Blonde Grayson Hall, Neal Hall, Administrator and Neal Hall v. Commissioner , 2014 T.C. Memo. 171 ( 2014 )

T.C. Memo. 2014-171UNITED STATES TAX COURT
BLONDE GRAYSON HALL, DECEASED, NEAL HALL, ADMINISTRATOR,
AND NEAL HALL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 353-12. Filed August 21, 2014.
Blonde Grayson Hall and Neal E. Hall,1 pro sese.
Harry J. Negro, for respondent.
1
This case was tried and briefed by petitioners pro sese. On June 23, 2014,
after the posttrial briefs were filed, Mark E. Cedrone entered an appearance as
counsel for petitioners. Blonde Grayson Hall died on June 3, 2014, and Neal Hall
was appointed administrator of her estate. On August 18, 2014, the Court granted
petitioners’ motion to substitute party and to correct caption.
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[*2] MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: Respondent determined deficiencies, additions to tax, and
accuracy-related penalties with respect to petitioners as follows:
Addition to tax Accuracy-related penalty
Year Deficiency sec. 6651(a)(1) sec. 6662(a)
2004 $7,381 $1,845.25 $1,476.20
2005 6,879 1,600.25 1,375.80
2006 37,433 --- 7,486.60
After concessions by the parties,2 the issues for decision are: (1) whether
petitioners overstated car and truck expenses for the taxable years 2004, 2005, and
2006 (years at issue); (2) whether petitioners overstated travel expenses for the
taxable years 2005 and 2006; (3) whether $54,832.40 of deductions claimed on the
law office of Hall & Associates Schedule C, Profit or Loss From Business, for
professional and legal expenses for the taxable year 2006 should be reclassified as
a miscellaneous itemized deduction on Schedule A, Itemized Deductions; (4)
whether petitioners overstated the loss claimed on Schedule E, Supplemental
2
Petitioners concede that they are not entitled to deduct $15,233 of
advertising expenses claimed on Schedule C, Profit or Loss From Business, for the
taxable year 2004. Respondent concedes that petitioners are entitled to the full
amounts of deductions claimed for legal and professional expenses on Schedules
C for the taxable years 2004 and 2005. Respondent also concedes that $23,840 of
legal and professional expenses that he disallowed in the notice of deficiency are
deductible on Schedule C for the taxable year 2006.
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[*3] Income and Loss, for the taxable year 2006; (5) whether petitioners are liable
for accuracy-related penalties for the taxable years 2004, 2005, and 2006 under
section 6662(a);3 (6) whether petitioners are liable for additions to tax under
section 6651(a)(1); and (7) whether Mr. Hall is entitled to relief from joint and
several liability under section 6015.
FINDINGS OF FACT
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 the petition was filed, Mr. Hall and Mrs. Hall resided in
Pennsylvania.
Blonde Grayson Hall obtained her license to practice law in 1982. Mrs.
Hall was a practicing attorney during the years at issue and operated her legal
practice under the name Law Offices of Hall & Associates (Hall & Associates).
Mrs. Hall reported the income and expenses associated with Hall & Associates on
Schedules C of Mr. Hall and Mrs. Hall’s tax returns for the years at issue.
Neal E. Hall is an ophthalmologist. Mr. Hall is the sole shareholder of
Ophthalmic Associates, Inc. (Ophthalmic Associates), a subchapter S corporation.
3
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the years at issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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[*4] The nonpassive losses from Ophthalmic Associates were reported on
Schedules E of Mr. Hall and Mrs. Hall’s tax returns for the years at issue.
Mr. Hall and Mrs. Hall owned three rental properties for which income and
expenses were reported on Schedules E for the years at issue.
On May 16, 2006, Mr. Hall and Mrs. Hall were convicted of willful failure
to file Federal income tax returns pursuant to a plea agreement in the U.S. District
Court for the Eastern District of Pennsylvania. They agreed to plead guilty to
three counts of willful failure to file tax returns under section 7203 for the taxable
years 1999, 2000, and 2001. See Hall v. Commissioner, T.C. Memo. 2013-93, at
*3. Mr. Hall and Mrs. Hall were each sentenced to 12 months’ imprisonment, an
additional 12 months’ supervised release, and a fine of $20,000. See id. at *7.
The law firm of Miller Alfano & Raspanti (Miller) was the legal counsel that
represented Mr. Hall during the plea agreement proceeding before the District
Court. Mrs. Hall was represented by different legal counsel, Nicholas Nastasi.
See id. at *6. Hall & Associates paid $27,932.40 to Miller during the taxable year
2006 for Mr. Hall’s representation.4 Mr. and Mrs. Hall deducted the payment as a
4
Mrs. Hall did not appeal her conviction or sentence. See Hall v.
Commissioner, T.C. Memo. 2013-93, at *7. Mr. Hall appealed his conviction and
sentence, which were affirmed by the Court of Appeals for the Third Circuit. See
United States v. Hall, 515 F.3d 186, 203 (3d Cir. 2008).
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[*5] legal and professional services expense on the Hall & Associates Schedule C
of their 2006 joint return.
Goldenberg Rosenthal (Goldenberg) was an accounting firm that was hired
in 2006 to perform forensic accounting services to ascertain Mr. and Mrs. Hall’s
correct tax liabilities for the taxable years 1998 through 2001. Stuart Katz was an
accountant at Goldenberg who worked on the forensic accounting project. To
determine Mr. Hall and Mrs. Hall’s correct tax liability, Goldenberg had to
determine the income and expenses of Hall & Associates and Ophthalmic
Associates as well as other items of income and deductions for Mr. Hall and Mrs.
Hall. During 2006 Hall & Associates paid Goldenberg $26,900 for the forensic
accounting services. Mr. Hall and Mrs. Hall deducted the payment as a legal and
professional services expense on the Hall & Associates Schedule C of their 2006
joint return.
On May 18, 2007, Mr. Hall and Mrs. Hall filed joint Federal income tax
returns for the taxable years 2004, 2005, and 2006. On November 10, 2011,
respondent issued to Mr. Hall and Mrs. Hall a notice of deficiency for the years at
issue. They timely filed a petition disputing the determinations in the notice of
deficiency.
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[*6] OPINION
The Commissioner’s determinations in a notice of deficiency are generally
presumed correct, and the taxpayers bear the burden of proving that the
determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933).
Deductions are a matter of legislative grace, and the taxpayers bear the
burden of proving that they are entitled to any deduction claimed. Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934). Section 6001 requires taxpayers to
maintain records sufficient to establish the amount of each deduction. See also
sec. 1.6001-1(a), Income Tax Regs.
Section 162(a) allows a deduction for ordinary and necessary expenses that
a taxpayer pays in connection with the operation of a trade or business. Boyd v.
Commissioner, 122 T.C. 305, 313 (2004). To be “ordinary” the expense must be
of a common or frequent occurrence in the type of business involved. Deputy v.
du Pont, 308 U.S. 488, 495 (1940). To be “necessary” an expense must be
“appropriate and helpful” to the taxpayer’s business. Welch v. Helvering, 290
U.S. at 113. Additionally, the expenditure must be “directly connected with or
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[*7] pertaining to the taxpayer’s trade or business”. Sec. 1.162-1(a), Income Tax
Regs. Section 262(a) disallows deductions for personal, living, or family
expenses.
If a taxpayer establishes that an expense is deductible, but is unable to
substantiate the precise amount, we may estimate the amount, bearing heavily
against the taxpayer whose inexactitude is of her own making. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The taxpayer must present
sufficient evidence for the Court to form an estimate because without such a basis,
any allowance would amount to unguided largesse. Williams v. United States, 245
F.2d 559, 560-561 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-
743 (1985).
Section 274 overrides the Cohan rule with regard to certain expenses. See
Sanford v. Commissioner, 50 T.C. 823, 828 (1968), aff’d per curiam, 412 F.2d 201(2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.
46014 (Nov. 6, 1985). Section 274 requires stricter substantiation for travel,
meals, and certain listed property. Section 274(d) provides that no deduction shall
be allowed unless the taxpayer substantiates by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement: (1) the amount of the
expense; (2) the time and place of the expense; and (3) the business purpose of the
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[*8] expense. See Oswandel v. Commissioner, T.C. Memo. 2007-183, 2007 Tax
Ct. Memo LEXIS 185, at *7. Even if such an expense would otherwise be
deductible, section 274 may still preclude a deduction if the taxpayer does not
present sufficient substantiation. Sec. 1.274-5T(a), Temporary Income Tax Regs.,
supra. However, in the alternative, each element of an expenditure or use may be
established by the taxpayer’s own written or oral statement “containing specific
information in detail as to such element” combined with corroborative evidence
sufficient to establish such element. Sec. 1.274-5T(c)(3)(i)(A) and (B), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).
1. Car and Truck Expenses
Mr. Hall and Mrs. Hall claimed on Schedules C deductions for car and truck
expenses of $6,463, $8,621, and $8,900 for the taxable years 2004, 2005, and
2006, respectively. Respondent determined that they were allowed deductions of
$1,288, $1,760, and $1,818 for the taxable years 2004, 2005, and 2006,
respectively.
Mr. Hall and Mrs. Hall’s car and truck expenses are subject to the
heightened substantiation requirements of section 274(d). See secs. 274(d)(4),
280F(d)(4)(A)(i). As applicable to vehicle expenses, section 274(d) requires a
taxpayer to substantiate: (1) the mileage; (2) the time and place of the use; and (3)
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[*9] the business purpose of the use. See Solomon v. Commissioner, T.C. Memo.
2011-91, 2011 Tax Ct. Memo LEXIS 90, at *8.
Mrs. Hall did not maintain a contemporaneous mileage log. Mr. Katz
testified that he based the number of miles driven on discussions with Mrs. Hall.
Mr. Katz claimed that he reviewed documentation in order to determine the
number of miles driven. The documentation that Mr. Hall and Mrs. Hall offered
into evidence to substantiate the number of miles driven consisted of seven
parking receipts, an equipment lease, a help wanted advertisement, a phone
message slip, and a few other documents. The evidence they submitted does not
demonstrate that Mrs. Hall incurred mileage expenses in amounts greater than
those respondent allowed in the notice of deficiency. Accordingly, we sustain
respondent’s determinations in the notice of deficiency.
2. Travel Expenses
Mr. Hall and Mrs. Hall claimed on Schedules C deductions for travel
expenses of $14,975 and $9,007 for the taxable years 2005 and 2006, respectively.
Respondent determined that Mr. Hall and Mrs. Hall were allowed deductions of
$13,748 and $5,587 for the taxable years 2005 and 2006, respectively.
Mr. Hall and Mrs. Hall failed to demonstrate that Mrs. Hall paid travel
expenses in amounts greater than those respondent allowed in the notice of
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[*10] deficiency. Accordingly, we sustain respondent’s determinations in the
notice of deficiency.
3. Legal and Professional Expenses
Mr. Hall and Mrs. Hall deducted the $26,900 payment to Goldenberg on the
Hall & Associates Schedule C of their 2006 joint return. Respondent disallowed
the deduction for the $26,900 payment and reclassified the amount as a Schedule
A miscellaneous deduction.
Petitioners argue that the $26,900 Hall & Associates paid to Goldenberg in
2006 related to the forensic accounting services performed only for Hall &
Associates. Petitioners argue that Mr. Hall and Mrs. Hall did not pay the fees they
owed to Goldenberg for the forensic accounting services performed for
Ophthalmic Associates and for them as individuals. Therefore, they contend that
the $26,900 payment should be a deduction on Schedule C. Respondent argues
that the $26,900 payment should be reclassified as a Schedule A miscellaneous
deduction because the forensic accounting services were performed for Hall &
Associates, Ophthalmic Associates, and Mr. Hall and Mrs. Hall as individuals.
Petitioners’ argument is contradicted by the testimony of Mr. Katz. Mr.
Katz testified that Goldenberg was hired to perform forensic accounting services
for Hall & Associates, Ophthalmic Associates, Mr. Hall, and Mrs. Hall. Mr. Katz
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[*11] testified he did not recall Goldenberg ever invoicing Ophthalmic Associates.
Instead, Mr. Katz testified that Goldenberg “billed Hall and Associates for all of
the forensic work”. Mr. Hall and Mrs. Hall offered into evidence two invoices
from Goldenberg which were addressed to Blonde Grayson Hall at the business
address of Hall & Associates. They did not offer any invoices that were addressed
to Ophthalmic Associates or to them at their home address. It is unlikely that
Goldenberg intended to separately bill Hall & Associates, Ophthalmic Associates,
and Mr. Hall and Mrs. Hall for their specific services but send invoices only to
Mrs. Hall at the business address of Hall & Associates.
Mr. Hall and Mrs. Hall have not provided sufficient evidence for us to find
that the $26,900 payment related to the services performed only for Hall &
Associates. Mr. Katz’ testimony and the Goldenberg invoices indicate that
Goldenberg sent invoices to Mrs. Hall at the business address of Hall &
Associates for the services performed for Hall & Associates, Ophthalmic
Associates, and Mr. Hall and Mrs. Hall as individuals. Accordingly, we find that
the entire $26,900 should not be reported on Schedule C of Mr. Hall and Mrs.
Hall’s 2006 joint return as a business expense of Hall & Associates.
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[*12] Petitioners bear the burden of proving what portion of the $26,900 payment
to Goldenberg related to services performed by Hall & Associates. See Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. at 84.
At trial Mrs. Hall asked Mr. Katz to allocate the time he spent on the
forensic accounting project between Hall & Associates and Ophthalmic
Associates. Mr. Katz testified that he spent 30% of his time on Ophthalmic
Associates and 70% of his time on Hall & Associates. We note that Mrs. Hall’s
question was phrased so as to exclude the amount of time that Mr. Katz worked on
Mr. Hall and Mrs. Hall’s personal income and deductions, which included those
relating to three rental properties for the years at issue. Furthermore, under cross-
examination Mr. Katz admitted that his estimate was “really a guesstimate in my
mind.” As a result, Mr. Katz’ testimony does not establish the portion of the
$26,900 payment that should be allocated to Hall & Associates. We also note that
there were other Goldenberg employees besides Mr. Katz who worked on the
forensic accounting project. Mr. Hall and Mrs. Hall failed to provide sufficient
evidence for us to determine the portion of the $26,900 payment allocable to Hall
& Associates. Accordingly, we hold that the $26,900 is properly reported as a
Schedule A miscellaneous deduction.
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[*13] In 2006 Mr. Hall and Mrs. Hall paid Miller $27,932.40 for legal work for
Mr. Hall. Mr. Hall and Mrs. Hall deducted the $27,932.40 payment to Miller on
the 2006 Hall & Associates Schedule C. Respondent disallowed the payment to
Miller as a deduction on the 2006 Hall & Associates Schedule C and reclassified
the amount as a Schedule A miscellaneous deduction.
Generally, taxpayers may not deduct expenses of another person and may
not deduct personal expenses. See Deputy v. du Pont, 308 U.S. 488 (1940).
“Where expenses of another are paid in order to protect a taxpayer’s business, the
taxpayer, in limited circumstances, may be allowed to deduct the expenses.”
Capital Video Corp. v. Commissioner, T.C. Memo. 2002-40, 2002 Tax Ct. Memo
LEXIS 42, at *8, aff’d, 311 F.3d 458 (1st Cir. 2002).
In Lohrke v. Commissioner, 48 T.C. 679, 688-689 (1967), the Court
adopted a two-prong test for analyzing whether a taxpayer may deduct the legal
expenses of another. For the first prong the Court must “ascertain the purpose or
motive which cause the taxpayer to pay the obligations of the other person.” Id. at
688. “To meet this prong, the expense must have been made primarily to benefit
the taxpayer’s business; any benefit conferred on the party whose expenses are
being paid must be only incidental.” Capital Video Corp. v. Commissioner, 311
F.3d at 464 (citing AMW Invs., Inc. v. Commissioner, T.C. Memo. 1996-235,
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[*14] 1996 Tax Ct. Memo LEXIS 255, at *13-*14). For the second prong the
Court must determine whether the expense “is an ordinary and necessary expense
of the individual’s trade or business; that is, is it an appropriate expenditure for the
furtherance or promotion of that trade or business?” Lohrke v. Commissioner, 48
T.C. at 688. The second prong requires that the origin of the expense arises in
connection with the business activities of the taxpayer paying the expense. Capital
Video Corp. v. Commissioner, 311 F.3d at 465.
Petitioners argue that the payment to Miller to represent Mr. Hall was made
to protect the business interests of Hall & Associates. Mr. Hall testified that Mrs.
Hall, on behalf of Hall & Associates, would perform legal work for Ophthalmic
Associates.5 Mr. Hall testified that Ophthalmic Associates did not pay Hall &
Associates for its services. Mrs. Hall testified that for the years at issue, the
substantial gross receipts of Hall & Associates did not include any payments from
Ophthalmic Associates.
5
Mr. Hall and Mrs. Hall failed to provide any invoices or documentation
substantiating the legal work Mrs. Hall claimed to have performed for Ophthalmic
Associates. Furthermore, we note that Mrs. Hall was the secretary and treasurer of
Ophthalmic Associates. As a result, if she did perform any work for Ophthalmic
Associates, it was most likely in her role as secretary and treasurer, not on behalf
of Hall & Associates.
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[*15] Mr. Hall was the primary beneficiary of the payment to Miller. Miller’s
representation of Mr. Hall was to benefit him in his prosecution for willfully
failing to file tax returns for the taxable years 1999, 2000, and 2001.6 The benefit
conferred on Mr. Hall was not incidental. Petitioners have failed to prove that the
payment to Miller was a business expense that benefited Hall & Associates. As a
result, petitioners have failed to satisfy the first prong of the Lohrke test. See
Capital Video Corp. v. Commissioner, 311 F.3d at 464. Additionally, the payment
to Miller arose from Mr. Hall’s failure to file tax returns. The payment did not
arise in connection with the business activities of Hall & Associates. As a result,
petitioners have also failed to satisfy the second prong of the Lohrke test. See
Capital Video Corp. v. Commissioner, 311 F.3d at 465. Accordingly, we hold that
respondent properly disallowed the payment to Miller as a deduction on Schedule
C and reclassified the amount as a Schedule A miscellaneous deduction.
4. Loss Limitation for S Corporation
Mr. Hall and Mrs. Hall claimed a loss deduction of $33,431 from
Ophthalmic Associates on Schedule E of their tax return for the taxable year 2006.
6
Mr. Hall was sentenced to 12 months’ imprisonment, an additional 12
months’ supervised release, and a fine of $20,000.
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[*16] Respondent determined that the loss deduction was limited to Mr. Hall’s
basis in Ophthalmic Associates, $21,245.
Ophthalmic Associates is an S corporation, and Mr. Hall is the sole
shareholder. Losses deductible by a shareholder are limited to the shareholder’s
basis in the corporation. See sec. 1366(d). As a result, losses cannot exceed the
sum of the shareholder’s adjusted basis in his stock in the S corporation and the
shareholder’s adjusted basis in any indebtedness of the S corporation to the
shareholder. Sec. 1366(d)(1)(A) and (B). The shareholder bears the burden of
establishing his basis in an S corporation. See Broz v. Commissioner, 137 T.C.
46, 60 (2011), aff’d, 727 F.3d 621 (6th Cir. 2013).
Goldenberg did not prepare a basis schedule for Mr. Hall’s basis in
Ophthalmic Associates. Instead, Mr. Katz testified that he analyzed gross receipts
to estimate Mr. Hall’s basis. Mr. Hall and Mrs. Hall did not offer into evidence
the purported analysis used by Mr. Katz to estimate Mr. Hall’s basis. Instead, Mr.
Hall and Mrs. Hall offered into evidence monthly bank statements for Ophthalmic
Associates for January 2005 and December 2006. We note that Mr. Hall and Mrs.
Hall did not share these bank statements with respondent before trial pursuant to
the Court’s pretrial order. Mrs. Hall testified that during the weekend before trial
she realized that two of the deposits were actually loans made to Ophthalmic
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[*17] Associates. Mr. Hall and Mrs. Hall did not provide sufficient evidence for
us to find that these amounts were loans. We are not required to accept Mr. Hall
and Mrs. Hall’s self-serving testimony. See Tokarski v. Commissioner, 87 T.C.
74, 77 (1986). We find that petitioners have failed to prove that Mr. Hall and Mrs.
Hall had a basis in Ophthalmic Associates in an amount greater than respondent
determined. Accordingly, we sustain respondent’s determination.
5. Accuracy-Related Penalty
Respondent determined that Mr. Hall and Mrs. Hall were liable for section
6662(a) accuracy-related penalties of $1,476.20, $1,375.80, and $7,486.60 for the
taxable years 2004, 2005, and 2006. Respondent concedes that they reasonably
relied upon Goldenberg with respect to respondent’s adjustments of $15,233 to the
Schedule C advertising expense for the taxable year 2004 and of $12,186 to the
loss from Ophthalmic Associates on Schedule E for the taxable year 2006. As a
result, respondent now asserts the accuracy-related penalty for adjustments to: (1)
Schedule C car and truck expenses of $5,275, $6,861, and $7,082 for the taxable
years 2004, 2005, and 2006; (2) Schedule C travel expenses of $1,227 and $4,430
for the taxable years 2005 and 2006; and (3) Schedule C legal and professional
expenses of $54,832.40 for the taxable year 2006.
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[*18] Section 6662(a) imposes an accuracy-related penalty equal to 20% of the
underpayment to which section 6662 applies. Section 6662 applies to the portion
of any underpayment which is attributable to, inter alia, negligence or disregard of
rules or regulations. Sec. 6662(b)(1). Respondent contends that the
underpayment of tax is attributable to negligence. For purposes of section 6662,
the term “negligence” includes any failure to make a reasonable attempt to comply
with the provisions of the Code, and the term “disregard” includes any careless,
reckless, or intentional disregard. Sec. 6662(c); see also Neely v. Commissioner,
85 T.C. 934, 947 (1985) (stating that negligence is lack of due care or failure to do
what a reasonably prudent person would do under the circumstances); sec. 1.6662-
3, Income Tax Regs. Negligence also includes any failure to exercise ordinary and
reasonable care in the preparation of a tax return or any failure to keep adequate
books and records and to properly substantiate items. Sec. 1.6662-3(b)(1), Income
Tax Regs.
Section 7491(c) provides that the Commissioner bears the “burden of
production” with regard to penalties and must come forward with sufficient
evidence indicating that it is appropriate to impose the penalty. See Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets his
“burden of production”, however, the “burden of proof” remains with the taxpayer,
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[*19] including the burden of proving that the penalty is inappropriate because of
reasonable cause under section 6664. See Rule 142(a); Higbee v. Commissioner,
116 T.C. at 446-447.
Mr. Hall and Mrs. Hall have failed to substantiate the car and truck
expenses and travel expenses that respondent disallowed. They have failed to
provide sufficient evidence that the payments to Miller and Goldenberg were
expenses solely of Hall & Associates. Accordingly, respondent has come forward
with sufficient evidence indicating that it is appropriate to impose the accuracy-
related penalty. We find that respondent has met his burden of production with
respect to negligence.
Section 6664(c)(1) provides that the penalty under section 6662(a) shall not
apply to any portion of an underpayment if it is shown that there was reasonable
cause for the taxpayer’s position and that the taxpayer acted in good faith with
respect to that portion. See Higbee v. Commissioner, 116 T.C. at 448. The
determination of whether the taxpayer acted with reasonable cause and in good
faith is made on a case-by-case basis, taking into account all the pertinent facts
and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioners have the
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[*20] burden of proving that the penalty is inappropriate because of reasonable
cause under section 6664. See Rule 142(a); Higbee v. Commissioner,
116 T.C. at 446-447.
Petitioners appear to argue that Mr. Hall and Mrs. Hall’s tax returns for the
years at issue were prepared by Goldenberg and that any errors on the returns were
not due to negligence by Mr. Hall and Mrs. Hall. “Reasonable cause requires that
the taxpayer have exercised ordinary business care and prudence as to the disputed
item.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d,
299 F.3d 221 (3d Cir. 2002). The good-faith reliance on the advice of an
independent, competent professional as to the tax treatment of an item may meet
this requirement. Id. (citing United States v. Boyle, 469 U.S. 241 (1985)); sec.
1.6664-4(b), Income Tax Regs. Whether a taxpayer relies on the advice and
whether this reliance is reasonable hinge on the facts and circumstances of the
case and the law that applies to those facts and circumstances. Neonatology
Assocs., P.A. v. Commissioner, 115 T.C. at 98; sec. 1.6664-4(c)(1), Income Tax
Regs. For reliance to be reasonable, “the taxpayer must prove by a preponderance
of the evidence that the taxpayer meets each requirement of the following three-
prong test: (1) The adviser was a competent professional who had sufficient
expertise to justify reliance, (2) the taxpayer provided necessary and accurate
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[*21] information to the adviser, and (3) the taxpayer actually relied in good faith
on the adviser’s judgment.” Neonatology Assocs., P.A. v. Commissioner, 115
T.C. at 99.
Respondent concedes that Goldenberg is a certified public accounting firm
with sufficient expertise to justify reliance. Respondent argues that Mr. Hall and
Mrs. Hall did not establish that they provided necessary and accurate information
to Goldenberg or that they relied on Goldenberg’s judgment in good faith.
Respondent disallowed car and truck expense deductions of $5,275, $6,861,
and $7,082 for the taxable years 2004, 2005, and 2006. Mr. Hall and Mrs. Hall
did not provide Goldenberg with a contemporaneous mileage log. Mr. Katz
testified that he prepared a schedule of business mileage on the basis of
conversations with Mrs. Hall and documentation such as parking receipts, credit
cards, and train tickets. Mr. Katz testified that he reviewed the schedule.7 We
note that Mr. Katz did not testify that all of the mileage on the schedule was
supported by documentation. Mr. Hall and Mrs. Hall did not offer into evidence
the documentation they allegedly provided to Goldenberg to support Mrs. Hall’s
business mileage. Instead, they offered into evidence seven parking receipts, an
7
We note that Mr. Katz also testified that while he supervised the
preparation of the returns, another employee at Goldenberg reviewed all the
information provided to Goldenberg in order to prepare the returns.
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[*22] equipment lease, a help wanted advertisement, a phone message slip, and a
few other miscellaneous documents. We find that Mr. Hall and Mrs. Hall have
failed to demonstrate that they provided Goldenberg with accurate and necessary
information to determine the car and truck expense deductions claimed on
Schedules C for the years at issue.
Respondent disallowed travel expense deductions of $1,277 and $4,430 for
the taxable years 2005 and 2006. We find that Mr. Hall and Mrs. Hall have failed
to demonstrate that they provided Goldenberg with accurate and necessary
information to determine the Schedule C travel expenses for the taxable years
2005 and 2006.
Respondent disallowed the $26,900 payment to Goldenberg and the
$27,932.40 payment to Miller as a deduction on Schedule C of Mr. Hall and Mrs.
Hall’s 2006 joint return and reclassified the amounts as a Schedule A
miscellaneous deduction.
Mr. Katz testified that Goldenberg was hired to perform forensic accounting
services for Hall & Associates, Ophthalmic Associates, and Mr. Hall and Mrs.
Hall as individuals. His testimony indicated that the $26,900 payment to
Goldenberg was for forensic accounting services performed not only for Hall &
Associates but also for Ophthalmic Associates and Mr. Hall and Mrs. Hall as
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[*23] individuals. We find no credibility in Mrs. Hall’s assertion that the payment
was for services performed solely for Hall & Associates. We note that Mr. Katz
did not testify that Goldenberg made the decision to deduct the expense on
Schedule C.
Petitioners argue that the payment to Miller to represent Mr. Hall was made
to protect the business interests of Hall & Associates. Therefore, petitioners
contend that Mr. Hall and Mrs. Hall properly deducted the $27,932.40 payment on
Schedule C. Mr. Katz testified that he understood that Ophthalmic Associates was
a primary client of Hall & Associates. Mr. Katz also testified that it was his
understanding that Hall & Associates performed legal services for Ophthalmic
Associates for which it expected to be compensated. Under cross-examination Mr.
Katz admitted that he did not know whether Ophthalmic Associates ever paid Hall
& Associates for the work allegedly performed in the years at issue. Mr. Katz
could not recall whether the gross receipts reported on Schedules C for the years at
issue included any amounts from Ophthalmic Associates.
Mr. Hall testified that Ophthalmic Associates did not pay Hall & Associates
for its services. Mrs. Hall testified that for the years at issue, the substantial gross
receipts reported on Schedule C did not include any payments from Ophthalmic
Associates. Mr. Hall and Mrs. Hall were aware that Ophthalmic Associates never
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[*24] paid Hall & Associates for any of the services allegedly performed.8 The
testimony of Mr. Katz indicated that he was not aware of this fact. Accordingly,
we find that Mr. Hall and Mrs. Hall did not provide accurate and necessary
information to Goldenberg.
Petitioners have failed to prove that the penalty is inappropriate because of
reasonable cause. Accordingly, we hold that petitioners are liable for the
accuracy-related penalty under section 6662(a) for the portions of the
underpayments that respondent did not concede for the 2004, 2005, and 2006
taxable years.
6. Section 6651(a)(1)
Section 6651(a)(1) imposes an addition to tax when a taxpayer fails to file a
timely return unless the taxpayer establishes that the failure was due to reasonable
cause and not willful neglect. The addition to tax is equal to 5% of the amount
required to be shown as tax on the delinquent return for each month or fraction
thereof during which the return remains delinquent, up to a maximum addition of
25% for returns more than four months delinquent. Id.8
We note that Mr. Hall and Mrs. Hall failed to provide sufficient evidence
for us to find that Hall & Associates performed legal services for Ophthalmic
Associates.
- 25 -
[*25] Respondent has the burden of production with respect to the section
6651(a)(1) addition to tax. See sec. 7491(c). To meet this burden, respondent
must produce evidence showing that the addition to tax is appropriate. See id.;
Higbee v. Commissioner, 116 T.C. at 446. Once respondent satisfies this burden,
petitioners have the burden of proof with respect to exculpatory factors such as
reasonable cause. See Higbee v. Commissioner, 116 T.C. at 446-447.
Mr. Hall and Mrs. Hall filed requests to extend the time to file their 2004
return until October 17, 2005, and their 2005 return until October 15, 2006. They
filed their 2004 and 2005 returns on May 18, 2007. Respondent has met his
burden of production. As a result, petitioners bear the burden of proving
reasonable cause and lack of willful neglect. See id. at 446.
Petitioners allege that in March 2007 the District Court ordered Mr. Hall
and Mrs. Hall to file their delinquent returns by May 18, 2007. Therefore,
petitioners argue that the District Court extended the due date for Mr. Hall and
Mrs. Hall’s 2004 and 2005 returns until May 18, 2007. Petitioners’ argument is
nonsensical. First, the due date of an income tax return is prescribed by the Code.
See sec. 6072(a). Petitioners cite no authority that would allow the District Court
to extend the due date of a tax return. Second, Mr. Hall and Mrs. Hall’s 2004 and
2005 tax returns were due on October 17, 2005, and October 15, 2006,
- 26 -
[*26] respectively. The alleged order of the District Court was issued in March
2007, long after the returns were already due.
Petitioners also appear to argue that Mr. Hall and Mrs. Hall had reasonable
cause for the late filing of the returns because they relied on the advice of Mrs.
Hall’s counsel, Mr. Nastasi, in the District Court proceeding. We note that Mr.
Hall and Mrs. Hall did not call Mr. Nastasi as a witness. Mrs. Hall testified that
Mr. Nastasi told her that she should not file their returns until the completion of
the IRS investigation and that Mr. Nastasi indicated that fraud penalties would not
apply. We do not accept Mrs. Hall’s testimony as proof of her attorney’s advice.
Moreover, we note that Mrs. Hall did not testify that Mr. Nastasi told her that Mr.
Hall and Mrs. Hall would not be liable for the section 6651(a)(1) addition to tax
for failing to timely file tax returns for the taxable years 2004 and 2005.
Accordingly, we hold that petitioners are liable for the additions to tax under
section 6651(a)(1) for the taxable years 2004 and 2005.
7. Relief From Joint and Several Liability
Petitioners argue that Mr. Hall is entitled to relief from joint and several
liability for the joint tax obligations for the years at issue. Respondent argues that
Mr. Hall has not established that he meets the requirements for relief.
- 27 -
[*27] A married taxpayer may elect to file a joint Federal income tax return with
his or her spouse. Sec. 6013(a). Generally, married couples who file a joint return
are jointly and severally liable for the entire tax shown on the return or otherwise
determined to be due. Sec. 6013(d)(3). Section 6015 provides for relief from joint
liability for spouses who meet the conditions of subsection (b) and it provides for
equitable relief in subsection (f) when the relief provided in other subsections is
not available. Olson v. Commissioner, T.C. Memo. 2009-294, 2009 Tax Ct.
Memo LEXIS 300, at *12.
The Court applies a de novo scope and standard of review to a taxpayer’s
request for relief from joint and several liability. Porter v. Commissioner, 132
T.C. 203, 210 (2009). The spouse requesting relief generally bears the burden of
proof. See Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff’d,
101 Fed. Appx. 34 (6th Cir. 2004); Reilly-Casey v. Commissioner, T.C. Memo.
2013-292, at *5.
Section 6015(b)(1) authorizes the Commissioner to grant relief from joint
and several liability for tax if the taxpayer requesting relief satisfies each of the
following five requirements:
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[*28] (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 1 individual filing the joint return;
(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 * * * 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 * * *
“The requirements of section 6015(b)(1) are stated in the conjunctive.
Accordingly, a failure to meet any one of them prevents a requesting spouse from
qualifying for relief offered therein.” Alt v. Commissioner, 119 T.C. at 313.9
Respondent argues that Mr. Hall has failed to satisfy requirements (B), (C), and
(D) of section 6015(b)(1).
Section 6015(b)(1)(C) provides that in order to obtain relief the requesting
spouse must establish that he did not know, and had no reason to know, that there
was an understatement. A requesting spouse has reason to know of an
understatement “if a reasonable person in similar circumstances would have
9
Mr. Hall is the requesting spouse. Mrs. Hall is the nonrequesting spouse.
- 29 -
[*29] known of the understatement.” Sec. 1.6015-2(c), Income Tax Regs. “The
facts and circumstances that are considered include, but are not limited to, * * *
whether the requesting spouse failed to inquire, at or before the time the return
was signed, about items on the return or omitted from the return that a reasonable
person would question”. Id. Mr. Hall bears the burden of proving that he satisfies
the requirements of section 6015(b)(1)(C). See Rule 142(a); Bokum v.
Commissioner, 94 T.C. 126, 138 (1990), aff’d, 992 F.2d 1132 (11th Cir. 1993).
Mr. Hall testified that Mrs. Hall had been responsible for preparing and
filing their tax returns since the 1980s. Mr. Hall and Mrs. Hall were both
convicted of willful failure to file tax returns under section 7203 for the taxable
years 1999, 2000, and 2001. They were both sentenced to 12 months’
imprisonment and an additional 12 months’ supervised release. The District Court
observed that Mr. Hall was a “‘highly educated, highly intelligent man [who has]
acknowledged that [he] knew [he was] obligated to file tax returns’ but ‘repeatedly
failed to do so.’” United States v. Hall, 515 F.3d 186, 193 (3d Cir. 2008). On
appeal, the Court of Appeals noted the identical roles played in the crimes by Mr.
Hall and Mrs. Hall. Id. at 202. This contradicts Mr. Hall’s assertion that Mrs.
Hall was entirely responsible for their tax return obligations.
- 30 -
[*30] Mr. Hall testified that he was not aware of the erroneous deductions claimed
on the returns. Despite the fact that Mr. Hall and Mrs. Hall’s failure to comply
with their tax return obligations resulted in imprisonment for both, he testified he
took no responsibility for their joint tax returns for the years at issue. Even if we
were to believe Mr. Hall, we note that the returns for the years at issue were filed
after he was convicted and sentenced to 12 months’ imprisonment. Under these
circumstances a reasonable person should have known that it was important to
verify the correctness of the amounts reported on the joint returns. Certainly, a
reasonable person in that circumstance would have inquired about the items
reported on his return. See sec. 1.6015-2(c), Income Tax Regs. Indeed, at his
sentencing hearing on March 21, 2007, Mr. Hall stated to the District Court: “‘I
assure you, * * * [Mrs. Hall] and I have taken the necessary steps to make sure we
never come before this Court or any court regarding these matters.’” Hall v.
Commissioner, T.C. Memo. 2013-93, at *7.10 Nevertheless, Mr. Hall testified that
he did not review the returns for the years at issue before they were filed on May
18, 2007. Section 6015(b)(1)(C) “‘was not designed to protect willful blindness or
10
Shortly after making this statement, Mr. Hall appealed his guilty plea to
the Court of Appeals for the Third Circuit, arguing that his plea agreement was
involuntary because it benefited Mrs. Hall more than himself. Hall, 515 F.3d at
196-197. The Court rejected Mr. Hall’s argument and held that there was no error
in the District Court’s acceptance of his plea. Id. at 197.
- 31 -
[*31] to encourage the deliberate cultivation of ignorance.’” Doyel v.
Commissioner, T.C. Memo. 2004-35, 2004 Tax Ct. Memo LEXIS 35, at *29
(quoting Friedman v. Commissioner, 53 F.3d 523, 525 (2d Cir. 1995), aff’g in
part, rev’g in part and remanding T.C. Memo. 1993-549). Section 6015(b)(1)(C)
was designed to protect the innocent, not the intentionally ignorant. Cohen v.
Commissioner, T.C. Memo. 1987-537, 1987 Tax Ct. Memo LEXIS 529, at *10.11
Mr. Hall has failed to prove that he was not aware of the erroneous
deductions reported on the joint returns for the years at issue. Mr. Hall has also
failed to prove that a reasonably prudent taxpayer in similar circumstances would
not have known of the understatements. Accordingly, we find that Mr. Hall has
failed to satisfy the requirements of section 6015(b)(1)(C).
Section 6015(b)(1)(D) provides that in order for a requesting spouse to
obtain relief, it must be inequitable to hold him or her liable for the deficiency in
11
Courts have adopted different standards to determine “reason to know” in
erroneous deduction cases. Under the circumstances of this case, Mr. Hall has
failed to establish that he did not have reason to know of the erroneous deductions
under either standard. See Price v. Commissioner, 887 F.2d 959, 962-963 (9th
Cir. 1989) (standard used by multiple courts of appeals); Bokum v. Commissioner,
94 T.C. 126, 148 (1990) (standard used by this Court), aff’d, 992 F.2d 1132 (11th
Cir. 1993); see also Doyle v. Commissioner, 94 Fed. Appx. 949, 951 (3d Cir.
2004) (stating that taxpayer failed to establish she did not have reason to know of
erroneous deductions under both Price and Bokum standards), aff’g T.C. Memo.
2003-96.
- 32 -
[*32] tax attributable to such understatement. “All of the facts and circumstances
are considered in determining whether it is inequitable to hold a requesting spouse
jointly and severally liable for an understatement.” Sec. 1.6015-2(d), Income Tax
Regs. The regulation specifies that some of the relevant factors are: (1) whether
the requesting spouse significantly benefited, directly or indirectly, from the
understatement; (2) whether the requesting spouse has been deserted by the
nonrequesting spouse; and (3) whether the spouses have been divorced or
separated. Id. The regulation also states that Rev. Proc. 2000-15, 2000-1 C.B.
447, provides guidance concerning the criteria to be used in determining whether
it is inequitable to hold a requesting spouse jointly and severally liable. Id. The
revenue procedure cited in the regulation has been superseded by Rev. Proc. 2003-
61, 2003-2 C.B. 296, which in turn has been superseded by Rev. Proc. 2013-34,
2013-43 I.R.B. 397.
Section 1.6015-2(d), Income Tax Regs., provides that a relevant factor in
this determination is whether the requesting spouse significantly benefited,
directly or indirectly, from the understatement. Normal support is not considered
a significant benefit. See Flynn v. Commissioner, 93 T.C. 355, 367 (1989). We
have not found that Mr. Hall significantly benefited from the understatements.
- 33 -
[*33] We may consider whether the requesting spouse was deserted, divorced, or
separated from the nonrequesting spouse. See Alt v. Commissioner, 119 T.C. at
315; sec. 1.6015-2(d), Income Tax Regs.; Rev. Proc. 2013-34, sec. 4.03(2)(a),
2013-43 I.R.B. at 400, provides that this factor will weigh in favor of relief if the
requesting spouse is no longer married to the nonrequesting spouse. Mr. Hall was
married to Mrs. Hall and they resided at the same address until her death.
The Court has held that a material factor is whether the failure to report the
correct tax liability on the joint return results from concealment, overreaching, or
any other wrongdoing on the part of the nonrequesting spouse. See Alt v.
Commissioner, 119 T.C. at 314 (citing Jonson v. Commissioner, 118 T.C. 106,
119 (2002), aff’d, 353 F.3d 1181 (10th Cir. 2003)). Nothing in the record suggests
that Mrs. Hall hid or concealed any financial or tax information from Mr. Hall.
Significantly, Mr. Hall never alleged that Mrs. Hall concealed any information
from him or committed any wrongful acts against him. The record demonstrates
that Mr. Hall had the opportunity to question Mr. Katz regarding the items
reported on the returns but declined to do so.12 We find that Mrs. Hall did not hide
12
Mr. Hall alleged that he did not know the amounts of the deductions
claimed by Hall & Associates for the years at issue. However, Mr. Katz met with
Mr. Hall and Mrs. Hall to explain their returns for the years at issue. Mr. Hall
signed the joint returns without asking Mr. Katz any questions regarding Hall &
Associates.
- 34 -
[*34] or conceal from Mr. Hall any information relating to their tax returns for the
years at issue.
Mr. Hall bears the burden of establishing that it is inequitable to hold him
liable for the deficiencies in tax attributable to the understatements. See Rule
142(a); Flynn v. Commissioner, 93 T.C. at 359. Mr. Hall has failed to meet his
burden. We find that under section 6015(b)(1)(D) it is not inequitable to hold Mr.
Hall liable for the deficiencies in tax for the years at issue. Since Mr. Hall failed
to satisfy the requirement of section 6015(b)(1)(C) and (D), he does not qualify for
relief under section 6015(b)(1). See Alt v. Commissioner, 119 T.C. at 313.13
Section 6015(f) allows for an alternative means of relief for a requesting
spouse who does not otherwise qualify for relief under section 6015. Sec.
6015(f)(2). Section 6015(f) permits relief from joint and several liability where it
would be inequitable to hold the individual liable for any deficiency or unpaid tax.
Sec. 6015(f)(1). Under subsection (f), the Commissioner may grant equitable
relief to a requesting spouse on the basis of the facts and circumstances of the
requesting spouse’s case. Id. The Commissioner has published revenue
procedures listing the factors the Commissioner normally considers in determining
13
Accordingly, we need not discuss whether Mr. Hall satisfies the
requirements of sec. 6015(b)(1)(B).
- 35 -
[*35] whether section 6015(f) relief should be granted. See Rev. Proc. 2013-34,
supra.14 We consider these factors, however, we are not bound by them. See
Cutler v. Commissioner, T.C. Memo. 2013-119, at *9. Mr. Hall bears the burden
of proving that he is entitled to relief under section 6015(f). See Rule 142(a); Alt
v. Commissioner, 119 T.C. at 311; Cutler v. Commissioner, T.C. Memo. 2013-
119, at *9.
A requesting spouse must satisfy seven threshold conditions before a
request under section 6015(f) will be considered. See Rev. Proc. 2013-34, sec.
4.01, 2013-43 I.R.B. at 399-400. Respondent concedes that Mr. Hall satisfies the
first six threshold conditions. Absent certain enumerated exceptions,15 the seventh
condition is satisfied if the “income tax liability from which the requesting spouse
seeks relief is attributable (either in full or in part) to an item of the nonrequesting
14
Rev. Proc. 2013-34, sec. 7, 2013-43 I.R.B. 397, 403, is effective for
requests for equitable relief pending on September 16, 2013, before a Federal
court.
15
The Commissioner will consider granting relief regardless of whether the
understatement or deficiency is attributable (in full or in part) to the requesting
spouse if any of the following exceptions applies: (1) attribution due solely to the
operation of community property law; (2) nominal ownership; (3)
misappropriation of funds; (4) abuse; and (5) fraud committed by the
nonrequesting spouse. Rev. Proc. 2013-34, sec. 4.01(7), 2013-43 I.R.B. at 399-
400. We note that Mr. Hall has failed to prove that he satisfies the requirements of
any of these exceptions.
- 36 -
[*36] spouse * * *. If the liability is partially attributable to the requesting spouse,
then relief can only be considered for the portion of the liability attributable to the
nonrequesting spouse.” Id. sec. 4.01(7).
Respondent argues that the income tax liability from which Mr. Hall seeks
relief is attributable in part to items of Mr. Hall. We find that the $26,900
payment to Goldenberg that was deducted on Schedule C is attributable to Hall &
Associates and Mrs. Hall, as well as to Ophthalmic Associates and Mr. Hall. Mr.
Hall has failed to prove which portion of the $26,900 payment is attributable to
Mrs. Hall or Hall & Associates. Accordingly, we find that the full amount of the
item is attributable solely to Mr. Hall. Mr. Hall and Mrs. Hall deducted on
Schedule C the $27,932.40 payment to Miller to represent Mr. Hall in the District
Court proceeding. We find that this item is attributable to Mr. Hall. Respondent
disallowed $12,186 of losses from Ophthalmic Associates claimed on Schedule E
because Mr. Hall had an insufficient basis in the company. We find that this item
is attributable solely to Mr. Hall. We hold that Mr. Hall has failed to satisfy the
seventh threshold condition for the above-mentioned items. See id. Accordingly,
Mr. Hall is not entitled to relief under section 6015(f) from the deficiencies arising
from these items.
- 37 -
[*37] Respondent concedes that the following adjustments are not attributable to
Mr. Hall: (1) the disallowance of car and truck expense deductions of $5,275,
$6,861, and $7,082 for the taxable years 2004, 2005, and 2006, respectively; (2)
the disallowance of travel expense deductions of $1,277 and $4,430 for the taxable
years 2005 and 2006; and (3) the disallowance of the advertising expense
deduction of $15,233 for the taxable year 2004. Accordingly, respondent
concedes that Mr. Hall has met the seven threshold conditions for these items.
When the threshold conditions have been met, the guidelines allow a
requesting spouse to qualify for a streamlined determination of relief under section
6015(f) if all of the following conditions are met: (1) the requesting spouse is no
longer married to the nonrequesting spouse; (2) the requesting spouse will suffer
economic hardship if relief is not granted; and (3) the requesting spouse did not
know or have reason to know that there was an understatement or deficiency.
Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. at 400. Mr. Hall was not eligible for
a streamlined determination because he was married to Mrs. Hall. See id. sec.
4.02(1).
Where a requesting spouse meets the threshold conditions but fails to
qualify for relief under the guidelines for a streamlined determination, a requesting
spouse may still be eligible for equitable relief if, taking into account all the facts
- 38 -
[*38] and circumstances, it would be inequitable to hold the requesting spouse
liable for the deficiency. See id. sec. 4.03, 2013-43 I.R.B. at 400. The guidelines
list the following nonexclusive factors that the Commissioner takes into account
when determining whether to grant equitable relief: (1) marital status; (2)
economic hardship; (3) in the case of an understatement, knowledge or reason to
know of the items giving rise to the understatement or deficiency; (4) legal
obligation; (5) significant benefit; (6) compliance with income tax laws; and (7)
mental or physical health. Id. In making our determination under section 6015(f),
we consider these factors as well as any other relevant factors. No single factor is
determinative, and all factors shall be considered and weighed appropriately. See
Pullins v. Commissioner, 136 T.C. 432, 448 (2011); Molinet v. Commissioner,
T.C. Memo. 2014-109, at *10.
The first factor is whether the requesting spouse is separated or divorced
from the nonrequesting spouse. Rev. Proc. 2013-34, sec. 4.03(2)(a). Mr. Hall was
married to Mrs. Hall until her recent death. Accordingly, this factor is neutral. Id.The second factor is whether the requesting spouse will suffer economic
hardship if relief is not granted. Id. sec. 4.03(2)(b). A requesting spouse suffers
economic hardship if the satisfaction of the tax liability, in whole or in part, would
cause him to be unable to pay reasonable basic living expenses. Id. Mr. Hall
- 39 -
[*39] bears the burden of proving that he will suffer economic hardship if we do
not grant him relief from joint and several liability. See Rule 142(a); Cutler v.
Commissioner, T.C. Memo. 2013-119, at *14. Mr. Hall has failed to prove he will
suffer economic hardship if we deny him relief. Accordingly, this factor is neutral.
Rev. Proc. 2013-34, sec. 4.03(2)(b).
The third factor is whether the requesting spouse knew or had reason to
know of the items giving rise to the understatement as of the date the joint return
was filed. Id. sec. 4.03(2)(c)(i)(A). We found that under section 6015(b)(1)(C)
Mr. Hall failed to prove that he did not know and had no reason to know of the
understatements. Rev. Proc. 2013-34, sec. 4.03(2)(c)(iii), 2013-43 I.R.B. at 402,
provides that the facts and circumstances that are considered in determining
whether the requesting spouse had reason to know of an understatement include:
(1) the requesting spouse’s level of education; (2) any deceit or evasiveness of the
nonrequesting spouse; (3) the requesting spouse’s degree of involvement in the
activity generating the income tax liability; (4) the requesting spouse’s
involvement in business or household financial matters; (5) the requesting
spouse’s business or financial expertise; and (6) any lavish or unusual
expenditures compared with past spending levels.
- 40 -
[*40] No evidence was presented that Mrs. Hall was deceitful or hid any
information from Mr. Hall in regard to the tax returns. Significantly, Mr. Hall did
not allege that Mrs. Hall hid from him information pertaining to the tax returns.
While Mr. Hall did not participate in Hall & Associates, he had the opportunity to
question Mr. Katz regarding the items reported on Schedule C. Mr. Hall, on his
own initiative, chose not to do so. Mr. Hall testified that Mrs. Hall had been
responsible for preparing and filing their tax returns since the 1980s. Mr. Hall and
Mrs. Hall were both convicted of willful failure to file tax returns under section
7203 for the taxable years 1999, 2000, and 2001. Mr. Hall was sentenced to 12
months’ imprisonment. Despite the fact that Mr. Hall and Mrs. Hall’s failure to
comply with their tax return obligations resulted in imprisonment for Mr. Hall, he
alleges he took no responsibility for their joint tax returns. A taxpayer cannot
obtain the benefits of section 6015(f) by turning a blind eye towards the items
reported on the tax return. See Levin v. Commissioner, T.C. Memo. 1987-67,
1987 Tax Ct. Memo LEXIS 63, at *11. We find that Mr. Hall failed to prove he
did not know and had no reason to know of the understatements. Accordingly,
this factor weighs against relief.
The fourth factor is whether the requesting spouse or the nonrequesting
spouse has a legal obligation to pay the outstanding Federal income tax liability.
- 41 -
[*41] Rev. Proc. 2013-34, sec. 4.03(2)(d), 2013-43 I.R.B. at 402. This factor will
be neutral if the spouses are not separated or divorced. Id. Mr. Hall and Mrs. Hall
were married and resided together until her recent death. Accordingly, this factor
is neutral.
The fifth factor is whether the requesting spouse significantly benefited
from the understatement. Id. sec. 4.03(2)(e). We have not found that Mr. Hall
significantly benefited from the understatements. In the context of this case, this
factor is neutral. Id.
The sixth factor considers whether the requesting spouse has made a good-
faith effort to comply with the income tax laws in the taxable years following the
years for which relief is requested. Id. sec. 4.03(2)(f), 2013-43 I.R.B. at 402-403.
Respondent concedes that Mr. Hall has made a good-faith effort to comply with
the income tax laws for the years after 2006. If the requesting spouse remains
married to the nonrequesting spouse and continues to file joint returns after
requesting relief, then this factor will be neutral if the joint returns are in
compliance with the tax laws. Id. sec. 4.03(2)(f)(ii). However, if the requesting
spouse remains married to the nonrequesting spouse and files separate returns after
requesting relief, then this factor will weigh in favor of relief if the returns are in
compliance with the tax laws. Id. sec. 4.03(2)(f)(iii). As a result, whether Mr.
- 42 -
[*42] Hall filed joint returns or separate returns for the taxable years after 2006
will determine whether this factor is neutral or will weigh in favor of relief. Mr.
Hall has failed to demonstrate whether he filed separate returns or joint returns
with Mrs. Hall for the taxable years after 2006. Mr. Hall bears the burden of proof
in regard to this issue. See Rule 142(a); Alt v. Commissioner, 119 T.C. at 311.
Accordingly, this factor is neutral.
The seventh factor is whether the requesting spouse was in poor physical or
mental health. Rev. Proc. 2013-34, sec. 4.03(2)(g), 2013-43 I.R.B. at 403. This
factor will weigh in favor of relief if the requesting spouse was in poor physical or
mental health at the time the returns to which the request for relief relates were
filed or at the time the requesting spouse requested relief. Id. This factor is
neutral if the requesting spouse was in neither poor physical nor poor mental
health. Id. Mr. Hall did not prove, or even testify, that he was in poor physical or
mental health. Accordingly, this factor is neutral.
Considering all the facts and circumstances, we find that it would not be
inequitable to deny Mr. Hall relief under section 6015(f).
In reaching our decision, we have considered all arguments made by the
parties, and to the extent not mentioned or addressed, they are irrelevant or
without merit.
- 43 -
[*43] To reflect the foregoing,
Decision will be entered under
Rule 155.