Court Opinion

ID: 9297507
Source: CourtListenerOpinion
Date Created: 2022-11-30 20:01:22.406864+00
Date Added: 2024-06-11T17:13:27.537944
License: Public Domain

United States Tax Court

                        T.C. Memo. 2022-115

  JASON TODD REYNOLDS AND KELLI HUNTER REYNOLDS,
                    Petitioners

                                  v.

            COMMISSIONER OF INTERNAL REVENUE,
                        Respondent

                              —————

Docket No. 14433-16.                         Filed November 30, 2022.

                              —————

Jason Todd Reynolds and Kelli Hunter Reynolds, pro sese.

Victoria E. Cvek, David A. Indek, and Nancy M. Gilmore, for respondent.

       MEMORANDUM FINDINGS OF FACT AND OPINION

       WELLS, Judge: Respondent determined deficiencies in
petitioners’ federal income tax and additions to tax and penalties for
2004–07 (years in issue) as follows:

                           Served 11/30/22
                                        2

[*2]                                             Additions to Tax/Penalties
        Year              Deficiency
                                              § 6651(a)(1)           § 6663 1

 2004                      $39,865              $9,216              $29,899

 2005                       51,739              12,070               38,804

 2006                       60,979              14,448               45,734

 2007                       74,019                —                  55,514

       Unless otherwise indicated, all statutory references are to the
Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times,
all regulation references are to the Code of Federal Regulations, Title 26
(Treas. Reg.), in effect at all relevant times, and all Rule references are
to the Tax Court Rules of Practice and Procedure. All amounts are
rounded to the nearest dollar. The sole issue for decision is whether
petitioner wife is entitled to innocent spouse relief pursuant to section
6015.

                            FINDINGS OF FACT

       Some of the facts have been stipulated and are so found. The
Stipulation of Facts and attached Exhibits are incorporated herein by
this reference. Petitioners resided in Maryland when they timely filed
their Petition.

       Petitioners married in April 2002 and are the parents of five
children. During the years in issue petitioners lived in a five-bedroom
home and owned four cars. They also went on family vacations at least
once per year. Three of their children attended private school.

       Before her marriage, petitioner wife obtained a law degree from
the University of Maryland and became licensed to practice in
Maryland. In the years preceding those in issue, she worked for a small
firm in Baltimore focusing on wrongful death, predatory lending, and
accountant malpractice cases. She thereafter worked as a staff attorney
for the National Association for the Advancement of Colored People.

       1 The section 6663 penalties are determined only against petitioner husband,

Jason Todd Reynolds.
                                   3

[*3] During the years in issue petitioner wife primarily stayed at home
with the children. In her spare time she operated a solo legal practice
out of the family’s basement where she represented clients in small
business and family law matters. She took a position with the
Department of Justice’s voting rights division in 2009. Since December
2014 petitioner wife has been working for the U.S. Department of
Agriculture as an equal opportunity specialist. She earns approximately
$143,000 per year.

       From 2001 to 2008 petitioner husband was employed as the
director of finance for National City Christian Church (church), which
paid him average annual wages of approximately $95,000. His wages
were paid at regular biweekly intervals via direct deposit. During the
years in issue petitioner husband improperly wrote checks to himself
out of the church’s checking account and misused the corporate credit
card. His wages and the embezzled funds were deposited into two bank
accounts held jointly by petitioners. The checks he wrote for himself
were similar to the amounts in his biweekly wages yet deposited at
irregular intervals. As a result of these actions, he was indicted and
subsequently sentenced to 97 months in prison for embezzlement. While
petitioner husband was incarcerated, petitioner wife gave birth to their
fifth child.

       Petitioner husband handled the family’s finances, which included
preparing yearly tax returns as well as making home mortgage and
vehicle payments. He used funds from their jointly held bank accounts
to cover their expenses and to purchase gifts for his wife, such as a
vintage coat, a diamond anniversary ring, and a designer handbag.
Petitioner wife took care of the children and their home. This included
shopping for household items, purchasing the children’s things, and
paying private school tuition. Her purchases were also made from their
jointly held bank accounts.

       While petitioner husband was incarcerated in 2013, petitioner
wife filed for chapter 7 bankruptcy. She received a discharge of her
debts in 2014 but lost the family home to foreclosure. Because of the
loss of their home, petitioner wife and the children moved in with her
parents where they remained until she was able to purchase a new home
in July 2016. After being released from prison in May 2018, petitioner
husband returned to live with petitioner wife and his family in their new
home; he continues to live there. The couple did not divorce or legally
separate throughout petitioner husband’s prison sentence and remained
married as of the date of trial
                                           4

[*4] Petitioner husband filed income tax returns electronically for the
years in issue with the approval of petitioner wife. Petitioners untimely
filed their 2004 through 2006 income tax returns and timely filed their
2007 return. They did not include petitioner wife’s unemployment
compensation, legal fees, or interest income. Neither did they account
for her self-employment taxes and erroneously claimed deductions for
the legal practice, as well as some jointly attributable items (e.g., child
tax credits).

       On April 2, 2014, petitioner wife timely filed Form 8857, Request
for Innocent Spouse Relief. On June 1, 2017, respondent denied that
request. Petitioners have conceded the deficiency amounts, additions to
tax, and penalties.

                                     OPINION

        Generally, married taxpayers may elect to file a joint federal
income tax return. § 6013(a). After this election is made, each spouse
is jointly and severally liable for the entire tax due for that taxable year.
§ 6013(d)(3). Section 6015 provides a spouse with three alternatives for
relief from joint and several liability: full or partial relief under
subsection (b), proportionate relief under subsection (c), and, if relief is
not available under either subsection (b) or (c), equitable relief under
subsection (f). Except as otherwise provided in section 6015, the
taxpayer bears the burden of proving that he or she is entitled to section
6015 relief. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002),
aff’d, 101 F. App’x 34 (6th Cir. 2004).

       This Court has jurisdiction to review respondent’s denial of
petitioner wife’s request for liability relief. See § 6015(e)(1)(A). We
apply a de novo standard of review as well as a de novo scope of review. 2
See Sutherland, 155 T.C. at 106; Porter v. Commissioner, 132 T.C. 203,
210 (2009).

I.     Section 6015(b)

      To qualify for relief under section 6015(b)(1), the requesting
spouse must satisfy the following conditions: (A) a joint return has been
made for a taxable year; (B) on such return there is an understatement

       2 The Petition in this case was filed before Congress enacted section 6015(e)(7),

which generally limits our review to the administrative record. Section 6015(e)(7) does
not apply to petitions filed before July 1, 2019. Sutherland v. Commissioner, 155 T.C
95, 105–06 (2020). Thus, the scope of review remains de novo.
                                   5

[*5] of tax attributable to erroneous items of the nonrequesting spouse;
(C) the requesting spouse did not know and had no reason to know of
the understatement at the time the return was signed; (D) taking into
account all of the facts and circumstances, it would be inequitable to
hold the requesting spouse liable for the deficiency; and (E) the
requesting spouse timely elects relief. These five conditions are
conjunctive; the failure to satisfy any one condition precludes relief
under section 6015(b). Rogers v. Commissioner, T.C. Memo. 2018-53,
at *100–01; Haltom v. Commissioner, T.C. Memo. 2005-209.
Respondent contends that petitioner wife has failed to satisfy the
requirements of section 6015(b)(1)(B), (C), and (D).

      A.     Portions of Understatements Attributable to Petitioner Wife

       Respondent asserts that petitioner wife is not entitled to section
6015(b) relief because certain erroneous items that led to the tax
understatements are attributable to her. See § 6015(b)(1)(B). For the
years in issue petitioners’ returns did not include petitioner wife’s
unemployment compensation, legal fees, or interest income. They also
did not account for her self-employment taxes and erroneously reported
deductions for her legal practice as well as some jointly attributable
items.

       Since a portion of each tax understatement is attributable to
petitioner wife, she may not obtain relief under section 6015(b) for that
portion of the understatement. As for the remaining items, respondent
concedes that each understatement is solely attributable to petitioner
husband and therefore section 6015(b)(1)(B) is satisfied for that portion
of each.

      B.     Knowledge or Reason to Know of Understatements

      Respondent argues that petitioner wife has not satisfied section
6015(b)(1)(C), which requires that she did not know or have reason to
know of the tax understatements when she signed the returns. A
requesting spouse has knowledge or reason to know of an
understatement if she actually knew of the understatement or if a
reasonable person in similar circumstances, at the time she signed the
return, could be expected to know that the return contained an
understatement. Hopkins v. Commissioner, 121 T.C. 73, 77 (2003);
Treas. Reg. § 1.6015-2(c). Consequently, the requesting spouse may
have a duty of inquiry with regard to the return.               Butler
v. Commissioner, 114 T.C. 276, 284 (2000), abrogated on other grounds
                                    6

[*6] by Porter, 132 T.C. 203. This duty is subjective, and its focus is on
the requesting spouse. Id. The following factors are considered relevant
in deciding whether a spouse had reason to know of an understatement:
(1) the alleged innocent spouse’s level of education; (2) the spouse’s
involvement in the family’s business and financial affairs; (3) the
presence of expenditures that appear lavish or unusual when compared
to the family’s past income levels, income standards, and spending
patterns; and (4) the culpable spouse’s evasiveness and deceit
concerning the couple’s finances. Id.

       Petitioner wife argues that she did not know or have reason to
know of the understatements when she signed the returns. We disagree.
During the years in issue petitioners maintained two jointly held bank
accounts. Both petitioner husband and petitioner wife used these
accounts to cover various household expenses. In one of the accounts,
there were biweekly direct deposits coming from the church. In that
same account there were other customer deposits of similar amounts
being made at irregular intervals. The combined effect was that
petitioner husband’s income was almost twice what it should have been.

       Petitioner wife claims that she had little involvement in the
family’s financial affairs and was not responsible for their tax reporting.
She testified, however, that during the years in issue she reviewed the
Forms 1040, U.S. Individual Income Tax Return, before signing them.
Having done so—and having been responsible for many household
purchases—she should have known that their income would far exceed
that which they reported. During this time petitioner wife was a
licensed attorney in the State of Maryland operating her own legal
practice. Although she practiced in nontax fields, we think that her legal
training would nonetheless have alerted her to a likely understatement.

       Petitioner wife contends that the family’s expenditures during the
years in issue were not unusual or lavish. She also asserts that
petitioner husband’s furtive efforts to cover up his embezzlement belie
respondent’s conclusion that she should have known about the
understatements. To the first point, petitioners have not put forth any
evidence regarding their expenditures before the years in issue. We
therefore cannot accord that argument any weight here. As to her
second argument, we are not persuaded. While it is true that petitioner
husband did not tell his wife outright that he was embezzling money
from his employer, he did not go to great lengths to hide it. He simply
wrote checks to himself which he deposited in petitioners’ joint bank
accounts. This seems neither evasive nor deceitful.
                                   7

[*7] The foregoing leads us to the conclusion that petitioner wife had
a duty to inquire about the amount of income reported on the returns.
Since she failed to inquire, she is deemed to have constructive
knowledge of the understatements and is not entitled to section 6015(b)
relief. See Porter, 132 T.C. at 211–12.

      C.     Whether It Would Be Inequitable to Hold Petitioner Wife
             Liable

       It would not be inequitable to hold petitioner wife liable for the
understatements even if she lacked knowledge or a reason to know of
them. To determine whether inequity exists, we examine the same
factors as those used in determining whether relief is available under
section 6015(f). See Alt, 119 T.C. at 316; Jones v. Commissioner, T.C.
Memo. 2010-112. Under section 6015(f) we consider the nonexclusive
factors provided in Revenue Procedure 2013-34: (1) marital status;
(2) economic hardship; (3) in the case of understatement, knowledge or
reason to know of the item giving rise to the understatement; (4) legal
obligation; (5) significant benefit; (6) compliance with tax laws; and
(7) mental or physical health. Rev. Proc. 2013-34, § 4.03(2), 2013-43
I.R.B. 397, 400–03.

       We have previously found that petitioner wife had reason to know
of the understatements, which weighs against relief. Marital status and
legal obligation are both neutral because petitioners are still married.
Petitioner wife did not proffer any evidence of poor mental or physical
health at the time the returns were filed or when she requested relief.
This factor is neutral as well.

       Respondent asserts that petitioner wife has not made a good faith
effort to comply with the income tax laws following the years in issue.
She failed to timely pay her 2011 tax liability and understated her
income for 2013, which led respondent to issue a notice of deficiency and
impose a penalty for that year. She ultimately agreed with respondent’s
determinations. This factor weighs against relief.

       Petitioner wife argues that upholding her joint liability for the
understatements and penalties will cause her economic hardship.
Although we are sympathetic to her situation as the sole earner for a
family of seven, we do not think she has met her burden of proof as to
this factor. Economic hardship is examined as of the trial date. Pullins
v. Commissioner, 136 T.C. 432, 446–47 (2011). At that time petitioner
wife was a GS–14 employee with the U.S. Department of Agriculture
                                     8

[*8] earning approximately $143,000 annually. This is roughly $6,400
per month after taxes per her calculations. She estimated her monthly
expenses to be approximately $10,000.

       We accept as fact her stated income amount as that is
independently verifiable. However, we do not find her expense estimate
reliable. Revenue Procedure 2013-34 provides that economic hardship
exists “if satisfaction of the tax liability . . . will cause the requesting
spouse to be unable to pay reasonable basic living expenses.” Rev. Proc.
2013-34, § 4.03(2)(b), 2013-43 I.R.B. at 401 (emphasis added). Many of
the expenses listed exceed what can be considered reasonable or basic
in necessity. There is no substantiation of these costs beyond the
tabulations provided. For those reasons, petitioner wife has failed to
carry her burden of proof as to the economic hardship factor.

        Finally, respondent contends that petitioner wife has derived a
significant benefit from the understatements. A significant benefit is
any benefit in excess of normal support. Id. § 4.03(2)(e), 2013-43 I.R.B.
at 402. During the years in issue, petitioners lived in a five-bedroom
house, owned four cars, sent their children to private school, and took
vacations. Petitioner wife also received several luxury fashion items as
gifts from her husband. Although we believe the family home was not
significant given the number of people requiring housing, the remainder
of their expenditures exceeded normal support.           Petitioner wife
benefited from those luxuries during the years in issue, and therefore
this factor weighs against relief.

      On the basis of this analysis, we find that it would not be
inequitable to hold petitioner wife liable for the tax understatements
and associated penalties. She is not entitled to section 6015(b) relief.

II.   Section 6015(c)

       Under section 6015(c), if the requesting spouse is no longer
married to or is legally separated from the spouse with whom she filed
the joint return, she may elect to limit liability for a deficiency as
provided in section 6015(d).       § 6015(c)(1), (3)(A)(i)(I); DeMattos
v. Commissioner, T.C. Memo. 2010-110, 2010 WL 1980315, at *4. The
requesting spouse may also elect proportionate relief if she was not a
member of the same household as the nonrequesting spouse during the
12-month period ending on the date such election was filed.
§ 6015(c)(3)(A)(i)(II).
                                   9

[*9] Petitioners have remained married at all relevant times.
Petitioner wife argues, however, that she is entitled to relief because
under Maryland law they became legally separated during petitioner
husband’s incarceration. She alternatively argues that they were not
members of the same household during that time. We disagree with
both arguments.

       Under Maryland law, there are only two types of judicially
sanctioned marital dissolutions: an absolute divorce and a limited one.
See Afeta v. Gonzales, 467 F.3d 402, 407 (4th Cir. 2006) (citing Md. Code
Ann., Fam. Law §§ 7-102, 7-103 (2006)). Each type of divorce requires a
judicial decree to be effective. See Md. Code Ann., Fam. Law §§ 7-102,
7-103 (West 2022). Petitioners do not assert that they ever obtained a
judicial decree of legal separation. We therefore reject that argument
as providing grounds for section 6015(c) relief.

       We similarly reject petitioner wife’s argument that she had not
been a member of the same household as her husband during the 12-
month period ending on the date she elected section 6015 relief. The
regulations provide that a requesting spouse and a nonrequesting
spouse “are considered members of the same household during either
spouse’s temporary absences from the household if it is reasonable to
assume that the absent spouse will return to the household, and the
household or a substantially equivalent household is maintained in
anticipation of such return.” Treas. Reg. § 1.6015-3(b)(3)(i).

       Petitioner husband’s period in federal prison is considered a
temporary absence. Id. (“Examples of temporary absences may include,
but are not limited to, absence due to incarceration, illness, business,
vacation, military service, or education.” (Emphasis added.)).
Petitioners therefore remained members of the same household during
that time. Petitioner wife further argues that because she lost her home
to foreclosure during petitioner husband’s incarceration, no
substantially equivalent home was maintained and thus it was not
reasonable to assume that he would return to the household. Though
this argument is compelling, we again disagree.

       Petitioner wife was pregnant with the couple’s fifth child while
petitioner husband was incarcerated, and petitioners do not assert that
they made any formal attempt at ending their marriage or legally
separating. On the basis of those facts, we think it was reasonable to
assume that petitioner husband would return to the family household—
wherever that might have been—upon his release. Our conclusion is
                                    10

[*10] bolstered by the fact that petitioner husband did in fact
immediately return to live with his wife and children at that time.
Accordingly, petitioner wife is not entitled relief under section 6015(c).

III.   Section 6015(f)

       Section 6015(f) provides an alternative means of relief for a
requesting spouse who does not otherwise qualify under section 6015(b)
or (c). Porter, 132 T.C. at 206. Section 6015(f)(1) permits relief from
joint and several liability if it would be inequitable to hold the
requesting spouse liable for any unpaid tax or deficiency. Under section
6015(f) the Secretary may grant equitable relief to a requesting spouse
on the basis of the facts and circumstances.

        The Commissioner issued Revenue Procedure 2013-34 to provide
guidance for determining whether a taxpayer is entitled to equitable
relief from joint and several liability. Rev. Proc. 2013-34, § 1.01, 2013-
43 I.R.B. at 397. While the Court may consider the guidance set forth
in Revenue Procedure 2013-34, we are not bound by it; our
determination ultimately rests on an evaluation of all the facts and
circumstances.      See Pullins, 136 T.C. at 438–39; Johnson v.
Commissioner, T.C. Memo. 2014-240, at *10.

       Revenue Procedure 2013-34 provides a three-step analysis for
evaluating a request for equitable relief. The first step consists of seven
threshold conditions that must be met. Rev. Proc. 2013-34, § 4.01, 2013-
43 I.R.B. at 399. Respondent concedes that petitioner wife meets the
seven threshold conditions for the portions of the deficiencies
attributable to petitioner husband. The second step of the analysis
provides three conditions that must be met to qualify for a streamlined
determination of relief under section 6015(f). Id. § 4.02, 2013-43 I.R.B.
at 400. The first condition is that the requesting spouse is no longer
married to the nonrequesting spouse. Id. § 4.02(1). Since petitioners
are still married, petitioner wife does not qualify for a streamlined
determination.

       A third step is available if the requesting spouse satisfies the
threshold conditions but fails to satisfy the conditions for a streamlined
determination. A requesting spouse may still be eligible for equitable
relief under section 6015(f) if, after taking into account all of the facts
and circumstances, it would be inequitable to hold the requesting spouse
liable for the unpaid tax or deficiency. Id. § 4.03. We previously
considered the factors in determining whether to grant equitable relief
                                    11

[*11] in our analysis of section 6015(b)(1)(D) and held that petitioner
wife is not entitled to equitable relief. See supra Part I.C. For the same
reasons, she is not entitled to relief pursuant to section 6015(f).

IV.   Bankruptcy Case

       At trial petitioner wife argued that the chapter 7 discharge she
obtained in 2014 resolved the tax debts at issue. On brief she
alternatively asserts that respondent abused his discretion by failing to
consider her bankruptcy case in deciding whether she was entitled to
section 6015 relief. Neither of these arguments has merit.

       The Tax Court does not have jurisdiction to adjudicate whether a
tax, fine, penalty, or addition to tax was discharged under the
Bankruptcy Code. Neilson v. Commissioner, 94 T.C. 1, 9 (1990);
Ashmore v. Commissioner, T.C. Memo. 2016-36, at *8. And we do not
consider any matters occurring at the administrative level before the
notice of deficiency was sent. Greenberg’s Express, Inc. v. Commissioner,
62 T.C. 324, 327–28 (1974). For those reasons, we reject petitioner wife’s
arguments regarding the bankruptcy case.

V.    Conclusion

       On the basis of the facts and circumstances presented, we
conclude that petitioner wife is not entitled to innocent spouse relief
under section 6015(b), (c), or (f). She remains jointly and severally liable
for the deficiencies, additions to tax, and associated penalties.

       We have considered all arguments made, and to the extent not
mentioned above, we conclude that they are moot, irrelevant, or without
merit.

      To reflect the foregoing,

      Decision will be entered for respondent.