TAX COURT OPINION

Case: Joe L. Shank
Docket Number: 16251-07
Judge: Colvin
Opinion Type: bench
Filed: 07/17/2008
Pages: 9

UNITED STATES TAX COURT WASHINGTON, D.C. 20217 JOE L . SHANK Petitioner, , V . COMMISSIONER OF INTERNAL REVENU E * Respondent . ORDE 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 petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Joseph R . Goeke at Washington, D .C ., on June 27, 2008, containing his 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 under Rule 155 . (Signed ) Joseph Robert Goeke Judge DATED : Washington, D .C . July 17, 2008 SERVED JUL 21 2008 3 1 Bench Opinion by Judge Joseph Robert Goeke 2 June 27, 200 8 3 Joe L . Shank v . Commissioner 16251-0 7 4 THE COURT : The Court has decided to render 5 oral findings of fact and opinion in this case, an d 6 the following represents the Court ' s oral findings of 7 fact and opinion . The oral findings of fact an d 8 opinion shall not be relied upon as precedent in any 9 other case . 10 This bench opinion is made pursuant to the 11 authority granted by Section 7459 ( b) of the Internal 12 Revenue Code and Roe 152 of the Tax Court Rules o f 13 Practice and Procedure . Hereinafter in this bench 14 opinion, unless otherwise indicated , all section 15 references are to the Internal Revenue Code . 16 Respondent was represented at the trial of 17 this case by Mr . . Scott Hovey . Petitioner appeared pro 18 se . This case is before the Court on Petitioner' s 19 attempt to obtain relief from joint and severa l 20 liability under Section 6015 for the years 1993, 1994, 21 1995, 1997 and 1998 . The record consists of a 22 stipulation of facts and related exhibits , and the 23 Petitioner ' s testimony and an exhibit the Petitioner 24 offered at trial . 25 -The facts of the case involve unreported Heritage Reporting Corporatio n (202) 628-4888 4 1 income and disallowed deductions, primarily associated 2 with the business of the Petitioner' s former spouse . 3 The Petitioner and his spouse were married for all the 4 years in question and filed joint returns for thos e 5 years . They have subsequently divorced . The 6 Petitioner' s former spouse ran a beauty salon for all 7 the years in question, and for the years 1993, 199 4 8 and 1995, Respondent made significant adjustments 9 disallowing deductions claimed and asserting 10 unreported income associated with that beauty salon, 11 as well as certain other adjustments that relate to a 12 small amount of unreported income by the Petitioner 13 and some disallowed interest deductions . 14 For the years 1997 and 1998, the Petitioners 15 failed to pay amounts shown on their joint federa l 16 income tax return . We will first address the years 17 .1997 and 1998 . Relief from joint and several 18 liability under Section 6015(b) or (c) is only 19 available if the liability results from a n 20 understatement of tax . Because the liabilities o f 21 Petitioners' joint returns for 1997 and 1998 resulted 22 from balances due, not understatements, Petitioner is 23 not eligible for relief under either Section 6015(b) 24 or 6015(c) . 25 If relief is not available under Section Heritage Reporting Corporatio n (202) 628-4888 5 1 6015 ( b) or (c ), relief may be available under Section 2 6015 ( f) if it is inequitable to hold the individua l 3 liable for any deficiency , taking into account all of 4 the facts and circumstances under procedure s 5 prescribed by the Secretary . These procedures are 6 found in Revenue Procedure 2003-61, 2003 - 2 C .B . 296 . 7 We reviewed Respondent ' s denial of relief unde r 8 Section 6015 ( f) for abuse of discretion . See Alt v . 9 Comm issioner , 119 T .C . 306 , 315-316 ( 2002) . 10 Section 4 .01 of the Revenue Procedur e 11 provides seven threshold conditions to determin e 12 relief . Respondent concedes that Petitioner satisfies 13 these threshold conditions for 1997 and 1998 . Section 14 4 .02 of the Revenue Procedure provides circumstances 15 under which relief will normally be gr an ted . One of 16 the requirements for relief under this section is tha t 17 the requesting spouse must establish that it wa s 18 reasonable to belie/ that the non - requesting spouse 19 would pay the reported income tax liability . 20 We find that it was not reasonable for 21 Petitioner to believe that his wife would pay the 22 reported income tax liability for 1997 or 1998 . 23 Therefore , relief is not available under Section 4 .02 24 of the Revenue Procedure . Section 4 . 03 of the Revenu e 25 Procedure provides a non-exclusive list of factors t o Heritage Reporting Corporation (202) 628-4888 6 1 consider to determine if, taking into account all of 2 the facts and circumstances of the case, it i s 3 inequitable to hold the requesting spouse liable for 4 all or part of the unpaid income tax liability . 5 These non-exclusive factors include whether 6 (1) the requesting spouse is separated or divorce d 7 from the non-requesting spouse, (2) the requesting 8 spouse will suffer economic hardship without relief, 9 (3) the requesting spouse did not know or have reason 10 to know of the item giving rise to the deficiency, (4) 11 the non-requesting spouse had a legal obligation to 12 pay the outstanding liability, (5) the requesting 13 spouse received a significant benefit from the item 14 giving rise to the deficiency, (6) the requesting 15 spouse had made a good faith effort to comply with the 16 income tax laws in subsequent years, (7) th e 17 requesting spouse was abused by the non-requesting 18 spouse, and (8 ) the requesting spouse was in poor 19 mental or physical health when signing the return or 20 requesting relief . 21 The fact that Petitioner is divorced from 22 the non-requesting spouse weighs in his favor . 23 However, the remaining factors are either neutral or 24 weigh against Petitioner . In particular, Petitioner 25 knew or had reason to know that his wife would not pa y Heritage Reporting Corporation (202) 628-4888 7 I the tax liabilities for 1997 or 1998, and Petitione r 2 has not shown that he will suffer economic hardship if 3 he is not granted relief relative to the years 199 7 4 and 1998 . . Therefore, we find that Respondent did not 5 abuse its discretion in denying Petitioner relief for 6 1997 and 1998 under Section 6015(f) . 7 We now turn to the years 1993, 1994 an d 8 1995 . A taxpayer is entitled to relief under Section 9 6015(c) if the taxpayer filed a joint return, th e 10 individuals who filed the joint return are no longer 11 married, are legally separated, or are living apart, 12 the tax remains unpaid, the relief is requested no 13 later than two years from the date of the firs t 14 collection activity, the liability results from an 15 understatement of tax, and the Secretary cannot show 16 that the taxpayer had actual knowledge of the item 17 giving rise to the deficiency . 18 As to the years 1993, 1994 and 1995 , 19 Respondent concedes that Petitioner satisfies all but 20 the last requirement . Respondent argues tha t 21 Petitioner had actual knowledge of the income and 22 (cid:127) expense items that give rise to the . adjustment . 23 Let's go off the record for a second . 24 (Whereupon, a brief recess was taken . ) 25 Petitioner's testimony and his arguments at Heritage . Reporting Corporatio n (202) 628-4888 8 1 trial were focused on the unreported income o n 2 Schedule C of his returns for 1993, 1994 and 1995 . 3 Exhibit 13-P entered into evidence in the cas e 4 demonstrates that those adjustments were only a 5 portion of the amounts that formed the basis fo r 6 Respondent' s deficiencies in the years in question . 7 However, with respect to those amounts, Petitioner 8 testified credibly that he reported the Schedule C 9 activity according to the books and records his wife 10 provided him . 11 As to the unreported income, we believe that 12 Petitioner credibly testified that he . had no knowledge 13 . that the income had been deposited into join t 14 accounts . He admitted that his wife did deposit funds 15 into the joint accounts that she had received fro m 16 persons she knew, but we believe that the Petitioner 17 attempted to report the Schedule C income receipts 18 that the Petitioner received in her business as he 19 knew them . 20 Therefore. we find that Petitioner did not 21 have actual knowledge of the items giving rise to the 22 deficiency associated with the bank deposits analysis 23 for 1993, 1994 and 1995 . Those amounts woul d 24 specifically be $4,927 in 1993, $40,141 in 1994, and 25 $20,713 in 1995 . With respect to all the other Heritage Reporting Corporatio n (202) 628-4888 9 1 adjustments for the years in question, we find tha t 2 Petitioner did have knowledge such that Respondent is 3 correct in that Petitioner fails to meet th e .4 requirements of Section 6015 (c) and the requirements 5 of Section 6015(b) . 6 However, with respect to the unreporte d 7 income associated with the bank deposits analysis, we 8 hold that the Petitioner is eligible for relief under 9 Section 6015(c) . With respect to Petitioner' s 10 potential alternative argument under Section 6015(f), 11 we also find that Petitioner's-involvement in th e 12 preparation of the Schedule C makes it appropriate 13 that he not be considered an innocent spouse for the 14 adjustments other than the Schedule C incom e 15 determined under the back deposits analysis . 16 We find this even though we disagree with 17 Respondent' s assertion that for the years 1993, 1994 18 and 1995, Petitioner has not shown economic hardship . 19 We do believe that Petitioner would have economi c 20 hardship with respect to those years, and that factor, 21 under Section 6015(f), would be in Petitioner's favor . 22 However, because of Petitioner's significant 23 involvement in the preparation of the return, to the 24 extent that items of adjustment for the years 1993 , 25 1994 and 1995 are based upon entries on the return, we Heritage Reporting Corporatio n (202) 628-4888 1 0 1 find that Petitioner is not entitled to equitabl e 2 relief . 3 However ,, for the reasons stated previously, 4 we do think Petitioner is entitled to relief unde r 5 Section 6015 ( c) with respect to the bank deposit 6 analysis adjustments for 1993, 1994 and 1995, a s 7 previously listed . These determinations will result 8 in the necessity for a Rule 155 computation for the 9 years 1993 , 1994 and 1995 , setting forth the amounts 10 to which the Petitioner is entitled to relief from 11 joint and several liability for those years . 12 This ends the Court ' s oral findings of fact 13 and opinion in this case . 14 (Whereupon, at 4 :09 p .m ., the bench opinion 15 in the above - entitled matter was concluded . ) 16 17 18 // 1 9 20 // 2 1 22 23 // 24 25 Heritage Reporting Corporation (202) 628-4888