cobble together different things. What this division 23 24 25 of the Court looks for is whether the taxpayer for the tax year in question at the time the return was signed should have realized that jointness in the family's finances had Heritage Reporting Corporation (202) 628-4888 12 1 2 3 4 5 6 7 8 9 broken down and should have gone off and started to separate her finances. I don't find that that occurred quite yet. She obviously began filing separately after that most recent year in 2004, but I do find that she behaved reasonably under the circumstances in signing the joint return and under these circumstances look instead to the divorce decree to allocate what the respective responsibilities of the spouses should be. The divorce decree here clearly anticipated that Mr. Hagemeyer would 10 assume this particular debt. It says: "The defendant," 11 meaning Mr. Hagemeyer, "shall assume and pay and be solely 12 13 14 15 responsible for the balance of the indebtedness owed to the I-nternal Revenue Service for income taxes and self- employment taxes associated with the defendant's business or owed by the parties and the defendant shall hold the 16 plaintiff harmless from said indebtedness." 17 18 19 20 21 22 23 24 25 Now, in light of this rather stark language in the divorce decree, Mr. Hagemeyer gave as his reason to intervene and oppose relief in this case the following: "We were married at the time, filing joint returns, and it was petitioner's responsibility to file the 2004 1040 return. To the best of my knowledge and belief, the income reported in the 2004 1040 return was comprised of both my income and petitioner's income. Petitioner is equally responsible for the tax obligation on the 2004 Heritage Reporting Corporation (202) 628-4888 13 1 2 3 4 5 6 7 8 return as I am." But I find that they are not equally responsible -- as did the State judge, who decided the divorce decree that I read already. And even if -- and in this case in particular, because of that divorce decree, relief would not really help Mr. Hagemeyer, or denying relief would not actually help Mr. Hagemeyer much because he has agreed as a matter of State law to hold his wife harmless. So any 9 money the IRS takes to pay their joint debt from Mrs. 10 Hagemeyer would then be something she could get back from 11- Mr. Hagemeyer, making it all a wash. 12 13 14 15 16 17 18 19 20 21 Again, I conclude with IRS counsel in this case, if not with IRS Appeals, that Mrs. Hagemeyer is entitled to relief from joint liability for the 2004 tax year. It is decided that petitioner is entitled to relief under Internal Revenue Code section 6015(f) from her unpaid Federal income tax liability for 2004, except for the income tax owed on Schedule C income of $2,035 and her share of the couple's still joint rental income of $680. That will require a bit of a computation, and I hope the Government will come up with a decision document 22 which all can agree on. So I will put this one on the 155 track. 23 24 25 What are 90 days from now, Mr. Porras? THE CLERK: Ninety days from today's date would Heritage Reporting Corporation (202) 628-4888 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 14 be September 5th -- which I believe is a Monday. So September 6th -- and a holiday. THE COURT: September 6th it is. And on or before September 6th, we'll issue -- or we'll issue an order calling for the submission of proposed decision documents on or before September 6th. This concludes the Court's oral findings of fact and opinion in this case. . (Whereupon, at 9 : 34 a . m. , the . bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // f_/__ Heritage Reporting Corporation (202) 628-4888