TAX COURT OPINION

Case: Snjezana Mahan & Melville Mahan
Docket Number: 7491-16
Judge: Nega
Opinion Type: bench
Filed: 03/20/2018
Pages: 16

CLC UNITED STATES TAX COURT WASHINGTON, DC 20217 SNJEZANA MAHAN & MELVILLE MAHAN, Petitioners, v. ) ) ) ) Docket No. 7491-16. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge Joseph W. Nega at San Francisco, California, on February 14, 2018, 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, decision will be for respondent. (Signed) Joseph W. Nega Judge Dated: Washington, D.C. March 20, 2018 SERVED Mar 20 2018 Bench Opinion by Judge Joseph W. Nega February 14, 2018 Snjezana Mahan & Melville Mahan v. Commissioner of 3 Internal Revenue Docket No. 7491-16 The Court has decided to render the following as its oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. In this Bench Opinion, unless otherwise 1 2 3 4 5 6 7 8 9 10 indicated, all section references are to the Internal 11 Revenue Code in effect for the year at issue, and all Rule 12 references are to the Tax Court Rules of Practice and 13 Procedure. This Bench Opinion is rendered pursuant to 14 section 7459(b) and Rule 152, and this opinion shall not 15 be treated as precedent for any other case. 16 17 18 Petitioner Snjezana Mahan (Ms. Mahan) appeared pro se. David M. Carl appeared on behalf of respondent. Respondent determined a deficiency of $3,448 in 19 petitioners' Federal income tax for tax year 2013. The 20 issue remaining for petitioners' tax year 2013 is whether 21 Ms. Mahan is entitled to relief from joint and several 22 liability under section 6015 with respect to the Federal 23 income tax return that she jointly filed with Mr. Mahan. 24 25 FINDINGS OF FACT This case was tried on February 13, 2018, in San cribers (973)406-2250|operations@escribersmet|www.escribem.net Francisco, California. Petitioners resided in California at the time they filed the petition. Since 2009, petitioners have both resided at 3840 Howe St., Apt. 211, Oakland, CA 94611. During 2013, 4 petitioners were married. Petitioners timely filed their Form 1040, U.S. Individual Income Tax Return (return), for tax year 2013. In that return, petitioners elected "Married filing jointly" filing status. Both petitioners signed .and dated their 2013 return on April 14, 2014. In their 2013 return, petitioners reported "Wages, salaries, tips, etc." of $40,515, which represented the wages Ms. Mahan earned that year as a teacher for the city of Oakland. Petitioners did not report any other income in their 2013 return. On January 4, 2016, respondent issued 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 petitioners a notice of deficiency (notice) for the tax 18 year 2013. In that notice, respondent determined, from 19 third party sources, that petitioner Melville Mahan (Mr. 20 Mahan) had failed to report social security/railroad 21 22 23 retirement income and nonemployee compensation in the amounts of $6,900 and $9,520, respectively. On March 28, 2016, respondent received Ms. 24 Mahan's Form 1.040A, U.S. Individual Income Tax Return 25 (separate return), for tax year 2013. In that return, Ms. cribers pf3)406-22soloperationseescritersmet|www.escribers.net 5 1 2 3 4 5 6 7 8 9 Mahan claimed: (1) "Head of household" filing status; (2) a dependency exemption for Mr. Mahan; and (3) a retirement savings credit of $2,224. In her 2013 separate return, Ms. Mahan also reported ome of $40,515, which represented the wages she had earned that year as a teacher for the city of Oakland. Respondent did not accept the 2013 separate return. On March 29, 2016, petitioners filed their petition with this Court. In that petition, petitioners 10 did not dispute any of the issues raised in the notice. 11 12 13 14 15 Instead, petitioners asserted that Ms. Mahan filed her 2013 amended return which should have eliminated her tax burden for the year at issue. On March 10, 2017, Ms. Mahan timely filed Form 8857, Request for Innocent Spouse Relief (Form 8857), in 16 which she sought relief from joint and several liability 17 18 for tax year 2013. On March 27, 2017, respondent's counsel appeared 19 at the calendar call for the Court's March 27, 2017, San 20 Francisco, California, trial session and filed 21 petitioners' Motion for Continuance and Motion For Leave 22 to Amend Petition in order to provide petitioners the 23 opportunity to amend their petition to state a claim for 24 innocent spouse relief for Ms. Mahan. The Court granted 25 petitioners' motions. cribers (973)406-2250loperations@escribers>net|www.escnbers.net I 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 On April 26, 2017, respondent received Ms. 6 Mahan's Form 8857. On May 30, 2017, petitioners filed an amended petition. In that amended petition, petitioners stated that: Snjezana Mahan is claiming innocent spouse relief for the following reasons: 1. 2. S. Mahan did not file/out the [Form] 1040A S. Mahan did not know of any unreported income 3. Because of S. Mahan's limited English language skills she was unaware of any errors when M. Mahan filed the return (such as filing the wrong category) 4. Melville Mahan would typically ask S. Mahan to sign forms without her knowledge of what it was. She trusted everything was done correctly. 5. Melville Mahan told S. Mahan that he did not have to pay tax on his income and she believed that she was paying what she owed on her income. 6. Snjezana Mahan did not know that her (Form] 1040A was filed incorrectly, neither did M. Mahan. 7. Taking into account all the facts and circumstances, it would be unfair to hold Cribers (973)406-2250|operations@escribersmet|www.escnbersaet Snjezana Mahan liable for the understated tax. On June 26, 2017, Mr. Mahan submitted Form 7 12508, Questionnaire for Non-Requesting Spouse (Form 12508). On June 28, 2017,·respondent received from Ms. Mahan an updated Form 8857. Thereafter, respondent's CCISO unit determined that Ms. Mahan is not entitled to innocent spouse relief. I. Innocent Spouse Relief OPINION Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). After 1 2 3 4 5 6 7 8 9 10 11 12 making the election, each spouse is jointly and severally 13 14 liable for the entire tax due for that year. Sec. 6013(d)(3). In certain circumstances, however, a spouse 15 who has filed a joint tax return may seek relief from 16 17 18 joint and several liability under procedures set forth in section 6015. Sec. 6015(a). The Court applies a de novo scope and standard 19 of review in deciding whether a taxpayer is entitled to 20 relief under section 6015. See Wilson v. Commissioner, 21 22 23 705 F.3d 980, 993-994 (9th Cir. 2013), aff'g T.C. Memo. 2010-134; Porter v. Commissioner, 132 T.C. 203, 0 (2009). Except as otherwise provided in section 6015, the 24 taxpayer (requesting spouse) bears the burden of proving 25 entitlement to relief. Rule 142(a); Porter v. (973)406.2250|operations@escribersmet|www.escnbersaet 8 Commissioner, 132 T.C. at 210. Under section 6015(a), a taxpayer may seek relief from joint and several liability under subsection (b), or, if eligible, may allocate liability according to provisions set forth in subsection (c). If a taxpayer does not qualify for relief under either subsection (b) or (c), the taxpayer may seek equitable relief under subsection (f). The Secretary has discretion to grant equitable relief to a spouse who filed a joint return with an unpaid tax liability or a deficiency. Sec. 6015(f) (1); sec. 1.6015-4(a), Income Tax Regs. A. Relief Under Section 6015(b) Section 6015(b)(1) provides that a taxpayer will A be relieved of liability for an understatement of tax if: (A) a joint return has made been for the taxable year in 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 question; (B) there is an understatement of tax 17 attributable to erroneous items of the nonrequesting 18 19 20 21 22 spouse; (C) 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 an understatement"; (D) taking into account all the facts and circumstances, it would be inequitable to hold the requesting spouse 23 liable for the deficiency attributable to the 24 understatement; and (E) the requesting spouse elects to 25 invoke subsection (b) within two years after the date the cribers p73)406-2250|operationspescribersmet|www.escnbers.net 9 1 2 3 4 5 6 7 8 9 Commissioner has begun collection actions with respect to the requesting spouse. The requirements of section 6015(b)(1) are conjunctive. Failure of a requesting spouse to satisfy any one of the elements precludes relief. Alt v. Commissioner, 119 T.C. 306, 313 (2002), aff'd, 101 F. App'x 34 (6th Cir. 2004). Respondent concedes that Ms. Mahan satisfies the requirements of section 6015(b) (1) (A), (B), and (E). 10 Respondent argues, however, that Ms. Mahan does not meet 11 12 the requirements of subparagraphs (C) and (D) because she had reason to know of the understatement and because it 13 would not be inequitable to hold her liable for the 14 deficiency. We need not decide whether Ms. Mahan 15 satisfies the requirements of subparagraph (D) because we 16 17 18 19 find that she failed to satisfy the requirements of subparagraph (C). "An individual has reason to know of the understatement if a reasonably prudent taxpayer in her 20 position at the time she signed the return could be 21 22 23 24 expected to know that the return contained the understatement." Hopkins v. Commissioner, 121 T.C. 73, 77 (2003); see also Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989), aff'g T.C. Memo. 1988-63; sec. 25 1.6015-2(c), Income Tax Regs. Consequently, the cribers (973)406-2250|operations@escribersmet|www.escnbers.net © 10 1 2 3 4 5 6 7 8 9 requesting spouse has a "duty of inquiry" with respect to the income tax return filed. Smith v. Commissioner, T.C. Memo. 2009-237, 2009 WL 3353053, at *3. That duty of inquiry is subjective, focusing on the individual seeking relief. Id. Factors to be considered in making this determination are: (1) the requesting spouse's level of education; (2) the requesting spouse's involvement in the family's business and financial affairs; (3) the presence of expenditures that appear lavish or unusual when 10 compared to the family's past levels of income, standard 11 of living, and spending patterns; (4) the culpable 12 13 14 15 16 spouse's evasiveness and deceit concerning the couple's finances; and (5) whether the requesting spouse failed to inquire, at or before the time the return in question was signed, about items on the return or omitted from the return that a reasonable person would question. Taft v. 17 Commissioner, T.C. Memo. 2017-66, 2017 WL 1382242, at *2; 18 19 20 21 see also Smith v. Commissioner, 2007 WL 3353053, at *3-*4; section 1.6015-2(c), Income Tax Regs. In this case, Ms. Mahan testified that she was aware that her husband, Mr. Mahan, earned self-employment 22 income and social security income at the time they filed 23 24 25 their 2013 return. Ms. Mahan, nonetheless, signed the 2013 return which omitted that income. To the extent that she claims she did not review the 2013 return before she 73)406-2250[operationscescrbersnet|wwwescnbers.net 11 signed it, we note that it does not excuse her from "knowing or having reason to know" of the misstatement on the return. See Olsen v. Commissioner, T.C. Memo. 2009- 294; see also sec. 1.6015-2(c), Income Tax Regs. Accordingly, on the record before us, we find that Ms. Mahan has failed to carry her burden of establishing that she is entitled to relief under section 6015(b). B. Relief Under Section 6015(c) In general, section 6015(c) allows proportionate tax relief (if a timely election is made) through 1 2 3 4 5 6 7 8 9 10 11 12 allocation of the deficiency between individuals who filed 13 14 a joint return and are no longer married, legally separated, or have not resided together for a 12-month 15 period. Such an allocation is not permitted, however, if 16 the Commissioner demonstrates that the individual electing 17 18 relief had actual knowledge, at the time the return was signed, of any item giving rise to a deficiency (or 19 portion thereof) which is not allocable to that 20 21 individual. Sec. 6015(c)(3)(C). For purposes of section 6015(c), unlike for purposes of section 6015(b) and (f), 22 equitable considerations in holding the putative innocent 23 spouse liable for unpaid tax or any deficiency are of no import. 24 25 In this case, petitioners are still married, not cribers (973)406-2250|operations@escribersmet|www.escribers.net legally separated, and have resided together in the same residence since 2009. Accordingly, on the record before us, we find that Ms. Mahan is not entitled to relief under 12 section 6015(c). C. Relief Under Section 6015(f) Section 6015(f) authorizes the Commissioner to grant equitable relief from joint and several liability if, taking into account all the facts and circumstances, it is inequitable to hold a taxpayer liable for any unpaid 1 2 3 4 5 6 7 8 9 tax. 10 11 As directed by section 6015(f), the Commissioner 12 has prescribed procedures to determine whether a taxpayer 13 qualifies for equitable relief from joint and several 14 15 liability. Those procedures are set forth in Rev. Proc. 2013-34, sec. 4, 2013-43 I.R.B. 397, 399-403. The Court 16 considers the procedures set forth in Rev. Proc. 2013-34, 17 18 sec. 4, when reviewing the Commissioner's denial of relief, but we are not bound by them as our determination 19 ultimately turns on an evaluation of all the facts and 20 21 circumstances. See Pullins.v. Commissioner, 136 T.C. 432, 438-439 (2011); Porter v. Commissioner, 132 T.C. at 2107 (3V) 22 Hudgins v. Commissioner, T.C. Memo. 2012-260. 23 24 1. Threshold Requirements for Granting Relief Rev. Proc. 2013-34, sec. 4.01, sets forth seven 25 threshold requirements that must be satisfied before the } cribers (973)406-2250|operations@escribers,net|www.escribersmet 13 1 2 3 4 5 6 7 8 9 Commissioner will consider a request for equitable relief under section 6015(f). On the record before us, we find that Ms. Mahan has met the threshold requirements for relief under section 6015(f). . 2. Conditions for Streamlined Determination If the requesting spouse satisfies the threshold requirements, then Rev. Proc. 2013-34, sec. 4.02, sets forth three conditions that a requesting spouse must satisfy to qualify for a streamlined determination 10 granting relief under section 6015(f). On the record 11 before us, we find that Ms. Mahan does not qualify for a 12 13 14 15 16 streamlined determination under Rev. Proc. 2013-34, sec. 4.02 because she is still married to Mr. Mahan. 3. Factors Used for Granting Equitable Relief If a requesting spouse meets the threshold requirements, but fails to qualify for a streamlined 17 determination, then he or she may still be eligible for 18 19 relief under section 6015(f) if, taking into account all the facts and circumstances, it would be inequitable to 20 hold the requesting spouse responsible for all or part of 21 22 the liability. In making that decision, we will weigh a number of factors. Those factors are: (1) marital 23 status; (2) economic hardship; (3) knowledge or reason to 24 know of the items giving rise to the understatement or 25 deficiency as of the date the joint return was filed; (4) (973)406-2250|operations@escribersmet|www.escribersmet 14 1 2 3 4 5 6 7 8 9 legal obligation to pay the outstanding tax liability; (5) receipt of a significant benefit from the unpaid income tax liability; (6) compliance with income tax laws; and (7) mental or physical health at the time of filing. In making our determination, however, no single factor is determinative, and we may vary the weight we assign to each factor or to include other factors, depending on the specific circumstances of each case. See Pullins v. Commissioner, 136 T.C. at 448; Hall v. Commissioner, T.C. 10 Memo. 2014-171, at *38. 11 The circumstances of this case appear 12 appropriate for application of the factors considered by 13 14 respondent in evaluating Ms. Mahan's claim for equitable relief. Accordingly, we address the factors listed in 15 Rev. Proc. 2013-34, sec. 4.03(2). 16 17 18 a. Marital Status Under this factor, we consider whether the requesting spouse was married to the nonrequesting spouse ½s, O W 4 19 at the time the Commissioner made ter determination. See 20 Rev. Proc. 2013-34, sec. 4.03(2)(a). Ms. Mahan was not 21 22 23 24 25 divorced and, as we stated above, was not living apart from Mr. Mahan when she filed Form 8857. This factor favors respondent. b. Economic Hardship Under this factor, we consider whether the ) cnbers S73)406-2250|operations@escribersmet|www.escnbers.net 15 requesting spouse will suffer economic hardship if relief is not granted. Rev. Proc. 2013-34, sec. 4.03(2) (b). In general, economic hardship exists where payment of the tax liability would cause the taxpayer to be unable to pay reasonable basic living expenses. Butner v. Commissioner, T.C. Memo. 2007-136. Ms. Mahan has not shown that her living expenses exceed her income. This factor is neutral. c. Knowledge or Reason to Know Under this factor, we examine whether the requesting spouse knew or had reason to know of items 1 2 3 4 5 6 7 8 9 10 11 12 giving rise to the understatement or deficiency as of the 13 14 15 date the joint return was filed, or the date the requesting spouse reasonably believed the joint return was filed. See Rev. Proc. 2013-34, sec. 4.03(2)(c)(i) (A). As 16 explained in our discussion of section 6015(b) relief, Ms. 17 Mahan's signing of the return without properly reviewing 18 19 it does not excuse her from "knowing or having reason to know" of the misstatement on the return. See Olsen v. 20 Commissioner, T.C. Memo. 2009-294. Moreover,. as we 21 mentioned above, Ms. Mahan had knowledge that Mr. Mahan 22 earned self-employment income and social security income 23 at the time they filed their 2013 return. This factor 24 25 favors respondent. d. Nonrequesting Spouse's Legal Obligation (973)406-2250|operations@escribersnet|www.escribers.net 16 Under this factor, we consider whether the requesting spouse had a legal obligation arising from a divorce decree or another binding agreement to pay the outstanding tax liability. Rev. Proc. 2013-34, sec. 4.03(d). Since petitioners were not divorced at the time Ms. Mahan filed her Form 8857, there is no divorce decree or separation order to impose such a liability on Mr. Mahan. This factor is neutral. e. Significant Benefit Under this factor, we consider whether the requesting spouse received a significant benefit, beyond normal support, from the unpaid tax liability. Rev. Proc. 2013-34, sec. 4.03(2)(e). Neither petitioner received a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 significant benefit. This factor is neutral. 15 16 17 18 f. Compliance with Federal Tax Laws Under this factoq3we consider whether the requesting spouse made a good-faith effort to comply with the income tax laws for the taxable years following the 19 year for which relief is requested. Rev. Proc. 2013-34, 20 sec. 4.03(2)(f). Ms. Mahan has a history of insufficient 21 withholding on both separate and joint returns. In fact, 22 petitioners' 2014 return is currently under audit. This 23 24 25 factor favors respondent. g. Mental or Physical Health Under this factor, we consider whether the cribers (973)406-2250|operations@escribersmet|vmsescribers.net . requesting spouse was in poor physical or mental health. Rev. Proc. 2013-34, sec. 4.03(2)(g). There is no evidence of mental or physical health problems. This factor is 17 neutral. 4. Conclusion In summary, three of the factors weigh in favor of respondent (i.e., against granting relief), while the remaining factors are neutral. However, our decision whether relief is appropriate is not based on a simple tally of factors. See, e.g. udgins v. Commissioner, T.C. Memo. 2012-260. Rather, our decision is heavily influenced by the totality of the circumstances in this case. Weighing all the facts and circumstances, we are not persuaded to grant Ms. Mahan relief from joint and several liability under section 6015(f). II. Conclusion Accordingly, a decision will be entered for respondent. This concludes the Court's oral findings of fact and opinion in this case. In reaching our holdings 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 herein, we have considered all arguments made by the 21 parties, and to the extent not mentioned above, find those 22 arguments moot, irrelevant, or without merit. 23 24 25 (Whereupon, at 10iOO a.m., the above-entitled matter was concluded.) cribers (973)406-2250|operations@escriberssiet|wwnescribers.net