TAX COURT OPINION

Case: Rosanna G. Viray
Docket Number: 21479-13
Judge: Holmes
Opinion Type: bench
Filed: 03/31/2016
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 Rosanna G. Viray v. Commissioner Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket Nos. ) ) ) ) 21479-13 ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is 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 Mark V. Holmes at San Francisco, California on February 26, 2016 containing his oral findings of fact and opinion rendered after the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision under Rule 155 will be entered. . (Signed) Mark V. Holmes Judge Dated: Washington, D.C. March 31, 2016 SERVED APR - 2016 Capital Reporting Company 3 Bench Opinion by Judge Mark V. Holmes February 26, 2016 Rosanna G. Viray v. Commissioner Docket No. 21479-13 THE COURT: In the case of Rosanna G. 1 2 3 4 5 6 7 Viray, Docket No. 21479-13, the Court has decided to 8 9 10 11 12 13 14 15 16 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 of Practice & Procedure. This is also an innocent spouse case. Ms. Viray is a California resident who works as a 17 medical assistant and grossed less than $25,000 in 18 19 20 21 22 23 24 25 2010, the tax year at issue. The parties were able to reach a stipulation that settled a great number of the issues, but not all of them. I found Ms. Viray to be an honest witness, credible in what she testified to, but I recognize that English is a second language for her, which greatly limited her ability to understand the tax laws and prepare for this case. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company I'll first go over some background. Ms. Viray and her then spouse, Mr. Angel 4 Pascua, jointly filed a Form 1040 for the year 2010. The IRS issued a Notice of Deficiency to them in 2013. As a result, in this Notice of Deficiency the Commissioner disallowed close to $30,000 from 1 2 3 4 5 6 7 Mr. Pascua's Schedule C business expenses. He also 8 9 10 11 12 13 14 15 16 17 18 19 disallowed various self-employed health insurance deductions that related to Mr. Pascua's business. But in addition, the Commissioner also disallowed several Schedule A itemized deductions for lack of substantiation. These were: one, personal property taxes of $755; two, charitable contributions that totalled $5785; three, an unreimbursed employee business expense for "uniforms" of $9525. And there were also education-related credits for both Ms. Viray and Mr. Pascua that were also disallowed for a lack of substantiation. Mr. Pascua, however, did not file a 20 petition in Tax Court challenging the Notice of 21 Deficiency. Ms. Viray did, and she also submitted a 22 23 24 25 Form 8857, request for innocent spouse relief. After reviewing the information that she provided to the IRS, the centralized Cincinnati innocent spouse operation examiner determined that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 she was entitled to partial relief under Internal Revenue Code section 6015(c). What's left are five items. The Government and Ms. Viray stipulated that she was not entitled to them, as a substantive matter. And they also stipulated that any accuracy-related penalty under section 6662(a) attaches to any portion of the deficiency attributable to those items that are allocable to Ms. Viray. 10 So how do we figure this problem out. 11 First, what does the law say about this. 12 13 14 15 16 17 18 19 20 21 22 23 24 Section 6013(d)(3) provides that married individuals who file a joint return are jointly and severally liable for the tax arising from that return. Code section 6015 provides that, notwithstanding section 6013(d)(3), an individual who files a joint return may seek relief from joint liability under three specific alternatives. Code section 6015(c) allows a taxpayer to limit her liability to the portion of the deficiency that is properly allocable to her, as provided in section 6015(d). See section 6015(c)(1). A taxpayer is eligible to make an election under section 6015(c) if, one, she filed the election 25 within two years of the Commissioner's first 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 6 collection activity against her; and, two, at the time she filed the election she was no longer married to the individual with whom she filed the joint return. Under section 15(d) (sic) for purposes of allocating a deficiency, erroneous items are generally allocated to the spouses as if separate returns were filed. Ms. Viray did, in fact, file her request for relief within two years of the IRS's collection action against her, and indicated that she had been divorced since June 26th of 2011. She satisfies the eligibility requirements for potentially receiving relief under subsection (c). As with relief under section 6015(c), relief under section 6015(f) and 6015(b) is available only for items not attributable to the requesting spouse. Attributability is not defined by the Code, however, so I have to do it with the regulations. These regulations may be found in 26 CFR section 1.6015-3 which sets up pages and pages of ways to allocate items to spouses who are divorced. The presumption is that there is proportionate allocation of erroneous items. Now, as I said, the Government has already conceded that those items attributable to Mr. 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 7 1 Pascua's Schedule C business go entirely to him. 2 What remains are the Schedule A items and the 3 4 5 6 7 8 9 10 11 12 13 education tax credits that are in some sense attributable to both of them. However, under 26 CFR section 1.6015- 3(d)(2) (iv), "Deduction items unrelated to a business or investment are also generally allocated 50 percent to each spouse unless the evidence shows that a different allocation is appropriate." So the presumption is that Ms. Viray would be responsible for the proportion of the overall deficiency not already allocated to Mr. Pascua, determined by the total amount of the deficiency 14 multiplied by a fraction, the numerator of which is 15 16 the net amount of erroneous items allocable to her, over the denominator of which is the net amount of 17 all erroneous items. The algebra is more 18 19 20 21 22 conveniently shown in section 26 CFR 1.6015- 3(d)(4) (i) (A), and I refer the Commissioner to that for the inevitable math in this exercise. Now that, as I said, is only a presumption. The Government says that presumption is overcome 23 because, according to the Commissioner's pretrial 24 memorandum, at 11-12, "The Schedule A items are 25 attributable to Petitioner because they are joint 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 items. Petitioner has provided no evidence that the items are solely attributable to Mr. Pascua. Further, she has not shown that there is any justification or lawful method of dividing the disallowed deductions between herself and 6 Mr. Pascua." 7 8 9 10 11 12 13 14 15 16 17 18 I find this to be an incorrect statement of the law in this area, however. The regulation says that in the case of non-business deductions, such as remaining items in this case, the presumption should be that the deductions are allocated 50-50 to each spouse. The regulation goes on to say, however -- see 26 CFR section 1.6015-4(i)(B) (1) -- that "Any portion of the deficiency attributable to. erroneous items allocable to the nonrequesting spouse of which the requesting spouse had actual knowledge." If this were to be the case, then it 19 wouldn't be a 50-50 split, but both spouses would 20 21 22 23 24 25 continue to be jointly liable. The key here is that burden is on the IRS to establish actual knowledge as of the time the return was signed. See 26 CFR section 1.6015-3(c)(2)(i). Specifically, since each of the five items that are still contested by the parties in this case 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 are fictitious items. The relevant standard for determining knowledge is in 26 CFR section 1.6015- 3(c)(2)(i)(B)(2): "Fictitious or inflated deduction" -- "If a deduction is fictitious or inflated, the IRS must establish that the requesting spouse actually knew that the expenditure was not incurred or not incurred to that extent." The burden, in other words, is on the IRS to establish that Ms. Viray had actual knowledge as of the time the return was signed. There is, however, no allegation in the pleading and no allegation in the pretrial memo that this is the case. What we have as Exhibit 3-J of the stipulation in which Ms. Viray said she had no knowledge of the return and did not participate in its creation, I find, based on my personal observation of her during her testimony, that -- and her lack of English language ability beyond that of a conversation -- that she was not fully capable of reviewing these returns, given her limited language 22 abilities and knowledge of what was going on when her 23 24 25 tax returns were being prepared. I therefore find her credible in her testimony, which buttresses what she said in her 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 request for innocent spouse relief: That she simply didn't have knowledge of what was going on with the return. She did sign it, and normally that means she has an obligation to review it, but her ability to review it in the circumstances of her particular case are quite limited, and I do not find that the IRS had pled or proved that she had actual knowledge at the time she signed the tax return that the contested five items were fictitious. Therefore, they get split 50-50. In addition to proportionate liability for the deficiency attributable to these five erroneous items, I also have to do something about the portion of the deficiency attributable to the accuracy-related penalty. That, too, is subject to 26 CFR section 1.6015-3(d) (4)(i)(B)(5), which tells me that "Any portion of the deficiency attributable to accuracy-related and fraud penalties" doesn't go through the proportionate allocation. However,.the reason for that is found in 26 CFR section 1.6015-3(d) (4)(iv)(B) that tells me that the accuracy-related penalty under section 6662 should be allocated to the spouse's item that generated the penalty. That's a long, long way of saying that 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 11 1 since the accuracy-related penalty is attributed to 2 all of the inaccurate items, both Mr. Pascua's business inaccurate items and the contested Schedule A items and the unjustified credits, that the accuracy-related penalty applies to Ms. Viray's portion of the proportionate allocation of the overall deficiency for which I am finding her responsible. My conclusion, in other words, is that one half of these contested erroneous items are allocable to Ms. Viray, together with half of the accuracy-related penalty. The remaining half of those contested items, as well as all those already conceded by the IRS to be allocable to Mr. Pascua, are allocable to Mr. Pascua. This is a math problem. I will enter decision under Rule 155. This concludes the Court's oral findings of fact and opinion in this case, and the San Francisco session. (Whereupon, at 1:51 p.m., the above- entitled matter was concluded.) 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