TAX COURT OPINION

Case: Mark M. Hopkins & Kristina S. Cream f.k.a. Kristina S. Hopkins
Docket Number: 12886-09S
Judge: Armen
Opinion Type: bench
Filed: 02/17/2012
Pages: 17

UNITED STATES TAX COURT WASHlWGTON, DC 20217 MARK M. HOPKINS & KRISTINA S. CREAM F.K.A. KRISTINA S. HOPK INS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 12886-09S. ) ) ) ) ORDE R Pursuant to Rule 152(b), Tax C urt Rules of Practice and Procedure, 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 of the above case before Special Trial Judge Rober: N. Armen, Jr. at San Diego, California, on February 9, 2012, containing his oral indings of fact and opinion rendered at the conclusion of the trial. In accordancë with the oral findings of fact and opinion, a decision will be entered under Rule 155. Dated: Washington; D.C. February 17, 2012 (Signed) Robert N. Armen, Jr. Special Trial Judge SGRV£D FEB 2 1 2012 1 Bench Opinion by Speci l Trial Judge Robert N. Armen, Jr. 2 Mark M. Hopkins & Kris ina S. Hopkins Docket No. 12886-09S 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 - 24 25 February . 9, 2012 THE COURT: I. The Court has decided to render oral firïdings of fact and opinion in this case, and the f ollowing kepresent s the Court ' s oral f indings of f act and opinion. The oral fin ings of fact and opinion shall not be relied üpon as precedebt in any other case. See Rule 152 (c) , Tax Court Rules of Practice and Procedure . II. This proceeding was heard as a Small Tax Case pursuant to the provisions of Section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. III. . This bench opinion is made pursuant to the authorit-y granted by S ction 7459 (b) of the Internal Revenue Code of 1986, as amend d, and .Rule 152· of the Tax Court Rules of Practice and Procedure . - Hereinafter 10. this benchs opinion, and unless otherwise indicated,' all section numbers refer to the Internal Revenue Code, as atnended and in effect for 2005, the taxable year in ishue, and all rule numbers refer to the Tax Court Rules of Prabt ice and Procedure. IV. Mark M. Hopkins (individually, Mr. Hopkins) appeared on his own beha¼f, and Kristina S. Cream, formerly known as Kristina S. Hppkins (individually, Ms . Cream) (cid:16)042 Heritage Reporting Corporation (202) 628-4888 3 1 2 3 4 5 6 7 8 9 10 11 appeared on her own behalf. Heather K. McCluskey appeared on behalf of Respondent. V. Respondent determined a deficiency in Petitioners' federal·.income tax for 2005 in the amount of $4,374. VI. In a stipulat.ion between Mr. Hopkins and Respondent .filed April 12, 2010, Mr. Hopkins conceded in full.Respondent's deficiency determination for 2005. At trial. on February 8, 2012, Ms . Cream did not challenge that determination. Accordingly, the only issue for decision by the Couft is whether Ms. Cream is entitled to relief from 12 - join and several liability pursuant to Section 6015(c). 13 14 15 16 17 18 19 20 21 22 23 24 25 VII. Some of! the facts have been stipulated, and they are so found. Petitioners rësided in the State of California at the time that the petition was filed with the Court. Petitioners were married in 19921 They had their first child in 1993, and a second child a few 'years thereafter.· (Parenthetically, we note that Petitioners' household included a third child born to Ms. Cream in a prior marriage. This matter is relevant insofar as the child tax credit, mentioned infra, is concerned.) Petitioners separated in June 2005 and did not live together at any time thereafter. Petitioners were divorced in July12006. 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 Prior to her marriage to Mr. Hopkins, Ms. Cream worked as a hairdresser, a profession that she practiced until her daughter was born in 1993. Thereafter, Ms. Cream was a homemaker and stay-at-home mom. Ms. Cream never obtained any educational credential other than a GED degree. The record does not reveal much about Mr. Hopkins' educati nal and professional background, but he gives the impression of being an educated individual. During 2005, the taxable year in issue, Mr. Hopkins was employed as a sales representative in the medical field and received compensätion in excess of $93 , 0 0 0 . Ms . Cream was not involved in Mr. Hopkins' employment; thus, for example, she did not maintain or keep any records for him related to his business activity. During the marriage, Mr. Hopkins handled all of the couple's finances, and he was the one who made most,. if not all, of the financial decisions. Thus, for example, Mr. Hopkins maintained the family checkbóok. Ms. Cream did have a credit card for her use, but Mr. Hopkins was the one who paid any charges she incurred.. Early in 2006, after the couple had been separated for mor t-han half a y ar, M . Hopkins contacted Ms . Cream about filing a joint rþturn for 2005, the final year of their m rriage. Ms. C eam agreed to do so, but her involvement in the process was strictly limited to signing Heritag Reporting Corporation (202) 628-4888 5 1 2 3 4 5 6 7 8 9 10 11 12 the return at the preparer's office after it had been prepared by him. Ms. Cream did not furnish any documents to the preparer, and she was not given a copy of either the 2005 federal or California return. If she examined either return before signing, 1t would have been in a perfunctory manner. However, it's clear that Ms. Cream knew that both returns claimed tax refunds. Petitioners timely filed their federal income tax return f or 2005. On the return, Petitioners principally reported compensation received by Mr . Hopkins of $93 , 364 . Petitioners itemized their deductions, attaching a Schedule A, "Itemized Deduction , " that claimed, inter alia, 13 miscelläneous deductions in the aggregate amount of. $24, 328, 14 15 16 17 18 19 20 21 22 23 24 25 which anïount consisted of a deduction for unreimbursed employee expenses related to Mr. Hopkins' jobs of $23,938 and a deduction for ta c preparation fees of $390. Petitioliers also claim d a child tax credit of $1, 065 (an amount squal to their tax before such credit) and an additional child tax credit (i.e., a refundable credit) of $1,935. L The return clåimed an overpayment of $9,702 and requested a refund in hat amount. Petitioners a so filed a California state income tax return, but a copy thereof is not part of the record. Nothing is known about that return other than it claimed a refund. Heritagé Reporting Corporation (202) 628-4888 1. 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 Petitioners agree that a California state refund check for 2005 was received by Mr. Hopkins, and that it was deposited into his ban account, and then shared with Ms. Cream. FHowever, the ecord is silent regarding both the amount f the check a d the basis on which it was shared, e.g., 5Ø/50 or otherwise. The record conclusively demonstrates that a federal tax refund check for 2005 in the amount of $9,702 was received by Mr. Hopkins and was negotiated solely by him. Mr. Hopkins contends t at he gave Ms. Cream $1,700 as her share, which he described as being one half of 5/12 (5/12 being approximately the fraction of the year that the couple was married in 2005). In stark contrast,. Ms.oCream contends that.sh received no p rt of the federal tax refund for 2005. In the Spring of 2006, Ms. Cream began contacting the.IRS about what she regarded as a missing refund check for 2005. She ceased her inquiries only after the IRS was able to furnish her with a copy of the refund check that had been negotiated by Mr. Hopkins and that bore his sole endorsement and bank account number. As previouslý mentioned, Petitioners were divorced in July 2006. The divbrce decree entered by the California court was silent about taxes. In October 2006, Mr. Hopkins drafted an "Addendum" Heritage Reporting Corporation (202)·628-4888 7 to Petitioners' marital settlement agreement, which Petitioners both signed. The gist of paragraph 4 of the Addendu appears to represent a relinquishment by Ms . Cream of any claim to the p rties' tax refunds for 2005. Respondent examined Petitioners' federal income tax return for 2005. By otice dated March 11, 2.009, Respondent determirïed a deficiency in income tax of $4,374. The deficiericy is attributable to- the following: (1) the disallowance of all of the miscellaneous - itemized deductions claimed on Schedule A; (2) the disallowance of the additio1ïal child tax credit, which disallowance was tempered by the allowance of a $3,000 child tax credit (i.e., $1,000 for each.of the three children);. and (3) the inclusion in income df an unreported state inconte tax refund of $3, 758 for some taxable year prior to 2005'. . Petitioners timely filed a petition with this Court in May 20 0 9 conties ting Respondent' s de f iciency determination. On April 12, 2010 Mr. Hopkins and Respondent filed a stipulation in which t-he former agreed to the determined deficie cy. Later tha year on October 14, 2010, Ms. Cream filéd ar amendment to etition seeking relief for .the first 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 . 23 time from joint and se eral liability. The following month, 24 25 Ms: Cream submitted to Respondent a Form 8857, "Request for Innocent Spouse Relief, " that was dated November 4, 2010. Heritage Reporting Corporation (202) 628-4888 1 Respondent's Innocent Spouse Unit then reviewed the matter. 2 Ultimatély, on March 30, 2011, the Innocent Spouse Unit 8 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 determi ed that Ms. Cream was entitled to full relief from joint and several lia ility under Section 6015(c). As previousl mentioned, this case came to trial on Februar 8, 2012, in S n Diego, California. At that time, Mr. Hopkins, and only Mr. Hopkins, opposed relief for Ms. Cream ffom joint and several liability under Section 6015(c). VIII. A. . Joint and several liability. In general, spouses may elect to file a joint federal income tax return for a year, even if one spouse has no obligation to file a return f r that year. . Section 6013(a). Spouses typically elect to file ointly because the tax rates applica le. to that filirfg status are generally more advanta eous. See, e. ., Section 1(a), (d). But an electi n to jointly file a federal income tax return has conseg nces. Thus, after electing to jointly file, each p se is jointly and severally liable not on1 for the enti tax due, but also for any deficiency subsequently determined. Section 6013 (d) (3) ; Butler v. Commissioner, 114 T.C. 276, 282 (2000);.·see Section 1. 6Ól3 -4 (b) , Income Tar Regs . In practical terms, " joint and several liabili y" means that although the tax may be collected only once, e ch spouse is respönsible, without 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 9 apportionment between the spouses, for the entire payment of the unpaid portion of the tax. Cluck v._ Commissioner, 105 T.C. 324, 326, note 4 (1995); Pesch v. Commissioner, 78 T.C. 100 (1982) . In turn, this means that the Commissioner may, as he sees fit, collect the tax. from either spouse. Compare Pesch v. Commissioner, supra. B. Relief from joint and several liability. The potential harshness in the general rule of joint and several liabilit y may be ameliorated under certain circumstances . In other words, an individual may be relieved of joint and several liability under Section 6015 if specific requirements are satisfied. There are three types of relief available under Section 6015: In general, Section 6015 (b) provides full or apporti ned felief from joint and several liability, · Section 6015 (c) provides proportionate tax relief to divorced or separat d taxpayers, and in certain circumstances, Section 6015 (f) provides. equitable relief from joint and several liability if relief is not available under Subsection (b) or (c) . In the instant case, we focus solely on the relief provided by- Section 6015 (c) because that. is the type of reliëf c ranted by Respondent, and because Ms . Cream did not, at trial, contend any more broadly. C. Section 6015 (c) . Under Section 6015 (c) if , at the time that a request for relief is filed with the 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 10 Commissioner, the electing spouse is no longer married to or is legally.separated from the spouse with whom she filed the. joint return, then the liability of the requesting spouse for a dëficiency in tax may be limited to the portion of the liabilit y that is properly allocable to her under Section 6015 (d) . In the instant case, Ms. Cream filed her request for relief no earlier than October 2010, in which month she filed the amendment to petition raising the innocent spouse issue. (It should be recalled that Form 8857, "Request for Innocent Spouse Relief , " was not submitted until the f ollowilig month . ) At that t ime , Ms . Cream and Mr . Hopkins had beerl divorced for several years. Therefore, Ms. Cream was eligible, as a matter of law, to elect relief under Section E6015 (c) at the time that she filed the amendment to petitiori; a fortiori, Ms. Cream was eligible at the time that she submitted Form 8857. Generally, items. giving rise to a deficiency on a joint return are allocated between spouses as if separate returns had been filed. Section 6015 (d) (3) (A) ; see also Section 1. 6015-3 (d) (2) , Income Tax Regs . Under the . f lush languag of Section 6015 (a) , any allocation under Section 6015 (d) (3) is made without regard to community. property laws. Charlton v. Comnissioner, T.C. Memo. 2001-76. In the notice of deficiency, Respondent disallowed I-feritage Reporting vCorporation (202) 628-4888 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 all of the miscellaneous itemized deductions claimed by Petitioners on Schedule A of their return. Without regard to the two percent flo r imposed by Section 67 on such deductions, this disal owance involved:. (1) a deduction claimed for unreimburs d employee business expenses of $23,938; and (2) a ded ction claimed for tax preparation fees of $390. The for er deduction is allocable in its entirety to Mr. Hopkins. The latter deduction would seem to be allocable to Mr. Ho kins and Ms. Cream equally. Respondent also determined in the notice of deficiency that Petitioners failed to report on their 2005 return a state income tax refund in the amount of $3,758. This amount would seem to be allocable to Petitioners equally. Finally, in the notice of deficiency, Respondent disallowed an additional child tax credit of $1,935. This amount would seem to be allocable to Petitioners equally. However, Respondent did allow.a child tax credit of $3,000 (i.e., $1,000 for each of three children) in lieu of the 20. $1,065 child tax credi claimed by Petitioners on their 21 22 23 24 25 return. As previously stated; an election to allocate. a deficien y under Section 6015(à) limits the.requesting spouse's liability to that portion of the deficiency- allocabl to the requesting spouse. Section Herita e Pepo ting 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 12 1.6015-3 (d) (1) (i), Inc,ome Tax Regs. It follows, therefore, that no Irelief is available in respect of items allocable to the requesting spouse. i There is yet another matter that may limit relief under Séction 6015(c). Thus, except for a return signed under duress, an election under Section 6015(c) is ineffective with respe t to any portion of a deficiency if the Commissioner prove by a preponderance of the evidence that th requesting sp use had actual knowledge when signing the return of an item giving rise to a deficiency that is otherwise allocable to the non-requesting spouse. Section 6015(c) ( ) (C); Hopkins v. Commissioner, 121 T.C. 73, 86 (2003); Section 1.6015-3(c) (2) (i), Income Tax Regs. In cases involving erroneous deductions or credits, a spouse is deemed to have.actual knowledge of an item giving rise to a deficiency if and only if she had actual knowled e of the factu 1 circumstances that made the deduction or credit unallowable. King v. Commissioner, 116 T.C. 198 204 (2001); Section 1.6015-3 (c) (2) (i) (B) (I) , Income Tax Regs. Actual knowledge of the tax laws or legal consequences of the operative facts is not required. Id.; Cheshire v. Commis sioner, 115 T . C . 183, ! 196--197 (20 0 0 ) , affd. 282 F.3d 326 (5th Cir 2002) . In cases involving omitted income, knowledge of -the item includes knowledge of the receipt of. the income . Heritage Reporting Corpofation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 1.4 15 16 17 18 19 20 21 22 23 24 25 13 Section 1. 6015 -3 (c ) (2) (i) (A) , Income Tax Regs . Thus, the Commissioner must sho that the requesting spouse had an "actual and clear awaréness of the omitted income. " cheshir v. Commissioner, supra .at 195. It bears repeating that- in either context, i.e. either n cases involving erroneous .deductions or credits, or in c ses involving omitted income, actual knowledge . on . the part of the requesting spouse as to the tax laws or legal c neequences of the operative facts is not required. King v. Commissioner, supra at 204; Cheshire v. Commiss oner, _supra a t 195. D. Allocation of the burden of proof. As previously stated, Re ondent has conceded that Ms Cream is entitled to relief un er Section .6015 (c) . Perforce, this concessfon contemplat s a Section 6015 (d) allocation satisfadtory to both f them, given that Respondent has awarded full relief from the deficiency in tax. In contrast , Mr . Hopkins challenges . Ms . Creani' s entitlement to Section 6015 (c) relie f . In this contèxt Mr Hopkins stands in the shoes of the Comnissioner because it is Mr. Hopkins, and not- the Commissi ner, who is challenging Ms. Cream's entitlement to proportionate s tax eliëf under Section 6015 (c) . This méans that VIr. Hopkins bears the burdën under Sectiòn 6015 (c) (3) (C) of proving that Ms . Cream had actual knowledge Hérit{age Reporting Corporatiòn (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 at the tdime she signed the return of any item giving rise t.o the def ciency (or portion thereof) that is not allocable to Ms . . Cream, e . g . , the $23, 938 deduction f or unreimbursed employee .expenses allocable t-o Mr. Hopkins' employment in 2005. in like vein, and to the extent that omitted incomë factors into the deficiency determination, Mr. Hopkins bears the burden of proving that Ms . Cream had an "actual and clear a areness of the omitted income." Cheshire v. Commiss oner, supra at 195. In contrast, Mr. Hopkins would bear no burden in respect of thàse items giving rise to the deficiency that are properly allocable to Ms. Cream, as she is not, as a matter. of law, entitled tot reliëf to that extent . E. Application of the burden of proof . We hold that Mr. Hopkins did not satisfy his burden of proof . Thus for example, although Ms. Cream certainly knew that .Mr. Hopkins was employed, and .although she inay have known (an perhaps reasonábly should have known) . that employment- related expenses related tò Mr. Hopkins' jobs were claimed as itemized deductions on Schedule A, Mr. Hopkins addu ed no svïdence that Ms . Crean+hád actual knowledge (rather thàn mere reason to know) of. the factual circumstances that made such e ucti ns unal awable. (The same m y bë said of the portion of the additional child tax credit allocable to Mr. Hopkins that was disallowed. ) Indeed, Ms . Cream maintained Heritage Reporting Corpoiration (202) 628-4888 15 no reco ds for Mr. Hopkins, and she was,. at best, only periphe ally in the preparation of the 2005 return. Similarly, and insofar as that portion of the unreport ed tax refund not allocable to Ms .. Cream is concerndd, Mr . Hopkins adduced no evidence that Ms . Cream had an "actual and c ear awareness of the omitted income." F. Conclusion. We are satisfied that Ms. Cream is entitled to relief un er Section.6015(c), but we are unable to decic e whether she is entitled to full relief, as determired by. Respond nt's Innocent Spouse Unit, because the record c oes not inclu e Respondent' s allocation computation under Sèction 6015 (d) Further, as discussed previously, certain items seem to be equally allocable to Mr. Hopkins and Ms. Cream. Accordingly, we leave it to the parties as part of the Rule 155 rocess to perform the. requisite computation necessary to demonstrate whether Ms . Cream' s relief s appropriately full or merely partial. See Section 1.6015-3 (d) (4) , Income Tax Regs . IX. Finally, a postscript. To.the extent that the parties dispute rega ding the disposition of the federal tax refdnd for 20 5 m y be relevant to ;the disposit ion of this cas!e, and we question whether that matter is germane given that our focus in thisk case is exclusively on proportionate relief inder Section 6015 (c) we concludelhat the evicience is too ir:conclusive to find as a fact that Mr. Heritac e Reporting Corporation (202) 628 4888 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 . 16 1 2 3 4 5 6 Hopkins shared that particular refund with Ms . Cream. The evidence clearly demonstrates that a federal tax reftnd was receive by Mr. Hopkins and negotiated by him. Although he adamantly insists that he gave Ms. Cream $1,700, Ms. Cream denies, equally adamantly, that she receive any part of t e federal refund (as opposed to the 7 Califorr ia state refund, which she. admits receiving in 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 part). We note that..$1,700 is not one half of the refund, nor is t one half of 5/12 (the amount Mr. Hopkins (cid:16)042 identif ied as the appropriate split). In short, .the $1,700 amount ears no discernible relationship to anything. Further, although Mr. Hopkin agreed that a California state tax reftnd was received and shared, he was unable to provide any particulars. Moreover, although the record includes a copy of a $1, 700 check draún by Mr. Hopkh.ns and made payable to Ms . C ream, it was not conclusively demonstrated that this check was in fact negotiated, as (1) no endorsement was shown, (2) no magnetic numerals appear in the lower right- hand co2 ner öf the che k, ånd (3) no monthly bank statement was. pro uced showing $1,700 debit to Mr. Hopkins' account. Finally one must wonder why (1) Ms. Cream would have ma e such a Herc lean effort during the Spring of 2006 to trac dówn with the IRS what seemed to her to be a 24 missing tax.return for 200.5 if Mr. Hopkins had previously 25 shared it with her, and why (2) Mr. Hopkins would have Heritage Reporting Corporation (202) (cid:16)042 628-4888 1 2 3 . 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 17 drafted the addendum in October 2006 wherein Ms. Cream appears to relinquish her claim to the parties' tax refunds for 2005. X. In order to give effect to our disposition of the dis uted 1ssue, decision will be entered pursuant to Rule 155. XI. This. concludes the Court's oral findings of fact an opinion in this case. (Whereupon, at 10:56 a.m., the bench opinion in the above entitled matter was concluded.) // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888