Geaccone v. Comm'r , 2007 Tax Ct. Summary LEXIS 58 ( 2007 )

T.C. Summary Opinion 2007-58
UNITED STATES TAX COURT
TRACY L. GEACCONE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3193-06S. Filed April 17, 2007.
Leonard S. Roth, for petitioner.
Susan K. Greene, for respondent.
JACOBS, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
at the time the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
- 2 -
and all Rule references are to the Tax Court Rules of Practice and
Procedure.
Respondent determined a deficiency of $5,921 in petitioner’s
2001 Federal income tax. The issue for decision is whether
respondent abused his discretion in denying petitioner innocent
spouse relief under section 66(c) for the deficiency and/or
liability for a portion of unpaid tax.
Background
Some of the facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated
herein by this reference. At the time she filed the petition,
petitioner resided in Houston, Texas.
Petitioner separated from her husband, Dr. Gasper Louis
Geaccone, in August of 2001; they divorced on December 18, 2002.
For the tax year 2001, petitioner timely filed a Federal income
tax return as a married individual filing separately.
On her 2001 return, petitioner reported: Wages of
$165,463.20; itemized deductions of $21,254; taxable income of
$144,227; total tax of $42,574; withholding credits of $38,354;
and a tax due of $4,220.
On Schedule A, Itemized Deductions, of the 2001 return,
petitioner claimed a deduction of $6,138 for real estate taxes and
$15,799 for home mortgage interest. Both of these itemized
- 3 -
deductions were accompanied by a notation that the amounts
represented one-half of the community property total amount.
Dr. Geaccone is a dentist. Petitioner, in her 2001 Federal
income tax return, did not include in gross income any amount
attributable to Dr. Geaccone’s earnings or profits from his dental
practice. Respondent determined that the combined earnings of
petitioner and Dr. Geaccone for the first 8 months of 2001 (the
portion of the tax year 2001 that petitioner and Dr. Geaccone were
not separated) was $320,986.67. According to respondent,
petitioner should have included (as items of community income)
half of that amount in income, as well as $55,154.33, the portion
of petitioner’s annual salary earned after her separation from Dr.
Geaccone.1 Respondent did not disturb petitioner’s treatment of
the claimed itemized deductions (i.e., her claiming half of the
community property total amount). However, respondent determined
that of the $38,354 withholding credit petitioner claimed, eight-
twelfths, or $25,569.33 (corresponding to the portion of the year
that petitioner was not separated from Dr. Geaccone) should have
been allocated evenly between petitioner and Dr. Geaccone, and
four-twelfths, or $12,784.67 (corresponding to the portion of the
year that petitioner was separated from Dr. Geaccone) should have
been allocated to petitioner. Therefore, according to respondent,
1
Respondent allocated 50 percent of interest income and
dividends to petitioner, as the total amounts were small ($13 and
$19, respectively).
- 4 -
the total withholding credit allocable to petitioner was
$25,569.33.
Dr. Geaccone did not pay any estimated income tax for the tax
year 2001, nor was any tax withheld from his earnings. According
to respondent, after taking into account petitioner’s prorated
share of Dr. Geaccone’s income, petitioner had taxable income for
2001 of $159,769.83, and the tax on this income was $48,495.
Respondent maintains that because petitioner’s prorated share of
the $38,354 of withheld tax credit was $25,569.33, petitioner owed
$22,925.67 ($48,495 minus $25,569.33), which is $18,705.67 more
than the $4,220 she showed as owed on her return.
On or about August 24, 2004, petitioner applied for relief
from liability with respect to the items of community income
attributable to her from Dr. Geaccone under section 66(c), which
respondent denied. Subsequently, respondent issued his notice of
deficiency.
Discussion
Except as otherwise provided in section 66(c), petitioner
bears the burden of proof. See Rule 142(a); Hardy v.
Commissioner, 181 F.3d 1002 (9th Cir. 1999), affg. T.C. Memo.
1997-97.
Texas is a community property State. Tex. Fam. Code Ann.
secs. 3.001-3.005 (Vernon 2001); Lange v. Phinney, 507 F.2d 1000,
1005 (5th Cir. 1975). Generally, a spouse residing in a community
- 5 -
property State has a vested interest in, and is owner of, one-half
of the spouses’ community property. United States v. Mitchell,
403 U.S. 190, 196 (1971). Generally, spouses residing in a
community property State are liable for the Federal income tax on
one-half of their community income. Id. Income and deductions
attributable to community property are also community property.
See Tex. Fam. Code Ann. secs. 3.001 and 3.002; Adams v.
Commissioner, 82 T.C. 563, 567-568 (1984); Hockaday v.
Commissioner, 22 T.C. 1327, 1329 (1954); Harris v. Harris, 765
S.W.2d 798, 802 (Tex. App. 1989); Marshall v. Marshall, 735 S.W.2d
587, 594 (Tex. App. 1987).
Spouses who reside in a community property State may file
either a joint Federal income tax return or separate Federal
income tax returns. If they file separate returns, then
generally each spouse must report, and pay tax on, one-half of the
community income, regardless of whether the spouse actually
received that income. United States v. Mitchell, supra at 196-
197; Bernal v. Commissioner, 120 T.C. 102, 105-106 (2003).
Under certain circumstances, section 66 provides that a
taxpayer may be relieved of liability on community income.
Section 66(a) addresses the treatment of community income in the
case of spouses who live apart at all times during the calendar
year. Section 66(b) allows the Secretary to disallow the benefits
of community property laws if the taxpayer acted as if he or she
- 6 -
were solely entitled to the income and failed to notify his or her
spouse of the nature and amount of the income before the due date
for filing the return. Section 66(c) provides a taxpayer with
relief if certain circumstances are satisfied.
Petitioner is not eligible for the type of relief provided by
section 66(a) or (b). Section 66(a) does not apply because
petitioner and Dr. Geaccone lived together for a portion of 2001.
Section 66(b) is not a relief provision and can be used only
by the Commissioner to disallow the benefits of community
property laws to a taxpayer. It cannot be used by a taxpayer to
claim relief from community property laws. Consequently, we need
to consider relief only under section 66(c), which provides as
follows:
SEC. 66(c). Spouse Relieved of Liability in Certain
Other Cases.--Under regulations prescribed by the Secretary,
if–-
(1) an individual does not file a joint return for
any taxable year,
(2) such individual does not include in gross
income for such taxable year an item of community
income properly includible therein which, in accordance
with the rules contained in section 879(a), would be
treated as the income of the other spouse,
(3) the individual establishes that he or she did
not know of, and had no reason to know of, such item of
community income, and
(4) taking into account all facts and
circumstances, it is inequitable to include such item of
community income in such individual’s gross income,
- 7 -
then, for purposes of this title, such item of community
income shall be included in the gross income of the other
spouse (and not in the gross income of the individual). * * *
Section 66(c) pertains to items of community income, and that
is one component of respondent’s calculations that led to his
determination that petitioner is liable for a deficiency in income
tax for 2001. According to respondent, the amount of income,
including community income, that petitioner should have reported
in her 2001 return was $215,647.66. Petitioner reported gross
income of $165,463.20, which is $50,184.46 less than respondent
determined, giving rise to a deficiency in tax of $5,921.
Petitioner may be relieved of liability for the tax associated
with this community income if she meets all four of the criteria
of section 66(c). We find that she does not.
The parties agree that petitioner meets the first and second
conditions of section 66(c). Respondent contends that petitioner
does not satisfy the third condition, which relates to
petitioner’s knowledge of the community income. Petitioner
contends that she did not have access to Dr. Geaccone’s books and
records, which would have shown the amount of his earnings, and
therefore she had no knowledge of his earnings as an item of
community property. Petitioner testified that her divorce was not
amicable and that by the time she filed her 2001 tax return in
2002, her relationship with Dr. Geaccone had deteriorated to the
point that they were no longer in direct communication.
- 8 -
Petitioner testified that she had intended to file a joint return
with Dr. Geaccone in 2001, but that alternative was not feasible,
because of the lack of cooperation between them by the time the
2001 income tax return was prepared. We found petitioner to be a
credible witness. Nonetheless, her testimony and the record in
this case do not satisfy the statutory requirement. Section 1.66-
4(a)(2)(ii), Income Tax Regs., provides:
If the requesting spouse is aware of the source of community
income or the income-producing activity, but is unaware of
the specific amount of the nonrequesting spouse’s community
income, the requesting spouse is considered to have knowledge
or reason to know of the item of community income. The
requesting spouse’s lack of knowledge of the specific amount
of community income does not provide a basis for relief under
this section.
There is no doubt that petitioner knew that Dr. Geaccone was
a dentist and that he earned income from his dental practice, even
though she might not have known the specific amount. The record
shows that petitioner and Dr. Geaccone filed joint returns for tax
years 1992 through 2000. Petitioner testified that she knew the
balance that was due on those returns. We conclude from
petitioner’s testimony that she knew of the item of community
income giving rise to the deficiency for the tax year 2001.
Even though we find that petitioner does not meet all four
requirements set forth in section 66(c),2 she may nevertheless
2
Because we find that petitioner has not satisfied the third
requirement of sec. 66(c), we need not consider the fourth.
- 9 -
obtain relief from liability under the flush language of section
66(c), which provides:
Under procedures prescribed by the Secretary, if, 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) attributable to any
item for which relief is not available under the preceding
sentence, the Secretary may relieve such individual of such
liability.
To prevail under the flush language of section 66(c),
petitioner must prove that respondent’s denial of equitable relief
from joint liability under section 66(c) was an abuse of
discretion. Butler v. Commissioner, 114 T.C. 276, 287-292 (2000);
see Beck v. Commissioner, T.C. Memo. 2001-198. The Court defers
to the Commissioner’s determination unless it is arbitrary,
capricious, or without sound basis in fact. Jonson v.
Commissioner, 118 T.C. 106, 125 (2002), affd. 353 F.3d 1181 (10th
Cir. 2003). Whether the Commissioner’s determination was an abuse
of discretion is a question of fact. The requesting spouse bears
the burden of proving that there was an abuse of discretion.
Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282 F.3d
326 (5th Cir. 2002); Abelein v. Commissioner, T.C. Memo. 2004-274.
We find that petitioner has not carried her burden with respect to
the deficiency for 2001 as determined by respondent ($5,921), but
as discussed infra, she has carried her burden with respect to her
- 10 -
liability for the unpaid tax resulting from respondent’s
reallocation of her withholding credits.3
As directed by section 66(c), the Commissioner has prescribed
guidelines in Rev. Proc. 2003-61, 2003-2 C.B. 296, modifying Rev.
Proc. 2000-15, 2000-1 C.B. 447, that are to be used in determining
whether it is inequitable to hold a requesting spouse liable for
all or part of the liability for any unpaid tax or deficiency.4
Sec. 1.66-4(b), Income Tax Regs. The requesting spouse must
satisfy five conditions (threshold conditions) before the
Commissioner will consider a request for relief under section
66(c). Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297.
Respondent concedes that petitioner satisfied the threshold
requirements.
3
Reallocation of the withholding credits affects the final
balance due from petitioner more than the treatment of the
community income. Petitioner claimed a credit of $38,354 for
withheld taxes, as shown on her Form W-2, Wage and Tax Statement.
Respondent proposes to allow only $25,569.33 of this amount, a
difference of $12,784.67. In contrast, the deficiency in tax
which resulted from the allocation of a portion of Dr. Geaccone’s
income to petitioner was $5,921.
4
Rev. Proc. 2000-15, 2000-1 C.B. 447, was superseded by Rev.
Proc. 2003-61, 2003-2 C.B. 296, which is effective as to requests
for relief filed on or after Nov. 1, 2003, and for requests for
relief pending on Nov. 1, 2003, as to which no preliminary
determination letter had been issued as of that date.
Petitioner’s application for relief was filed after Nov. 1, 2003,
in August of 2004. Respondent issued a notice of deficiency on
Jan. 20, 2006.
- 11 -
Where, as here, the requesting spouse meets the five threshold
conditions set forth in Rev. Proc. 2003-61, sec. 4.01, we employ a
balancing test to determine whether, taking into account all the
facts and circumstances, it would be inequitable to hold the
requesting spouse liable for all or part of the unpaid liability.
Id. sec. 4.03, 2003-2 C.B. at 298. We begin by considering
petitioner’s request for relief in the light of six factors listed
in the revenue procedure. A description of each factor,
underscored, and our application of that factor to the facts of
this case, follows.5
(a) Marital status. The requesting spouse is separated or
divorced from the nonrequesting spouse. The parties agree that
petitioner is divorced from Dr. Geaccone. This factor weighs in
petitioner’s favor.
(b) Economic hardship. The requesting spouse will suffer
economic hardship if relief from the liability is not granted.
Petitioner did not present any evidence tending to show that she
would suffer economic hardship if relief from liability were not
granted. We note that petitioner earned substantial income in
5
These six factors are found in Rev. Proc. 2003-61, sec.
4.03(2)(a), 2003-2 C.B. at 298. Additional factors that, if
present, will weigh in favor of relief but will not weigh against
equitable relief if not present in a case are found in Rev. Proc.
2003-62, sec. 4.03(2)(b), 2003-2 C.B. at 299. Neither of those
factors, pertaining to abuse and mental or physical health, is
present in this case.
- 12 -
2001, and that she is a skilled professional. Nothing in the
record indicates that she is no longer employed at a salary similar
to her 2001 salary. On this record, we do not find that petitioner
would suffer economic hardship if relief is not granted. This
factor weighs against petitioner.
(c) Knowledge or reason to know. In the case of an income tax
liability that arose from a deficiency, whether the requesting
spouse did not know and had no reason to know of the item giving
rise to the deficiency. As discussed supra, we find that
petitioner knew or had reason to know of the community income which
gave rise to the understatement of her income and resulted in the
deficiency respondent determined. This factor weighs against
petitioner.
(d) Nonrequesting spouse’s legal obligation. Whether the
nonrequesting spouse has a legal obligation to pay the outstanding
income tax liability pursuant to a divorce decree or agreement.
Petitioner’s divorce decree assigns her responsibility for all
income taxes “associated with the federal income tax return filed
by petitioner individually for the calendar year 2001.”
Correspondingly, the divorce decree assigns to Dr. Geaccone
responsibility for all Federal income taxes “associated with * * *
[Dr. Geaccone’s] earnings in his dental practice for the calendar
year 2001.” This factor weighs in favor of petitioner.
- 13 -
(e) Significant benefit. Whether the requesting spouse
received significant benefit (beyond normal support) from the
unpaid income tax liability or item giving rise to the deficiency.
Petitioner credibly testified that she received no gifts or other
benefits beyond normal support from the unpaid tax liability.
While, as respondent posits, Dr. Geaccone made some transfers of
funds to a bank account petitioner controlled, we are satisfied
that these transfers were for the purpose of contributing to the
support of the family as a whole and did not constitute a benefit
beyond normal support to petitioner. This factor weighs in favor
of petitioner.
(f) Compliance with income tax laws. Whether the requesting
spouse has made a good faith effort to comply with income tax laws
in the taxable years following the taxable year to which the
request for relief relates. The record is devoid of any reference
to petitioner’s compliance with the income tax laws in years
subsequent to 2001. Therefore, this factor is neutral.
To conclude, we hold that respondent did not abuse his
discretion in denying petitioner innocent spouse relief under
section 66(c) for the determined deficiency. However, to require
petitioner to remain liable for unpaid tax in excess of $10,141
($48,495, the tax on petitioner’s income including her prorated
share of Dr. Geaccone’s income, less $38,354, the amount of
petitioner’s withholding credits) would be inequitable. Yet this
- 14 -
is the outcome of respondent’s refusal to allow petitioner credit
for the entire amount of tax withheld by her employer from her
income. It therefore follows that in denying petitioner credit for
the $38,354 withheld from her wages, and thus denying her innocent
spouse relief under section 66(c) for unpaid tax in excess of
$10,141, respondent abused his discretion.
To reflect the foregoing,
An appropriate decision
will be entered.