TAX COURT OPINION

Case: Jennifer Darlene Hall
Docket Number: 16251-10
Judge: Gustafson
Opinion Type: bench
Filed: 04/22/2011
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 JENNIFER DARLENE HALL, KVC Petitioner, v. ) Docket No. 16251-10. COMMISSIONER OF INTERNAL REVENUE, Respondent 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 Gustafson at Baltimore, Maryland, on April 13, 2011, containing his oral of in the above case before Judge David fact and opinion rendered at the pages of the the conclusion the trial findings of the trial. In accordance with the oral findings of decision will be entered for the respondent. fact and opinion, (Signed) David Gustafson Judge Dated: Washington, D.C. April 22, 2011 SERVEDApr222011 3 Bench Opinion by Judge David Gustafson April 13, 2011 Jennifer Darlene Hall v. Commissioner Docket No. 16251-10 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in this case. The following represents the Court's oral Findings of Fact and Opinion, which shall not be relied on as precedent in any other case. 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 Rules of Practice and Procedure. PROCEDURAL BACKGROUND On November 4, 2009, petitioner Jennifer Darlene Hall submitted to the Internal Revenue Service (IRS) a Request for Innocent Spouse Relief; and at the request of the IRS she submitted an updated request on January 13, 2010. On May 25, 2010, the IRS issued to Ms. Hall a determination letter denying her request for relief. On July 19, 2010, Ms. Hall filed a timely petition with this Court, seeking our review of that determination. At the time she filed her petition, Ms. Hall resided in Maryland. Trial in this case was held April 11, 2011, 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 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 4 in Baltimore, Maryland. The parties' Stipulation of Facts, with Exhibits 1-J through 8-J, and their Supplemental Stipulation of Facts, with Exhibit 9-P, were admitted into evidence. Ms. Hall was the only witness who testified, and she was candid and credible. Nonetheless, on the facts proved at trial, we must hold in favor of the IRS and deny Ms. Hall the relief she seeks. FINDINGS OF FACT In the year 2004 Ms. Hall received $665 in interest and taxable social security benefits. She was married at that time to Mr. Richard Hall, but she received these amounts individually, i.e., not jointly with Mr. Hall. More significant, she also received in that year $93,913 as the beneficiary of her late father's pension. Mr. Hall was not a co-beneficiary with her. The pension proceeds were deposited into an account that Ms. Hall owned individually and not with Mr. Hall. Along with her son and daughter (and not Mr. . Hall), Ms. Hall inherited from her father his house, which was subject to a mortgage for which a balloon payment was soon due. Ms. Hall made this balloon • payment using the pension proceeds. (Ms. Hall and her children still live in this house, and Mr. Hall does Heritage Reporting Corporation (202) 628-4888 5 not.) Ms. Hall and Mr. Hall used some of the pension proceeds to go on vacations to Jamaica and to the Bahamas. Ms. Hall and Mr. Hall filed a joint tax return for 2004. In doing so, they were poorly advised by an accountant that the pension proceeds were not taxable. Consequently, when they filed their joint tax return for 2004 they did not report on it the pension proceeds. (They also did not report the $665 of other income that Ms. Hall received.) The IRS determined that the omitted income was taxable, and in March 2007 it assessed against them additional tax of $15,156 and an accuracy-related penalty of $3,031. Ms. Hall and Mr. Hall were divorced in May 2008. Their divorce decree provides that each spouse would pay half of the back taxes. However, the IRS has evidently collected only from Ms. Hall and not from Mr. Hall, who seems to have little means and whose employment has apparently been irregular. In November 2009 both former spouses agreed to a consent order providing that Mr. Hall would be solely liable for the 2004 tax debt. However, the IRS has not collected from Mr. Hall and continues to collect from Ms. Hall by garnishment of her wages. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Heritage Reporting Corporation (202) 628-4888 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In March 2010 Ms. Hall filed her petition seeking to be relieved from the joint liability. In May 2010 the IR$ denied that request. However, the IRS now stipulates that she will suffer economic hardship if the Court does not grant her relief. I. Standard and scope of review OPINION When determining whether a taxpayer is entitled to relief under section 6015, we conduct a trial de novo. Porter v. Commissioner, 130 T.C. 115, 117 (2008) (Porter I). We do not review for abuse of discretion but instead employ a de novo standard of review. Porter v. Commissioner, 132 T.C. 203 (2009) (Porter II). Except as otherwise provided in section 6015, the taxpayer bears the burden of proof. See sec. 6015(c) (2); Rule 142(a). II. Joint and several liability and section 6015 relief generally Section 6013(d) (3) provides that when taxpayers file a joint return, the tax is computed on their aggregate income, and their liability to pay the tax shown on the return or found to be owing is joint and several. That is, each spouse is liable for the entire joint tax liability. Section 6015 provides three types of relief Heritage Reporting Corporation (202) 628-4888 7 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 from joint and several liability: (1) full or apportioned relief under section 6015(b); (2) proportionate relief for divorced or separated taxpayers under section 6015(c); and (3) equitable relief under section 6015(f) when relief is unavailable under either section 6015(b) or (c). III. Relief under Section 6015(b) and (c) Subsections (b) and (c) both include a requirement that, in order to obtain relief, the requesting spouse must show that the tax at issue arises from income attributable to the other spouse. See secs. 6015(b) (1) (]B), (c) (1), (d) (1), (d) (3) (A). That is, the statute that Congress enacted explicitly provides for relief only from tax attributable to the other spouse -- in this case, Mr. Hall. However, Ms. Hall candidly admits that the tax at issue here arises from the pension income paid solely to her as a beneficiary of her late father's pension (and from her smaller amounts of interest income and the like). This income is not attributable to Mr. Hall but rather to Ms. Hall, and she therefore cannot obtain relief under subsection (b) or (c). IV. Equitable relief under section 6015(f) A. Statutory text Section 6015(f) provides the third form of 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 relief: 8 SEC. 6015(f). Equitable Relief.--Under procedures prescribed by the Secretary, if-- (1) 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); and (2) relief is not available to such individual under subsection (b) or (c), the Secretary may relieve such individual of such liability. Thus, section 6015(f) may offer relief from joint and several liability, provided that the taxpayer shows that it is inequitable to hold her liable upon consideration of all the facts and circumstances. B. Factors for evaluating equitable relief In accord with the statutory provision that relief is to be granted under section 6015(f) following "procedures prescribed by the Secretary," the IRS has issued revenue procedures to guide its employees in determining whether a taxpayer is entitled to relief from joint and several liability. Revenue Procedure 2003-61, 2003-2 C.B. 296, lists the factors that IRS employees should consider, and 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 9 Court consults those same factors when reviewing the IRS's denial of relief. See Washington v. Commissioner, 120 T.C. 137, 147-152 (2003). Revenue Procedure 2003-61 provides the analysis for IRS personnel to follow in evaluating requests for relief: Section 4.01 lists seven threshold conditions that must be met before the IRS will grant any relief; and section 4.03 sets out eight non-exclusive factors that the IRS will consider in determining whether equitable relief should be granted. (Section 4.02 provides for relief in circumstances where the tax liability at issue was reported on the joint return; but since that was not the case here, we do not discuss that provision further, but consider only sections 4.01 and 4.03.) 1. Section 4.01: Threshold conditions The IRS apparently admits that Ms. Hall meets the first six of the seven threshold requirements of section 4.01; but the seventh is the sticking point. As a condition for relief, it requires that -- 7. The income tax liability from which the requesting spouse seeks relief is attributable to an item of the individual with whom the requesting Heritage Reporting Corporation (202) 628-4888 spouse filed the joint return * * * [absent certain enumerated exceptions]. 10 Ms. Hall did not meet this seventh threshold condition and the IRS denied her relief. We cannot criticize this denial. The point of section 6015 is to figure Ms. Hall's own liability apart from joint liability, excuse her from liability attributable to Mr. Hall, and ngt excuse her from paying her own liability. Unfortunately, the tax at issue here arises from her income and would have been taxable to her even apart from her joint liability for tax with Mr. Hall. Our analysis could end there. 2. Alternative facts-and-circumstances test However, if we were to assume that Ms. Hall does satisfy the threshold conditions of Revenue Procedure 2003-61, section 4.01, we would proceed to analyze her claim under the facts-and-circumstances test of section 4.03. If we make such an analysis here, we reach the same, adverse conclusion. Ms. Hall is not entitled to recover. The criteria considered under section 4.03 are these: f. Marital status Ms. Hall had divorced Mr. Hall when she requested innocent spouse relief. This factor would weigh in favor of relief. 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 Heritage Reporting Corporation (202) 628-4888 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 ii. Economic hardship The IRS has stipulated that Ms. Hall will face economic hardship if she is required to pay this liability. This factor would weigh in favor of relief. This factor may also weigh in Ms. Hall's favor in the collection context, if she proposes to the IRS alternatives to collection (such as an installment agreement, offer-in-compromise, or currently-not-collectible status); but no such collection issues are before us now in this suit. iii. Knowledge or reason to know In the case of a deficiency (such as is at issue here), the question is whether the requesting spouse (Ms. Hall) did not know of the item giving rise to the deficiency -- in this case, chiefly the pension income. Ms. Hall does not contend that she did not know about the pension income. On the contrary, having specifically focused on the question when she obtained advice from the accountant (sadly, bad advice), Ms. Hall did know that she had received the income and did know that the pension income was not reported on the return. What she contends is that she did not know that it was taxable. We find this to be true as a matter of fact; but as a matter of law, it Heritage Reporting Corporation (202) 628-4888 12 would not support her claim for relief. See Bauman v. Commissioner, T.C. Memo. 2005-31 ("Ignorance of the law is not a defense for a taxpayer seeking relief under sec. 6015"). iv. Nonrequesting spouse's legal obligation The State court's January 2010 consent order made Mr. Hall solely liable for the 2004 tax debt -- a fact that Ms. Hall stresses very urgently, which is understandable. However, the consequence of this consent order is that, as between Mr. and Ms. Hall, she is not liable. As between Ms. Hall and the IRS -- to whom Ms. Hall is liable pursuant to Federal law -- the result is different. The IRS was not a party to the divorce proceeding. It is not bound (and this Court is not bound, by collateral estoppel or otherwise) to the determination of a State family court. That State court does not have the power to adjust a spouse's Federal tax liabilities. Revenue Procedure 2003-61, sec. 4.03(2) (a) (iv), provides that the nonrequesting spouse's legal obligation "will not weigh in favor of relief if the requesting spouse knew or had reason to know, when entering into the divorce decree or agreement, that the nonrequesting spouse would not pay 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 Heritage Reporting Corporation (202) 628-4888 13 the income tax liability." Where the spouse supposedly accepting liability is in fact unable to pay it (as Ms. Hall knew was the case with the underemployed Mr. Hall), it would be unjust to allow the spouses, by obtaining a consent decree, to deprive the IRS of the ability to collect from the financially responsible spouse to whom the liability was actually attributable. Accordingly, this factor would weigh against granting Ms. Hall relief. v. Significant benefit The significant benefit factor examines whether the requesting spouse directly or indirectly received "significant benefit (beyond normal support) from the unpaid income tax liability." Rev. Proc. 2003-61, sec. 4.03(2) (a) (v), referencing 26 C.F.R. sec. 1.6015-2(d), Income Tax Regs. Because she did not pay the tax of $15,156, Ms. Hall was able to spend that portion of the pension proceeds. Both from the balloon payment she made on the house she inherited and from the Caribbean vacations she took with Mr. Hall, Ms. Hall received special benefit from their nonpayment of the tax liabilities. This factor would weigh against relief. vi. Compliance with income tax laws The IRS does not dispute that Ms. Hall has 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 Heritage Reporting Corporation (202) 628-4888 filed her tax returns. This factor would weigh in 14 favor of granting relief. vii. Abuse Ms. Hall does not allege that she suffered any abuse from Mr. Hall. This factor would not weigh either in favor of nor against relief. viii. Mental or physical health Ms. Hall does not allege that she was ill when she signed the returns, or when she requested relief, or at the time of trial. This factor would not weigh in favor of or against granting relief. Thus, three of these factors favor relief (Ms. Hall's divorce from Mr. Hall, Ms. Hall's economic hardship, and Ms. Hall's compliance with the tax laws); and two factors are neutral (the absence of abuse and the lack of a claim of ill health). However, three fagors favor retained liability -- Ms. Hall's knowledge of the unreported pension income, Ms. Hall's knowledge that Mr. Hall would not fulfill his supposed legal obligation under the consent decree to pay the tax, and Ms. Hall's benefit from the nonpayment. If we were analyzing Ms. Hall's claim even apart from the fact that the liability really is her own, we would find these last three factors to be especially weighty. Equitable relief is properly 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 Heritage Reporting Corporation (202) 628-4888 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 granted when a spouse did not know of the income item, had reason to think the other spouse would pay the tax, and did not personally benefit from the nonpayment. To grant relief in this circumstance, however, would allow Ms. Hall, who knew about and benefitted from the income, to obtain the benefit of joint filing status, but to escape liability for the tax on her own income, and to knowingly leave the IRS with no real opportunity to collect from the other spouse. Accordingly, even after considering and weighing all the factors, we would find that it would not be inequitable to hold Ms. Hall liable for the 2004 tax liabilities. Apart from and above these factors, however, the critical fact in this case -- controlling under subsections (b), (c), and (f) of section 6015 -- is that the pension income belonged to Ms. Hall, was received by her, and resulted in benefit to her. Section 6015 does not grant relief from tax liability in such circumstances, and we must hold in favor of the IRS. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 12:20 p.m., the bench opinion in the above-entitled matter was concluded.) Heritage Reporting Corporation (202) 628-4888