TAX COURT OPINION

Case: Iris Troche
Docket Number: 30746-14
Judge: Holmes
Opinion Type: bench
Filed: 10/05/2015
Pages: 17

UNITED STATES TAX COURT WASHINGTON, DC 20217 IRIS TROCHE, Petitioner, v. ) ) ) ) ) Docket No. 30746-14. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ORDER 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 the pages of the transcript of the trial of the above case before Judge Mark V. Holmes at El Paso, Texas on September 23, 2015 containing his oral findings of fact and opinion rendered after the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision under ~' Rule 155 will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. October 5, 2015 SERVED OCT - 9 2015 Capital Reporting Company 3 1 2 3 4 5 6 7 8 Bench Opinion by Judge Mark V. Holmes September 23, 2015 Iris Troche v. Commissioner Docket Number 30746-14 In the case of Iris Troche v. Commissioner, Docket Number 30746-14, the Court has decided to render Oral Findings of Fact and Opinion, and the following is the Court's Oral Findings of Fact and 9 Opinion. This bench opinion is made pursuant to the 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 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. This case is an appeal from the IRS's decision to deny innocent spouse relief to Ms. Troche for unpaid tax debts from the '97, 2000, 2002 through 2007 tax years. Ms. Troche was a resident of Texas when she filed the appeal. The parties were able to reach a stipulation, and together with the testimony in the case, that constitutes the record. There were only two witnesses, Mr. and Mrs. Troche, Mr. Troche supporting his wife's application for innocent spouse relief. I found them both to be very credible witnesses. They've had some difficult times in their 40-plus years of marriage, especially 25 with the tax problems caused by Mr. Troche's failure 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 to timely file, timely pay, and make estimated tax payments for many, many years, stemming from his law practice. Mrs. Troche was a W-2 wage earner for the years in issue. She had plenty of withholding for her income. The problem is really entirely due to 7 Mr. Troche's failures to adequately prepare, pay and 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 report income from his own practice. Many of the sums involved were not that great. The problem is that through his failure to timely file, failure to timely pay, and failure to make estimated tax payments, there was just a cascade of additions tax and interest, some, as I said, dating back to the 1997 tax year, where, for instance, the return, which was not challenged by the IRS, showed a tax liability of $15,000 that was unpaid, and it more than doubled over time to reach a peak of over $31,000 at one point. And similar numbers apply to some of the other earlier tax years. In the end, more than $100,000 in tax debt is owed, a very substantial part, maybe three- quarters of that, attributable to these additions to tax and interest, and interest on the additions to tax, and the effect of compounding daily year to year to year. And this problem is really due entirely to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Mr. Troche. He did not make estimated tax payments. 5 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 He didn't set aside money to pay the self-employment tax. He lied to his wife about having filed the returns, and it all came crashing down years after his failures began. On the other hand, he honorably admitted that this was his fault. His testimony on that was entirely credible, as I said. The problem is, of course, that they were a married couple, filing joint returns. We must, therefore, figure out how to apply the usual rules on innocent spouse relief in this situation. I'll begin at the beginning. In general, a spouse who files a joint federal income tax return is jointly and severally liable for the income tax liability. See Section 6013(d)(3). A spouse may be relieved from joint and several liability under 6015(f) if, taking into account all the facts and circumstances, it would be inequitable to hold her liable for any unpaid tax. This Court has jurisdiction to conduct a de novo review of the Commissioner's denial of the Section 6015(f) relief. See Porter v. Commissioner, 132 T.C. 203 (2009). The Commissioner has published revenue procedures listing the factors normally 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 considered in determining whether to grant relief under 6015(f). The revenue procedure that applies in this situation is Revenue Procedure 2013-34. Neither party has added or subtracted from this revenue procedure. It's the one that I will follow. Briefly, these revenue procedures over time, including the one that I have to apply today, make a couple of important distinctions. One is between understatement and underpayment situations. In this case, what we have is an underpayment situation. The IRS has not challenged the accuracy of the returns apart from some minor math errors that the Troches ended up filing for the years in question, so I will apply the part of the revenue procedure that deals with underpayment. The second thing that is noteworthy is that the revenue procedure treats in starkly different ways couples who remain married through their tax travails versus couples who get divorced or separated during the course of their tax travails. I, of course, have to recognize that the Troches remain 22 married. 23 24 25 So I will go through the revenue procedure step by step. The first step is what are called the threshold conditions for relief. They are several, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 and they are listed in 4.01 of the revenue procedure. The first is that for each year there be a joint return filed. This is subject to a little bit of contention at trial, because Mrs. Troche, apart from the 2006 year, did not actually sign the joint returns that were filed with the IRS. However, she was earning income in those years, and I believe her and her husband said that the pattern in their 9 marriage was for Mr. Troche to prepare the tax 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 returns and deal with the taxes. She made no effort to file a return herself. The question in these cases is what was the intent of the nonsigning spouse, in this case, Mrs. Troche. And I certainly find her to have intended to file joint returns, and I will treat all the returns that were submitted as being joint returns. The second threshold requirement for relief is that relief not be available under 6015(b) or (c). This is easily met, because this is, again, an underpayment, not an understatement, situation. The claim for relief must be timely filed before the expiration of the collection statute expiration date, which it was here, taking into account the tolling that goes on when requests for innocent spouse relief are made. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 The fourth requirement is that no assets were transferred between the spouses as part of a fraudulent scheme. No allegations of that here. The fifth threshold requirement is that the nonrequesting spouse did not transfer disqualified assets to the requesting spouse. None of that here. The sixth, the requesting spouse did not knowingly participate in the filing of a fraudulent joint return. No hint of that here. The seventh is that the income.tax liability from which the requesting spouse seeks relief is attributable either in full or in part to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse's income. That, as I said, is met here. The problem was under-withholding and late reporting of 17 Mr. Troche's income from his law practice, not the 18 wage income, for which there was more than adequate 19 withholding from Mrs. Troche. 20 21 22 23 24 25 So the threshold requirements are met, and we can go on to the streamlined relief provisions of the revenue procedure. Those streamlined relief provisions are set out in Section 4.02 of the revenue procedure. The first of them, however, is that the requesting spouse be no longer married to the 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 nonrequesting spouse. That's just not the case here, so no streamlined relief for Mrs. Troche is available. And that leads to the loosey-goosey balancing factors, where we take a non-exclusive list of factors and add them up and see where they lead us. In this case, there are numerous factors to consider, the first of which is the marital status of the parties. They are, of course, still married. This factor is, therefore, neutral. The second of these multi-factor balancing test factors is the question of economic hardship. Here there was a bit of controversy between the parties, because what is feared to be at issue by 15 Mrs. Troche is the potential forced sale or lien on 16 Montana farmland that has been in her family since 17 18 19 20 21 22 the time of settlement. She has this land -- she wants to continue to own this land, not just for sentimental reasons, but because it's a potentially important source of income for her and husband's imminent retirement years. However, the revenue procedure has a much 23 more difficult standard to meet. Section 4.03(2)(b) 24 25 tells me to ask whether the requesting spouse will suffer economic hardship is determined based on rules 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 similar to those provided in Treasury Regulation 301.6343-1(b)(4), and I am to take into consideration a requesting spouse's current income and expenses, and the requesting spouse's assets. In determining the requesting spouse's reasonable basic living expenses, I am to consider whether the requesting spouse shares expenses or has expenses paid by another individual, such as a family 9 member, including a current spouse. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In determining whether the requesting spouse would suffer economic hardship if relief is not granted, I need to compare her income to the federal poverty guidelines. And here again, because they share a common household and remain married after all these years, I look at their household income together, not just what she makes as a teacher or, apparently in more recent months, a worker in the retail segment of the economy. The revenue procedure tells me to weigh in favor of relief this factor, if the requesting spouse's income is below 250 percent of the federal poverty guidelines, unless the requesting spouse has assets out of which the requesting spouse can make payments toward the tax liability and still adequately meet the requesting spouse's reasonable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 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 basic living expenses. If the requesting spouse's income exceeds 250 percent of the federal poverty guidelines, this factor will still weigh in favor of relief if the requesting spouse's monthly income exceeds the requesting spouse's reasonable basic monthly living expenses by $300 or more. So I went to the federal poverty guidelines, and they show that for a household of two, which is what the Troches are now that their children are up and grown, approximately $40,000 would be 250 percent of the federal poverty guidelines. Their household income is well above that. Joint Exhibit 14 at page 4 also shows that their monthly income exceeds expenses by roughly $1,700. Moreover, they do have these considerable assets, including hundreds of acres of unmortgaged farmland in Montana. So my conclusion is that denying relief will not cause Mrs. Troche to suffer economic hardship. That means that this factor is neutral. Again, so far three neutral factors. Then we come to the fourth factor and a very important one in this case, knowledge or reason to know. This factor is defined in Section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company .- ' 12 1 2 4.03(2) (c) (ii) as, "In the case of an income tax liability that was properly reported but not paid, 3 whether as of the date of the return was filed or the 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 date the requesting spouse reasonable believed the return was filed, the requesting spouse knew or had reason to know that the nonrequesting spouse would not or could not pay the tax liability at that time or within a reasonable period of time after the filing of the return. "This factor will weigh in favor of relief if the requesting spouse reasonably expected the nonrequesting spouse to pay the tax liability reported on the return. This factor will weigh against relief if, based on the facts and circumstances of the case, it was not reasonable for the requesting spouse to believe that the nonrequesting spouse would or could pay the tax liability shown on the return. "For example, if prior to the return being filed or the date the requesting spouse reasonable believed the return was filed, the requesting spouse knew of the nonrequesting spouse's prior bankruptcies, financial difficulties or other issues 24 with the Service or other creditors, or was otherwise 25 aware of difficulties in timely paying bills, then 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 this factor will generally weigh against relief." The facts and circumstances that I considered in determining whether the requesting spouse had reason to know of the understatement or reason to know whether the nonrequesting spouse could or would pay the reported tax liability include but are not limited to her level of education, any deceit or evasiveness of the nonrequesting spouse, her degree of involvement in the activity generating the income tax liability, the requesting spouse's involvement in business or household financial 12 matters, the requesting spouse's business or 13 14 15 16 17 18 19 20 financial expertise, and any lavish or unusual expenditures compared with past spending levels. Let me look at each of these subfactors individually. Mrs. Troche is a well-educated woman. She teaches in school. She has a college education. However, in the division of household responsibilities between her and her husband, she was responsible for all the household expenses except for 21 mortgage and taxes and did not inquire into and was 22 23 24 25 usually stonewalled when she asked about her husband's law practice, its profitability, and its expenses. So I do find at the very least evasiveness 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 5 6 7 8 9 on Mr. Troche's part, as he admitted honestly when under oath and testifying here today she had no involvement whatsoever in his business, his law practice. She was deeply involved in household financial matters, but as I said, it was a division of responsibility and not a sharing of responsibility that was present in this case. She had some financial expertise. She kept the household expenses going, but she was by no means 10 an accountant or a tax lawyer, and neither she nor 11 Mr. Troche had any lavish or unusual expenses that 12 13 14 15 16 17 18 19 20 would have indicated to her that something was up. The Government says that Mrs. Troche should have known that her husband was not being fully competent or honest in his part of the household financial responsibilities, because their home was threatened with foreclosure back in 1998. The problem with this, though, is that the foreclosure was staved off when Mr. Troche somehow paid off the bank involved, and since that time, there were for 21 many years no other visible problems, and I do find 22 Mrs. Troche's testimony credible in this regard. 23 24 25 However, by the end of 2005, Mr. Troche's failure to file, late filing, and other tax troubles had led the IRS to begin -- had led Mr. Troche to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 finally file the missing '97, 2000 and 2002 returns, and IRS records stipulated to into evidence show that notices started to come from the IRS to the Troches, beginning at the end of 2005, notices of balance due, the preliminary notices of an intent to levy for these now ancient tax years. So I conclude, although this is a very, very close case, that on balance at that point, even 9 with Mr. Troche continuing to take correspondence, to 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 not tell Mrs. Troche what exactly was going on, a woman of Mrs. Troche's intelligence and attention to household details had at that point a reason to know that something was up, a reason to know that her husband's protestations that the taxes would be filed, her assumption that the taxes would be filed and paid, was no longer reasonable. So at the end of 2005, I find there was a shift. Before then, I don't find that she had knowledge or reason to know of the failure of Mr. Troche to pay the taxes. After then, I find that she does. So my conclusion is that for the tax years '97, 2000, 2002 through 2004, this factor weighs in favor of relief. But for tax years 2005, which, remember, were filed in April of 2006, for tax year 2006, and for tax year 2007, I find that this weighs 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 against relief. So it's sort of a split factor. The remaining factors can be dealt with fairly quickly. The legal obligation to pay the tax, which is Section 4.03(2) (d) tells me this factor will be neutral if the spouses are not separated or divorced, which is the case here. The next factor is significant benefit. This factor directs me to determine whether the requesting spouse significantly benefitted from the unpaid income tax liability or understatement. A significant benefit is then defined as any benefit in excess of normal support. Neither spouse received a significant benefit here. This factor is neutral. Next factor is compliance with income tax laws. For the taxable years following the years to 16 which the request for relief relates -- this means 17 18 19 20 21 22 23 24 25 post-2007 in this case -- I do believe the testimony that this is met here. The 2009 return in addition was attached to the collection financial statement in the stipulation, and it appears to be entirely normal. It shows an inauguration of estimated tax payments that at least got the Troches within spitting distance of their final tax liability. Moreover, I notice that the parties stipulated that Mr. Troche was under an installment 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 agreement for most of this time, and an installment agreement is not available if someone is not current 3 with his tax obligations. So I conclude that this 4 5 6 7 8 9 10 11 12 13 14 factor, too, is neutral. Finally, there is mental or physical health. The parties stipulated that the requesting spouse was in neither poor physical nor poor mental health, so this factor is also neutral. So this is a somewhat curious case. All the factors are neutral but one, and that one is the knowledge or reason to know that the tax liability would not be paid within a reasonable time. So this is a split decision based on that one factor. For the tax years 2005 through 2007, I'm ruling against 15 Mrs. Troche. For the other tax years, I am ruling in 16 17 18 19 20 21 22 23 24 25 her favor. This is not a mechanical application of the factors, though when you have only one factor that's not neutral, it might seem that way. What I look to is, in general, at what point in a couple's tax trouble does it make sense for the requesting spouse to begin looking to either change their practice or to get out and start filing married, filing separately, or otherwise react to the less innocent spouse's tax troubles. 866.488.DEPO www.CapitalReportingCompany.com I Capital Reporting Company 18 And in this case, as I said, once the notices started coming from the IRS, even if Mrs. Troche continued to let her husband take them, she had to know that something was up, because of her general level of intelligence and absence in this case of any sign of abuse or duress, or the other factors that might mitigate against a finding of knowledge. So this is a split decision, A decision will be entered in part for Respondent and in part for Petitioner. This concludes the Court's Oral Findings of Fact and Opinion in this case. (Whereupon, at 4:23 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com