Court Opinion

ID: 8488092
Source: CourtListenerOpinion
Date Created: 2022-11-18 22:01:06.745372+00
Date Added: 2024-06-11T16:50:07.920993
License: Public Domain

United States Tax Court

                              T.C. Memo. 2022-110

                      HAYWOOD EARL PARKER, JR.,
                              Petitioner,
                     AND JACQUELINE ANN PARKER,
                              Intervenor

                                          v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

                                    —————

Docket No. 6054-19.                                    Filed November 15, 2022.

                                    —————

Lee A. Moore and Michael L. Boman, for petitioner.

Jacqueline Ann Parker, pro se.

Britton G. Wilson, for respondent.

           MEMORANDUM FINDINGS OF FACT AND OPINION

       PARIS, Judge: By notice of deficiency dated March 25, 2019,
respondent determined a deficiency in federal income tax of $82,592 and
an accuracy-related penalty of $16,518 pursuant to section 6662(a) 1 for
petitioner and intervenor’s 2016 tax year. The parties have resolved the
deficiency amount, 2 and the only issue for decision is whether petitioner
is entitled to relief from joint and several liability pursuant to section
6015(f).

       1  Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
        2 The parties have stipulated that the amount of the deficiency is $39,318 and

that there is no penalty under section 6662(a).

                                 Served 11/15/22
                                   2

[*2]                     FINDINGS OF FACT

      Petitioner resided in Missouri when he filed the Petition. He and
intervenor were married from March 1988 until they divorced in 2018.

       Petitioner has a history of serious health problems. His only
source of income is Social Security disability payments, which he began
receiving in 2012. He receives approximately $28,300 annually.

      On March 7, 2016, intervenor signed a “Settlement Agreement
and Release,” settling an employment discrimination lawsuit against
her previous employer for $325,000. Pursuant to the settlement
agreement, intervenor received $39,000, subject to applicable
withholding, for backpay; $156,000 for noneconomic and compensatory
damages; and $130,000 for attorney’s fees, which were paid directly to
her lawyer. Both Form W–2, Wage and Tax Statement, and Form
1099–MISC, Miscellaneous Income, were to be issued to intervenor
under the terms of the Settlement Agreement.

      In March 2016 intervenor received two checks for settlement
proceeds of $23,536.50 and $156,000, both of which she deposited in the
checking account she shared with petitioner. Petitioner and intervenor
used the funds to refinance and renovate their home and pay off debts.

       Petitioner prepared and timely filed a joint income tax return for
2016. Form W–2 was issued to intervenor for her backpay income. Form
1099–MISC reporting $286,000 was also issued to intervenor. Petitioner
reported as income the portion of the settlement attributable to backpay
but did not include the portions attributable to attorney’s fees or
noneconomic and compensatory damages. The Form 1099–MISC listed
$286,000 in box 3, Other income, despite intervenor’s having received a
check for only $156,000. Both petitioner and intervenor agree that the
amount was confusing and that petitioner called the IRS customer
service line, described the terms of the settlement, and concluded from
that call that the attorney’s fees and damages proceeds were nontaxable.

       Petitioner and intervenor divorced in April 2018. Under the terms
of the Judgment Decree of Dissolution of Marriage (divorce decree),
petitioner executed a quitclaim deed, conveying title to their shared
home to intervenor, and intervenor paid petitioner $50,000,
representing his share of equity in the home. With respect to prior
income tax returns, the divorce decree provided as follows:
                                          3

[*3]   The parties represent that all federal, state and local tax
       returns required to be filed since the date of the marriage
       have been filed and all federal, state and local taxes,
       penalties and interest required to be paid with respect to
       the periods covered by such returns are paid in full. For
       each calendar year in which the parties filed or will file
       joint federal and state income tax returns, the Husband
       and Wife shall be equally liable to promptly pay when due,
       all taxes, interest and penalties arising from a successfully
       asserted joint tax return deficiency unless the same was
       caused by a spouse’s failure to disclose income which
       should be included on such return in which case that
       spouse shall be solely responsible for all amounts due
       deriving from the said failure.

       Respondent examined the jointly filed 2016 return and, on the
basis of the unreported settlement proceeds, determined the deficiency
and the accuracy-related penalty. The adjustments in the notice of
deficiency relate solely to the unreported settlement proceeds.

       Petitioner and intervenor, who were divorced when the notice of
deficiency was issued, filed separate Petitions with the Court. In
intervenor’s case, at docket No. 10489-19, intervenor challenged the
deficiency amount, arguing that the unreported settlement proceeds
were not taxable income. The Court entered a stipulated decision, in
which respondent and intervenor agreed that the amount of the
deficiency for 2016 is $39,318 and that there is no accuracy-related
penalty. 3

      In his own Petition, filed April 4, 2019, petitioner also challenged
the deficiency amount and further requested relief from joint and
several liability pursuant to section 6015. Petitioner and respondent
have stipulated that the deficiency amount is $39,318 and that there is
no accuracy-related penalty.

        After petitioner filed the Petition, respondent’s counsel requested
respondent’s innocent spouse unit to consider petitioner’s request for
relief from joint and several liability. Petitioner submitted Form 8857,
Request for Innocent Spouse Relief, on which he described his health

       3 Specifically, respondent and intervenor agreed that the settlement proceeds

were taxable income, but that intervenor was entitled to a deduction for her attorney’s
fees.
                                          4

[*4] problems and reported monthly income of $2,042 and monthly
expenses totaling $2,035.

       Respondent’s innocent spouse unit initially determined that
petitioner was not eligible for relief. But respondent now agrees, after
review of additional supporting documentation, that petitioner is
entitled to complete relief pursuant to section 6015(f).

      Intervenor timely filed a Motion to Intervene in this case and
opposes any relief.

                                    OPINION

I.     Overview

        Married taxpayers may elect to file a joint federal income tax
return. § 6013(a). If a joint return is made, generally each spouse is
jointly and severally liable for the entire tax due on their aggregate
income for that year. § 6013(d)(3). In certain circumstances, however,
section 6015 allows a spouse to obtain relief from joint and several
liability. § 6015(a). Under section 6015(a), a spouse may seek relief from
joint and several liability under section 6015(b) or, if eligible, may
allocate liability according to provisions set forth in section 6015(c). If a
taxpayer does not qualify for relief under section 6015(b) or (c), the
taxpayer may seek equitable relief under section 6015(f). Petitioner and
respondent agree that petitioner is not entitled to relief under section
6015(b) or (c) because he had actual knowledge of the item giving rise to
the deficiency.

       This Court has jurisdiction to determine the appropriate relief
available to a requesting spouse under section 6015(f). See
§ 6015(e)(1)(A). In determining whether a taxpayer is entitled to relief
under section 6015(f), the Court applies a de novo standard and scope of
review. 4 Porter v. Commissioner, 132 T.C. 203, 210 (2009). Petitioner
generally bears the burden of proving that he is entitled to equitable
relief under section 6015(f). See Porter, 132 T.C. at 210; see also Rule
142(a)(1).

       4 Because petitioner filed his Petition before July 1, 2019, section 6015(e)(7)

does not apply to this case. See Sutherland v. Commissioner, 155 T.C. 95, 104 (2020).
                                     5

[*5] II.    Section 6015(f)

       As directed by section 6015(f), the Commissioner has prescribed
procedures to determine whether a requesting spouse is entitled to
equitable relief from joint and several liability. Those procedures are set
forth in Rev. Proc. 2013-34, § 4, 2013-43 I.R.B. 397, 399–403. Although
the Court is not bound by the eligibility guidelines set forth in Rev. Proc.
2013-34, the Court considers those factors when reviewing a taxpayer’s
claim for relief under section 6015(f). See Pullins v. Commissioner, 136
T.C. 432, 438–39 (2011); Pocock v. Commissioner, T.C. Memo. 2022-55,
at *14. Ultimately the Court’s determination rests on an evaluation of
all the facts and circumstances. Porter, 132 T.C. at 210.
       A.    Threshold Conditions

        Rev. Proc. 2013-34, § 4.01, 2013-43 I.R.B. at 399–400, establishes
several threshold conditions that the requesting spouse must satisfy to
be considered for equitable relief: (1) a joint return was filed for the
year(s) at issue; (2) the tax liability from which the requesting spouse
seeks relief is attributable in full or in part to an item of the
nonrequesting spouse; (3) relief is not available to the requesting spouse
under section 6015(b) or (c); (4) no assets were transferred between the
spouses as part of a fraudulent scheme; (5) the nonrequesting spouse did
not transfer disqualified assets (as defined by section 6015(c)(4)(B)) to
the requesting spouse; (6) the requesting spouse did not knowingly
participate in the filing of a fraudulent joint return; and (7) the claim for
relief is timely filed. The parties agree that petitioner satisfies these
threshold conditions.

       B.    Streamlined Determination

       Once a taxpayer has satisfied the threshold conditions, the Court
will consider whether the requesting spouse is eligible for streamlined
relief. Streamlined determinations granting equitable relief under
section 6015(f) are available if the requesting spouse can establish that
he or she (1) is no longer married to the nonrequesting spouse; (2) would
suffer economic hardship if relief were not granted; and (3) lacked
knowledge or reason to know of the understatement at the time the
return at issue was signed. Rev. Proc. 2013-34, § 4.02, 2013-43 I.R.B.
at 400. Petitioner is not entitled to streamlined relief because he had
knowledge of the settlement proceeds.
                                     6

[*6]   C.    Equitable Factors

       Rev. Proc. 2013-34, § 4.03(2), 2013-43 I.R.B. at 400–03, sets forth
the following seven nonexclusive factors to be considered in determining
whether, taking into account all facts and circumstances, equitable
relief under section 6015(f) should be granted: (1) the current marital
status of the spouses; (2) whether the requesting spouse will suffer
economic hardship if relief is not granted; (3) whether the requesting
spouse knew or had reason to know of the item giving rise to the
understatement; (4) whether either spouse has a legal obligation to pay
the outstanding federal income tax liability; (5) whether the requesting
spouse significantly benefited from the understatement; (6) whether the
requesting spouse has made a good faith effort to comply with income
tax laws in the years following the year for which relief is sought; and
(7) whether the requesting spouse was in poor mental or physical health
when the return at issue was filed, when the request for relief was made,
or at the time of trial. See Pullins, 136 T.C. at 448.

       In making a determination under section 6015(f), the Court
considers the enumerated factors as well as any other relevant facts. No
single factor is dispositive, and “[t]he degree of importance of each factor
varies depending on the requesting spouse’s facts and circumstances.”
Rev. Proc. 2013-34, § 4.03(2); see Pullins, 136 T.C. at 448; Hall v.
Commissioner, T.C. Memo. 2014-171, at *38.

             1.     Marital Status

       If the requesting spouse is no longer married to the nonrequesting
spouse, this factor will weigh in favor of granting relief. See Rev. Proc.
2013-34, § 4.03(2)(a), 2013-43 I.R.B. at 400. If the requesting spouse is
still married to the nonrequesting spouse, this factor is neutral. Id.
Petitioner and intervenor divorced in 2018. This factor favors relief.

             2.     Economic Hardship

       Economic hardship exists if satisfaction of the tax liability, in
whole or in part, would result in the requesting spouse’s being unable to
meet his reasonable basic living expenses. Id. § 4.03(2)(b), 2013-43 I.R.B
at 401. Where the requesting spouse’s income is below 250% of the
federal poverty guidelines, this factor will weigh in favor of relief, unless
the requesting spouse has assets out of which he can make payments
towards the tax liability and still adequately meet his reasonable basic
living expenses. Id. If denying relief from joint and several liability will
                                          7

[*7] not cause the requesting spouse to suffer economic hardship, this
factor will be neutral. Id.

      Petitioner’s health condition prevents him from holding full-time
employment, and his only source of income is Social Security disability
payments. His annual income of $28,300 is below 250% of the federal
poverty guidelines. 5 This factor favors relief.

               3.      Knowledge or Reason to Know

       If the requesting spouse knew or had reason to know of the items
giving rise to the understatement when the return was filed, this factor
will weigh against relief. Id. § 4.03(2)(c), 2013-43 I.R.B. at 401–02. If the
requesting spouse did not know or have reason to know of the
understatement, this factor will weigh in favor of relief. Id. Actual
knowledge of the item giving rise to the understatement or deficiency
will not be weighted more heavily than any other factor. Id.

        Petitioner knew of the settlement proceeds and prepared the
return that failed to report them as income. This factor weighs against
relief.

               4.      Legal Obligation

       This factor will favor relief where the nonrequesting spouse has
the sole obligation to pay an outstanding federal tax liability pursuant
to a divorce decree or other legally binding agreement. Id. § 4.03(2)(d),
2013-43 I.R.B. at 402. This factor is neutral where both spouses have
such an obligation or the divorce decree or agreement is silent as to any
such obligation. Id.

       Under the terms of the divorce decree, both spouses have a legal
obligation to pay any taxes, interest, and penalties arising from their
jointly filed tax returns. This factor is neutral.

               5.      Significant Benefit

       A significant benefit is any benefit in excess of normal support.
Id. § 4.03(2)(e), 2013-43 I.R.B. at 402. If the requesting spouse has
received a significant benefit, enjoying the “benefits of a lavish lifestyle,

        5 The federal poverty line for an individual living in the contiguous 48 states

in 2022 is $13,590. Annual Update of the HHS Poverty Guidelines, 87 Fed. Reg. 3315,
3316 (Jan. 21, 2022). Two-hundred fifty percent of this amount is $33,975.
                                      8

[*8] such as owning luxury assets and taking expensive vacations,” this
factor weighs against relief. Id. If the amount of unpaid tax or
understatement was small such that neither spouse received a
significant benefit, this factor is neutral. Id. Whether the amount of
unpaid tax or understatement is small such that neither spouse received
a significant benefit will vary depending on the facts and circumstances
of each case.

       Petitioner and intervenor did not live a lavish lifestyle. They used
the funds from the settlement to pay off debts and make renovations to
their home. The Court finds that neither spouse received a significant
benefit from the unpaid tax. This factor is neutral.

              6.     Compliance with Income Tax Laws

       This factor weighs in favor of relief if the requesting spouse is in
compliance with the income tax laws for taxable years after being
divorced from the nonrequesting spouse. Id. § 4.03(2)(f)(i), 2013-43
I.R.B. at 402. If the requesting spouse is not in compliance, this factor
will weigh against relief, unless he made a good faith effort to comply
with the tax laws but was unable to fully comply. Id.

        The parties have stipulated that petitioner’s income is below the
filing requirements for an individual receiving Social Security disability
payments and that he did not have an obligation to file an individual
income tax return for tax years 2017 through 2020. This factor favors
relief.

              7.     Mental or Physical Health

       If the requesting spouse was in poor mental or physical health at
the time the return was filed or at the time he requested relief, this
factor will weigh in favor of relief. Id. § 4.03(2)(g), 2013-43 I.R.B. at 403.
The Court also considers a taxpayer’s mental and physical health at the
time of trial. See Pullins, 136 T.C. at 454; Bell v. Commissioner, T.C.
Memo. 2011-152.

       Petitioner was in poor physical health at all relevant times, and
the Social Security Administration has determined that he is disabled.
This factor favors relief.
                                     9

[*9]         8.     Conclusion

       Four of the above factors weigh in favor of relief, two are neutral,
and one weighs against relief. In considering whether a taxpayer is
entitled to relief under section 6015(f), however, the Court does not
simply count factors. Rather, the Court evaluates all of the relevant facts
and circumstances to reach a conclusion. See Pullins, 136 T.C. at 448.

        Petitioner’s poor physical health has left him disabled to the point
that he is unable to work. His only source of income is Social Security
disability payments, which allow him to meet his monthly expenses, but
little else. Payment of the deficiency would create financial hardship.
Although he did have knowledge of the income that gave rise to the
deficiency in this case, petitioner credibly testified that he made a good-
faith effort, despite confusing advice and reporting documents, to comply
with the tax law but erroneously believed that the settlement funds were
not taxable. He has remained in compliance with the federal income tax
laws in subsequent years. On consideration of all of the relevant facts
and circumstances, the Court concludes that petitioner is entitled to
complete relief.

      The Court has considered all of the parties’ arguments and, to the
extent they are not discussed herein, finds them to be irrelevant, moot,
or without merit.

       To reflect the foregoing,

       An appropriate decision will be entered.