Michael B. Butler and Jean Butler v. Commissioner , 114 T.C. 276 ( 2000 )

114 T.C. No. 19UNITED STATES TAX COURT
MICHAEL B. BUTLER AND JEAN BUTLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27554-96. Filed April 28, 2000.
P and H filed a joint 1992 Federal income tax
return on which H failed to report income from an S
corporation in which he was a shareholder. R issued a
notice of deficiency jointly to P and H who in response
filed a joint petition in this Court. H conceded that
his share of the income from the S corporation was
improperly omitted from the return. In the petition, P
alleged that she was entitled to innocent spouse relief
pursuant to sec. 6013(e), I.R.C. After trial, Congress
enacted sec. 6015, I.R.C., and simultaneously repealed
sec. 6013(e), I.R.C. The parties agreed to treat P's
claim pursuant to sec. 6013(e), I.R.C., as an election
pursuant to sec. 6015(b)(1), I.R.C., which R denied.
Additionally, after trial, P requested that R consider
equitable relief pursuant to sec. 6015(f), I.R.C. R
considered P's request but denied P equitable relief.
P seeks to reopen the record to introduce evidence as
to P's ability to qualify for proportionate innocent
spouse relief pursuant to sec. 6015(b)(2), I.R.C.
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P contends that she is an innocent spouse pursuant to
sec. 6015(b)(1), I.R.C. Additionally, P contends that it
was an abuse of R's discretion not to allow equitable relief
pursuant to sec. 6015(f), I.R.C. Alternatively, P contends
that she is entitled to proportionate relief, pursuant to
sec. 6015(b)(2), I.R.C., for a portion of the omitted
income. P contends that the Tax Court has jurisdiction to
review R's determination that P is not entitled to equitable
relief pursuant to sec. 6015(f), I.R.C. R contends that P
is not entitled to innocent spouse relief pursuant to either
sec. 6015(b)(1), I.R.C., or sec. 6015(f), I.R.C., and
contends that we do not have jurisdiction to review R's
denial of relief pursuant to sec. 6015(f), I.R.C.
Held: P had reason to know of the understatement
on P's and H's joint return, and, therefore, P is not
entitled to innocent spouse relief, pursuant to sec.
6015(b)(1), I.R.C.
Held, further, P's motion to reopen the record to
introduce evidence as to P's ability to qualify for
proportionate innocent spouse relief pursuant to sec.
6015(b)(2), I.R.C., is denied.
Held, further, On the basis of the evidence in the
record, P is not entitled to proportionate innocent
spouse relief pursuant to sec. 6015(b)(2), I.R.C.
Held, further, The Tax Court has jurisdiction to
review for abuse of discretion R's decision to deny P's
request for equitable relief pursuant to sec. 6015(f),
I.R.C.
Held, further, R's denial of P's request for
equitable relief was not an abuse of discretion.
Robert H. Culton II, for petitioners.
Michael D. Zima, for respondent.
OPINION
WELLS, Judge: Respondent determined a deficiency in
petitioners' Federal income tax for the taxable year 1992 in the
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amount of $26,720 and an addition to tax pursuant to section
6651(a)(1)1 in the amount of $4,008.
After concessions, the issues to be decided2 are: (1)
Whether Jean Butler (petitioner) is entitled to innocent spouse
relief pursuant to section 6015(b) relating to the understatement
of tax on petitioners' 1992 joint Federal income tax return; (2)
whether the record in the instant case should be reopened to
receive additional evidence regarding petitioner's ability to
qualify for proportionate innocent spouse relief pursuant to
section 6015(b)(2); and (3) whether this Court has jurisdiction
to review for abuse of discretion respondent's denial of P's
request, pursuant to section 6015(f), for equitable innocent
spouse relief and, if so, whether it was an abuse of respondent's
discretion to deny such relief.
Background
Some of the facts have been stipulated for trial pursuant to
Rule 91. The parties' stipulations are incorporated into this
Opinion by reference and, accordingly, are found as facts in the
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
2
Respondent determined that petitioners were liable for an
addition to tax pursuant to sec. 6651(a)(1). At trial, however,
petitioners advanced no argument as to the addition to tax and
failed to address the issue on brief. Consequently, we conclude
that petitioners have abandoned any contention as to the addition
to tax. See Bernstein v. Commissioner, 22 T.C. 1146, 1152
(1954), affd. per curiam 230 F.2d 603 (2d Cir. 1956).
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instant case. When they filed their petition, petitioners
resided in Longwood, Florida.
Petitioners were married at the time they filed their
petition, are currently married, and have always had a "smooth"
marital relationship. Petitioner Michael B. Butler (petitioner's
husband) has always applied all of his income toward the benefit
of his family. Throughout their 35-year marriage, petitioner's
husband has never concealed any assets from petitioner and has
always told her about his financial endeavors.
Petitioner's husband operates a lucrative surgical practice
in three Florida locations: Orlando, Apopka, and Altamonte
Springs. Petitioner's family lived quite comfortably, with a
very high standard of living, during 1992. They paid $19,963 in
home mortgage interest during 1992, making their monthly mortgage
payment more than $1,600. Their average monthly electricity bill
during 1992 was greater than $275, and their average monthly
phone bill was more than $100. Petitioner had credit cards from
various upscale department stores, including Saks Fifth Avenue,
Jacobsen's, Nieman Marcus, Dillard's, and Burdines. During the 8
months of 1992 for which petitioner provided canceled checks,
petitioner spent $5,162.55 at such department stores. During
1992, petitioner also had credit cards at Sears and Montgomery
Ward department stores, and had a Visa Gold charge card.
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Petitioner and her husband were members of the Orlando Opera
Guild.
Petitioner's husband works at his surgical practice on an
average of more than 70 hours per week. During 1992, petitioner
worked with her husband as a medical transcriber, earning $11,700
in wages. Petitioner graduated from St. Louis University in 1960
with a degree in medical records administration. Because she had
more free time, petitioner maintained the family's checking
account and handled the bills for all of the household expenses.
She usually retrieved the mail because she arrived home earlier
than her husband.
Petitioner oversees the operation of JCB Construction, Inc.
(JCB), an S corporation of which she has been the sole owner
since its creation in 1987. As secretary-treasurer of JCB,
petitioner maintains its books and records, keeps track of income
and expenditures, handles payroll and personnel responsibilities,
writes checks for materials and supplies, and collects
information for the preparation of JCB's tax returns. JCB filed
Forms 1120S with the Internal Revenue Service (IRS) from 1988
through 1996, and FICA and FUTA returns since at least 1989. The
gains or losses of JCB were reported on petitioners' Federal
income tax returns for the year at issue and in prior years.
B.G. Enterprises, Inc. (BGE) was an S corporation owned by
petitioner's husband and Thomas George. BGE was engaged in the
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foliage nursery business in Apopka, Florida, on land owned
jointly by petitioners. In 1990, BGE rented the Apopka property
from petitioners and operated the nursery, as Sweetwater
Greenery, from that time until some time in 1992. Petitioner's
husband and Thomas George were each 50-percent shareholders of
BGE. Petitioner never favored petitioner's husband's involvement
with the nursery, and their discussions on the subject were
usually contentious.
During mid-December 1990, BGE applied a fungicide called
Benlate, manufactured by E.I. DuPont De NeMours and Co. (Dupont),
to its plant inventory for protection against fungi. The Benlate
treatments damaged the foliage, prompting BGE to seek damages
from Dupont. Petitioner's husband told petitioner that he was
going to Atlanta during August 1991 to negotiate a claim for
damages against Dupont. BGE and Dupont reached a settlement
(settlement) whereby Dupont paid BGE a total of $812,411
(settlement proceeds). The damage award represented compensation
for three items: Crop damage in the amount of $367,046,
replacement costs of $55,244, and business interruption of
$390,121. Dupont paid BGE $455,000 during 1991 and $357,411
during 1992. After expenses, BGE received net proceeds of
$158,759 from Dupont during 1992. Because BGE did not reenter
the nursery business after the destruction of its inventory, most
of the money BGE received was not spent on replacements. BGE
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paid JCB to remove unsalvageable plants and other waste materials
from the nursery premises.
The exact amount of the distributions from BGE to
petitioner's husband during 1992 is unknown, and petitioner has
provided insufficient evidence to fully account for the
settlement proceeds. The record contains no documents
illustrating where the distribution of money from BGE to
petitioner's husband was deposited during 1991 or 1992.
Petitioner failed to explain the use of the following funds:
$40,000 paid to petitioner's husband on January 14, 1992, from
the escrow account holding the settlement proceeds; another
$23,654 disbursed from the escrow account to petitioner's husband
on March 31, 1992; and $5,238.47 which remained in the escrow
account as of March 24, 1998. Petitioner offered only 8 monthly
bank statements from petitioner and her husband's personal joint
bank account for 1992. Petitioner failed to offer statements or
canceled checks from any of petitioner's and her husband's other
bank accounts. Petitioners held a bank account throughout 1992
at Southern Bank of Florida. Petitioners did not produce bank
statements relating to that account from the periods March 12 to
April 12, 1992, from May 12 to July 12, 1992, from August 12 to
September 12, 1992, and from December 12 to December 31, 1992.
Petitioners failed to offer any bank statements or other
financial records from petitioner's husband's surgical practice.
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Petitioners filed a joint Federal income tax return for
1988. By September 16, 1991, they owed $109,580.82 on their 1988
income tax liabilities. Notices of Federal Tax Lien concerning
that joint liability were filed during the fall of 1991. On
October 4, 1991, petitioners' 1989 Federal income tax return was
filed on their behalf approximately 1 year late. They had filed
and received two extensions of time in which to file their 1989
return. No payment was made with the filing of the 1989 return,
and, on November 4, 1991, the IRS assessed penalties for a
failure to pay estimated tax and for late filing. During the
winter and spring of 1992, the IRS recorded Notices of Federal
Tax Lien against petitioners relating to their 1989 return.
Petitioners' 1990 joint Federal income tax return was filed on
their behalf on December 17, 1991, 8 months late. On December
17, 1991, penalties for the late filing and for failure to pay
estimated tax were assessed against petitioners. During the
Spring of 1992, the IRS recorded Notices of Federal Tax Lien
concerning petitioners' 1990 joint tax liability.
In the notice of deficiency sent to petitioners in the
instant case, respondent determined that petitioners failed to
include flowthrough income from BGE in the amounts of $79,380 and
$18 on their 1992 joint Federal income tax return. Petitioners
concede that the flowthrough from BGE for petitioner's husband's
share of the net settlement proceeds ($79,380) received by BGE
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during 1992 was not reported on petitioners' 1992 Federal income
tax return.3 Petitioners also concede the receipt of $18 in
interest income during 1992 from BGE which was not reported on
their 1992 Federal income tax return.
Discussion
Petitioners filed their petition in the instant case in
response to a notice of deficiency. In the petition, petitioner
claimed that she was entitled to innocent spouse relief pursuant
to section 6013(e). After the trial and briefing of the instant
case, Congress enacted section 6015 as part of the Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3201(a), 112 Stat. 685, 734, and simultaneously
repealed section 6013(e). The effective date of new section 6015
is July 22, 1998. Accordingly, petitioner can no longer seek
relief pursuant to section 6013(e). The parties, however, have
treated the petition as an election of relief pursuant to section
6015(b)(1).4 The parties agreed to waive any right to a new
trial for the purpose of section 6015 and concede that the issues
that were tried pursuant to section 6013(e) are the same issues
the Court should decide pursuant to section 6015(b)(1) except,
3
Petitioner's husband testified that he did not know why the
income from BGE was omitted from petitioners' 1992 joint Federal
income tax return.
4
We treat petitioner's innocent spouse claims pursuant to
sec. 6015 as an amendment to the petition to conform the petition
to the evidence. See Rule 41(b).
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however, that petitioner contends that she is entitled to reopen
the record for the Court to receive evidence as to petitioner's
entitlement to proportionate relief pursuant to section
6015(b)(2), and except that petitioner contends that she is
entitled to equitable relief pursuant to section 6015(f).
Petitioners' Claim for Innocent Spouse Relief Pursuant to Section
6015(b)(1)
Generally, spouses filing a joint tax return are each fully
responsible for the accuracy of their return and for the full tax
liability. See sec. 6013(d)(3). The innocent spouse provisions
of section 6015 provide exceptions to the general rule in certain
circumstances. Section 6015 provides, in pertinent part, as
follows:
SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON JOINT
RETURN.
(a) In General.--Notwithstanding section 6013(d)(3)–-
(1) an individual who has made a joint return may elect
to seek relief under the procedures prescribed under
subsection (b) * * *
* * * * * * *
(b) Procedures for Relief from Liability Applicable to All
Joint Filers.--
(1) In general.--Under procedures prescribed by the
Secretary, if–-
(A) a joint return has been made for a taxable
year;
(B) on such return there is an understatement of
tax attributable to erroneous items of one individual
filing the joint return;
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(C) the other individual filing the joint
return establishes that in signing the return he or she
did not know, and had no reason to know, that there was
such understatement;
(D) taking into account all the facts and
circumstances, it is inequitable to hold the other
individual liable for the deficiency in tax for such
taxable year attributable to such understatement; and
(E) the other individual elects (in such form as
the Secretary may prescribe) the benefits of this
subsection not later than the date which is 2 years
after the date the Secretary has begun collection
activities with respect to the individual making the
election,
then the other individual shall be relieved of liability for
tax (including interest, penalties, and other amounts) for
such taxable year to the extent such liability is
attributable to such understatement.
(2) Apportionment of relief.--If an individual who, but
for paragraph (1)(C), would be relieved of liability under
paragraph (1), establishes that in signing the return such
individual did not know, and had no reason to know, the
extent of such understatement, then such individual shall be
relieved of liability for tax (including interest,
penalties, and other amounts) for such taxable year to the
extent that such liability is attributable to the portion of
such understatement of which such individual did not know
and had no reason to know.
Former section 6013(e) is, for the most part, the same as
new section 6015(b), but there are important differences. For
example, new section 6015(b)(2) explicitly provides for
proportionate relief, although former section 6013(e) did not
have an explicit provision for such relief. Additionally, unlike
former section 6013(e), which encompassed only substantial
understatements attributable to grossly erroneous items, new
section 6015(b) encompasses any understatement. Despite the
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differences between the former provision and the new one, cases
interpreting old section 6013(e) remain instructive as to our
analysis of whether a taxpayer "knew or had reason to know" of an
understatement pursuant to new section 6015(b).
Of the several elements necessary for innocent spouse relief
listed in new section 6015(b)(1), the parties in the instant case
have presented only the issue of whether petitioner had reason to
know of the understatement on petitioners' 1992 tax return.
Cases arising pursuant to former section 6013(e) provide that the
spouse seeking relief has reason to know of an understatement if
a reasonably prudent taxpayer in his or her position, at the time
he or she signed the return, could be expected to know that the
return contained an understatement or that further investigation
was warranted. See Kistner v. Commissioner, 18 F.3d 1521, 1524
(11th Cir. 1994),5 revg. and remanding T.C. Memo. 1991-463;
Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989),
affg. T.C. Memo. 1988-63. The spouse seeking relief has a "duty
of inquiry". Stevens v. Commissioner, supra at 1505. In
deciding whether a spouse "has reason to know" of an
understatement, we undertake a subjective inquiry, and we
recognize several factors that are relevant to our analysis,
including: (1) The alleged innocent spouse's level of education;
5
The instant case, absent stipulation to the contrary, is
appealable to the Court of Appeals for the Eleventh Circuit.
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(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 spouses's evasiveness and deceit concerning the couple's
finances. See Kistner v. Commissioner, supra at 1524.
As to the first factor, level of education, petitioner
earned a college degree in medical records administration from
St. Louis University. She also owned and operated her own
construction business (JCB) that was, like the corporation in
which her husband was a shareholder (BGE), an S corporation.
Petitioner was primarily responsible for JCB's day-to-day
affairs. She collected the information with which to file tax
returns for JCB and signed those tax returns. Consequently, we
believe that she must have been familiar with the manner in which
income of an S corporation flows through to the individual
shareholders for Federal tax purposes. Although petitioner
testified that she had nothing to do with petitioner's husband's
nursery business during its existence, she admitted that she was
the secretary-treasurer of Sweetwater Greenery, Inc. (the
bankrupt predecessor company of BGE and the initial S corporation
operating the foliage nursery). By 1992, petitioner had
considerable experience in business and financial matters. At a
minimum, given her experience in the family's financial affairs,
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her knowledge of the settlement between BGE and Dupont, and her
apparent experience and knowledge of the tax implications of
doing business as an S corporation, petitioner should have
inquired into whether the flowthrough of income from the Dupont
settlement with BGE was properly accounted for on petitioners'
return. Accordingly, petitioner's education and experience weigh
heavily against allowing innocent spouse relief to petitioner.
As to the second factor, involvement in the family's
finances, petitioner had full responsibility for maintaining the
family checkbook and for writing checks to pay the household
bills. Petitioner's husband worked late, and petitioner was
entrusted with substantial control over the household bank
accounts and budgeting. Because petitioner usually retrieved the
mail, she had first access to the bank statements mailed to
petitioners' residence. Moreover, petitioners had been having
considerable difficulties with the IRS concerning earlier taxable
years. Petitioner played a significant role in gathering the
documents and materials necessary for petitioners' accountants to
prepare their tax returns. Given the difficulties petitioner and
her husband had with the IRS, and her involvement in preparing
the tax returns, petitioner should have had a heightened
awareness about the accuracy of petitioners' 1992 tax return.
Although respondent requested petitioners to provide the
bank statements from all of their bank accounts for 1992,
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petitioner produced only 8 of the 12 1992 bank statements from
their joint personal account, and they produced no statements
from any of the other accounts they held. The failure to
introduce such evidence leads us to conclude that it would not
have been helpful in proving petitioner's innocent spouse claim.
The evidence pertaining to petitioner's involvement in her
family's finances weighs heavily against petitioner.
As to the third factor, unusual or lavish expenditures,
although the record demonstrates that petitioner enjoyed a high
standard of living during 1992 and maintained accounts at various
upscale department stores where she made significant purchases,
there is no evidence in the record indicating whether such
expenditures were out of the ordinary when compared to
petitioners' spending habits in prior years. Accordingly, the
evidence pertaining to unusual and lavish expenditures neither
supports nor weakens petitioner's claim for innocent spouse
relief.
As to the fourth factor, whether petitioner's husband was
evasive about his finances, he never attempted to hide any of his
income or assets from petitioner. In his own words, he "always
told her about everything he was involved in." All of his income
was applied toward the benefit of the family. Consideration of
this factor weighs against innocent spouse relief.
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We also think it significant that petitioner had actual
knowledge of the Dupont settlement with BGE. Petitioner's
husband informed petitioner of the damage claim prior to his
departure for the Atlanta settlement negotiations. At trial,
petitioner admitted knowledge of the settlement. Thomas George,
the other shareholder of BGE, testified that he informed
petitioner of the Dupont settlement negotiations between BGE and
Dupont on several occasions. Although the amount may not have
been determined by that point, we believe there is little doubt
that petitioner knew that there was going to be a substantial
settlement. We fail to believe that petitioner's husband would
negotiate a settlement that would allow him to walk away from the
financial misery of the nursery with money left over without
telling his wife at least minimal facts about its nature and
scope. Petitioner testified that she never approved of his
involvement in the nursery business. Their discussions on the
subject were almost always argumentative. If there was anything
that petitioner's husband would likely discuss about the nursery
with petitioner, we believe it would be the good news that the
settlement was finally going to bail out petitioner's husband
from the financial woes of his involvement in the nursery
business. At a minimum, the foregoing was sufficient to trigger
petitioner's duty of inquiry.
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In sum, consideration of the foregoing factors leads us to
believe that petitioner should have known of the understatement
on petitioners' 1992 tax return. At a minimum, petitioner's
knowledge of the settlement and the tax consequences of S
corporations placed on her the duty to inquire about the amount
of the settlement and the flowthrough of petitioner's husband's
share of BGE's income as it might affect petitioners' 1992 tax
return. Consequently, we hold that petitioner is not entitled to
innocent spouse relief pursuant to section 6015(b)(1).
Petitioner's Motion To Reopen the Record To Introduce Evidence of
Her Ability To Qualify for Proportionate Relief Pursuant to
Section 6015(b)(2)
Petitioner requests that we reopen the record in the instant
case to submit evidence as to petitioner's qualification for
relief pursuant to new section 6015(b)(2). Reopening the record
for the submission of additional evidence lies within the
discretion of the Court. Zenith Radio Corp. v. Hazeltine
Research, Inc., 401 U.S. 321, 331 (1971). A court will not grant
a motion to reopen the record unless, among other requirements,
the evidence relied on is not merely cumulative or impeaching,
the evidence is material to the issues involved, and the evidence
probably would change the outcome of the case. See Coleman v.
Commissioner, T.C. Memo. 1989-248 (citing Edgar v. Finley, 312
F.2d 533 (8th Cir. 1963)). Petitioner's motion to reopen the
record does not describe in any way the evidence she would offer.
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See Rule 50(a) (stating that motions "shall state with
particularity the grounds therefor."). Additionally, petitioner
fails to explain in any way how the evidence would support
petitioner's claim for proportionate innocent spouse relief
pursuant to new section 6015(b)(2). Accordingly, we hold that
reopening the record is not warranted in the instant case, and
petitioner's motion will be denied. Moreover, based on the
evidence in the record, we hold that petitioner does not qualify
for proportionate innocent spouse relief.
The Tax Court's Authority To Review the Commissioner's Discretion
as Exercised Pursuant to Section 6015(f)
Petitioner asked respondent to consider equitable relief
pursuant to section 6015(f), which request respondent denied.
Respondent contends that the Tax Court has no authority to review
the Commissioner's denial of petitioner's request for equitable
relief pursuant to section 6015(f). We disagree with respondent.
As a part of our traditional authority in deficiency
proceedings, we have jurisdiction in the instant case to review
respondent's denial of equitable relief. Petitioner raised her
claim for innocent spouse relief in a petition for
redetermination filed pursuant to section 6213(a). In a
proceeding to redetermine asserted deficiencies, we may take into
account all facts and circumstances that bear upon the deficiency
as they affect petitioner, including petitioner's affirmative
defense that she is entitled to innocent spouse treatment. See
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secs. 6212-6214; Estate of Mueller v. Commissioner, 101 T.C. 551,
556 (1993); Woods v. Commissioner, 92 T.C. 776, 784 (1989). In
the context of a deficiency proceeding, a claim for innocent
spouse relief historically has been an affirmative defense that
must be set forth in the pleadings.6 See Rule 39; United States
v. Shanbaum, 10 F.3d 305, 311 (5th Cir. 1994); Roberts v.
Commissioner, T.C. Memo. 1993-98; Lerch v. Commissioner, T.C.
Memo. 1987-295, affd. 877 F.2d 624 (7th Cir. 1989); Connelly v.
Commissioner, T.C. Memo. 1982-644. A taxpayer is entitled to
raise an affirmative defense to respondent's deficiency
determination. See Estate of Mueller, supra at 556; Woods v.
Commissioner, supra at 784.
In Naftel v. Commissioner, 85 T.C. 527, 533 (1985), we held
that where a taxpayer files a petition for a redetermination of a
deficiency, we take jurisdiction over the entire tax liability,
not just the items determined to be erroneous in the notice of
deficiency. Consequently, where a taxpayer raises an affirmative
defense to a deficiency determination, we need no additional
basis for our authority to render an opinion on such issues
because the affirmative defense is part of the deficiency
proceeding over which we have jurisdiction. See Rule 39.
Accordingly, in the instant case, our authority to review
6
We equate the affirmative defense of innocent spouse
available pursuant to former sec. 6013(e) with the rights
afforded taxpayers by sec. 6015.
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petitioner's affirmative defense that she is entitled to innocent
spouse treatment is governed by our general jurisdiction to
consider any issue which affects the deficiency before us. See
sec. 6213. Petitioner's innocent spouse claim is one such issue.
Respondent argues that section 6015(e) precludes judicial
review of claims made pursuant to subsection (f) and limits
judicial review only to claims made pursuant to subsections (b)
and (c). Respondent contends, inter alia, that the references in
section 6015(e)(3) and (4) to subsections (b) and (c), coupled
with silence with regard to subsection (f), evidence an intent by
Congress to segregate proceedings involving subsection (f) from
proceedings involving subsections (b) and (c). Respondent
contends that the foregoing statutory scheme, as well as the
express language of the statute, evidence a congressional intent
to preclude judicial review of determinations made by the
Commissioner pursuant to section 6015(f). Alternatively,
respondent argues that the Commissioner's determinations pursuant
to subsection (f) are "committed to agency discretion" by law.
This Court has stated that there exists a strong presumption
that the actions of an administrative agency are subject to
judicial review. See, e.g., Mailman v. Commissioner, 91 T.C.
1079, 1082 (1988); Estate of Gardner v. Commissioner, 82 T.C.
989, 994 (1984). Agency action is exempt from judicial review
only: (1) Where the governing statutes expressly preclude such
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review, or (2) where the action is "committed to agency
discretion" by law. 5 U.S.C. sec. 701(a)(1984); Estate of
Gardner, supra at 995.
As to respondent's argument that section 6015 precludes
judicial review, we disagree. Section 6015(e), in relevant part,
provides:
(e) Petition for Review by Tax Court.
(1) In general.--In the case of an individual who
elects to have subsection (b) or (c) apply--
(A) In general.--The individual may petition the
Tax Court (and the Tax Court shall have jurisdiction)
to determine the appropriate relief available to the
individual under this section if such petition is filed
during the 90-day period beginning on the date on which
the Secretary mails by certified or registered mail a
notice to such individual of the Secretary's
determination of relief available to the individual.
* * *
* * * * * * *
(3) Applicable rules.--
* * * * * * *
(B) Res Judicata. In the case of any election
under subsection (b) or (c), if a decision of the Tax
Court in any prior proceeding for the same taxable year
has become final, such decision shall be conclusive
except with respect to the qualification of the
individual for relief which was not an issue in such
proceeding. The exception contained in the preceding
sentence shall not apply if the Tax Court determines
that the individual participated meaningfully in such
prior proceeding.
* * * * * * *
(4) Notice to other spouse. The Tax Court shall
establish rules which provide the individual filing a joint
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return but not making the election under subsection (b) or
(c) with adequate notice and an opportunity to become a
party to a proceeding under either such subsection.
We find nothing in section 6015(e) that precludes our review of
respondent's denial of equitable relief to petitioner. Indeed,
section 6015(e) states that, where a taxpayer elects to have
either subsection (b) or (c) apply, the taxpayer "may petition
the Tax Court (and the Tax Court shall have jurisdiction) to
determine the appropriate relief available to the individual
under this section". Sec. 6015(e)(1)(A). (Emphasis added). In
Woodral v. Commissioner, 112 T.C. 19, 22-23 (1999), we held that
the phrase "this section" in section 6404(g) includes all
subsections of 6404.
Moreover, the legislative history supports our
interpretation that section 6015 does not limit our authority to
review the Commissioner's determinations pursuant to section
6015(f). The House report states: "The bill specifically
provides that the Tax Court has jurisdiction to review any denial
(or failure to rule) by the Secretary regarding an application
for innocent spouse relief." H. Rept. 105-364, Part I, at 61
(1997). (Emphasis added). The Senate report provides:
The Tax Court has jurisdiction of disputes arising from
the separate liability election. For example, a spouse
who makes the separate liability election may petition
the Tax Court to determine the limits on liability
applicable under this provision. [S. Rept. 105-174, at
56 (1998).]
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The Conference report states that it follows the "House bill and
the Senate amendment in establishing jurisdiction in the Tax
Court over disputes arising in this area." H. Conf. Rept. 105-
599, at 251 (1998). In short, there is no language in either the
statute or the legislative history that precludes our review of
the Commissioner's denial of equitable relief pursuant to section
6015(f) where the taxpayer has made the requisite election for
relief pursuant to section 6015(b) or (c). But see In re Mira,
245 Bankr. 788 (Bankr. M.D. Pa. 1999).
We also disagree with respondent's argument that the
Commissioner's authority to grant equitable relief pursuant to
section 6015(f) is "committed to agency discretion by law." The
"committed to agency discretion" exception to the general rule of
judicial review is a very narrow one. (Estate of Gardner v.
Commissioner, supra at 995, citing Citizens to Preserve Overton
Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971)). The exception
applies only in those rare instances in which a statute is drawn
in terms so broad that there is no law to apply. See id.Whether there is law to apply turns on pragmatic considerations
as to whether an agency determination is the proper subject of
judicial review. See id. In Mailman v. Commissioner, supra at
1082-1083, we stated:
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To determine whether an action has been committed
solely to agency discretion, we have followed the standards
followed in other Federal courts. Only in cases in which it
can be found that the existence of broad discretionary power
is not appropriate for judicial review, or that the agency
determination involves political, economic, military, or
other managerial choices not susceptible to judicial review,
or that the agency determination requires experience or
expertise for which legal education or the lawyer's skills
provide no particular competence for resolution and for
which there are no ascertainable standards against which the
expertise can be measured, have the courts refrained from
reviewing administrative discretion.
None of the foregoing circumstances, where action is committed
solely to agency discretion, are present in the instant case.
Our review does not involve political, economic, military, or
other managerial choices not susceptible to judicial review.
Respondent argues that there is no ascertainable standard
upon which to review respondent's discretionary denial of relief
pursuant to section 6015(f). We disagree. The language of
section 6015(f)(1), "taking into account all the facts and
circumstances, it is inequitable to hold the individual liable
for any unpaid tax or any deficiency (or any portion of either)"
does not differ significantly from the language of section
6015(b)(1)(D), "taking into account all the facts and
circumstances, it is inequitable to hold the other individual
liable for the deficiency in tax for such taxable year
attributable to such understatement". Indeed, the language of
section 6015(f)(1) does not differ significantly from the
language of former section 6013(e)(1)(D), "taking into account
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all the facts and circumstances, it is inequitable to hold the
other spouse liable for the deficiency in tax for such taxable
year attributable to such substantial understatement".
We have consistently applied a "facts and circumstances"
analysis in considering the application of former section
6013(e)(1)(D). See Terzian v. Commissioner, 72 T.C. 1164, 1170
(1979); French v. Commissioner, T.C. Memo. 1996-38; Bouskos v.
Commissioner, T.C. Memo. 1987-574. In Kistner v. Commissioner,
T.C. Memo. 1995-66, on remand from the Court of Appeals for the
Eleventh Circuit, we discussed the particular standards to be
applied when deciding the appropriate relief pursuant to section
6013(e)(1)(D). Accordingly, we are well equipped to decide
whether it was an abuse of discretion for respondent to deny
relief to petitioner under section 6015(f). See Local 1219, Am.
Fed. of Gov. Employees v. Donovan, 683 F.2d 511, 516 (D.C. Cir.
1982) ("This limited determination is one which courts are well-
equipped to make.").7
On the basis of the foregoing, we conclude that we have the
authority to review respondent's denial of petitioner's claim for
equitable relief pursuant to section 6015(f). We discuss below
whether it was an abuse of discretion for respondent to deny
petitioner's equitable relief claim.
7
We note that respondent in Rev. Proc. 2000-15, 2000-5 I.R.B.
447, announced certain standards by which respondent will
evaluate an equitable relief request.
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Whether Respondent Appropriately Denied Petitioner Equitable
Spouse Relief Pursuant to Section 6015(f)
On February 4, 1999, petitioner submitted a Form 8857,
Request for Innocent Spouse Relief, to the IRS. The Form 8857
was forwarded to the IRS Appeals Office, and the claim was
assigned to an Appeals Officer who, after meeting with
petitioner, made petitioner a settlement offer that petitioner
rejected. In a September 22, 1999, letter, the Appeals Officer
informed petitioner that he had determined that petitioner is not
entitled to relief pursuant to either subsection (b)(1) or (f) of
section 6015.
Section 6015(f) provides as follows:
(f) Equitable Relief.--Under procedures prescribed
by the Secretary, if–-
(1) taking into account all the facts and
circumstances, it is inequitable to hold the
individual liable for any unpaid tax or any
deficiency (or any portion of either); and
(2) relief is not available to such
individual under subsection (b) or (c),
the secretary may relieve such individual of such
liability.
In deciding above whether petitioner qualified for relief
pursuant to section 6015(b)(1), we have held that petitioner had
reason to know of the understatement of tax on petitioners' 1992
return. The parties stipulated that petitioner's husband always
kept petitioner informed about everything in which he was
involved. Indeed, we have found that petitioner was fully
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engaged in the family's finances. Moreover, the record does not
demonstrate that there would be any economic hardship to
petitioner if relief were not granted. Petitioner remains
married to her husband and is living with him in the same
household. Additionally, there is no evidence that petitioner's
husband has ever abused petitioner in any manner. Petitioner's
husband has always applied all of his income toward the benefit
of his family. At her meeting with the IRS Appeals Officer,
petitioner did not come forward with any additional evidence that
would support her claim for equitable relief. In short, there
were no compelling reasons in the instant case for respondent to
grant petitioner equitable relief. Consequently, we hold that it
was not an abuse of discretion for respondent to deny
petitioner's claim for equitable relief pursuant to section
6015(f).
To reflect the foregoing,
An appropriate order will
be issued and decision will be
entered for respondent.