TAX COURT OPINION

Case: Catherine R. McDougall, Petitioner, and Thomas McDougall, Intervenor
Docket Number: 2986-13
Judge: Holmes
Opinion Type: bench
Filed: 11/26/2014
Pages: 13

UNITED STATES TAX COURT WASHINGTON, DC 20217 CATHERINE R. McDOUGALL, AND Petitioner, THOMAS McDOUGALL, Intervenor, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 2986-13. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith the pages the transcript of intervenor and to respondent a copy of to petitioner, of Mark V. Holmes at Phoenix, AZ, on September 29, 2014 containing his oral session at which the case was heard. the trial in the above case before Judge findings of fact and opinion rendered at the trial In accordance with the oral findings of fact and opinion, an appropriate decision will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. November 26, 2014 SERVED DEC - 4 2014 Capital Reporting Company 3 1 2 Bench Opinion by Judge Mark V. Holmes September 29,2014 3 Catherine R. McDougall, Petitioner, and 4 5 6 Thomas McDougall, Intervenor v. Commissioner Docket No. 2986-13 THE COURT: In the case of Catherine R. 7 McDougall, Petitioner and Thomas McDougall, 8 9 Intervenor, Docket No. 2986-13, the Court has decided to render Oral Findings of Fact and Opinion and the 10 following is the Court's Oral Findings of Fact and 11 Opinion. 12 13 14 15 16 This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's Rules of Practice and Procedure. The parties of this case were Ms. Catherine 17 McDougall, who is the Petitioner in the case; the 18 19 20 21 22 23 24 Respondent, the Commissioner of the Internal Revenue; and the Intervenor, Thomas McDougall, who was the forger husband of Mrs. McDougall. The parties were able to reach a stipulation and in combination with the testimony in this case that constitutes the record of the case. Everyone involved was a resident of Arizona at the time Mrs. McDougall filed her 25 petition. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 The case is a little bit unusual in that the Petitioner, Ms. McDougall, and the Respondent, the IRS, agreed that she should be allowed relief, and permitted relief of the money that she paid to satisfy the couple's tax liability. So it was only the Intervenor, Mr. McDougall, who contested the relief. Appellant venue, with us being the 9 9 Circuit. See section 7482. Appellant jurisdiction 10 11 12 13 14 of appeal by Mr. McDougall, however, might be a problem. See Baranowicz v. Commissioner, 432 F.3d 972, 976 (9th Cir. 2005), dismissing appeal, T.C. Memo. 2003-274. This case also involves a refund, the 15 Petitioner having paid half of the couple's 16 17 18 19 20 21 22 23 24 25 outstanding tax debt from the proceeds from the sale of their marital home. Let me start at the beginning here. Spouses who file joint returns are jointly and separately liable for the tax owed. See section 6013(d)(3). Section 6015 provides three ways out of this joint liability. See section 6015(b),(c),(f). These subsections address the same general problem but differ in important ways. Relief under subsection F is available for a spouse who shows that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 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 "taking into account all the facts and circumstances it is inequitable to hold her liable for any unpaid tax or any deficiency or any portion of either." In routine subsection F cases where the requesting spouse challenges the Commissioner's denial of relief the allocation of the burden of proof places it on the parties who are adverse to each other. But a problem arises in section 6015 cases when the Commissioner favors relief and the non-requesting spouse intervenes to oppose it. See section 6015(e)(4); Rule 325; see also King v. Commissioner, 115 T.C. 118 (2000), Corson v. Commissioner, 114 T.C. 354, 363. In these cases the Commissioner isn't adverse to the petitioning spouse any longer so if the intervenor has intervened to oppose relief relying on any of the three exceptions listed in section 6015, there's a good chance that we would place the burden of proof on him to convince us that the requesting spouse is not entitled to relief. We don't need to decide that today because both parties produced evidence and we can just decide the issues on who persuaded us by a preponderance of the evidence. The standard of review and scope of review 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 are both de novo. What that means is that I'll reach my decision on the basis of what happened at the trial in front of me without deference to the administrative record compiled by the IRS. The scope of review is also de novo which also means that I don't give any deference to what the IRS found during the administrative part of these proceedings. See Porter v. Commissioner, 132 T.C. 203, 210 (2009). The basic facts here are easy to state. The McDougall s were married in December, 1990, in Las Vegas, Nevada. They resided in Iowa from the time of their marriage until July, 2002, when they 13 moved to Arizona. In that year the McDougall's 14 15 16 17 18 19 bought a home in Paradise Valley, Arizona for them and their four children to live in. They lived together in that home until their separation. During 2006 a commercial property in Iowa City was sold to Johnson County, Iowa in a condemnation sale. This property was owned by a partnership in which Mr. 20 McDougall was a partner before the marriage, i.e. it 21 22 23 24 25 was not community property. The McDougall's filed a joint 2006 income tax return which they both signed. That return, however, did not report the gain from the condemnation sale, but rather included a statement 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 that the McDougall's received $588,679 of gross proceeds from the sale, that their tax basis in the property was $17,500, that the closing costs were $27,250 and that the total gain associ'ated with this condemnation sale was $543,929. This statement also indicated that the McDougalls had elected to defer the gain and to replace the property within the required three year period. The McDougalls also filed a 2007 joint income tax return which they both signed. That return reported a capital loss carry forward from the 2006 return. In 2009 their separation began when 13 Mrs. McDougall filed a petition for divorce just 14 15 16 17 18 19 20 21 22 23 24 25 before the replacement property wodld have had to be bought and put into service. The couple missed the deadline for placing any replacement property into service. Instead, on April 15, 2010, Mr. McDougall filed an amended 2006 return reporting the gain from the sale of that Iowa City property. This amended return showed an additional $101,501 of tax due as compared to the original return. He also filed an amended 2007 return removing the loss carry forward from 2006 which had been eliminated by reporting the gain from the sale of the Iowa property as of 2006. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 However, Mr. McDougall made no payments for the 2006 or 2007 additional liabilities that he reported on these amended returns. Mrs. McDougall did not sign either of the amended returns. The Commissioner accordingly assessed the increased tax on the amended returns and ultimately filed a federal tax lien in Maricopa County, Arizona in October, 2010, with respect to the McDougal unpaid tax liabilities for 2006 and 2007. This would present an obvious problem if the marital residence needed to be sold as part of the divorce and, indeed, a decree of the dissolution of the McDougall s 13 marriage was entered in March of 2011. That decree 14 15 16 17 18 19 20 21 22 23 24 25 stated that the McDou.gall had an equal interest in the Paradise Valley home. The McDougall' then sold that home in June 2011. On the date of the sale the title company wrote two checks to the United States Treasury, each in the amount of $73,138. One check ported to be a payment from Mrs. McDougall and the other from Mr. McDougall. These two checks when combined fully paid the 2006 and 2007 tax liabilities. The federal tax lien was thereupon released. Mrs. McDougall filed for relief under section 6015. The IRS granted her relief but not a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 refund. She filed a timely petition to challenge that decision but while the case was pending the Commissioner conceded beforehand that she was entitled to a refund. Let me turn to the legal analysis now. It's customary, first of all, to apply the factors and use the method of the Revenue Procedures issued by the IRS. The Revenue Procedure here is Revenue Procedure 2013-34, which I will follow with the single exception that I generally look at the situation of the married couple or formerly married couple as of the time of trial, rather than at the time of any of the administrative proceedings, unless there's a good reason to do otherwise. That Revenue Procedure begins by setting forth several conditions that are necessary for equitable relief. The first is that the requesting spouse file a joint return for the taxable year for 19 which she seeks relief. The second is that relief is 20 21 22 not available to her under sections 6015(b) or (c). And the third is that the claim for relief is timely filed. None of these three factors are a problem for 23 Mrs. McDougall here. She signed the original joint 24 25 returns. Relief is not available to her under (b) or (c) and she timely filed her petitions. In addition, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 no assets were transferred between the spouses as part of a fraudulent scheme. Mr. McDougall did not transfer assets to Mrs. McDougall. Mrs. McDougall did not knowingly participate in the filing of a fraudulent tax return. And the tax liability from 6 which she seeks relief is attributable to an item of 7 Mr. McDougall's. The Iowa City property proceeds I 8 9 10 11 12 13 14 15 16 17 find are attributable to Mr. McDougall because this was his separate property. So I have to conclude that all the threshold conditions for innocent spouse relief are met. Now section 402 of the Revenue Procedure sets out provisions for what is called streamlined relief. Streamlined relief is available if a requesting spouse meets several conditions. The first is that she is no longer married to the non- requesting spouse. The McDougalls are no longer 18 married, so Mrs. McDougall meets that factor. The 19 20 21 22 23 24 25 second is that the requesting spouse would suffer economic hardship if relief were not granted as set forth in section 4.03 (2)(e). This is an easy factor for Mrs. McDougall to meet on the facts of this case. She has next to no savings and the disputed tax debt is more than twice her annual income even in her most recent year which was a fairly high earning year for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 her. It would clearly cause economic hardship for her to have to pay this half of the debt. The third factor for streamlined relief is knowledge or reason to know. Here the question is 5 whether Mrs. McDougall did not know or have any 6 7 8 9 10 11 12 13 14 reason to know that there was an understatement or deficiency on the joint income tax return. I find that she did know about the Iowa City property's existence and its sale but she did not know of the non-replacement of that property when she signed the original return. That non-replacement, which is after all what triggered the additional tax, did not occur for several years after she signed the return. Moreover, I find that Mr. McDougall 15 maintained control over the household finances by 16 17 18 19 20 21 22 restricting Mrs. McDougall's access to financial information. And because of this extreme degree of financial control Mrs. McDougall was not able to challenge the treatments of the items on the joint return or the failure to replace the property with a new property. I found in this regard that Mr. Brown's testimony, the forensic accountant, was 23 particularly persuasive. 24 Moreover, Mrs. McDougall had a fear of Mr. 25 McDougall's retaliation. He wasn't physically 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 abusive but he was clearly quite controlling. In any event, he was especially controlling about the couple's finances which he seemed to keep quite secret. And this financial control also buttresses my finding that the factor of Mrs. McDougall not knowing about what triggered this gross understatement of tax. Even if she had reason to know the Iowa CityNg property, the shady practices of 9 Mr. McDougall are a reason to doubt even some of the 10 11 12 13 14 paper records in this case that he presented. And further)rhuttress my finding that Mrs. McDougall had no reason to know of the trigger for this understatement of tax. So my conclusion is that Mrs. McDougall 15 meets each of the conditions for streamlined relief 16 17 18 19 and I agree with the IRS and find de novo that she is entitled to relief under section 6015(f). That leaves only the question of whether she is entitled to a refund. The rules are a bit 20 different here. The Revenue Procedure in section 21 4.01(b) states that claims for refund of amounts paid 22 must be made before the expiration of the period of 23 24 25 limitation on credit or refund, as provided in section 6511. Generally that period expires three years from the time the return is filed or two years 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 from the time the tax is paid, whichever is later. Here, Mrs. McDougall filed for innocent spouse relief at about the same time that the tax was paid. So she 4 meets this condition for a refund. 5 6 7 8 9 There is another condition for the refund found in the Revenue Procedure at section 4.04. It says, "a requestive spouse is eligible for the refund of separate payments...if the requesting spouse establishes that the funds used to make the repayment 10 for which a refund is sought were provided by the 11 12 13 14 15 16 17 18 19 20 21 22 23 requesting spouse." The key word here is provided. Again, I have to find that Mrs. McDougall meets this standard in Exhibit 6-J of the stipulation one can find the divorce decree here, which says in paragraph 8 that, "by operation of law the marital community is deemed to have terminated on August 12th, 2009, the date the petition for dissolution was served on husband." Under paragraph 10 of the divorce decree the title in the marital home was retitled to tenants in common before the sale to a third party. And the proceeds were divided in keeping with that new legal description. I agree with the Government and Mrs. 24 McDougall that the proceeds from the sale are not 25 community property but rather the separate funds of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 5 each spouse. And so when her share of the joint tax liability was paid for out of her funds she provided them, to quote from the Revenue Procedure, from her own property. My conclusion, again, here is that I agree 6 with the Commissioner and Mrs. McDougall that she is entitled to a refund. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 10:23 a.m., the above- entitled matter was concluded.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com