TAX COURT OPINION

Case: Lori A. Harris, Petitioner and Kenneth Donnelly, Intervenor
Docket Number: 14290-12
Judge: Holmes
Opinion Type: bench
Filed: 01/28/2014
Pages: 21

UNITED STATES TAX COURT WASHINGTON, DC 20217 Lori A. Harris, Petitioner, and Kenneth Donnelly, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ) ) Docket No. 14290-12. 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 the to petitioner and to respondent a copy of transcript of Holmes at San Diego, California, on January 10, 2014, containing his oral session at which the case was heard. in the above case before Judge Mark % the pages of the trial findings of fact and opinion rendered at the trial January 28, 2014 Washington, D. C. (Signed) Mark V. Holmes Judge SERVED FEB 0 5 2014 Capital Reporting Company 3 Bench Opinion by Judge Mark V. Holmes January 10, 2014 Lori A. Harris, Petitioner and Kenneth Donnelly, Intervenor Docket No. 23956-12 192.90 THE COURT: In the case of Lori A. Harris, 1 ·2 3 4 5 6 7 Petitioner, and Kenneth Donnelly, Intervenor v. 8 9 10 11 12 13 14 15 16 17 Commissioner, Docket Number 14290-12, 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 Court's Rules of Practice and Procedure. This is an innocent spouse case in which the record consists of the stipulation agreed to by 18 all three parties and their testimony. Both the 19 Petitioner and the Intervenor were California 20 21 residents when the Petitioner filed her petition. The two parties at issue are Ms. Lori 22 Harris and Mr. Kenneth Donnelly. They were married 23 24 25 in 1991, had two children together, one born in 1994, and one in 1995. The marriage dissolved in 2008, and separation followed shortly thereafter. 866.488.DEPO www.CapitalReportingCompany.com I Capital Reporting Company 4 1 Seven months after the separation began, on 2 April 14th, 2009, Mr. Donnelly prepared and signed a 3 4 5 6 7 8 9 10 11 12 13 joint federal income tax return for the 2008 tax year. On that return, he reported distributions from his IRA accounts, and calculated the amount of tax due. But he failed to also report the additional ten percent tax on early distributions from his IRAs and pensions imposed by IRC Section 72(t). On April 15th, 2009, Mr. Donnelly e-mailed his ex-spouse requesting her to meet him at 9:00 p.m. that evening to sign their federal and state income tax returns so that he could timely mail the returns to avoid late fees and penalties. He said he would 14 write checks for the amounts owed for each return, 15 16 17 18 19 20 21 22 23 Ms. Harris was, because of the lateness of the hour and the approaching midnight deadline, unable to have those tax returns reviewed by a tax service. So believing the returns to be okay because the couple had not had any previous tax problems, she signed the returns as Mr. Donnelly requested. She was not aware that an additional ten percent tax was due on the amount of the IRA and pension distribu- tions that Mr. Donnelly was reporting on that report. 24 Mr. Donnelly did timely file the joint tax return, 25 and paid the tax shown as he computed it on that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 return. The problem was that, because of the failure of Mr. Donnelly to correctly compute the tax, the IRS asserted a deficiency of $6368, and a penalty under 6662(a) of $1273.60. Ms. Harris, when she discovered this, then asserted that she was entitled to innocent spouse relief under Section 6015. She was initially denied that relief, and petitioned the Tax court for review. The Tax Court conducts a trial de novo in determining whether a taxpayer is entitled to relief under IRC Section 6015. We consider evidence outside the administrative record, and use a de novo standard of review. See Wilson v. Commissioner, 705 F.3d 980 (9th Circuit 2013), affirming T.C. Memo 2010-134; Porter v. Commissioner, 130 T.C. 115, 117 (2008); Porter v. Commissioner, 132 T.C. 203, 210 (2009). We analyze the case using the evidence in the trial record, and give no deference to the IRS's own determination. This is an unusual case in that, while the case was being prepared for trial, the Government reconsidered and decided that Ms. Harris was entitled to relief from joint liability under Section 6015(f), the so-called equitable relief provisions. Mr. 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 Capital Reporting Company 6 1 Donnelly then intervened, as is his right, to 2 3 4 5 6 7 8 challenge this agreement between the Government and Ms. Harris that she was entitled to relief. Let me briefly review the framework of how a court goes about deciding whether to grant one spouse relief from joint liability. Pursuant to his grant of authority under Section 6015(f), the Commissioner has fashioned guidelines for determining 9 whether an individual qualifies for equitable relief. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 These are in Revenue Procedure 2013-34. The Court considers these guidelines in light of all the facts and circumstances to determine whether equitable relief is appropriate. But we're not bound by them. See Pullins v. Commissioner, 136 T.C. 432, 438-439 (2011). The guidelines begin by establishing certain threshold requirements that at least the Commissioner contends must be satisfied before equitable relief should even be considered. The procedure then sets forth a safe harbor condition, which no one here asserted was met. Finally, there is a non-exclusive list of factors that a court and the Commissioner should consider in determining whether relief under Section 6015(f) is proper. I'm using today Revenue Procedure 2013-34, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 even though it was not in effect at the time that Ms. 2 Harris initially asked for innocent spouse relief 7 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 because Section 7 of that Revenue Procedure states that: "This Revenue Procedure is effective...for requests for equitable relief pending on September 16, 2013, whether with the Service, the Office of Appeals, or in a case docketed with a federal court. " Looking at the threshold factors first, the first of those is whether the requesting spouse, here Ms. Harris, filed a joint return. She did. The second is whether relief is available to her under Section 6015(b) or (c). The Service denied relief under those sections, so I find that it is not available to her. The third threshold condition is whether the claim for relief is timely filed. She seeks relief from her '08 tax return, well within the ten- year statute of limitations. The fourth threshold condition is whether assets were transferred between Ms. Harris and Mr. 25 Donnelly as part of a fraudulent scheme. There's no 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 support for any such scheme, and nobody asserts that one existed. The fifth condition is whether the non- requesting spouse transferred disqualified assets to the requesting spouse. There were transfers of assets between the spouses, but Section 6015(c)(4)(B) (ii)(II) does not include as prohibited transfers those that are incident to a divorce. And since that what was going on between Ms. Harris and Mr. 10 Donnelly, she doesn't fail this threshold condition 11 12 13 14 15 16 17 18 19 20 21 either. The sixth threshold condition is whether the requesting spouse knowingly participated in the filing of her fraudulent joint return. There is no evidence or allegation of this either. Finally, the seventh threshold condition is whether the income tax liability from which the requesting spouse seeks relief is attributable in full or in part to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse's income. Here it's a little 22 bit tricky because California is, of course, a 23 24 25 community property state. So that the withdrawal that Mr. Donnelly made from his IRA and pension accounts in his own name are attributable by force of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 law to be half for the benefit of Ms. Harris. However, the threshold condition has an exception. If the attribution is solely due to the operation of community property law, then for purposes of this Revenue Procedure, that item will be considered to be attributable to the non-requesting spouse. So in other words, my conclusion is that 8 all seven of the threshold conditions for innocent 9 spouse relief under Section 6015(f) are met here. 10 11 So on to the balancing test. The general rule is that I have to look at all the factors and 12 all the facts and circumstances, and that I'm not 13 limited to any particular group of factors. 14 Nevertheless, as Tax Court has generally done, we 15 16 17 18 19 20 21 look at the Revenue Procedure in effect at the time. This is particularly noteworthy in this case, because the current Revenue Procedure in Section 3.01 states that this Revenue Procedure "gives greater deference to the presence of abuse than [previous Revenue Procedures]. The Service recognizes that the issue of abuse can be relevant 22 with respect to the analysis of other factors, and 23 24 25 can negate the presence of certain factors. This change is entitled to give greater weight to the presence of abuse when its presence impacts the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 analysis of other factors." This is an extremely important factor in this case in particular. "Abuse" is a little defined term in tax law. None of the Revenue Procedures, including the one relevant in this case, have defined "abuse" with a great deal of specificity. But they have all said, including the current Revenue Procedure, that abuse takes into consideration proof that the requesting spouse was abused by the non- requesting spouse, but that such abuse did not amount to duress. This obviously lets me infer that abuse is at least sometimes, somehow, lesser than duress. Duress is a concept that Tax Court has had a lot to say about. Courts have long considered duress to be a reason to relieve a taxpayer from joint liability where her spouse coerces her to sign a tax return. See, for example, Furnish v. Commissioner, 262 F.2d 727, 733 (9th Circuit 1958). Duress is a subjective analysis where the focus is on the mind of the individual at the relevant time in question. An extreme case is, of course, sign the return or I pull the trigger. But in tax law, duress means any constraint of will so strong that it makes a person reasonably unable to 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 Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 resist demands to sign a return. When that happens, innocent spouse relief is actually unavailable, because duress means the return is not treated as joint. See Raymond v. Commissioner, 119 T.C. 191, 195-96 (2002). Now, there are a good number of cases analyzing abuse not amounting to duress in considering whether one spouse knew or should have known about the other's wrongdoing. A classic instance is when abuse helps explain a spouse's failure to inquire about non-compliance with tax law. See, for example, Aude v. Commissioner, T.C. Memo 1997-478. But it's abuse as a factor by itself, and not just as a relevant bit of evidence about one spouse's state of knowledge, that I'm looking for in this case. It's an important point because it liberates me from focusing on the moment the return is signed. The relevant abuse here precedes that 20 moment. And there's no suggestion in any of the 21 22 23 24 25 Revenue Procedures, including the current one, or any other source of relevant law that limits my consideration to whether a spouse was abused only to abuse that causes a particular instance of non- compliance with the tax law. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 This leads to the heart of my inquiry on this particularly important factor. What is abuse for purposes of innocent spouse relief? If there was verifiable physical harm, that would likely be sufficient. And here, in fact, there was verifiable physical harm to the two daughters, albeit not Ms. 7 Harris, caused by Mr. Donnelly. 8 9 That leads to a somewhat related question: Under what circumstances can psychological 10 mistreatment in the absence of physical harm -- and 11 here Ms. Harris admitted that she was never harmed by 12 Mr. Donnelly -- constitute abuse? One has to be 13 14 15 16 17 18 19 20 21 22 23 24 25 aware of the danger that requesting spouses, in trying to escape financial liability, may easily exaggerate the level of non-physical abuse. Innocent spouse cases often spring from the dissolution of troubled marriages, and there's an obvious incentive to vilify the non-requesting spouse. Our cases usually require substantiation, or at least specificity in allegations of abuse. See, for instance, Fox v. Commissioner, T.C. Memo 2006-22. We've hesitated to find abuse where marital conflict is understandably distressing, but doesn't significantly alter a requesting spouse's behavior. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 See, for example, Krasner v. Commissioner, T.C. Memo 2006-31. So what I'm looking for from a psycho- logical perspective is whether one spouse has abused the other through isolation, encouragement of exhaustion, for example, intentionally limiting food or interrupting sleep, behaving in an obsessive or possessive manner, threatening to commit suicide, to 9 murder the requesting spouse, or to cause the death 10 11 of family or friends, the use of degrading language, including humiliation, denial of victim's talents and 12 abilities, and name-calling, drug abuse, alcohol 13 14 15 abuse, undermining the victim's ability to reason independently, occasionally indulging in positive behavior in order to keep hope alive that the abuse 16 will cease. Some of these are present in this case. 17 And indeed there's corroborated evidence that Mr. 18 Donnelly physically abused his daughters twice. It's 19 not a pattern of extreme abuse of the sort that the 20 Court has unfortunately occasionally seen, leading to 21 22 23 24 25 hospitalizations and incarceration. And it's not characterized by alcohol, drug abuse, threats of suicide or murder. But it is consistent. A couple of examples of physical abuse, one of which caused a permanent shoulder injury to one of his daughters, 866.488.DEPO www.CapitalReportingCompany.com 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 Capital Reporting Company 14 was accompanied throughout the marriage, it appears, at least in the later years, by emotional abuse that was much more constant. There was a lot of anger in this family coming from Mr. Donnelly. There was a lot of belittling. I base this finding mostly on the fact that the children have been in therapy rather consistently over the last several years as the marriage began to head towards its end, and especially by Exhibit 11-J, which was an attachment to the judgment of dissolution in the California State Court, in which the Superior Court judge noted that: "The minor children have not had a relationship with their father since September 2008. They have returned the Christmas and birthday presents that husband has sent them. They refuse to communicate with him, except to tell him that they do not wish contact." Testimony of the parties clearly demonstrated the cause of the breakdown of husband's relationship with both children had its roots prior to the breakup of his marriage, both in the conflict 866.488.DEPO www.Capita1ReportingCompany.com 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 Capital Reporting Company 15 that existed between the parties over parenting, and the husband's inappropriate use of physical discipline on at least two occasions. And here I'm not quoting directly, because it mentions the name of the then minor child. Resuming the quote: "Since the parties' separation, this parent-child relationship has been further damaged by husband's actions towards his daughters. When the couple returned to the community residence with wife in July 2009 for the purpose of retrieving their clothing and personal items, the door to[..}s room was locked. Husband did not allow her into the room, indicating his girlfriend's children had possession of the room. The girlfriend's children were also allowed to wear his own children's clothing. When items were finally returned, they were badly damaged by mold or were 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 unusable...husband's relationship with his children has also been damaged by his inaction during the pendency of these proceedings." Resuming the quote, the court then went on and said that, based on his observations -- this is the therapist's observations -- of the changes in the children's body language during their sessions, the therapist indicated that neither child was ready for contact with husband outside of a therapeutic setting. The judge in the Superior Court went on to find that it is in the best interests of the children for the wife to have sole legal and physical custody of both children, and finally concluded that pending further court order or agreement of the parties, husband's contact with the children shall be in a therapeutic setting only. This is all in Exhibit 11-J at pages 3 to 5. In the applicable Revenue Procedure, the Commissioner has instructed his employees -- and I think it's a good thing, and the Court will do it as 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 well in this case -- that abuse of the requesting 25 spouse's child or other family members living in the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 1 2 3 household may constitute abuse of the requesting spouse, depending on the facts and circumstances. In this case, given the close relationship between Ms. 4 Harris and her daughters, and the extreme estrange- 5 ment of the daughters their 6 7 8 9 10 11 12 13 father, I have to find that abuse exists in this situation. Again, it's not extraordinary physical abuse, but I don't want to belittle the extent of the emotional abuse, and the anger, and the carryover that this has had, given that Mr. Donnelly also kept Ms. Harris largely isolated from the financial facts of the marriage. So the emotional abuse of children who Ms. 14 Harris clearly loved, combined with Mr. Donnelly's 15 16 17 18 19 20 21 intentional maintenance of Ms. Harris's ignorance of the family's financial position, amounts to an abuse that I will take into account in weighing the other factors in accordance with the Revenue Procedure that is currently in effect. Moving on to those factors, the first of them is whether the requesting spouse is no longer 22 married to the non-requesting spouse. That's true. 23 24 25 They've been divorced. This weighs in Ms. Harris's favor. The second is whether the requesting spouse 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 1 will suffer economic hardship if relief is not 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. The Revenue Procedure goes on to state that: "This factor will weigh in favor of relief 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 towards the tax liability, and still adequately meet the requesting spouse's reasonable basic living expenses." Those federal poverty guidelines in effect as of last year for a family of three have a federal poverty line of $19,530, 250 percent of which is north of $40,000. Even if the daughters, both of whom are going to college, are no longer living in the household, Ms. Harris's current income, including alimony, is less than $23,000 a year. She would meet this factor. It weighs in her favor, in other words. The third factor is knowledge or reason to know. This is a little bit peculiar here, because 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 1 2 3 4 5 6 7 8 given that the deficiency resulted from the failure to correctly compute taxes, probably neither spouse knew that they were understating the taxes. It's also a little bit hard to talk about knowledge or reason to know of the item giving rise to the understatement. Here I have to say that I guess the item is properly computing the tax owed on withdrawal from an IRA or a pension account. It's clear that 9 Ms. Harris didn't know that they were understating 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it. Although, again, this is a little bit of a square peg in a round hole situation, inasmuch as it's a computational or mathematical problem rather than an understatement or a hiding of an item of income or exaggeration of a deduction. I take into consideration this factor, the line in the Revenue Procedure that says, if the requesting spouse abused by the non-requesting spouse, or the non-requesting spouse maintained control of the household finances by restricting the requesting spouse's access to financial information" -- both of these sub-factors present in this case, as I've said -- this knowledge factor also is at least lightly weighing in favor of granting Ms. Harris relief. The next factor is abuse by the non- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 20 1 2 3 4 5 6 7 8 requesting spouse, which I've already found is present in this case, given Mr. Donnelly's abuse of his daughters. The next factor is legal obligation. This factor is neutral, because the couple's divorce instrument did not provide one way or the other as to who should pay on the joint liability. The fifth factor is significant benefit, 9 whether the requesting spouse significantly benefited 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 from the unpaid income tax liability or under- statement. Here all the parties stipulated that she did not. That weighs in her favor. The next one is compliance with income tax laws, whether Ms. Harris has made a good faith effort to comply with the income tax laws in the tax years following the tax year to which the request for relief relates. Here I have to find against her. She hasn't filed. She has something of a reason for that, namely, that she's in a refund posture, and she doesn't want the various refundable credits that she would otherwise be entitled to seized by the Federal Government pending the outcome of this case. It's not really a good excuse, but she at least had a reason other than just pure neglect. Nevertheless, this weighs against relief. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 21 1 2 And then, finally, the last factor is whether the requesting spouse was in poor physical or 3 mental health. Ms. Harris was not, so this factor is 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 neutral. Toting them up, although always noting that we don't just tote them up, most of these factors weigh in favor of relief for Ms. Harris, as indeed the Government lawyer recognized in suggesting that she was entitled to relief. Indeed in balancing these factors, I look to whether it's more likely than not that Ms. Harris in this case, as the requesting spouse, should have been moving away from relying on Mr. Donnelly to be filing joint tax returns, should've known better than to sign the joint tax return, should've been establishing an independent financial presence. Given her extreme lack of income, she's kept afloat only it appears by the sufferance of her parents and other relatives. 19 Given the demands on her emotionally from Mr. 20 Donnelly's bad relationship with their daughters, and 21 22 23 24 25 given his seemingly continuous effort to keep her ignorant of the family's financial conditions, I agree with the Government counsel in this case, and find that she's entitled to relief from joint tax liability for the tax year 2008 under Section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 22 6015(f). Decision will be entered in her favor. That concludes this bench opinion and this session. Thank you all. (Whereupon, at 1:16 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