TAX COURT OPINION

Case: Nicholas Champeau, Petitioner and Solongo Erdenekuyag, Intervenor
Docket Number: 22869-13
Judge: Gustafson
Opinion Type: bench
Filed: 03/18/2015
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 NICHOLAS CHAMPEAU, PETITIONER AND ) ) SOLONGO ERDENEKUYAG, INTERVENOR, ) ) ) ) Docket No. 22869-13. v. PA COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceedings at Washington, D.C., on March 4, 2015, it is ORDERED that the Clerk of the Court shall transtnit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before the undersigned judge at Washington, D.C., containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, an appropriate order and decision will be entered for petitioner. (Signed) David Gustafson Judge Dated: Washington, D.C. March 18, 2015 SERVED Mar 19 2015 Capital Reporting Company 3 1 Bench Opinion by Judge David Gustafson 2 March 4, 2015 3 Nicholas Champeau, Petitioner & Solongo Edenekuyag, f 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Intervenor v. Commissioner Docket No. 22869-13 THE COURT: The Court has decided to render the following, as its oral Findings of Fact and Opinion in this case. It 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 (26 U.S.C.), and Rule 152 of the Tax Court Rules of Practice and Procedure. By a Notice of Deficiency dated July 1, 2013, the Internal Revenue Service (IRS) determined against petitioner Nicholas Champeau and his divorced wife Solongo Erdenekuyag, for the year 2011, a deficiency of Federal income tax in the amount of $8,963 and a 20-percent accuracy-related penalty under section 6662(a) in the amount of $1,777. The deficiency arose from unreported compensation of Ms. Erdenekuyag, which is not disputed in this case. Mr. Champeau timely filed his unilateral petition in this 23 Court on September 30, 2013, seeking relief from 24 25 liability as an innocent spouse, pursuant to section 6015. At that time he resided in Maryland. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 The trial of this case was held on March 2, 2015. At the trial Mr. Champeau represented himself, and respondent was represented by John D. Ellis. On January 23, 2014, Ms. Erdenekuyag had filed a notice of intervention; but she failed to appear when this case was called from the calendar for trial (pursuant to notice duly served on her on October 1, 2014, and consistent with our order of February 4, 2015, reminding the parties of the trial schedule), so we 10 will dismiss her from the case pursuant to Rule 11 12 13 14 15 16 17 18 19 20 21 22 23 24 123(b) for failure to prosecute. We hold that Mr. Champeau is entitled to relief pursuant to section 6015(c). FINDINGS OF FACT In 2011 Mr. Champeau was unmarried. He was acquainted with Ms. Erdenekuyag and learned that she did not have but desired to obtain permanent resident status in the U.S. To facilitate this effort, she intended to enter into a marriage of convenience with a U.S. citizen of Mr. Champeau's acquaintance, but the man developed "cold feet", and Ms. Erdenekuyag lacked a citizen-groom. Mr. Champeau is a U.S. citizen, and he admired Ms. Erdenekuyag and her family, so he decided to cooperate with her by 25 marrying her in order to enable her to obtain 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 permanent resident status. They married in the courthouse in March 2011. They never lived together as husband and wife, and instead she continued to live in her father's household in Rockville, Maryland, with other family 6 members, while Mr. Champeau lived in Potomac, 7 Maryland. Mr. Champeau admits the marriage was "less 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 than genuine". They were amicably divorced in 2013. In 2011 Mr. Champeau came to understand that, in order for Ms. Erdenekuyag to claim marriage to a U.S. citizen in support of her attempt at permanent residency, it was important that she file a joint income tax return with her putative husband. Therefore, Mr. Champeau agreed to file a 2011 income tax return jointly with Ms. Erdenekuyag. He was aware that she had worked "periodically" and had earned some amounts of income, but she told him that her earnings had been small and had been paid in cash. He did not require of her any specific accounting as to the amounts of her earnings or the identities of her payors. Mr. Champeau did not take Ms. Erdenekuyag with him to his income tax return preparer; and she did not see any draft of the return before it was electronically filed by the preparer. Several payors thereafter reported to the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 IRS that in 2011 they had paid nonemployee compensation to Ms. Erdenekuyag in amounts totaling $24,371. The IRS therefore recomputed the couple's joint liability by including these amounts and issued its notice of deficiency. Only Mr. Champeau filed a 6 petition challenging the tax deficiency and penalty. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Although not using these terms, the petition seeks innocent spouse relief under section 6015. I. Standard and scope of review OPINION When determining whether a taxpayer is entitled to relief under section 6015 (whether under subsection (b), (c), or (f)), we conduct a trial de novo. Porter v. Commissioner, 130 T.C. 115, 117 (2008). For all claims under section 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, 210 (2009). 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 joint and several. That is, each 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 spouse is responsible for the entire joint tax liability. (Itc. Champeau does not claim that he and Ms. Erdenekuyag were not husband and wife for purposes of section 6013 and does not otherwise dispute that a joint return was filed.) Section 6015 provides for relief from that joint liability. Except as otherwise provided in section 6015 (as in one instance mentioned below), the taxpayer bears the burden of proof. See sec. 6015(c)(2); Rule 142(a). Section 6015 grants relief 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 (b) and (c) is not available. We consider Mr. Champeau's claim for relief under all three subsections. A. Subsection (b) Section 6015(b) provides for relief for an innocent spouse where the joint return reflects an understatement of tax attributable to erroneous items of the other spouse. However, the several requirements of subsection (b) include two that Mr. Champeau does not satisfy: 1. Knowledge Subsection (b) relief is available only where 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 8 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 the requesting spouse "establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement". Sec. 6015(b)(1)(C). We believe that Mr. Champeau did not know the precise amounts or payors of Ms. Erdenekuyag's unreported income, but he did know that she had some unknown amount of income which he knowingly omitted from the return. He claims that he did so because he considered the amounts "negligible", but he also repeated in his testimony that the amounts were paid in cash. Of course, that amounts are paid in cash is no reason that they are not taxable. Cash income is taxable and must be reported. But amounts paid in cash are not likely to come to the attention of the IRS, and we think that probably this is the reason he did not inquire further about her income -i.e., because he thought the IRS would never know. He had reason to know that there was an understatement in some amount and reason to know that it might be greater. 2. Inequitable Subsection (b) relief is available only where, "taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 attributable to such understatement". Sec. 6015(b)(1)(D). Here the filing of the joint return was part of an effort to contrive deceptive circumstances to assist an immigration effort. Mr. Champeau undertook to file a joint return with a person with whom he did not live and who was a member of another household. He did not investigate her acknowledged receipt of some income but instead prepared and filed the return without even showing it to her for confirmation or correction. Any actual ignorance that he suffered about Ms. Erdenekuyag's income amounts was the result of his lack of a real relationship with her. His very purpose in filing 14 the joint return was to deceive immigration 15 officials; and we are not persuaded that, in doing 16 17 18 19 20 21 22 23 24 25 so, he made a sincere effort to correctly report the couple's total income to the tax officials. B. Subsection (c) Section 6015(c) is rather different from the other subsections. Where a couple that filed jointly has divorced, section 6015(c) allows a taxpayer to elect to have his liability for a deficiency to be recomputed separately, without the items of the other taxpayer. Mr. Champeau is not rendered ineligible for this election by most of the requirements of that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 subsection (c); however, this relief is not available "[i]f the Secretary demonstrates that an individual 3 making an election under this subsection had actual 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 knowledge, at the time such individual signed the return, of any item giving rise to a deficiency". Sec. 6015(c)(3)(C). Because the statute requires that "the Secretary demonstrates" this actual knowledge, the burden of proof on this particular is on the Secretary, see sec. 6015(c)(2); and what respondent must prove is "actual knowledge" of an "item". Under this statute, we look for "an actual and clear awareness (as opposed to reason to know) of the existence of an item which gives rise to the deficiency (or portion thereof)." Cheshire v. Commissioner, 115 T.C. 183, 195, aff'd, 282 F.3d 326 (5th Cir. 2002). We do not infer actual knowledge from a mere reason to know of the omitted income. See 26 C.F. R. sec. 1.6015-3(c)(2)(iii). Keeping in view the Commissioner's burden of proof, we observe he has proved only that Mr. Champeau had actual knowledge of the vague generality that Ms. Erdenekuyag had some income, from an unspecified source or sources, in an amount he thought to be "negligible". The question is whether the Commissioner has thus carried his burden to prove 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 actual knowledge of three income "items" totaling $24,371. See Sowards v. Commissioner, T.C. Memo. 2003-180, slip op. at 39-41, and cases cited therein. A We cannot say that the Commissioner has carried his burden. Mr. Champeau is therefore entitled to elect relief under section 6015(c). To state what should be obvious, we reach this result not from equitable considerations (which tend instead against Mr. Champeau) but from application of 10 the actual knowledge standard and the burden of proof 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 provision that Congress enacted in section 6015(c). C. 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)". However, relief is available under subsection (f) "only if ... relief is not available to such individual under subsection (b) or (c)." Since we have found that Mr. Champeau is eligible for relief under subsection (c), he cannot obtain equitable relief under subsection (f). (For the reasons we stated above, such equitable relief would not be available to Mr. Champeau in any event.) 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 12 In sum, we find that Mr. Champeau is entitled to relief under section 6015(c). We will dismiss Ms. Erdenekuyag from the case and enter decision in Mr. Champeau's favor. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 3:08 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