TAX COURT OPINION

Case: Emily W. Adams, Petitioner, and Daniel Scott Adams, Intervenor
Docket Number: 17304-13
Judge: Holmes
Opinion Type: bench
Filed: 01/12/2015
Pages: 19

Sec-km 606%id S b elm85 UNITED STATES TAX COURT WASHINGTON, DC 20217 EMILY W. ADAMS, Petitioner, and DANIEL SCOTT ADAMS, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent. · ) ) ) ) ) Docket No. 17304-13. ) ) ) ) ) ) ) ORDER This case was tried during the Court's Septernber 22, 2014 trial calendar for Phoenix, Arizona. The Court gave an oral opinion after trial, and under Tax Court Rule 152(b), it is sending a copy of the transcript pages that contain that opinion to all the parties. It is therefore, ORDERED that the Clerk of the Court shall transmit herewith to petitioner, intervenor and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Mark V. Holmes at Phoenix, AZ, on October 3, 2014 containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the opinion, decision will be entered for respondent. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. January 12, 2015 SERVED JAN 1 4 2016 Capital Reporting Company 3 1 Bench Opinion by Judge Mark V. Holmes 2 October 3, 2014 3 4 5 6 Emily W. Adams, Petitioner, and Daniel Scott Adams, Intervenor v. Commissioner Docket No. 17304-13 THE COURT: In the case of Emily W. Adams, 7 Petitioner, and Daniel Scott Adams, Intervenor v. 8 9 10 11 12 13 14 15 Commissioner, Docket No. 17304-13, 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. This is an innocent spouse case that began 16 with a petition filed by Emily Adams seeking relief 17 18 19 20 21 22 23 24 25 from joint liability of approximately $50,000 in unpaid taxes from the 2008 through the 2010 tax year. She and her former husband were both Arizona residents at the time she filed the petition. The parties reached a stipulation and together with the exhibits admitted during trial and their testimony, we have a record in the case. The usual rules about innocent spouse relief apply to this case. Spouses who file joint 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 returns are jointly and separately liable for the tax owed. See section 6013(d)(3). Section 6015 provides three ways out of this joint liability. See section 6015(b)(c)(f). These subsections address the same general problem but differ in important ways. Relief under subsection F is available for a spouse who shows that "taking into account all the facts and circumstances it is inequitable to hold her liable for any unpaid tax or any deficiency or any portion of either." The basic facts in this case are that Emily and her former husband Scott Adams were married in 2004. They have two minor children, and during the tax years at issue Mr. Adams worked as a medical device salesperson. Mrs. Adams mostly worked inside the home raising their small children. In each of the three years in issue, she and her husband's 18 withholding and estimated tax payments were not 19 20 enough to cover the amount of tax owed based on their filed returns. The Adams did not submit a payment 21 with any of their returns and this resulted in 22 23 24 25 assessed deficiencies of $19,910 for 2008, $8,314 for 2009 and $19,744 for 2010, each of which resulted from underpayment. The standard of review in an innocent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 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 spouse case and the scope of review have both determined to be de novo. See Porter v. Commissioner, 132 T.C. 203, 210 (2009). What this means is that I use as my standard of review what I saw at trial; those exhibits, the testimony and a stipulation that the parties agreed to. The scope of review means I give no deference to what the IRS gave to Mrs. Adams. It is customary, nevertheless, even though I don't defer to the IRS, to apply the factors and the method of the current revenue procedure that the IRS itself uses to determine whether innocent spouse relief should be granted. For this case, which was still in the system under relevant and revenue procedure was promulgated, that revenue procedure is 2013-34. It has three parts, reshold part, all of whose conditions a requesting spouse must meet. A streamlined relief part, which will give an innocent spouse relief if she or he meets the streamlined conditions. Or, the ever-popular balancing test of non-exclusive factors. Let me go over first the threshold conditions. These are found in section 4.01 of the Revenue Procedure. I'll take them in reverse order. 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 22 23 24 25 The first is that the income tax liability from which the requesting spouse seeks relief is attributable to an item of the non-requesting spouse or an underpayment resulting from the non-requesting spouse's income. This has been stipulated in as much as Mrs. Adams had no outside income during the years in questioned. The second threshold condition is that the requesting spouse did not knowingly participate in the filing of a fraudulent tax return. The parties stipulated to this. Next, the requesting spouse did not transfer disqualified assets to the requesting spouse. The parties again stipulated to this. Next, that no items were transferred between the spouses as part of a fraudulent scheme. The parties stipulated to this. Mrs. Adams' claim for relief was clearly timely filed, nobody challenged that. And relief is not available to her under section 6015(b) or (c) because this is an underpayment case, not an understatement case. That leaves only one contested factor among these threshold conditions for relief. And that's the first one actually listed in 4.01 of the Revenue Procedure. Whether or not the requesting spouse filed a joint return for the taxable year for which 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 she seeks relief. The problem here is that the Adams . 7 being a young couple in the 21st century filed electronically, which means tracking down a signature is very hard to do. It is clear from the testimony of the parties that Mr. Adams took the lead in getting information to their accountsag, to their accountant that prepared and filed the tax returns. But there was no physical signing. Mrs. Adams claims that there was no joint return. Nevertheless, she suffers here from some contradictions. In her administrative hearing at Exhibit 1-J(8) she actually did sign a statement that said that she had signed the last page of the returns but now she tells a different story, see Exhibit 11-J(2). However, it has long been the case in tax law and that it is "settled that where an income tax return is intended by both spouses as a joint return, the absence of the signature of one spouse does not prevent their intention from being realized . . . . the question of the spouses' intentions is one of fact." Estate of Campbell v. Commissioner, 56 T.C. 1, 12 (1971). The Court considers four factors in determining whether a non-signing spouse intended to file a joint return; and those factors are whether 866.488.DEPO www.CapitalReportingCompany.com Capital Repor.ting Company 8 1 the couple had a history of filing joint returns, 2 whether the non-signing spouse relied on the signing 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 spouse to handle financial matters, whether the non- signing spouse's income was reported on a joint return, and whether the non-signing spouse filed a separate return. Here, Mr. and Mrs. Adams historically filed jointly. There was proof that they had done so in the first four years of their marriage that were not at issue in this case. Also, Mrs. Adams repeatedly stated that she relied on Mr. Adams to handle the family's finances including saying so on her Form 8857, the form she used to request innocent spouse relief. The third factor isn't really applicable here because Mrs. Adams didn't have any individual income for the taxes at issue. And the fourth factor isn't really that relevant here because Petitioner, I'm sorry, and the fourth factor is met here because 19 Mrs. Adams did not file individual returns at any 20 21 22 23 24 25 time during her marriage being the Intervenor, including tax years 2008, 2009, and 2010, the years that I was here to decide. This is relevant even for somebody who works inside the home, of course, in a community property state. Therefore, I find on this factor that Mrs. Adams passively consented to the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 filing of joint returns for the tax years at issue. And the joint returns that were filed are valid as to both Adams'. The threshold conditions for granting an innocent spouse relief therefore are met. Next up is whether streamlined relief is available for Mrs. Adams under the provisions of section 4.02 of the relevant revenue procedure. Here there are three factors that I'm told to consider. If all are present then Mrs. Adams would be entitled to relief. But there are problems with a couple of the factors and since this is an all or nothing test, I will only add one here; the factor of knowledge or reason to know. Here the key question is whether or not Mrs. Adams knew or had reason to know that Mr. Adams was not going to be paying the taxes reported on their joint income tax returns. I focused on the date that the return was filed and I asked whether Mrs. Adams knew or had reason to know that her husband would not or could not pay the tax liability at that time or within a reasonable period of time after the filing of those returns. This factor weighs in favor of relief, if 23 Mrs. Adams reasonably expected her husband to pay the 24 25 tax liability reported on those returns. This factor weighs against relief if based on the facts and 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 circumstances of the case, it wouldn't be reasonable for Mrs. Adams to have believed that her husband would or could pay the tax liability shown on the return. For example, if the return is being filed and the requesting spouse, in this case Mrs. Adams, knew of her husband's financial difficulties or other issues with the service or other creditors or was otherwise aware of difficulties in timely paying 9 bills, then this factor generally weighs against 10 11 12 relief. Mrs. Adams said in her application for innocent spouse relief, Exhibit 11-J, "We always had 13 bills that went unpaid," referring to the period at 14 15 16 17 18 19 20 21 22 issue. Mr. Adams credibly testified that Mrs. Adams knew that the tax bills were going unpaid and that under-withholding was a problem for the couple, but he said they did it to increase their cash flow, and both indeed spent the resulting increase in that cash flow. Nevertheless, knowledge can, even in a spouse, who is requesting relief who has knowledge, can meet this factor if the non-requesting spouse 23 maintained control of the household finances by 24 25 restricting the requesting spouse's access to financial information or financial control. And the 866.488.DEPO www.CapitalReportingCompany.com 9 Capital Reporting Company 11 requesting spouse was not able to question the payment of the taxes reported as due on the return for fear of retaliation or because of that control by the non-requesting spouse. Now, Mrs. Adams did claim that this was the case when she sought relief but she conceded on cross -examination that she would often paid the bills herself online early in their marriage and she was in effect, extremely effective on cross-examination. It was shown that her signature was even on checks drawn on the one account that her husband started late in the marriage when he was trying to get a firmer financial foothold. Her signature appeared even on checks to the Arizona Department of Revenue. She explained that she didn't know what the Arizona Department of Revenue was and had no idea what that government agency did. This was clearly incredible testimony. My conclusion is, thus forth, that Mrs. Adams knew or had reason to know of the underpayment and therefore. she is not qualified for streamlined relief. It is then time to go to the third part of any innocent spouse opinion and move on to section 403 of the revenue procedure, the balancing test of several non-exclusive factors. In this case the . 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 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 factors listed are the only ones I will consider because none of the parties raised any additional possible factors for me to include in my analysis. The first factor listed in the revenue procedure is the martial status of the parties. If the requesting spouse is no longer married to the non-requesting spouse, this factor weighs in favor of relief and, of course, that includes being divorced, and the parties stipulated that they were divorced. This is a positive factor for Mrs. Adams. The second factor is economic hardship. This was an extremely contested factor between Mr. and Mrs. Adams. According to the revenue procedure whether the requesting spouse will suffer economic hardship if relief is not granted is an important factor. For purposes of this factor and economic hardship exists if satisfaction of the tax liability in whole or in part will cause the requesting spouse to be unable to pay reasonable basic living expenses. 20 Whether the requesting spouse will suffer economic 21 22 23 24 25 hardship is determined based on rules similar to those provided in 26 C.F.R. 301.6343-1(b)(4). And the service will take into consideration which means that the Tax Court will take into consideration whether a requesting spouse's current income and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 expenses and the requesting spouse's assets. In determining the requesting spouse's reasonable basic living expenses I'll consider whether the requesting spouse shares expenses or has expenses paid by another individual such as a family member. If denying relief from the joint and several liability 7 will cause the requesting spouse to suffer economic 8 9 10 11 hardship this factor will weigh in favor of relief. If not, the factor is neutral. In determining whether the requesting spouse had suffered economic hardship like the .12 service, I'll compare the requesting spouse's income 13 14 to the federal poverty guidelines as updated periodically by the Department of Health and Human 15 Services. This tells me to consider the family's 16 size, in this case a family size of three because 17 Mrs. Adams won custody for the most part of her two 18 small children, and will determine by how much, if at 19 all, the requesting spouse's monthly income exceeds 20 21 22 23 24 25 the spouse's reasonable basic living expenses. The factor weighs in favor of relief if the requesting spouse's income is below 250 percent of the federal poverty guidelines. If it's greater than 250 percent of the federal poverty guidelines the factor still weighs in favor of relief. If the monthly income of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 the requesting spouse exceeds her reasonable basic 2 monthly living expenses by $300 or less the revenue 3 4 5 6 7 procedure tells me to consider her assets as well but because she had next to no assets that's a non-factor in this case. If the requesting spouse's income exceeds 250 percent of the federal poverty guidelines and the monthly income exceeds monthly expenses by 8 more than $300 the service and the Courts will 9 consider all the facts and circumstances in 10 11 12 13 14 15 determining whether the requesting spouse would suffer economic hardship if relief·were not granted. Again, here Mrs. Adams suffered some rather severe credibility problems. Her income at the time of her application she reported to be only $2,250 but she admitted doing part-time work even during her 16 marriage and especially in its latter stage that she 17 18 19 20 simply didn't report to the IRS. Then the income numbers began fluctuating. She reported during the administrative appeal that she earned $5,000 a month in wages and had $5,700 a month in income. In an 21 April 13, 2013 letter she reported $6,600 in monthly 22 23 24 25 income and $5,000 in wages. And finally at trial $7,375 in monthly income, again, with $5,000 in wages. But right before the trial suspiciously when this procedure was brought to her attention she 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 reported that she had only $2,500 in wages and $3,900 in monthly income. Now for a family of three, and here I'll treat her as having full-time custody, of her children to be generous in the analysis, 250 percent of the federal property guidelines for a family of her size would be about $4,123 a month. Her monthly expenses range again, as with her income 8 wildly over the exhibit one looks at, but they seem 9 to cluster around $5,461 in income and $3,663 in 10 11 expenses. In any event, in all but that one letter that was submitted on the eve of trial, she reported 12 monthly income that was more than $300 in excess of 13 14 15 16 17 18 19 20 21 22 23 the reasonable basic monthly expenses. The real problem that she faces is that as in her marriage her spending habits vastly exceed the normal for somebody who is being reasonable and prudent. This is the key fact and circumstance that I have to consider here. And so I conclude that this economic hardship factor is not key in favor of relief. As I discuss the next factor, knowledge of under payment, I already discussed as a factor in the streamlined analysis. This is a negative factor for 24 Mrs. Adams. A positive factor for her, however, is 25 the legal obligation in which the Divorce Court said 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company . 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 belonged to her husband. And the parties acknowledged this is paragraph 55 of their joint stipulation. The next factor after that is whether Mrs. Adams received a significant benefit from the failure to pay the taxes. Here, I have to see whether she significantly benefitted from the unpaid income tax liability. A significant benefit is defined somewhat unhelpfully as any benefit in excess of normal support. If a requesting spouse receives a significant benefit this factor, of course, weighs against relief. And the revenue procedure stresses that whether the amount of unpaid tax is so small that neither spouse received a significant benefit 15 will vary depending on the facts and the 16 17 18 19 20 21 22 23 24 25 circumstances of the case. Here again, remember that it's about $60,000 in unpaid tax that's at issue. She admitted in her questionnaire to the IRS, Exhibit 11-J(2), that she did receive significant benefit. Although, she specified that it was private school tuition for her children. But the trial showed a persistent purchasing problem. She has a very large spending problem and a very large amount of what was spent in the family reflected what she describes as a "you sell, I spend" way of life, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 her husband being a salesman, that refers to him. She testified that she regarded any expenditure over $100 as something that was extraordinary but cross- examination again, extremely effective in this case. It brought out numerous, numerous examples of seemingly unreasonable expenses that she incurred for her own benefit during the course of the years in question. I find that this weighs against her. As to the compliance with income tax laws the revenue procedure says that this should weigh in a requesting spouse's favor if she has made a good faith effort to comply with the income tax laws in the years following the years for which request relates. We have data for three years and it's a tiny bit mixed. She didn't file any tax returns in 2011, the year immediately after the divorce, but she was getting her foothold as a single person and so she might not have had the income necessary to file. Now, she did file a return in 2012 and she has not yet filed a return for 2013, but she is still legal because she got a request for an automatic extension. So she's compliant, but maybe. To recap these factors, there's three positive factors. She is divorced. Mr. Adams is legally obliged under the terms of the divorce decree 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 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 to pay the outstanding tax debt, and she has compliant with the tax laws as far as we know for the years after she and her husband split. A neutral factor is that she would not suffer economic hardship as a result of having to bear her share of the tax debt. But very significant negative factors are that she knew about and I find she received some significant benefit as a result of her excessive spending. Now this leaves, of course, a mixed picture with some factors weighing in favor, some neutral and some negative. And as in any multi- factor balancing test the Court has to have something in mind as the appropriate fulcrum when there are factors weighing down both sides of the lever. And here, what I do is I look at the economic uni.ty of the household filing a joint return and I ask myself whether it's been broken down by the actions of the non-requesting spouse in a way that did not allow the requesting spouse a reasonable 20 exit. As the Second Circuit once wrote the innocence 21 22 23 24 25 we look for, "within the meaning of the statute is innocent vis-à-vis a guilty spouse whose income is concealed from the innocent and spent outside the family." Bliss v. Commissioner, 59 F.3d 374, 380 n.3 (2d Cir. 1995) (discussing former section 6015) affg. 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 19 1 2 3 4 5 6 7 8 9 T.C. Memo 1993-390. Here, not only was there no reason for Mrs. Adams to exit the economic unity of the Adams household, but she continued spending and living a life based on her husband' s income and benefi ting from the couple's failure to pay their taxes. She benefi ted from the economic unity that resulted. So I conclude that on balance Mrs. Adams is not entitled to relief under section 6015 and I'll uphold the 10 Commissioner's decision not to grant it to her. This concludes the Court's Oral Findings of Fact and Opinion of this case. The decision will be entered for respondent. (Whereupon, at 1:52 p.m., the above- entitled matter was concluded.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 19 20 21 22 23 24 25 Capital Reporting Company 20 CERTIFICATE OF TRANSCRIBER AND PROOFREADER CASE NAME: Emily W. Adams, Petitioner, and Daniel Scott Adams, Intervenor v. Commissioner DOCKET NO.: 17304-13 We the undersigned, do hereby certify that the foregoing pages, numbers 1 through 20, inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Grant Dayley, on October 3, 2014, before the United States Tax Court at its session in Phoenix, Arizona, in accordance with the applicable provisions of the current verbatim reporting contract of the Court, and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Lisa Peltonen (Transcriber) 10/8/14 (Date) Kathleen Huczek 10/8/14 (Proofreader) (Date) 866.488.DEPO www.CapitalReportingCompany.com