Banderas v. Comm'r , 93 T.C.M. 1247 ( 2007 )

T.C. Memo. 2007-129
UNITED STATES TAX COURT
DEBRA ANNE BANDERAS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7733-05. Filed May 22, 2007.
P filed joint Federal income tax returns with her
husband H for the 1997 and 1999 taxable years. The
returns were signed subsequent to H’s filing for
bankruptcy protection and reported balances due that
were not paid upon submission. Following H’s death, P
sought relief from joint and several liability under
sec. 6015(f), I.R.C., with respect to the 1997 and 1999
liabilities.
Held: P is not entitled to relief from joint and
several liability, pursuant to sec. 6015(f), I.R.C.,
with respect to her 1997 and 1999 taxable years.
James R. Monroe, for petitioner.
Miriam C. Dillard, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case arises from a petition for
judicial review filed in response to a determination concerning
relief from joint and several liability under section 6015.1 The
issue for decision is whether denial by respondent of
petitioner’s request for relief from joint and several liability
for the taxable years 1997 and 1999 constitutes an abuse of
discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of the parties, with accompanying exhibits, are
incorporated herein by this reference.
Petitioner married Julio C. Banderas (Dr. Banderas) in March
of 1972. For most of their married life, the couple resided in
Georgia, where Dr. Banderas practiced medicine, specializing in
orthopedic surgery, and petitioner stayed at home caring for
their children and children from a previous marriage of Dr.
Banderas. Petitioner later returned to school and in 1993
completed a registered nursing degree. Throughout the relevant
period and at the time of trial, petitioner was employed in the
nursing field, often working multiple jobs. During their
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, and Rule references
are to the Tax Court Rules of Practice and Procedure.
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marriage, petitioner and Dr. Banderas maintained and had equal
access to a joint checking account, and both wrote checks on the
account. Both also opened household mail. Dr. Banderas,
however, assumed primary responsibility in handling the family’s
financial affairs.
In the mid-1990s, Dr. Banderas became involved in a contract
dispute with a business associate, Alexander Doman (Dr. Doman),
who was to purchase Dr. Banderas’s medical practice in
preparation for Dr. Banderas’s retirement. The matter proceeded
to litigation and resulted in a $832,447 civil judgment against
Dr. Banderas on June 25, 1997. To collect on the judgment, the
Banderases’ joint checking account was levied in 1997.
Petitioner then, in August of 1997, opened a separate checking
account into which Dr. Banderas’s Social Security checks and
petitioner’s income were deposited and out of which living
expenses were paid.
During the pendency of the foregoing controversy,
Dr. Banderas retired, and he and petitioner moved to Florida in
early 1996. Thereafter, on October 3, 1997, Dr. Banderas filed a
voluntary chapter 7 bankruptcy petition in the U.S. Bankruptcy
Court for the Middle District of Florida. The bankruptcy case
was closed by order of that court on July 21, 2005, after
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disbursement by the trustee of more than $2.37 million.2
Meanwhile, on October 15, 1998, petitioner and Dr. Banderas
signed and timely filed a joint Form 1040, U.S. Individual Income
Tax Return, for 1997. The return reflected total adjusted gross
income of $304,673, consisting primarily of pension, annuity, and
Social Security income of Dr. Banderas but also including $5,025
of wage income earned by petitioner.3 A reported $10,250 was
shown as Federal income tax withheld, $250 of which represented
withholding from petitioner’s wages. The stated balance due was
$64,767. Petitioner was aware of the balance due at the time she
signed the return. No payment was submitted with the return.
The Banderases’ joint Form 1040 for 1998 was filed in late 1999
reporting a loss and is not at issue here.
By 1999, financial pressures had apparently led Dr. Banderas
to return to work. Then, on September 16, 1999, Dr. Banderas was
diagnosed with cancer. The cancer was terminal, and Dr. Banderas
died of complications from the disease on November 16, 1999. On
October 15, 2000, petitioner signed and timely filed a joint Form
1040 for 1999 as a surviving spouse. The return reflected total
adjusted gross income of $121,326, which amount incorporated wage
2
This Court takes judicial notice of the July 21, 2005,
order. See Fed. R. Evid. 201; Estate of Reis v. Commissioner, 87
T.C. 1016, 1027 (1986).
3
The Banderases rounded the amounts reported on their tax
returns.
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and Social Security income of Dr. Banderas totaling $84,089 and
petitioner’s wages of $37,068. After subtraction of $10,063 in
Federal income tax withheld, $853 of which was attributed to
petitioner’s wages, the return reported a balance due of $10,262.
No payment was submitted with the return.
On or about June 12, 2003, the Internal Revenue Service
(IRS) received from petitioner a signed Form 8857, Request for
Innocent Spouse Relief. Petitioner indicated on the Form 8857
that she was requesting equitable relief under section 6015(f)
for underpayments of tax for 1997 and 1999,4 and she attached the
following explanatory statement:
Most of my married life - which was my entire
adult life until my husband passed away - I was a
“stay-at-home” wife and mother, with my husband working
hard to support us and to build what we thought was our
retirement plan.
In 1997, as a result of an unjust judgement
against my husband, an illegal hold was placed on our
joint checking account, which caused our check to the
IRS for the balance of our 1996 taxes to bounce due to
“unavailable funds”. Shortly afterwards, my husband
was advised to file for bankruptcy.
Before filing, we were reassured that the IRS
would be the #1 creditor, and that all taxes would be
paid before any other creditors. Had we not been
assured of this, my husband would have gotten a
distribution from the pension plan to pay any taxes
before filing.
During the bankruptcy proceedings, we realized
that our retirement plan was, in reality, his
retirement plan - and it was taken away. When my
4
Petitioner also listed 1996 as a year for which she was
requesting relief, but that year was not further considered after
the IRS explained that no balance was due.
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husband passed away, the proceeds of his life insurance
policy also went to the bankruptcy court.
So I found myself, at almost 50 years of age, not
only without my beloved husband, but also with the
urgent need to prepare financially for my future.
In an attempt to pay off our debts, to support
myself since he passed away, and to try to prepare for
my future/retirement, I have been working 2-3 jobs at a
time, 70-100+ hours/week, something that I cannot
continue much longer.
Finding myself now responsible for an additional
bill of over $100,000 to the IRS, I am overwhelmed even
by the idea of how to pay it off. Because almost all
the taxes were based on my husband’s income, etc., and
the ensuing financial problems were a result of his
petition of bankruptcy and the court’s actions, I
respectfully request that I be relieved of the
responsibility of these debts as they present an
unfathomable hardship to me.
Petitioner also submitted to the IRS a Form 12510,
Questionnaire for Requesting Spouse, dated July 22, 2003. In
response to a question asking her to explain when and how she
thought reported balances due would be paid, petitioner wrote:
“By proceeds from my husband’s pension plan - never dreaming that
the court would take it away”. A further question asking what
efforts were made to pay reported taxes after relevant returns
were filed elicited the following answer:
Everything (pension plan) was frozen by the court - we
were waiting for the discharge to have the funds freed
up - in 99 we found that was never going to happen -
accountant said with such a loss we would not owe
anything “ever again”. Then my husband passed away;
with $400,000 left in bankruptcy court they are telling
me there will be none left for me or our kids.
Petitioner also on the Form 12510 completed a statement of her
average income and expenses. She listed wage income of
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approximately $80,000 and monthly expenses totaling approximately
$3,700.
Petitioner’s request for relief was initially denied by the
IRS Examination Division on April 29, 2004. Petitioner responded
with a statement of disagreement requesting that the IRS
reconsider the denial. Her reasons for the continued dispute
paralleled those alluded to in her Forms 8857 and 12510, to wit:
Contrary to your conclusion, when my husband and I
signed the tax returns for 1997, we had every reason to
believe that we would be able to pay those taxes.
First of all, my husband’s attorney had assured us that
the IRS was always the first creditor in bankruptcy
proceedings. Therefore, we had no doubt that the taxes
would be paid through the court. As stated in my
original request for relief, had we even suspected that
this would not be the case, the amount for the taxes
could have - and would have - been withdrawn from the
pension plan monies before the bankruptcy was ever
filed. Also, had that suspicion existed, we still
would have had the security of knowing that the taxes
could be paid with pension plan funds after the
bankruptcy was discharged. Never in our wildest dreams
- or worst nightmares - did it ever occur to us that
the pension plan could be lost to the court. I believe
that it was two years later when we found that this
travesty of justice could actually take place.
While I knew when I filed and signed the 1999 return
that we had lost our pension plan, I believed, again
without a doubt, that those taxes would be paid.
Shortly after my husband’s death, before the return was
filed, I was told by several sources, including the
bankruptcy trustee, that remaining monies would go to
me as his beneficiary. When my husband passed away,
the bankruptcy court received an additional $750,000.00
- ¾ of a million dollars - from the proceeds of my
husband’s life insurance policy (monies which I still
contend rightfully belong to our children and me).
Therefore, although I no longer had faith or trust in
our “judicial” system, logic alone told me that there
would be more than enough monies to pay all taxes and
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debts owed. It was not until last year, 2003, that the
trustee intimated that, although there was over
$400,000 remaining with the court, with all creditors
having been paid, that there “may not” be anything left
for me and/or the family. Over a year later, I am
still unable to fathom either the ludicrousness or
horrific injustice of this outcome.
Petitioner received the requested reconsideration of her
claim by the IRS Office of Appeals. Appeals Officer Mark Pearce
(Mr. Pearce) was assigned petitioner’s case in July of 2004. His
case activity records show that Mr. Pearce communicated with
petitioner or her representative, James R. Monroe (Mr. Monroe),
on a number of occasions and logged at least 8.75 hours
specifically on her case. After his review of the case,
Mr. Pearce concluded in an Appeals Case Memo prepared on February
22, 2005, that a weighing of the factors prescribed in Rev. Proc.
2003-61, 2003-2 C.B. 296, for evaluating claims under section
6015(f) did not support petitioner’s request for equitable
relief.
On March 3, 2005, the IRS issued to petitioner a notice of
determination denying her request for section 6015(f) relief.
The grounds listed in the notice for the denial were that
petitioner had established neither a reasonable belief that the
tax would be paid nor economic hardship. Petitioner filed a
timely petition with this Court contesting the adverse
determination and reflecting an address in Cape Coral, Florida.
A trial was held in November of 2005. At the time of trial,
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petitioner had, within the last month, moved to Las Vegas,
Nevada, and had just begun a new job.
After posttrial briefs were filed, two Courts of Appeals,
those for the Eighth and Ninth Circuits, ruled that the Tax Court
lacked jurisdiction to consider denials of relief under section
6015(f) in proceedings where no deficiency had been asserted.
See Bartman v. Commissioner, 446 F.3d 785, 787 (8th Cir. 2006),
affg. in part and vacating in part T.C. Memo. 2004-93;
Commissioner v. Ewing, 439 F.3d 1009, 1013-1014 (9th Cir. 2006),
revg. 118 T.C. 494 (2002), vacating 122 T.C. 32 (2004). This
Court subsequently reached the same conclusion in Billings v.
Commissioner, 127 T.C. 7, 17 (2006).
Given these developments, the Court on August 30, 2006,
issued an order directing the parties to show cause why this case
should not be dismissed for lack of jurisdiction. Following
responses from both parties, the Court on October 24, 2006,
issued T.C. Memo. 2006-228, holding that we were constrained to
dismiss this case. An order of dismissal for lack of
jurisdiction was entered on the same date.
Thereafter, the Tax Relief and Health Care Act of 2006, Pub.
L. 109-432, div. C, sec. 408, 120 Stat. 3061, amended section
6015(e)(1) to provide that this Court may review the
Commissioner’s denial of relief under section 6015(f) in cases
where no deficiency has been asserted. The amendment applies
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with respect to liability for taxes arising or remaining unpaid
on or after the December 20, 2006, date of enactment. Id.
Once again, in light of the change in the law, the Court on
December 26, 2006, issued an order directing the parties to show
cause why the earlier dismissal for lack of jurisdiction should
not be vacated. Respondent filed a response confirming that
petitioner’s liabilities for the relevant years remain unpaid and
that the Court now has jurisdiction to review the underlying
determination. The Court issued an order vacating the
October 24, 2006, dismissal on January 11, 2007. This matter is
now in a posture to be addressed on the merits.
OPINION
As a general rule, section 6013(d)(3) provides that “if a
joint return is made, the tax shall be computed on the aggregate
income and the liability with respect to the tax shall be joint
and several.” An exception to such joint and several liability
exists, however, for spouses able to satisfy the statutory
requirements for relief set forth in section 6015.
Section 6015 authorizes three types of relief. Subsection
(b) provides a form of full or partial relief available to all
joint filers and similar to, but less restrictive than, that
previously afforded by former section 6013(e), which was repealed
for taxes remaining unpaid as of July 22, 1998, or arising after
that date. Subsection (c) permits a taxpayer who has divorced or
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separated to elect to have his or her tax liability calculated
proportionately as if separate returns had been filed.
Subsection (f) confers discretion upon the Commissioner to grant
equitable relief, based on all facts and circumstances, as
follows:
SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON
JOINT RETURN.
(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.
The Court reviews a denial of relief under section 6015(f)
for abuse of discretion; i.e., whether respondent’s determination
was arbitrary, capricious, or without sound basis in law or fact.
Jonson v. Commissioner, 118 T.C. 106, 125 (2002), affd. 353 F.3d
1181 (10th Cir. 2003); Butler v. Commissioner, 114 T.C. 276, 292
(2000). Except as otherwise provided in section 6015, the
taxpayer generally bears the burden of proving such an abuse of
discretion. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311
(2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004); Jonson v.
Commissioner, supra at 113.
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Relief under section 6015(b) or (c) is premised on the
existence of an understatement or deficiency. Because the
liabilities at issue in this case derive from unpaid taxes
reported on the 1997 and 1999 returns, petitioner is not eligible
for relief under subsection (b) or (c). Accordingly, there is no
dispute that petitioner satisfies the criterion for equitable
relief codified in section 6015(f)(2). The instant dispute thus
centers on the facts and circumstances inquiry of section
6015(f)(1).
As directed by section 6015(f), the Secretary has
promulgated guidance to structure the relevant facts and
circumstances analysis, the applicable version of which is set
forth in Rev. Proc. 2003-61, 2003-2 C.B. 296. Rev. Proc. 2003-
61, sec. 4.01, 2003-2 C.B. at 297, first lists seven threshold
conditions that must be met before the IRS will consider a
request for relief under section 6015(f): (1) The requesting
spouse filed a joint return for the year for which relief is
sought; (2) relief is not available under section 6015(b) or (c);
(3) the application for relief is made no later than 2 years
after the date of the IRS’s first collection activity; (4) no
assets were transferred between the spouses as part of a
fraudulent scheme; (5) the nonrequesting spouse did not transfer
disqualified assets to the requesting spouse; (6) the requesting
spouse did not file or fail to file the return with fraudulent
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intent; and (7) absent enumerated exceptions, the liability from
which relief is sought is attributable to an item of the
nonrequesting spouse. Respondent here concedes that petitioner
meets these seven conditions.
Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298, then
gives three circumstances under which, if all are satisfied, the
IRS “ordinarily will grant relief” with respect to underpayments
on joint returns. The first of these elements requires that, on
the date of the request for relief, the requesting spouse be no
longer married to, be legally separated from, or not have been a
member of the same household as the nonrequesting spouse at any
time during the preceding 12-month period. Id. sec. 4.02(1)(a),
2003-2 C.B. at 298. The death of Dr. Banderas in November of
1999 preceded petitioner’s request by more than 12 months, and
this element therefore raises no barrier. The remaining two
elements, however, which address knowledge and economic hardship,
are at the crux of the instant controversy.
The second, or knowledge, element requires that:
On the date the requesting spouse signed the joint
return, the requesting spouse had no knowledge or
reason to know that the nonrequesting spouse would not
pay the income tax liability. The requesting spouse
must establish that it was reasonable for the
requesting spouse to believe that the nonrequesting
spouse would pay the reported income tax liability. If
a requesting spouse would otherwise qualify for relief
under this section, except for the fact that the
requesting spouse’s lack of knowledge or reason to know
relates only to a portion of the unpaid income tax
liability, then the requesting spouse may receive
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relief to the extent that the income tax liability is
attributable to that portion. [Id. sec. 4.02(1)(b),
2003-C.B. at 298.]
Petitioner argues that respondent erred in concluding that
she possessed knowledge or reason to know that the taxes would
not be paid. As to 1997, petitioner contends that she had a
reasonable belief that the taxes would be paid either out of the
bankruptcy proceeding, from Dr. Banderas’s pension plan, or from
future earnings obtained through Dr. Banderas’s returning to
work. As to 1999, petitioner alleges that she reasonably
believed that the taxes would be paid from funds remaining after
the close of the bankruptcy proceeding, particularly in light of
the additional $750,000 received by the bankruptcy estate from a
life insurance policy on Dr. Banderas.
Petitioner testified regarding payment of the balances due
on the 1997 and 1999 returns, of which she was concededly aware.
The following colloquy on direct examination dealt with 1997:
Q Did your husband attempt to pay the 1997
taxes?
A We didn’t--we had no access to the money at
that time. It was in the Bankruptcy Court, and we--
Q So the bankruptcy was filed in 1997?
A Right. Before we filed the return.
Q And the return was filed in 1998?
A Right.
Q And all the funds were tied up in bankruptcy?
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A Right.
Q What source did your husband attempt to use
to pay the 1997 taxes that were due?
A Well, we were told that the IRS was the
number one creditor. And we expected the Court, the
Bankruptcy Court to pay the taxes.
Q Any other source?
A If we--well, the pension plan. Because we
thought the pension plan was protected, and we never
thought that was going to be taken away from us.
Q How much was in the pension plan?
* * * * * * *
A Over a million dollars. Plus my husband’s
life insurance ended up being in there too. So over $2
million in the end.
Q Did somebody tell you that the pension funds
were exempt?
A We have always been told that the pension
plan was exempt. Yes.
* * * * * * *
Q What would have happened if the pension plan
didn’t pay for the taxes and the bankruptcy hadn’t paid
for the taxes? Was there any other source of--
A My husband would have had to go back to work,
which he ended up having to do anyway.
With respect to 1999, counsel inquired: “what was your intent
regarding the balance due that was shown on the 1999 tax return”?
Petitioner replied: “I anticipated money coming from the
Bankruptcy Court to pay it off”, and she went on to cite the
pension plan and life insurance.
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The overarching general question raised by petitioner’s
contentions is one of timing. The standard suggested by
petitioner on brief highlights this issue: “The test should be
whether the requesting spouse had a reasonable belief that the
taxes would eventually be paid by the non-requesting spouse.”
(Emphasis added.) Petitioner was clearly aware on the dates she
signed the Forms 1040 that no liquid funds were available and on
hand to be submitted with the returns. She knew that the bulk of
Dr. Banderas’s assets were tied up in the bankruptcy; there is no
suggestion that any concrete steps had been taken, or were ever
taken, to try to obtain a distribution from the pension plan; and
Dr. Banderas had not yet returned to gainful employment at the
time of filing the return for 1997 and was deceased at the time
of filing the return for 1999.
It would thus appear that petitioner had not so much a
reasonable belief that the taxes would be paid as an inchoate
hope for a favorable change in circumstances that would, at some
undefined future point in time, place moneys at Dr. Banderas’s or
her own disposal to pay the taxes. Petitioner has at no juncture
made any attempt to identify when, in terms of a particular time
period, she thought the taxes would be paid. Furthermore,
although petitioner has generally alluded to being “told” that
the IRS would be the number one creditor in the bankruptcy and
that the pension plan was exempt, she did not call any witnesses
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to establish the specific information she was given. As much as
we sympathize with the unfortunate, even tragic, string of events
that befell the Banderas household, we cannot accept a test so
nebulous as that proposed by petitioner. To do so would
essentially eviscerate the reasonable belief standard.
“Eventually” is simply too open-ended to place any meaningful or
administratively workable limits on qualification for relief.
The Court concludes that a reasonable belief that taxes
would be paid must at minimum incorporate a belief that funds
would be on hand within a reasonably prompt period of time.5 As
just indicated, petitioner has failed to make such a showing
here. Furthermore, because petitioner has never identified any
timeframe, the Court need not probe the contours of the how soon
question, or even whether the standard should be limited to
5
Taxpayers are required to pay their taxes when due. A
delay in payment not authorized by statute renders the Government
an involuntary creditor without security or other assurance that
the tax and interest thereon will be paid. When tax or interest
due is not paid, the burdens of Government are transferred to
other taxpayers, including those of future generations. Where
all funds needed to pay the taxes for a year of bankruptcy will
be trapped in the bankruptcy estate or for any other reason, the
bankrupt taxpayer and spouse may, at the taxpayer’s or spouse’s
option, elect to close their taxable years effective on the day
before the bankruptcy case was commenced. Sec. 1398(d)(2). This
election creates 2 short taxable years, the tax liability for the
first of which is included as a claim against the debtor’s estate
and is payable from the estate. Id.; see also sec. 6161(c)
(regarding authorized extensions of time to pay).
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situations where moneys were thought to be available at the time
the relevant return was signed and filed.6
The foregoing conclusion is consistent with the result
reached by this Court in other contexts involving factual
contingencies regarding source of payment. In Vuxta v.
Commissioner, T.C. Memo. 2004-84, the Court addressed a
taxpayer’s request for relief under section 6015(f) for 1989,
1990, and 1991. The underlying returns showing balances due had
been filed on September 17, 1990, September 23, 1991, and May 30,
1996, respectively. The taxpayer and her husband had filed for
6
Placement of the modifying prepositional phrase (“On the
date the requesting spouse signed the joint return”) in the text
of Rev. Proc. 2003-61, sec. 4.02(1)(b), 2003-2 C.B. 296, 298,
would not appear to be conclusive on this issue. While the
Court’s placement of the phrase has varied, certain paraphrases
of the standard are amenable to a reading that could require a
belief that actual payment of the taxes would occur with the
filing of the return. E.g., Merendino v. Commissioner, T.C.
Memo. 2006-2 (“The relevant knowledge in the case of a reported
but unpaid liability is that the tax would not be paid when the
return was signed.”). The legislative history of the provision
might be open to a similar reading, in that the example supplied
indicates Congress intended for equitable relief to be granted
where a requesting spouse “does not know, and had no reason to
know, that funds intended for the payment of tax were instead
taken by the other spouse for such other spouse’s benefit.” H.
Conf. Rept. 105-599, at 254 (1998), 1998-3 C.B. 1008. Again,
however, the Court need not decide here whether such usages or
examples operate as limitations.
Additionally, guidelines set forth in the Internal Revenue
Manual (IRM) could suggest a more liberal reading, stating: “A
belief the tax would be paid is not reasonable if the RS
[requesting spouse] knew or had reason to know the NRS
[nonrequesting spouse] was not in an economic position, and was
not expected to be in an economic position within the foreseeable
future, to pay those taxes.” IRM sec. 25.15.3.8.3.2(2).
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bankruptcy on May 1, 1992, and received a discharge on May 23,
1997. This Court concluded that, while the taxpayer lacked
knowledge or reason to know that the taxes for 1989 would not be
paid, she knew or had reason to know that the 1990 and 1991
liabilities would be unpaid because the return for 1990 preceded
the bankruptcy petition by only a little over 7 months and the
return for 1991 was filed during pendency of the bankruptcy case.
In Morello v. Commissioner, T.C. Memo. 2004-181, the
taxpayer’s husband lost his job in 1992, and she returned to work
after more than 20 years as a homemaker, in order to help relieve
resultant financial difficulties. By the time tax returns for
1992 through 1995 were signed and filed in 1996, financial
pressures, including mortgage foreclosure proceedings and the
fact that her husband was contemplating and then did file for
bankruptcy, had continued to plague the family for a number of
years. Because the taxpayer was aware of these circumstances, we
held that she had not established that it was reasonable for her
to believe that the balances shown as due on the returns would be
paid.
Given the foregoing, the Court cannot conclude that the
facts of this case are consistent with a reasonable belief that
the taxes would be paid. Accordingly, petitioner has not shown
that, at the times she signed the 1997 and 1999 returns, she had
no knowledge or reason to know that the taxes would not be paid.
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Her sincere hope for payment through eventual receipt of funds
from various contingencies is not sufficiently concrete to fall
within the ambit of a meaningful reasonableness standard.
The third and final element of section 4.02 of Rev. Proc.
2003-61 places a requirement that the requesting spouse will
suffer economic hardship if relief is not granted. Id. sec.
4.02(1)(c), 2003-2 C.B. at 298. For purposes of making the
hardship determination, Rev. Proc. 2003-61, supra, references the
rules in section 301.6343-1(b)(4), Proced. & Admin. Regs. The
cited provision defines economic hardship as an inability to pay
“reasonable basic living expenses” and directs the Commissioner
to consider factors such as, among other things, the taxpayer’s
age, employment status and history, ability to earn, number of
dependents, and amount reasonably necessary for food, clothing,
housing, utilities, medical expenses, insurance (including home-
owner & health), transportation, current tax payments, etc. Sec.
301.6343-1(b)(4), Proced. & Admin. Regs.
The parties dispute what information the Court should
consider in its analysis of this element. Respondent’s position
is that consideration should take into account only those
materials provided to the Appeals Office during the underlying
administrative process. Petitioner disagrees and has sought to
supplement the administrative record in several respects.
Petitioner suggests that a purportedly insufficient quantity of
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time spent by the Appeals officer in reviewing her case and the
officer’s failure to request updated financial information
justify augmentation of the record.
The Court stated its position on this issue in Ewing v.
Commissioner, 122 T.C. 44 (in exercising our jurisdiction
under section 6015(e)(1)(A) “to determine” whether a taxpayer is
entitled to relief under section 6015(f), it is appropriate for
this Court de novo to consider evidence beyond the administrative
record), vacated on other grounds 439 F.3d 1009 (9th Cir. 2006).
However, because here the outcome flowing from a limited review
of the administrative record alone and that obtaining after
taking into account all information proffered by petitioner are
identical, the Court finds it unnecessary to comment further on
the merits of the parties’ differing views of the proper record
for review.
During the administrative phase, petitioner submitted a Form
12510 dated July 22, 2003, showing an excess of income over
expenses of approximately $2,980 per month. This portrayal
clearly fails to reflect economic hardship, and we do not read
petitioner’s arguments to contend otherwise. Nor does petitioner
suggest that she provided updated financial information to the
Appeals officer at any time prior to his final recommendations on
her case in early 2005. To the extent that petitioner intimates
that the burden rested entirely on the Appeals officer to request
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new data, her point, in this particular context, is not well
taken.
As a general matter, taxpayers are usually responsible for
establishing their positions before the IRS. Second, on a more
specific and practical level, petitioner, despite being
represented by counsel, apparently never alerted the Appeals
officer of any relevant change in circumstances. Furthermore,
the types of items reported on the Form 12510 were not inherently
of a nature to raise a suspicion of dramatic change over the
course of the ensuing period. The only likely difference hinted
at on the face of the Form 12510 would have been a reduction in
income, as petitioner appended a comment that she might be unable
to continue to sustain multiple jobs. However, third-party
payers reported to the IRS even higher wages of $87,925 for the
completed taxable year of 2003 (the most recent year for which
records would have been available during at least the majority of
the time petitioner’s case was before Mr. Pearce). This fact was
noted by the Appeals officer in his recommendations. Third-party
payers similarly reported still higher wages to petitioner of
$90,974 for 2004. In this scenario, the Court, despite its
admiration for petitioner’s efforts to help herself, is
unconvinced that petitioner may abdicate all responsibility for
raising some issue of pertinent change or, conversely, that the
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Appeals officer acted arbitrarily or capriciously in relying on
the information previously provided.
Additionally, the Court is not persuaded that petitioner’s
remarks concerning the quantum of time devoted to her case should
have any bearing on our analysis. The recorded time is in no way
patently insufficient, and the Court is not in a position to
divine any type of arbitrary standard as to the time it might
take an individual to properly evaluate a given set of facts.
At trial, petitioner sought to introduce three 1-page sheets
of financial information, all dated November 14, 2005 (the date
of the calendar call): (1) A listing of assets and liabilities;
(2) a listing of purported actual current income and expenses;
and (3) a listing of current income and expenses incorporating
national, regional, and local IRS standards. The listings were
not accompanied by any supporting documentation. Counsel for
respondent objected on grounds, in part, that she was not
provided with the exhibits until the morning of trial. The
Court, in light of the Standing Pretrial Order and citing the
prejudice to respondent’s ability to prepare for cross-
examination, sustained the objection, and the documents were not
admitted. Instead, petitioner testified regarding her estimates
of various assets, liabilities, income amounts, and expenses.
Petitioner then filed a posttrial brief and attached thereto
three tables, purportedly summarizing petitioner’s testimony and
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bearing striking similarity to the exhibits not admitted at trial
(with the income and expense listings now bearing two columns,
one labeled November 14, 2005, and the other labeled February
2005). However, the tables incorporate noticeably more detail
and precision than can reasonably be gleaned from petitioner’s
often generalized approximations from the stand.
It is the status of the record as just described that
precipitated the Court’s comment that the outcome of the case is
unaffected regardless of any proffered information considered in
augmentation of the administrative record. The complete dearth
of any documentation to corroborate or substantiate the figures
renders petitioner’s various estimates unpersuasive in any event.
Moreover, the Court would observe that only the computations
purporting to detail income and expenses as of February 2005 show
an excess of expenses over income, and it is decidedly
questionable whether all of those expenses shown are properly
taken into account for purposes of section 301.6343-1(b)(4),
Proced. & Admin. Regs. (for example, charitable contributions and
payments on various liabilities).
The Court is therefore constrained to conclude that
petitioner has failed to establish economic hardship within the
meaning of Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298.
Accordingly, on account of failure to satisfy two of the three
elements enumerated as delineating those circumstances in which
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the Commissioner will ordinarily grant relief, petitioner does
not qualify for equitable relief under Rev. Proc. 2003-61, sec.
4.02, 2003-2 C.B. at 298.
Where relief is not available under section 4.02 of Rev.
Proc. 2003-61, section 4.03 of the revenue procedure sets forth a
list of nonexclusive factors that the Commissioner will consider
in determining whether it would be inequitable to hold the
requesting spouse liable for all or part of the unpaid income tax
liability. As emphasized in Rev. Proc. 2003-61, sec. 4.03(2),
2003-2 C.B. at 298, no single factor is to be determinative;
rather, all factors are to be considered and weighed
appropriately.
Eight factors are listed, the latter two of which will weigh
in favor of granting relief if present but will not weigh against
relief if absent. The factors are directed toward whether: (1)
The requesting spouse is separated or divorced from the
nonrequesting spouse; (2) the requesting spouse will suffer
economic hardship without relief; (3) the requesting spouse did
not know or have reason to know that the nonrequesting spouse
would not pay the liability; (4) the nonrequesting spouse had a
legal obligation to pay the outstanding liability; (5) the
requesting spouse received significant benefit (beyond normal
support) from the enhanced assets or income resulting from the
unpaid liability; (6) the requesting spouse has made a good faith
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effort to comply with income tax laws in subsequent years; (7)
the requesting spouse was abused by the nonrequesting spouse; and
(8) the requesting spouse was in poor mental or physical health
when signing the return or requesting relief. Rev. Proc. 2003-
61, sec. 4.03(2)(a) and (b), 2003-2 C.B. at 298-299.
As just described in connection with analysis of section
4.02 of Rev. Proc. 2003-61, the marital status factor weighs in
favor of granting relief, while the economic hardship and
knowledge elements weigh against granting relief. The remaining
factors are considered below.
The legal obligation factor asks whether the nonrequesting
spouse has an obligation to pay the outstanding liability
pursuant to a divorce decree or separation agreement. Id. sec.
4.03(2)(a)(iv), 2003-2 C.B. at 298. Because petitioner and
Dr. Banderas were never divorced or separated, this factor is
neutral.
The significant benefit factor probes whether the requesting
spouse received, directly or indirectly, from the assets or
income resulting from the unpaid liability any benefit in excess
of normal support. Sec. 1.6015-2(d), Income Tax Regs.; Rev.
Proc. 2003-61, sec. 4.03(2)(a)(v), 2003-2 C.B. at 299
(referencing sec. 1.6015-2(d), Income Tax Regs.). Evidence of
such benefit “may consist of transfers of property or rights to
property, including transfers that may be received several years
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after the year of the * * * [relevant return]”. Sec. 1.6015-
2(d), Income Tax Regs. Normal support is measured by the
circumstances of the particular parties. Estate of Krock v.
Commissioner, 93 T.C. 672, 678-679 (1989); Levy v. Commissioner,
T.C. Memo. 2005-92.
Respondent notes that from 1999 to 2005, the Banderases or
petitioner sold several parcels of real property and received
approximately $8,000 to $10,000 on each of the three
transactions. Petitioner testified that the proceeds were used
primarily to pay living and moving expenses, to make a
downpayment on a new residence, and to contribute to the cost of
a daughter’s wedding. In 2004, petitioner received a $60,000
distribution from her individual retirement account. Petitioner
also acknowledged making a loan of conservatively at least
$18,000 during 2004 to a friend whose whereabouts were unknown at
the time of trial.
In the unique circumstances of this case, particularly the
fact that the majority of the Banderases’ assets were tied up in
the bankruptcy litigation, the described uses of the relatively
modest proceeds from the property transactions would not
generally appear to rise to the level of excess benefit. The
wedding costs, however, give us pause. Likewise, the $18,000
loan and the failure to apply any of the retirement account
distribution to outstanding taxes could signal a more telling
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selective avoidance of tax liabilities. Nonetheless, the Court
is also cognizant that, while the bankruptcy establishes reason
to know that the taxes would not be paid at the time of filing,
its pendency could have engendered a degree of confusion in
petitioner’s mind as to responsibility for the taxes and the
eventual source of funds for their payment. The Court therefore
is unconvinced that the substantial benefit prong weighs strongly
either for or against relief.
The compliance with income tax laws factor addresses the
good faith efforts of the requesting spouse in subsequent years.
Rev. Proc. 2003-61, sec. 4.03(2)(a)(vi), 2003-2 C.B. at 299. The
record indicates that petitioner’s 2000 return was not timely
filed and that amounts due remained outstanding until at least
February of 2004. The 2001 and 2002 returns were timely filed,
but the balance due for 2001 was not paid until January of 2003.
The 2002 taxes were timely paid. As of the time of trial, IRS
records did not reflect that petitioner had filed her 2003 or
2004 returns. Petitioner testified that she believed she timely
filed the 2003 return but refiled it, in response to IRS
inquiries, shortly before the trial in November of 2005, at which
time she also filed her initial return for 2004. Petitioner also
explicitly conceded at trial and on brief that various of her
returns and related payments were delinquent on account of
financial difficulties, moves, misplaced documents, etc.
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Hence, petitioner’s compliance with tax laws subsequent to
the filing of the 1999 return reveals shortcomings.
Additionally, petitioner’s generalized allusions to financial
pressures and information misplaced during moves are insufficient
to establish good faith efforts with respect to the series of
delinquencies occurring over a period of years. This factor
weighs against relief.
The presence of abuse is a factor weighing in favor of
relief, but its absence carries no contrary weight. Rev. Proc.
2003-61, sec. 4.03(2)(b)(i), 2003-2 C.B. at 299. Because
petitioner has at no point alleged any abuse by Dr. Banderas,
this factor is neutral.
The final factor enumerated in the revenue procedure, and
again weighing only in favor of and not against relief, is
directed toward whether the requesting spouse was in poor mental
or physical health when signing the return or seeking relief.
Id. sec. 4.03(2)(b)(ii), 2003-2 C.B. at 299. The nature, extent,
and duration of illness are to be taken into account. Id.
Petitioner’s statements at trial and on brief incorporate general
assertions of high blood pressure, depression, and bad knees.
Nonetheless, the record is bereft of any corroborating medical
documentation or any specific contentions regarding how such
ailments might have impacted petitioner’s ability to meet her
Federal tax obligations. In fact, petitioner acknowledged that,
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except for her weight, she was in good health during the 1997 and
1999 years at issue and until 2000 when her blood pressure began
rising. The Court observes that petitioner was able to work
multiple jobs throughout much of the relevant period. Thus,
while the Court does not doubt that petitioner bore substantial
stress on account of the difficult circumstances besetting her
family, the record does not enable us to find particular health
issues of a nature that would affect the balancing of her claim
for relief. This factor, too, is neutral.
Accordingly, of those factors identified in the pertinent
revenue procedure, only one weighs clearly in favor of granting
relief. The remainder are either negative or essentially
neutral. The Court is therefore unable to conclude that
respondent’s denial of equitable relief under section 6015(f) was
an abuse of discretion.
The Court has considered all other arguments made by the
parties and, to the extent not specifically addressed herein, has
concluded that they are without merit or are moot. To reflect
the foregoing,
Decision will be entered
for respondent.