Katherine Denise Henry, and Timmy H. Black, Intervenor v. Commissioner ( 2019 )

T.C. Memo. 2019-24
UNITED STATES TAX COURT
KATHERINE DENISE HENRY, Petitioner, AND TIMMY H. BLACK,
Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20138-16. Filed March 27, 2019.
Katherine Denise Henry, pro se.
Timmy H. Black, pro se.
Britton G. Wilson and Douglas S. Polsky, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: This case arises from petitioner’s request for relief from
joint and several liability under section 60151 with respect to an income tax
1
Unless otherwise indicated, all section references are to the Internal
(continued...)
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[*2] liability arising from certain income earned by her former husband, Timmy H.
Black, that he failed to report on the joint return he filed with petitioner for the
2012 tax year. Respondent purportedly granted relief to petitioner under section
6015(c). The only relief she sought, however, was a refund of an overpayment for
the 2014 tax year that the Internal Revenue Service (IRS) applied to the 2012 joint
liability, and section 6015(c) does not permit refunds. Consequently, petitioner
filed a timely petition seeking review of respondent’s determination to deny relief
under section 6015(b) and (f). Intervenor filed a timely notice of intervention.
Respondent now concedes that petitioner is entitled to the relief sought under
section 6015(f).2 Only intervenor stands in the way of relief for petitioner. The
sole issue for decision is whether petitioner is entitled to relief under section
6015(f).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of
fact and facts drawn from stipulated exhibits are incorporated herein by this
1
(...continued)
Revenue Code, as amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
In conceding relief under sec. 6015(f), respondent did not address the
applicability of sec. 1.6015-4(b), Income Tax Regs.
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[*3] reference. Petitioner resided in Kansas City, Missouri, at the time she filed
her petition. Intervenor also resided in Kansas City, Missouri, at the time he filed
his notice of intervention.
I. The Marriage
Petitioner and intervenor married on August 16, 1997, and the marriage
produced two children. During the marriage intervenor held a full-time position as
a firefighter, and starting in 2011 he began playing as a musician for a church
attended by the family. In 2012 the marriage failed, and petitioner filed a petition
for dissolution of marriage on July 25, 2012 (divorce proceeding). After a trial
held on February 27 and March 7, 2013, the Circuit Court of Jackson County,
Missouri (family court), granted the divorce on May 23, 2013.
During the divorce proceeding intervenor’s income, and more specifically,
income from his second job as a church musician, became a contentious issue.
Intervenor failed to report any wages earned from the church in his initial income
disclosure to the family court. The church paid intervenor’s wages by check, and
intervenor either cashed the checks or deposited them into a separate account to
which petitioner did not have access. Petitioner nevertheless challenged
intervenor’s omission during the divorce trial. Despite intervenor’s testimony that
the church no longer paid him for playing, the family court sided with petitioner
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[*4] and included intervenor’s church wages in calculating intervenor’s support
obligations.
II. Petitioner’s 2012 Tax Liability and Post-2012 Tax Compliance
On February 15, 2013, while the divorce proceeding was pending but before
the trial took place, petitioner and intervenor filed a joint Federal income tax
return for the 2012 tax year. The return was prepared by a paid return preparer
during a meeting attended by both petitioner and intervenor. The return reported
total adjusted gross income of $64,778 but failed to include intervenor’s church
wages of $14,650. Intervenor claims that petitioner knew of the income and that
the reason for the omission was a missing Form W-2, Wage and Tax Statement.
Petitioner disavowed any knowledge of the income or any discussion related to a
missing Form W-2 at that time.
On March 24, 2014, respondent sent petitioner and intervenor a “Notice
CP2000” proposing a deficiency of $2,243 attributable to the unreported wage
income from the church. On August 25, 2014, respondent issued a statutory notice
of deficiency to petitioner and intervenor. Neither petitioner nor intervenor
petitioned this Court with respect to the notice. On January 5, 2015, respondent
assessed the deficiency and an addition to tax for failure to pay under section
6651(a)(2) (plus interest).
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[*5] On March 9, 2015, respondent withheld $2,393 of a $6,689 overpayment
that petitioner claimed on her 2014 tax return and applied it to fully pay the 2012
joint tax liability of petitioner and intervenor. On March 16, 2015, respondent
sent a notice to petitioner informing her of this offset.
Since filing her 2012 tax return, petitioner has remained in compliance with
her tax filing and payment obligations.
III. Petitioner’s Section 6015 Request for Relief
On March 20, 2015, petitioner filed a request for section 6015 relief to
recover the portion of her 2014 tax refund that respondent had applied against the
unpaid joint tax liability for 2012. Petitioner based her request for relief on a lack
of knowledge of the unreported income, her limited participation in the
preparation of the return, her financial hardship, and her limited financial
expertise. Petitioner claimed $955 in assets, a monthly income, including alimony
and Government assistance, of $2,128, and monthly expenses of $2,653.
As part of the administrative process, on April 17, 2015, respondent notified
intervenor of petitioner’s request for section 6015 relief and of his right to
participate by providing additional information. Intervenor, as the nonrequesting
spouse, completed a questionnaire on which he claimed that petitioner had full
knowledge of the unreported income and participated equally in household
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[*6] finances and the preparation of the 2012 tax return. Intervenor alleged that
petitioner knew about the unreported income because: (1) she signed the 2011 tax
return which included income from the same church; (2) the parties consulted their
tax preparer regarding the missing Form W-2, and their tax preparer suggested
they amend the return at a later date; and (3) in the divorce proceedings, after his
initial nondisclosure, his church income was included for purposes of calculating
spousal and child support.
On February 1, 2016, respondent issued a preliminary determination
proposing to deny relief to petitioner. Respondent proposed to deny relief under
section 6015(b) and (c) because petitioner had actual knowledge of the unreported
income and had reason to know of the tax understatement. Respondent proposed
to deny relief under section 6015(f) because petitioner had knowledge of the
understatement and failed to establish economic hardship.
Petitioner appealed respondent’s preliminary determination by filing a
statement of disagreement indicating she would like her section 6015 case
transferred to the Appeals Office. The statement of disagreement largely reiterated
petitioner’s position in her initial request for section 6015 relief. Appeals Officer
(AO) Karen Lancaster held telephone conferences with petitioner and intervenor
and accepted document submissions from both parties.
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[*7] On July 26, 2016, AO Lancaster issued a final Appeals determination
purportedly granting relief under section 6015(c) but denying a refund to
petitioner. AO Lancaster found that petitioner did not qualify for relief under
section 6015(b) because she had reason to know of the unreported income that
triggered the deficiency. AO Lancaster did not address relief under section
6015(f) in either the final Appeals determination or the case memorandum.3
On September 13, 2016, petitioner filed a timely petition with this Court.
On December 14, 2016, intervenor filed a timely notice of intervention. Trial was
held on February 5, 2018, in Kansas City, Missouri. As of the trial date, petitioner
was working as an instructional assistant for special needs children but resigned
that position as of the end of the 2017-18 school year because of a serious medical
condition. Petitioner was receiving Social Security disability payments of $999
per month because of her medical condition. After her resignation became
effective, petitioner’s only income would be her Social Security disability
payments and her $500 monthly alimony payments.
3
We surmise that the Appeals Office did not address relief under sec.
6015(f) because it “granted” relief under sec. 6015(c). Sec. 6015(f) relief applies
only when the requesting spouse does not qualify for relief under sec. 6015(b) and
(c). Sec. 6015(f)(2).
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[*8] OPINION
We have jurisdiction to review respondent’s denial of petitioner’s request
for relief under section 6015. See sec. 6015(e)(1). In doing so we apply a de novo
standard of review as well as a de novo scope of review. See Porter v.
Commissioner, 132 T.C. 203, 210 (2009). As a general rule, a taxpayer requesting
relief under section 6015 bears the burden of proving that he or she is entitled to
relief. See Rule 142(a); Porter v. Commissioner, 132 T.C. 210.
Married taxpayers may file a joint Federal income tax return. Sec. 6013(a).
Spouses who elect to file a joint return for a tax year are required to compute their
tax for the tax year on the aggregate income of both spouses, and the liability for
that tax is joint and several. See sec. 6013(d)(3). Under certain circumstances,
however, a taxpayer who filed a joint return may qualify for relief from joint and
several liability. Sec. 6015.
Section 6015 provides three avenues for relief from joint and several
liability. Section 6015(a)(1) provides that under section 6015(b) a spouse who has
filed a joint return may seek relief from joint and several liability for an
understatement of tax. Section 6015(a)(2) provides that under 6015(c) a spouse
who meets certain criteria may elect to allocate a joint liability as permitted by
section 6015(d) (generally, as if the spouses had filed separate returns). If relief is
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[*9] not available under either section 6015(b) or (c), a taxpayer may seek
equitable relief under section 6015(f), which the Commissioner may grant in his
discretion.
Petitioner contends that she is entitled to full relief from the 2012 liability
and, more specifically, to a refund of the 2014 overpayment that respondent
applied against the 2012 joint liability. We construe her contentions as a prayer
for relief under section 6015(f).
Respondent has now conceded that petitioner is entitled to relief under
section 6015(f). We construe that concession as an acknowledgment that
petitioner is not entitled to relief under sections 6015(b) or (c). We will decide the
only remaining dispute between petitioner and intervenor, which is whether
petitioner is entitled to relief under section 6015(f).
A requesting spouse may seek relief under section 6015(f) upon a showing
that: (1) taking into account all the facts and circumstances, it would be
inequitable to hold the requesting spouse liable for any unpaid tax and (2) the
requesting spouse does not qualify for relief under subsection (b) or (c). That
petitioner is not eligible for relief under section 6015(b) or (c) is not disputed.
We, therefore, turn our inquiry to whether, under the facts and circumstances, it
would be inequitable to hold petitioner liable for the unpaid tax.
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[*10] The Commissioner published guidance in Rev. Proc. 2013-34, 2013-43
I.R.B. 397, modifying and superseding Rev. Proc. 2003-61, 2003-2 C.B. 296,
setting forth the framework that the IRS uses to evaluate requests for relief under
section 6015(f). Under Rev. Proc. 2013-34, supra, a taxpayer must first meet
certain threshold conditions in section 4.01, and then he or she must either qualify
for a streamlined determination to grant relief under section 4.02 or qualify under
the full facts and circumstances test of section 4.03. Id. sec. 4.01, 4.02, and 4.03,
2013-43 I.R.B. at 399-403. We consider these factors in the light of the attendant
facts and circumstances, but we are not bound by them. See Pullins v.
Commissioner, 136 T.C. 432, 438-439 (2011).
1. Threshold Conditions
Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. at 399, sets forth seven
threshold conditions that a requesting spouse must satisfy to qualify for relief
under section 6015(f): (1) the requesting spouse filed a joint Federal income tax
return for the relevant year; (2) the requesting spouse does not qualify for relief
under section 6015(b) or (c); (3) the requesting spouse filed a timely request for
relief; (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 knowingly participate in the
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[*11] filing of a fraudulent joint return; and (7) the liability from which relief is
sought is attributable to an item of the nonrequesting spouse.
Respondent concedes, and intervenor does not dispute, that petitioner meets
the threshold conditions. Petitioner meets the first, second, third, and seventh
requirements: (1) petitioner filed a joint return; (2) as inferred from respondent’s
concession, petitioner does not qualify for alternate relief; (3) petitioner filed a
timely claim for relief; and (7) the liability is attributable to intervenor. The
remaining requirements relate to fraud or improper asset transfers, and no party
contends that there was fraud or improper asset transfers, nor do we find any
evidence of such. Consequently, we find that petitioner meets the threshold
conditions for relief under section 6015(f).
2. Streamlined Determination
When a requesting spouse satisfies the threshold conditions of Rev. Proc.
2013-34, sec. 4.01, we next consider whether the requesting spouse is entitled to a
streamlined determination of equitable relief pursuant to Rev. Proc. 2013-34, sec.
4.02, 2013-43 I.R.B. at 400. A requesting spouse is eligible for a streamlined
determination if, among other requirements, as of the date she filed the return, she
did not know or have reason to know of an understatement on the joint income tax
return. Rev. Proc. 2013-34, sec. 4.02.
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[*12] Because petitioner had reason to know of the understatement, see infra pp.
13-16, we find petitioner does not qualify for a streamlined determination.
3. All Facts and Circumstances
If a requesting spouse is not entitled to a streamlined determination, we
evaluate the request for relief taking into account all the facts and circumstances.
Rev. Proc. 2013-34, sec. 4.03(2), 2013-43 I.R.B. at 400. Rev. Proc. 2013-34, sec.
4.03, focuses the analysis on a number of factors, including, but not limited to:
(a) marital status, (b) economic hardship, (c) knowledge, (d) legal obligations to
pay the tax, (e) significant benefits reaped from the understatement, (f) subsequent
compliance with income tax laws, and (g) mental or physical health. Id. No single
factor is determinative. Id.
a. Marital Status
The marital status factor weighs in favor of relief when the requesting
spouse is no longer married to the nonrequesting spouse. Id. sec. 4.03(2)(a).
Because petitioner divorced intervenor in 2013, this factor weighs in favor of
relief.
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[*13] b. Economic Hardship
A requesting spouse will suffer economic hardship, which weighs in favor
of relief, if satisfaction of the tax liability will impair her ability to pay reasonable
basic living expenses. Id. sec. 4.03(2)(b), 2013-43 I.R.B. at 401; see also
McKnight v. Commissioner, T.C. Memo. 2006-155, 2006 WL 2087750, at *8.
This inquiry takes into account petitioner’s income, expenses, and assets. Rev.
Proc. 2013-34, sec. 4.03(2)(b). Petitioner’s medical condition currently prevents
her from holding full-time employment, severely hindering her income-earning
potential. As of the trial date, her monthly income, consisting of $500 in alimony
and $999 in Social Security disability payments, totaling $1,499, is substantially
lower than her total monthly expenses of $2,653. On the basis of her income and
expenses, as well as her serious medical challenges, we conclude that petitioner
would suffer economic hardship if we deny relief. This factor favors relief.
c. Knowledge or Reason To Know
If the requesting spouse knew or had reason to know of the understatement
as of the date the joint return was filed, this factor will weigh against relief. Id.
sec. 4.03(2)(c)(i)(A). Although not controlling, we find that the regulations
applicable to knowledge under section 6015(b) and (c) provide a useful framework
for the analysis under section 6015(f). See, e.g., Jacobsen v. Commissioner, T.C.
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[*14] Memo. 2018-115 (applying the knowledge analysis under section 6015(b) to
the section 6015(f) analysis); Durland v. Commissioner, T.C. Memo. 2016-133
(applying the knowledge analysis under section 6015(c) to the section 6015(f)
analysis).
i. Actual Knowledge
We consider all the facts and circumstances in deciding whether a taxpayer
had actual knowledge of unreported income. See sec. 1.6015-3(c)(2)(iv), Income
Tax Regs. Although the regulations provide only modest guidance, we can extract
some principles that inform our analysis. See id. First, knowledge of a spouse’s
receipt of income, which is not reported, constitutes actual knowledge of the
unreported income. Id. subdiv. (i)(A). Second, knowledge of the source of the
income does not in itself constitute actual knowledge of omitted income. Id.
subdiv. (iii). We accept as credible petitioner’s testimony that she did not know
that intervenor received a salary from the church for 2012 because intervenor
either cashed the checks or deposited them into a separate account she could not
access. Petitioner’s knowledge of the source of the income--that intervenor played
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[*15] for the church--does not establish actual knowledge that the church paid
wages to intervenor in 2012.4
Both petitioner and intervenor provided testimony to the Court supporting
their respective positions. Intervenor’s testimony was not credible enough to
undermine our conclusion that petitioner did not have actual knowledge of
intervenor’s unreported income.
ii. Reason To Know
A requesting spouse has reason to know of an understatement if a
reasonable person in similar circumstances would have known of the
understatement. Sec. 1.6015-2(c), Income Tax Regs. We consider all the relevant
facts and circumstances in determining whether a requesting spouse had reason to
know of an understatement. Rev. Proc. 2013-34, sec. 4.03(2)(c)(iii), 2013-43
I.R.B. at 402. Although Rev. Proc. 2013-34, sec. 4.03(2)(c)(iii), lists several
factors that bear on the analysis,5 we find that the following factors are most
4
Additional factors that can indicate actual knowledge of unreported income
include: (1) any deliberate effort by the requesting spouse to avoid learning of the
unreported income and (2) joint ownership of the property giving rise to the
unreported income. Sec. 1.6015-3(c)(2)(iv), Income Tax Regs. Neither factor is
relevant in this case.
5
The factors listed in Rev. Proc. 2013-34, sec. 4.03(2)(c)(iii), 2013-43 I.R.B.
397, 402, include: (1) the requesting spouse’s level of education, (2) any deceit or
(continued...)
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[*16] pertinent to our analysis: (1) whether petitioner knew of the source of the
income and (2) whether the omitted item represented a departure from a prior
reporting position. See sec. 1.6015-2(c), Income Tax Regs.
On their joint return for the year preceding the year at issue here, petitioner
and intervenor reported intervenor’s wage income from the same church that paid
intervenor in 2012. Moreover, during the divorce trial--held two weeks after the
filing of the return--petitioner alleged that intervenor had omitted his church
wages from his income disclosure. Petitioner’s challenge at the divorce trial at the
very least indicates, and we find, that petitioner knew at the time she signed the
2012 joint return that intervenor continued to play for the church in 2012.
Because petitioner knew that intervenor received a salary from the church in 2011
and that intervenor continued to play for the church in 2012, we find that
petitioner had reason to know that intervenor received income from his work as a
musician, which was not reported on the 2012 joint return. This factor weighs
against relief.
5
(...continued)
evasiveness of the nonrequesting spouse, (3) the requesting spouse’s degree of
involvement in the activity generating the liability, (4) the requesting spouse’s
involvement in household financial matters, (5) the requesting spouse’s financial
expertise, and (6) any lavish or unusual expenditures.
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[*17] d. Legal Obligation
If the nonrequesting spouse had a legal obligation to pay the outstanding tax
liability, apart from the income tax laws, this factor weighs in favor of relief; if the
requesting spouse had the obligation, this factor weighs against relief. Rev. Proc.
2013-34, sec. 4.03(2)(d). This factor is neutral in the absence of any legal
agreement assigning responsibility for the payment of outstanding income tax
liabilities. Id. Because we find nothing in the record indicating that either
petitioner or intervenor had a legal obligation to pay this outstanding joint tax
liability, this factor is neutral.6
e. Significant Benefit
If the requesting spouse receives a significant benefit from the
understatement, this factor weighs against relief. Id. sec. 4.03(2)(e). Under Rev.
Proc. 2013-34, supra, if the unpaid tax is small such that neither spouse received a
significant benefit, this factor is neutral. This Court, however, treats the lack of a
significant benefit as a factor favoring relief. See, e.g., Wang v. Commissioner,
6
The divorce decree allocates the Federal tax dependency exemptions for the
children to intervenor. Petitioner, however, claimed the benefits with respect to
one child for the 2014 tax year, alleging that intervenor gave her permission to do
so. Intervenor contends that he did not agree to allow petitioner to claim the
benefit and petitioner is not entitled to relief because she claimed an improper
benefit. We need not decide this dispute to decide the sec. 6015(f) issue before us.
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[*18] T.C. Memo. 2014-206, at *40. Because petitioner did not receive any
benefit from intervenor’s unreported income, we find this factor favors relief.
f. Compliance With Income Tax Laws
If the requesting spouse has made a good faith effort to comply with the
income tax laws in the tax years following the tax year to which the request for
relief relates, this factor weighs in favor of relief. Rev. Proc. 2013-34, sec.
4.03(2)(f). Because petitioner has complied with the income tax laws in the years
following her divorce, this factor favors relief.
g. Mental and Physical Health
“This factor will weigh in favor of relief if the requesting spouse was in
poor mental or physical health * * * at the time the requesting spouse requested
relief.” Id. sec. 4.03(2)(g), 2013-43 I.R.B. at 403. We also consider a taxpayer’s
mental and physical health at the time of trial. See Pullins v. Commissioner, 136
T.C. 454; Bell v. Commissioner, T.C. Memo. 2011-152. At the time of trial,
petitioner suffered from a serious medical condition, so we find that this factor
weighs in favor of relief.
4. Conclusion
After considering and weighing all the factors, we find it would be
inequitable to hold petitioner liable for the 2012 tax liability. Although we do not
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[*19] base our decision on a simple tally of the factors, we note that five factors
weigh in favor of relief, one is neutral, and one weighs against relief. See Hudgins
v. Commissioner, T.C. Memo. 2012-260, at *39-*40. After considering all of the
relevant facts and circumstances, we find that petitioner meets the requirements of
section 6015(f) and is entitled to relief under section 6015(f). The Court has
considered all the other contentions of the parties and, to the extent not discussed
above, finds those arguments to be irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered for
petitioner.