TAX COURT OPINION

Case: Crystal J. Kelly
Docket Number: 26554-08
Judge: Colvin
Opinion Type: bench
Filed: 12/04/2009
Pages: 14

UNITED STATES TAX COUR T i WASHI NGTON , DC 2021 7 CRYSTAL J . KELLY, Petitione r v . ) Docket No . 26554-08 . COMMISSIONER OF INTERNAL REVENUE , Respondent O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge L . Paige Marvel at New Orleans, Louisiana, on November 16, 2009, containing her oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be entered for petitioner . (Signed) L . Paige Marvel Judge Dated : Washington, D .C . December 4, 2009 VED DEC - 7 2009 14, 3 1 Bench Opinion by Judge L . Paige Marve l 2 Docket No . 26554-09 November 19, 2009 3 Crystal J . Kelly v . Commissione r 4 THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT 5 AND OPINION IN THIS CASE, AND THE FOLLOWING REPRESENTS 6 THE COURT'S ORAL FINDINGS OF FACT AND OPINION . THE 7 ORAL-FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED 8 UPON AS PRECEDENT IN ANY OTHER CASE . 9 These oral findings of fact and opinion are 10 rendered in accordance with and pursuant to section 11 7459(b) of the Internal Revenue Code and Rule 152 of 12 the Tax Court Rules of Practice and Procedure . Unless 13 otherwise indicated, subsequent section references . 14 made in this opinion are to the Internal Revenue Code 15 of 1986 as amended in effect for the relevant period, 16 and rule references are to the Tax Court Rules o f 17 Practice and Procedure . 18 Petitioner Crystal J . Kelly appeared pro se . 19 John K . Parchman appeared on behalf of respondent . 20 Petitioner filed this proceeding to 21 challenge respondent's determination, made in a notice 22 of determination dated July 31, 2008, that she is no t 23 entitled to relief under section 6015(b), (c) or (f) 24 with respect to the joint and several federal income 25 tax liability that she and her former husband, Jody Heritage Reporting Corporation (202) 628-4888 4 1 Yates (Mr . Yates), owe for the taxable year 2001 . 2 3 FINDINGS OF FAC T Some of the facts have been stipulated . The 4 stipulations of fact are incorporated herein by thi s 5 7 reference . When she petitioned the Court, petitioner resided in Louisiana . At the age of 15, petitioner met Mr . Yates LPG 8 and began a relationship with him ; several years later 9 she married him . Petitioner did not graduate fro m 10 high school, but she did complete her GED in 11 approximately 2005 . 12 Petitioner, who was not employed during 2001 13 and earned no income of any kind during that year, was 14 married to Mr . Yates throughout 2001 . Mr . Yates was 15 the sole source of income for the family ; he worked as 16 an equipment operator on construction projects during 17 2001 . Mr . Yates deposited his earned income in a 18 joint checking account, and he and petitioner paid 19 household expenses from the account . 20 In approximately March 2002 petitioner left 21 Mr . Yates because of their deteriorating relationship 22 caused by Mr . Yates' repeated infidelity . Petitioner 23 moved in with her parents . Petitioner had no income 24 and no obligation to file a return for 2001 . She did 25 not file a joint return for 2001 with Mr . Yates befor e Heritage Reporting Corporation (202) 628-4888 5 1 the due date . 2 In approximately January 2003 petitioner and 3 Mr . Yates divorced . After the divorce, petitioner had 4' no contact with Mr . Yates about any matter, including 5 taxes . J ~- In 3a3a: y 2005 petitioner remarried . L-All , Before her wedding, in approximately October 2004, petitioner contacted Mr . Yates' mother Cynthia to 9 obtain petitioner's original birth certificate ; 10 petitioner had left the birth certificate at her 11 former home when she separated from Mr . Yates . 12 The mother told petitioner that she could f4azj Shou,(d A, c.S o 13 pick up the birth certificate that she Iad sign Lfft 14 some forms when she did so . When petitioner arrive d 15 at the home, the mother told her that Mr . Yates had 16 not filed a return for 2001 and that petitioner had to 17 join in the return because she was married to Mr . 18 Yates during 2001 . The mother gave petitioner a blank 19 Form 1040, U .S . Individual Income Tax Return, whic h 20 petitioner signed after she was assured by the mother 21 that the return would not show a tax liability . 22 Petitioner did not prepare the 2001 return 23 or participate in any way in its preparation . I n 24 response to a contact by the Internal Revenue Service, 25 Collection Division, hereafter IRS, Mr . Yates Heritage Reporting Corporation (202) 628-4888 6 1 submitted a joint 2001 joint return that showe d 2 $15,205 of wages, a tax liability of $272, and an 3 amount owing of $161 . 4 After reviewing the return , the IRS reduced 5 the wage amount by $ 13,966, reclassified the $13,966 6 as Schedule C, Profit or Loss from Business, gros s receipts, and determined that Mr . Yates owed self- employment tax of $1,973 . The IRS determined tha t 9 petitioner and Mr . Yates owed a deficiency of $1,823, 10 a section 6651(a)(1) addition to tax, and interest . 11 In May 2007 petitioner learned for the first 12 time of the existing 2001 tax liability when sh e 13 received astatement about the unpaid liability from 14 the IRS . She promptly submitted Form 8857, Request 15 for Innocent Spouse Relief, dated May 28, 2007 , 16 requesting that she be relieved of the 2001 joint 17 liability . In both a preliminary determination an d 18 the notice of determination, respondent denied section 19 6015 relief because petitioner knew or had reason to 20 know of the income or deductions that caused th e 21 additional tax . 22 OPINION 23 In general married taxpayers who file a 24 joint federal income tax return for a taxable year are 25 jointly and severally liable for the full amount of Heritage Reporting Corporatio n (202) 628-4888 7 1 that year ' s tax liability . Sec . 6013(d)(3) ; Butler v . 2 Commissioner , 114 T .C . 276, 282 (2000) . Under section 3 6015, however , a spouse may obtain relief from join t 4 and several liability if the spouse satisfies certain 5 requirements . Petitioner claims that she is entitled 6 to relief from joint and several liability unde r 7 section 6015 ( b), (c), or ( f) for the tax liabilities 8 attributable to the reclassification of a substantial 9 portion of Mr . Yates ' income as Schedule C gros s 10 receipts and a resulting determination that that 11 income was subject to self-employment tax . 12 Section 6015 ( a)(1) provides that a spouse 13 who has made a joint return may elect to seek relief 14 from joint and several liability under section 6015(b) 15 (dealing with relief from liability for a n 16 understatement of tax on a joint return) . Section 17 6015 ( a)(2) provides that a spouse who is eligible to 18 do so may elect to limit that spouse's liability for 19 any deficiency with respect to a joint return under 20 section 6015 ( c) . If relief is not available unde r 21 either section 6015 ( b) or (c), an individual may seek 22 equitable relief under section 6015(f) . 23 Our jurisdiction to review petitioner's 24 request for relief is conferred by section 6015(e), 25 which allows a spouse who has requested relief from Heritage Reporting Corporatio n (202) 628-4888 8 1 joint and several liability to contest th e 2 Commissioner's denial of relief by timely filing a 3 petition in this Court . 4 'Section 6015(b)(1) authorizes th e 5 Commissioner to grant relief from joint and severa l 6 liability if the taxpayer requesting relief satisfies 7 each requirement of subparagraphs (A) through (E) . To 8 qualify for relief under section 6015(b)(1), the 9 requesting spouse must establish that : (A) a join t 10 return has been made for a taxable year ; (B) there is 11 an understatement of tax on the return which i s 12 attributable to erroneous items of the nonrequesting 13 spouse ; (C) in signing the return, the requesting 14 spouse did not know, and had no reason to know of the 15 understatement ; (D) taking into account all the facts 16 and circumstances, it is inequitable to hold th e 17 requesting spouse liable for the deficiency in tax for 18 such taxable year attributable to such understatement, 19 and, (E) the requesting spouse filed a timely request 20 for the relief . The requirements are stated in the 21 conjunctive, and if the requesting spouse fails t o 22 meet any one of them, he or she does not qualify fo r 23 relief . Alt v . Commissioner , 119 T .C . 306, 313 24 (2002), affd . 101 Fed . Appx . 34 (Fe . Cir . 2004) . 25 Except as provided by section 6015, the electin g Heritage Reporting Corporation (202) 628-4888 9 1 spouse bears the burden of proving that she satisfies 2 each requirement of section 6015(b)(1) . See Rul e 3 142(a) . 4 In his pretrial memorandum responden t 5 concedes that petitioner meets requirements A, B, and 6 E . Respondent contends that petitioner does no t 7 qualify for relief under section 6015(b) because she does not fulfill requirements C and D . Responden t 9 argues that petitioner was in a hurry when she signed 10 her return and did not review it before signing . 11 Respondent contends that petitioner had a duty t o 12 inquire about the return, and she did not fulfill that 13 duty . Respondent argues that the failure to review 14 the return indicates that petitioner fail s 15 requirements C and D . 16 Generally, a requesting spouse has knowledge 17 or reason to know of an understatement if he or sh e 18 actually knew of the understatement, or if a 19 reasonable person in similar circumstances would have 20 known of the understatement . See sec . 1 .6015-2(c), 21 Income Tax Regs . ; see also Cheshire v . Commissioner , 22 282 F .3d 326, 334 (5th Cir . 2002) (stating that i n 23 erroneous deduction cases, the court considers whether 24 the requesting spouse "knew or had reason to know that LPM 25 the deduction in question would give rise to a Heritage Reporting Corporation (202) 628-4888 1 substantial understatement of tax on the joint return'" L- PM 2 (citing Reser v . Commissioner , 112 F .3d 1258, 126 7 10 3, (5th Cir . 1997), affg . in part and revg . in part T .C . 4 Memo . 1995-572), affg . 115 T .C . 183 (2000) ; Reser v . 5 Commissioner , supra, at 1265 (stating that in omission 6 of income cases the relevant inquiry is whether the 7 requesting spouse knew or should have known of a n income-producing transaction that the other spous e 9 failed to report) ; Hopkins v . Commissioner , 121 T .C . 10 73, 77 (2003) . All facts are considered i n 11 determining whether a requesting spouse had reason to 12 know of the understatement . Sec . 1 .6015-2(c), Income 13 Tax Regs . 14 The facts and circumstances that ar e 15 considered include, inter alia, the nature of th e 16 erroneous item, the requesting spouse's education and 17 business experience, the extent of the requestin g 18 spouse's participation in the activity that resulted 19 in the erroneous item, and whether the requestin g 20 spouse failed to inquire, when she signed the return, 21 about the items on the return that a reasonable person 22 would question . Id . 23 This case does not involve an omission o f 24 income or an improperly claimed deduction, which might 25 be apparent to a spouse upon even a cursory review of Heritage Reporting Corporatio n (202) 628-4888 1 1 1 the return . Rather, the understatement in this case 2 results from respondent's determination that Mr . 3 Yates' income should have been reported as Schedule C 4 gross receipts rather than wages and that self- 5 employment tax is applicable . 6 Even if petitioner reviewed a full y 7 completed return before she signed it, the retur n showed $15,205 of wages and an amount owing of $161 . 9 Petitioner did not know any details about Mr . Yates' 10 jobs as an equipment operator on constructio n 11 projects , and she had no reason to know whether Mr . 12 Yates' job arrangements were properly classified as 13 employment or a Schedule C activity . A reasonable 14 person in petitioner ' s position would not inquir e 15 whether Mr . Yates properly classified his income, even 16 if she thoroughly reviewed a completed return . See 17 sec . 1 .6015-2(c), Income Tax Regs . 18 We also conclude that it is inequitable to 19 hold petitioner liable for a deficiency in tax . 20 Section 1 .6015-2 ( d), Income Tax Regs ., provides that 21 all of the facts and circumstances are considered in 22 determining whether it is inequitable to hold th e 23 requesting spouse jointly and severally liable for an 24 understatement . One such factor is whether th e 25 requesting spouse has significantly benefitted from Heritage Reporting Corporatio n (202) 628-4888 12 1 the understatement, and significant benefit is define d 2 as benefit beyond normal support . Sec . 1 .6015-2(d), 3 Income Tax Regs . Another factor is whether the 4 spouses are divorced or separated . Id . Petitioner 5 did not benefit from the misclassified income other 6 than for normal support. She did not know or have 7 reason to know about Mr . Yates' work, and petitioner 8 and Mr . Yates are divorced . Accordingly, we conclud e that petitioner qualifies for relief under sectio n 10 6015(b) and that respondent erred in denying such 11 relief . 12 In the alternative, petitioner qualifies fo r 13 relief under section 6015(c) . Under section 14 6015(c)(1), if an individual who has made a join t 15 return for any taxable year elects the application of 16 this subsection, the individual's liability for any 17 deficiency which is assessed with respect to th e 18 return shall not exceed the portion of the deficiency 19 properly allocable to the individual under 6015(d) . 20 The purpose of section 6015(c) is to allocate the tax 21 liability between the individuals who filed the joint 22 return in approximately the same way it would hav e 23 been allocated if the individuals filed separately . 24 See Hopkins v . Commissioner , supra , at 80 . 25 An individual shall be eligible to elect the Heritage Reporting Corporation (202) 628-488 8 1 1 3 1 application of section 6015(c) only if : (1) At the 2 time the election is filed, the electing individual is 3 not married to, or is legally separated from, th e 4' other individual who filed the joint return, or (2) 5 the electing individual was not a member of the same 6 household as the other individual at any time durin g 7 the 12-month period ending on the date the election is 8 filed . Sec . 6015(c) (3) (A) (i) . In this case, th e 9 activity giving rise to the deficiency, namely Mr . 10 Yates' self-employment at construction projects, was 11 attributable solely to Mr . Yates . Respondent concedes 12 that petitioner has met the requirements of sectio n 13 Sec . 6015 (c) (3) (A) (i ) 14 Respondent relies on Section 6015(c)(3)(C) 15 to argue that respondent properly denied petitioner's 16 relief under section 6015(c) . Section 6015(c) (3) (C) 17 provides that the Commissioner may deny the relie f 18 under section 6015(c) if the Secretary demonstrates 19 that the requesting spouse had "actual knowledge, at 20 the time such individual signed the return, of any 21 item giving rise to a deficiency (or portion thereof) 22 which is not allocable to such individual," th e 23 election under section 6015(c) will not apply to such 24 deficiency . "Actual knowledge" for purposes o f 25 section 6015(c)(3)(C) is the actual and clear Heritage Reporting Corporation (202) 628-4888 14 1 awareness of the item, as distinguished from mer e 2 reason to know of the item . Cheshire v . Commissioner , 3 282 F .3d at 337 n .26 . The Commissioner must prov e 4 actual knowledge by a preponderance of the evidence . 5 Culver v . Commissioner , 116 T .C . 189, 196 (2001) ; sec . 6 1 .6015-3(c)(2), Income Tax Regs . 7 Respondent contends that petitioner had 8 actual knowledge of the item giving rise to the 9 deficiency because when the petitioner signed the 10 return, the tax was entered on the return, bu t 11 petitioner signed it without reviewing it or asking 12 any questions . We disagree . As discussed above, the 13 basis for the deficiency was the imprope r 14 classification of income as wages rather than Schedule 15 C gross receipts . Petitioner did not know any details 16 about Mr . Yates' jobs as an equipment operator o n 17 construction projects . The facts in this case differ 18 from facts in section 1 .6015-3(c)(4), Example (1) , 19 Income Tax Regs ., where the spouse knew that the othe r 20 spouse was a self-employed musician,,tthe return showed iPrn. 21 self-employment income, but did not report self- 22 employment tax . 23 The Example concludes that when signing the 24 return, the electing spouse had actual knowledge o f 25 the other spouse's self-employment income and the fact Heritage Reporting Corporatio n (202) 628-4888 1 5 1 that the electing spouse was unaware of the ta x 2 consequences of that income is irrelevant . Id . Even 3 if petitioner reviewed the return, she would not know 4 whether Mr . Yates' work arrangements were properl y 5 classified as employment or self-employment . 6 Accordingly, we conclude that respondent did not 7 establish that petitioner had actual knowledge that 8 her former spouse had improperly classified hi s 9 income . Petitioner therefore is entitled to relief 10 from the tax liability under section 6015(c) . 11 For the foregoing reasons, we hold that the 12 petitioner satisfied the requirements of section 13 6015(b) or, alternatively, 6015(c) . Accordingly, 14 decision will be entered for petitioner . 15 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF 16 FACT AND OPINION . 17 (Whereupon, at 10 :25 a .m ., the bench opinion 18 in the above-entitled matter was concluded . ) 19 2.0 21 22 23 2 4 25 Heritage Reporting Corporation (202) 628-4888