TAX COURT OPINION

Case: Daniel J. Leone
Docket Number: 18543-09
Judge: Colvin
Opinion Type: bench
Filed: 12/29/2010
Pages: 20

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM DANIEL J. LEONE, Petitioner, v. ) Docket No. 18543-09. 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 the transcript of the to petitioner Daniel J. Leone and to respondent a copy of in the above case before pages of Judge David Gustafson at Boston, Massachusetts, on December 8, 2010, containing his oral at fact and opinion rendered the conclusion of the trial. findings of the trial In accordance with the oral decision will be entered in part Leone's request for 1999 through 2005) and in part Leone's request 6663 fraud penalty for each of findings of for respondent fact and opinion, (denying Mr. for relief from joint liability for income tax for petitioner (granting Mr. for relief from joint liability for the section those years). (Signed) David Gustafson Judge Dated: Washington, D.C. December 29, 2010 SERVED Dec 29 2010 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 I 3 Bench Opinion by Judge David Gustafson Leone v. Commissioner Docket No. 18543-09 December 8, 2010 The Court has decided to render oral Findings of Fact and Opinion in this case, and the following represents the Court's orall Findings of Fact and Opinion. The oral Findings of Faåt and Opinion 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. By a notice of determination dated April 30, 2009 (Ex. 33-J) , the Internal Revenue Service (IRS) denied the request of petitioner Daniel J. Leone, pursuant to section 6015 of the Internal Revenue Code (26 U.S.C.), for relief from joint liability for returns he filed with his wife for them seven years 1999 through 2005. He timely mailed his petition to this Court on July 28, 2009, seeking review of that determination. Trial of this case was conducted on December 7, 2010, in Boston, Massachusetts, and Mr. Leone and his son testified, as did respondent's Revenue Officer Susan Samaha. The parties' Stipulation of Facts, with Exhibits 1-J through 38-J, was admitted into evidence 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 with the reservations addressed below. The parties' First Supplemental Stipulation of Facts was also admitted, with Exhibits 40-J through 47-J, although contrary to the stipulation there was no Exhibit 39 attached, and Exhibit 40 is the notice of deficiency for 1999, not 2000, and there is no notice of deficiency for-2000 included in the stipulation. Respondent's Exhibit 48-R was also admitted. The parties' stipulation is based on respondent's proposed stipulation that the Court deemed stipulated pursuant to Rule 91(f).(3), by Order of November 15, 2010. However, in a pretrial telephone conference held November 19, 2010, the Court encouraged Mr. Leone to continue to cooperate in pretrial preparation, advised him that-the Court would consider at trial a motion to vacate the deemed stipulations, and encouraged respondent to be reasonable in agreeing to relieve him from incorrect assertions in the deemed stipulations.. Thereafter the parties did cooperate, and they presented at trial a largely agreed revision of respondent's prior draft, with five of the propositions still disputed by Mr. Leone. Having heard Mr. Leone's testimony, the Court resolves those disputes as follows: The deemed stipulations reflected 'in: paragraphs 55 and 66 are not vacated, but 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 5 the words "petiitioner and" are deemed stricken from paragraphs 63, 64, and 67. FINDINGS OF FACT Mr. Leone's formal education ended when he graduated from high school He served his country in the Navy for four years and then went to work for the phone company, New England Telephone and Telegraph Company, where he worked until retirement.. For nearly all of his career, he was a "tech". At one point he briefly served as a foreman, which was a desk job that involved paperwork, but after two months he reverted to being a tech, because he was not well shited to the foreman's responsibility and did not enjoy that position. In 1969 "he married Marilyn Leone, when they were "very young". (our record does not show how young.) After 41 years they are still married and living together. When they were first married, Mr. Leone believed that, as husband, he should take responsibility for the family's financial-matters (chiefly; paying the- bills), and he initially performedathat role; but after two months he saw that he was not doing well in that role, and Mrs. Leone ook overethat function. She has continued to have that role since then. For example, when the Leone' s Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 a 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 son first bought a caí-, it was Mrs ; Leone who handled the finances of the purchase. Mrs.- Leone's role in the family finances corresponds to her work outside the home, which has been as a bookkeeper or accountant. During the years at issue she worked for Executive Management Corporation ("EMC"), which paid her as an independent contractor. Her work for EMC included preparing Forms 1099 for EMC's clients, to report their payment of nonemployee compensation. During the entire time relevant here, Mr. Leone knew that Mrs. Leone-earned money from this job. .Her earnings went into the household finances along with Mr. Leone's earnings and helped to pay the bills. When Mr. Leone retired from the phone company, he and Mrs. Leone collaborated with another married couple to start a business that rented out and repaired recreational vehicles ("RVs"). (The business initially failed, and the couples,started a second equivalent business, which later discontinued.) The husbands serviced the RVs, and the wives did the paperwork and arranged the rentals. Throughout the Leones' marriage, it has been Mrs. Leone who prepared tax returns for herself and Mr. Leone. Mrs. Leone appears to possess, much more than Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 1:2 13 14 15 16 17 18 19 :20 21 22 23 24 25 7 Mr. Leone, a skill set for tax return preparation, both from her natural aptitude and from her work experience. We assume that Mr. Leone is a man who is knowledgeable and skillful in his work, but he makes no pretense to financial sophistication or business acumen. Having observed him and heard his testimony, we believe that he relied heavily on his wife for keeping their finances in order and filing their tax returns. That reliance was unfortunate for the years 1999 through 2005. Mrs. Leone filed no return for 1999 or the years thereafter until 2005, when IRS personnel conducting a payroll- tax investigation determined that Mrs. Leone had filed no income tax returns and asked her to do so. She then prepared six returns (for 1999 through 2004) and asked her husband to sign them. He did so, without reviewing the returns. Had he done so, he might have noticed that, rather than identifying herself as a bookkeeper and reporting income from her work at EMC, she left blank the box for her occupation and omitted the income she derived from EMC. The returns reported Mr. Leone's wage income and payroll withholding credits (apparently from the RV rental business, see Ex. 13-J, second page), but those credits were in amounts not Heritage Reporting Corporation (202) 628-4888 8 sufficient to cover the reported tax liability, so that in each year there was an underpayment of the tax reported Those six returns were filed in August 2005, and in April 2006 Mrs. Leone prepared a similar return that reported Mr. Leone's wages and withholding credits, and reported an underpayment of tax, but did not report her : occupation or EMC income . Again, Mr. Leone did not review the return. He did sign it. The IRS subsequently examined the Leones' returns for 1999 through 2005, and in July 2008 the IRS issued notices of deficiency, in which the IRS determined deficiencies in income for each of those years, based on the EMC income and determined a fraud penalty pursuant to sectiôn 6663. The tax deficiencies totaled $52, 893, and the fraud. penalties totaled $39, 992. (It is unclear why the fraud penalty total equals more than '75 percent of the tax total.) The Leones -did not file a petition in this Court disputing those deficiencies, and the IRS assessed them in December 2008. Befdre the notices of deficiency were issued or the amounts were assessed (and perhaps in response to Form 4549 "Income Tax Examination Changes" proposed by t he IRS examiner) , Mr. Leone submitted a request for Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 l'ì 18 19 20 21 22 23 24 25 | 1 2 3 4 5 6 8 9 10 11 12 È3 14 15 16 17 18 19 20 21 22 23 24 25 9 innoceñt spouse relief- on Form 8857, in which he acknowledged that he had signed the returns but stated that he was not ihvolved in preparing the returns . The IRS sent Mr. Leone a preliminary determination denying*relief, and he resýonded with a "Statement of Disagreement" on Form 12509 that stated: disagree on the marital status, the marital status should not afeat the discision of - the request for spousal rielife and the [decision] to deny reliéf under IRC 6015 B&F is inacuret . I did not )¿now and had no- reason to know of the income that caused the aditional tax, I was totaly unaware that the income was unreported. After further consideratioè, the IRS Office of Appeals issued its final adversè determination on April 30, 2009. Mr. Leone filed his,petition in this Court on August 3, 2009, at which time he -resided in Ivias s achuse t t s . OPINION 5tåndard and scope of review When dètermining ahether a taxpayer is entitled to relief under section 6015 (whether :under subsection (by, (c) , or (f ) ) , we conduct a trial de novo, in which we may consider evidence introduced at trial which was not inchided in the administrative record. 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 Porter v. Commissioner, 130 T C. 115, 117 (2008) . For all sclaims under ssection 6015 (including claims for equitable relief under section 6015 (f ) ) , 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).. Respondent contends, however, that when the Court reviews e denial of relief under section 6015_(i)_, it must apply an abuse-of-discretion standard of review and must limit the scope of its review to the administrative record. We have held otherwise in the two Porter opinions cited above, and we do not repeat in this opinion the reasons for those holdings . II. Joint and several liability and section 6015 relief Section 6013 (d) (3) provides that if a joint return is filed, the tax is computed on the taxpayers' aggregate income, and liability for the resulting tax is oint and several. That is, each spouse is responsible for the entire joint tax liability. However, section 6015 provides for relief from joint liability for spouses who meet the conditions of subsection (b) and for divorced and separated persons under subsection (c) , and provides equitable relief in subsection (f) when the relief provided in subsections 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 11 (b) and (c) is not available. Except as otherwise provided in section 6015, the taxpayer bears the burden of proof . See sec 6015 (c) (2) ; Rule 142 (a) . Because Mr a Leone generally requests relief under section 6015, we analyze his eligibility under all three subsections. A. Subsection (by relief Section 6015(b) provides one form of "innocent spouse'' relief That subsection states multiple conditions, but we restrict our discussion to the requirement of section 6015(b) (1) (C) , which requires that "the other individual filing the joint return [in this case, Mr. Leone] establishes that in signing the return he or she did not know, and had no reason to know, that there wast such understatement.'' Under the applicable regulations, 26 C.F.R. Sec. 1.6015-2(c), "All of the facts and circumstances are considered in determining whether a requesting spouse had reason to know of an understatement . " As a co-signatory of his tax returns, Mr. Leone always had the duty to review it to ensure its accuracy. Magill v. Commissioner, 70 -T.C. 465, 479-480 (1978) , af fd. 651 "F. 2d 1233 (6th Cir. 1981) . His uncurious and uncritical signing of tax returns without any review of them did not fulfill his duty. Hežitagé 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 12 Moreover, even if his wholesale reliance on Mrs. Leone hadsbeen subjectively reasonable prior to 2005, alarm bells should have gone offewhen she brought six delinquent tax returns to him for his signature. Even a cursory review, aimed only at making sure that the major items were reported, would have revealed problems: Mrs . Leone declared no occupation, and no income attributable to her was on the return. Mr. Leone was~unaware of these facts, but only because he did not review or inquiré. It is only fair to say that, at that point, he "had reason to know" that the returns omitted income. That being the case, he is ineligible for relief under section 6015(b). B. Subsection (c) relief Section 6015(c) is entitled "Procedures to Limit Liability for Taxpayers No Longer Married or Taxpayers Legally Separated or Not,Living Together." Because Mr and Mrs. Leone were married in the years in issue and continue to be married, Mr. Leone is not entitled to relief under subsection (c) . We note however, that if this case were analyzed under section 6015(c), "Any accuracy-related or fraud penalties under section 6662 or 6663 are allocated to the spouse whose income generated the penalty. " 26 C.F.R. section 1.6015-3(d) (iv) (JB). We think this Heritage Réporting 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 13 provision informs notions of what is "equitable" under section 6015(f), disaussed below. C. Equitable relief under subsection (f) Section 6015(f) provides relief from joint liability if "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)". The Tax Court has been given express authority to review the IRS's denial of equitable relief under section 6015(f). Section 6015 (e) (1) provides : [I]n the case of an individual who requests equitable relief under subsection (f) * * * [i]n addition to any other remedy provided by law, the individual may.petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section * * *. That is, upon reviewing the IRS's action, the Court "determine[s] the appropriate relief". 1. IRS analysis. In accord with the statutory provision that section 6015(f) relief is to be granted "[u]nder procedures prescribed by the Secretary," the Commissioner has issued revenue procedures to guide 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 14 IRS employees in determining whether a requesting spouse is entitled to relief from joint and several liability. See Rev. Proc. 2003-61, 2003-2 C.B. 296, modifying and superseding Rev. Proc. 2000-15, 2000-1 C.B. 447. Revenue Procedure 2003-61 provides a three-step analysis for IRS employees to use in deciding whether to grant relief: Section 4.01 lists seven threshold conditions that must be met for any relief to be granted; section 4.02 lists circumstances in which relief will ordinarily be granted as to underpayments; and section 4.03 sets out eight non-exclusive factors to be considered in determining whether equitable relief should be granted. In "determin[ingJ the appropriate relief", the Court reviews the IRS's three-step analysis prescribed in its revenue procedure, see Washington v. Commissioner, 120 T.C. 137, 147-152 (2003), but our review is not circumscribed by that matrix. Rather, we consider "all the facts and circumstances" in determining whether the taxpayer is entitled to "innocent spouse" relief. Sec. 6015(f) (1); see Porter v. Commissioner, 132 T.C. 203 (2009); Lantz v. Commissioner, 132 T.C. 131 (2009) . In doing so, however, it is helpful to follow initially the IRS's 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 15 analysis. 2. Threshold eligibility Revenue Procedure 2003-61 sets out, in section 4.01, seven threshold conditions that all requesting spouses must meet in order for the IRS to grant relief pursuant to section 6015(f). The IRS contends that Mr. Leone fails to meet one of those criteria--i.e. it asserts that he "file[d] the return with fraudulent intent". We have found that this is not so. Mr. Leone was negligent in not performing his duty as a signer of a tax return, but he was not fraudulent--no matter which party has the burden of proof on that point. Since Mr. Leone thus meets the threshold requirements, we proceed to the next step of the analysis. 3. Underpayments. Section 4.02 provides circumstances in which relief will ordinarily be granted as to underpayments (i.e., amounts shown on a return but not paid). On the record before us, it is not clear whether or to what extent underpayments still exist in the years at issue. However, we need not determine that fact, since Mr. Leone clearly fails to meet the first circúmstance in section 4.02--i.e., he is still married to Mrs. Leone. We therefore proceed to 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 16 next step to determine whether relief is available under section 4.03. 4. Facts-and-circumstances test Where the requesting spouse satisfies the threshold conditions of section 4.01 of Revenue Procedure 2003-61, the IRS may grant relief under the facts-and-circumstances test of section 4.03. Under that test the IRS considers a "nonexclusive list of factors" in section 4.03(2) (a) to determine whether "taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable": First factor: whether the requesting spouse is separated or divorced from the nonrequesting spouse. As we have noted, Mr. Leone was not divorced, separated, or living apart from Mrs. Leone when he filed his request for "innocent spouse" relief. This factor weighs against granting relief. Second factor: Economic hardship. Mr. Leone made no showing of economic hardship, so this factor weighs.against granting relief. Third factor: Knowledge or reason to know. As we have shown, Mr. Leone has failed to establish that he did not have reason to know of the item giving rise to the deficiency (i.e., Mrs. Leone's income from 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 17 EMC). This factor weighs against granting relief. Fourth factor: Nonrequesting spouse's legal obligation. Where a divorce decree or other court order gives the nonrequesting spouse a legal obligation to pay the liability, this fact can weigh in favor of granting relief to the requesting spouse. No divorce decree or separation order imposes such a liability- on Mrs. Leone, and this factor therefore weighs against granting relief to Mr. Leone. Fifth factor: Significant benefit. While Mr. Leone did share in the benefit of the EMC income and did share with Mrs. Leone the benefit of the money that they did not use to pay their tax liability, there is nothing in the record that indicates that Mr. Leone "received significant benefit (beyond normal support) from the unpaid income tax liability or item giving rise to the liability", and respondent does not contend that he did. Therefore, this factor weighs moderately in favor of relief. See Magee v. Commissioner, T.C. Memo. 2005-263. Sixth factor: Compliance with Federal tax laws. The parties have stipulated that as of the time Mr. Leone requested relief under section 6015 in July 2008, the Leones had not filed Federal tax returns for 2006 or 2007. However, the record does not show 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 18 state of their filings when the adverse determination - was issued on April 30, 2009. Respondent has made no explicit contention about Mr. Leone's compliance, so we assume that this factor is neutral. Seventh factor: abuse. There is no evidence or allegation that Mrs. Leone abused Mr. Leone. Therefore, this factor is neutral. Eighth factor: mental or physical health. Mr. Leone has not alleged, nor does the record show, that his mental or physical health was poor at the relevant times. Therefore, this factor is neutral. When we weigh the facts and circumstances implicated in these.eight factors, we find that Mr. Leone is not entitled to relief from joint liability as to the tax at issue. Three factors are neutral, four factors weigh against relief, and only one factor weighs moderately in favor of relief. Mr. Leone knew that Mrs. Leone earned income from EMC, and the interpretation of events that is favorable to him--which interpretation we have adopted--involves Mr. Leone's assuming that Mrs. Leone must have reported that income on the returns. Mr. Leone signed the returns under that assumption, and he therefore necessarily undertook to bear a joint liability for the tax on her EMC income. There :Us no injustice or 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 19 inequity in now holding him liable for that tax. Mr. Leone lived with and continues to live with Mrs. Leone; he showed no economic hardship that would result if relief were not granted; he should have known of the understatement reflected on the return; and Mrs. Leone is not under any order or decree to pay the liability. As a result, when the facts and circumstances are weighed, Mr. Leone is not entitled to "innocent spouse" relief under section 6015(f) with respect to the Leones' joint liability for income tax for 1999 through 2005. 5. Fraud penalty However, in addition to the roughly $53,000 in additional tax that Mr. Leone had reason to know, at least in a general sense, that he and his wife owed for those seven years, there is also at issue here nearly $40,000 in fraud penalties. These call for a different analysis and a different outcome. We find that he did not actually know that his wife omitted her income from the returns, nor did he know that his wife suppressed information returns reporting her income to the IRS; and therefore Mr. Leone was not actively involved in his wife's fraud, and he was not personally fraudulent in signing the returns. If he had thereafter divorced his wife, making himself Heritage Reporting Corporation (202) 628-4888 i 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 20 eligible for relief under section 6015(c), he could be relieved from this $40,000 liability. Thus, the IRS's application of section 6015 results in an unintended and perverse marriage penalty. We decline to follow that application. Considered on his own, Mr. Leone had no fraudulent intent. After seeing him and evaluating his testimony, we conclude that this is so even if he bears the burden of proof on this point, as respondent seems to think that he does. That being the case, it would not be equitable to hold the unwitting Mr. Leone liable for the fraud penalty arising from Mrs. Leone's failure to report Mrs. Leone's income. See Cheshire v. Commissioner, 115 T.C. 183, 197-200 (2001), affd. 282 F.3d 326 (5th Cir. 2002); Rowe v. Commissioner, T.C. Memo. 2001-325. In sum, we find that Mr. Leone is not entitled to relief under section 6015(b), (c), or (f) from joint liability for income tax for 1999 through 2005 but that he is entitled to relief under section 6015(f) from joint liability for the section 6663 fraud penalty for each of those years. This concludes the Court's oral Findings of Fact and Opinion in this case. // Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 io 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 11:44 a.m., the bench opinion in the above-entitled matter was concluded.) 21 // // // // // // // // // // // // // // / // // // // // // // // Heritage Reporting Corporation (202) 628-4888