DocketNumber: Docket No. 23882-04.
Citation Numbers: 2010 T.C. Memo. 134, 99 T.C.M. 1552, 2010 Tax Ct. Memo LEXIS 171
Judges: HOLMES
Filed Date: 6/17/2010
Status: Non-Precedential
Modified Date: 11/21/2020
Decision will be entered for petitioner.
MEMORANDUM FINDINGS OF FACT AND OPINION
HOLMES,
When the SEC cease-and-desist order arrived, Wilson stopped working altogether. He asked a different tax preparer to help him out of the mess; that preparer filled out amended returns that Lloyd and his wife Karen signed. The amended returns led to a tax bill of over $ 540,000; neither Wilson has paid it. The Wilsons divorced, and Karen resumed working outside the home in an insecure and low-paying clerical job. She now seeks relief from the old tax debt.
FINDINGS OF FACT
The Wilsons married in 1983. Karen Wilson was working as a cashier in a gas station and, apart from a bit of technical training, did not have an education beyond high school. For the first 14 years of *172 their marriage, Lloyd was a self-employed insurance salesman, earning about $ 30,000 to $ 36,000 a year. Karen supplemented the family income by working a variety of jobs, eventually becoming a loan officer at the local credit union. The Wilsons had three sons, one of whom is still a minor. And every year Karen would prepare the family's simple joint tax return.
Until 1997. That year the Wilsons' financial situation started changing radically for the better. Lloyd began netting $ 20,000 a month in his new venture of steering people into a Ponzi scheme called the Venture Fund Group. We specifically find, on the basis of her credible testimony, that Karen did not understand the nature of her husband's business--she believed it was legitimate and had no knowledge about its operations or fraudulent nature. But its apparent success allowed Karen to leave her job at the credit union to help Lloyd with paperwork and bookkeeping, and to spend more time taking care of the children. With their new earnings, the Wilsons put down $ 50,000 on two neighboring houses in Modesto, California and took out a mortgage on each. They used one as the family home and the second as Lloyd's office.
Accounting *173 for Lloyd's new business was complicated--the business involved several entities and offshore accounts--and Lloyd turned to Roosevelt Drummer to prepare the Wilsons' 1997 and 1998 joint returns. But Drummer failed to report the substantial income that Lloyd was sending to offshore accounts in the name of a grantor trust. 1 And, in the meantime, the SEC was investigating. In May 1999, an SEC cease-and-desist order put an abrupt end to Lloyd's $ 20,000-a-month business. Lloyd dumped Drummer and hired John Northup, a licensed CPA, for advice. Northup looked at the Wilsons' 1997 and 1998 returns and told them to get right with the IRS. They took his advice and at the end of 1999 filed amended 1997 and 1998 returns that reported the income Lloyd had been sending offshore. They also filed their 1999 return. The three returns showed a total tax liability of $ 540,000.
Northup knew about the *174 order when he prepared the amended returns, and he discussed it with Lloyd. Lloyd told Karen about the cease-and-desist order in 2000. She was credible on this point, and we find it more likely than not that this is true.
Lloyd responded to this unfortunate turn of events by, as Karen described it, spending much of 2000 and 2001 staying at home and doing nothing. Karen got upset with this behavior; the unpaid bills piled up, and the Wilsons became estranged. Karen went to work as a clerk at a commercial real-estate company, but she still did not have enough money to move out of the marital home. At this point, the Wilsons were renting out the other house, so Karen moved to a different bedroom, celebrated holidays separately, and did her best to avoid Lloyd.
While all of this was happening, the tax debt remained unpaid. In March 2002 Karen submitted IRS Form 8857 seeking innocent-spouse relief for tax years 1997, 1998, and 1999. Karen requested equitable relief and described her financial status as "of survival." She also submitted Form 886-A, Innocent Spouse Questionnaire. On that form she wrote that she was married and still living with Lloyd and that she believed he could pay the taxes *175 when she signed the returns because Lloyd was "still in business during this time."
The Commissioner's Centralized Cincinnati Innocent Spouse Operation (CCISO) denied Karen's request for relief in a preliminary determination letter in March 2003. CCISO's denial was based on its finding that Karen did not have a reasonable belief that the tax would be paid because there was an outstanding balance from 1998 when the 1999 return was filed. Karen responded to CCISO's preliminary determination letter by sending what she labeled a "statement of disagreement" to the IRS Appeals Office. The IRS Appeals officer handling the case wrote Karen in February 2004, outlining his initial findings based on her questionnaire. The Appeals officer summarized his findings--based on the limited information in the administrative record--for each of the numerous factors that the IRS considers in such situations. In March 2004 he also spoke with Karen, who explained that she was filing for divorce from Lloyd but still sharing a house with him. The Appeals officer told her that this would complicate his analysis but that he would contact her again in about three months. Karen filed for divorce the very next month. *176 In July 2004, the Appeals officer mailed Karen a letter asking her to contact him by August 18, 2004 for a telephone hearing. Karen never did, and in September she received a notice of determination denying her request for relief.
The state court judge overseeing the Wilsons' divorce awarded Karen the couple's second house in December 2004, and in early 2005 she evicted the tenant and moved in. She petitioned the Tax Court as a resident of California, and we tried the case in September 2005. Karen did not have the assistance of legal counsel and was even unaware that she could testify. 2 When complicated facts and legal issues unfolded, we arranged for
OPINION
The Commissioner never asserted a deficiency against Karen, so hers is a case where relief is possible only under . jurisdiction; . standard of review; and . scope of review.
Karen's case is a "stand alone" nondeficiency case--one where a spouse asks for relief on her own initiative, and not in response to a deficiency action or moves by the IRS to collect a *178 tax debt. After the trial began back in 2005, courts began questioning whether we had jurisdiction over stand-alone nondeficiency petitions. See
The Commissioner argues that we should review his determination to see if he abused his discretion. But our decision in
An earlier opinion,
A trial
Because our Court has interpreted
But, contrary to the Commissioner's arguments here, remand is not an option in innocent-spouse cases. 4 In
To sum up these preliminary matters: We hold that we have jurisdiction to decide what relief Karen is entitled to under the Code, and we will make our decision on the basis of the evidence presented to us at trial, without deferring to the findings of the Appeals officer who issued the notice of determination denying relief.
The procedure also has a safe harbor. This safe harbor grants *183 relief to a requesting spouse if she meets three conditions. At the time relief is requested, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date relief was requested;
And even keeping separate households wouldn't be enough in the case of a married couple, because those separate households must be maintained for a "12-month period ending on the date relief was requested."
This leaves us with an eight-factor balancing test to apply.
Weighs for Relief | Neutral | Weighs Against |
Relief | ||
Separated or | Still married | N/A |
divorced | ||
Abuse present | No abuse present | N/A |
No significant | Significant benefit | |
benefit 6*186 | ||
N/A | Later compliance | Lack of later |
with Federal tax | compliance with | |
laws | Federal tax laws | |
No knowledge or | N/A | Knowledge or reason |
reason to know taxes | to know taxes would | |
would be left unpaid | be left unpaid | |
Economic hardship if | N/A | No economic hardship |
relief not granted | if relief not | |
granted | ||
Tax liability | N/A | Tax liability |
attributable to non-requesting | attributable to | |
spouse | petitioner | |
Nonrequesting spouse | No divorce decree | Petitioner |
responsible for | responsible for | |
paying tax under | paying tax under | |
divorce decree | divorce decree |
The Commissioner conceded only that the nonrequesting-spouse's-legal-obligation-to-pay-the-tax factor is neutral. That leaves the remaining seven factors in dispute.
The first contested factor is Karen's marital status. This factor favors relief if Karen is "separated (whether legally separated or living apart) or divorced" from Lloyd.
Karen does argue that Lloyd was frequently angry with her, and suggests that that might be a form of abuse. But we agree with the Commissioner on this point. Karen conceded during the IRS's consideration of her claim that she was not abused, and during the trial presented no specific evidence on the issue.
The third contested factor is whether Karen received a significant benefit. This factor weighs against relief if Karen "significantly benefitted (beyond normal support) from the unpaid liability or items giving rise to the deficiency."
The IRS Appeals officer found in Karen's favor on this issue, and the trial revealed nothing that would change that result. Since Karen applied for innocent-spouse relief in 2002, significant benefits have not been rolling in. As we already found, Lloyd had stopped working by 2001--failing to provide even "normal support." As a result, Karen is struggling--living modestly in an unairconditioned house in Modesto. The two homes *188 the Wilsons purchased in 1998 still have significant mortgage balances outstanding; and the $ 250,000 CD from the First International Bank of Grenada, which may or may not be solvent, lists only Lloyd as a beneficiary. Therefore, on both the administrative record and
The fourth contested factor is whether Karen was in compliance with the Federal tax laws. If Karen "has not made a good faith effort to comply with federal income tax laws" for years after those to which her request for innocent-spouse relief relates, then this factor would weigh against relief.
Based upon Karen's pattern of resolving her 2001 and 2002 tax liabilities, we find it probable that she would resolve her 2004 tax liability as well. We find that these minor shortfalls show no bad faith. But it was her burden to produce evidence of her tax compliance, and she did not. We find that this factor, taking into account her lack of bad faith, slightly weighs against relief on
The fifth contested factor is Karen's knowledge of the underpayment. This factor weighs against relief if she "knew or had reason to know * * * the reported liability would be unpaid at the time the return was signed."
Based solely on the administrative record, the knowledge factor would weigh against Karen. The IRS Appeals officer wrote Karen, asking her to explain what she knew when she signed the returns. She never did, and so failed to show in the administrative proceedings that she neither knew nor had reason to know of the underpayment.
On
In
Because, however, Karen's knowledge or reason to know changed over time on the
The next contested factor is whether Karen will suffer economic hardship if she must pay the tax debt. This factor weighs in her favor when satisfaction of the tax liability would cause her to be unable to pay "her reasonable basic living expenses."
The Commissioner argues that the administrative record shows Karen would not suffer economic hardship. The records Karen provided to the IRS show that her monthly income exceeds her expenses by only $ 114. But because Karen failed to substantiate her expenses as requested by the IRS Appeals officer, the Commissioner argues that he could not have abused his discretion. We agree that if we looked only at the administrative record, we'd have to find that the Commissioner had not abused his discretion in finding that Karen would not suffer economic hardship.
On
The Commissioner points to
The last contested factor is whether the tax liability is attributable to Lloyd. This factor weighs in favor of relief if the "liability for which relief is sought is solely attributable" to Lloyd.
The Commissioner concedes that the portion of unpaid liabilities attributable to Lloyd weighs in favor of relief; but argues *195 that since Karen did basic clerical work to assist Lloyd and was an employee of his company, a portion of those liabilities is attributable to her. There was little information in the administrative record that sheds any light on attribution, so the IRS Appeals officer assumed that 50 percent of the tax liability was attributable to Karen. If we looked only to the administrative record, this would weigh against relief. But the trial record leads us to find that Karen had no understanding of Lloyd's business. She merely assisted with clerical duties while Lloyd made all the business decisions. We therefore find that the tax liability is entirely attributable to Lloyd.
After our analysis of these contested factors, the table looks like this:
Weighs for Relief | Neutral | Weighs Against |
Relief | ||
Divorced | ||
No abuse present | ||
No significant | ||
benefit | ||
Lack of later | ||
compliance with | ||
Federal tax laws | ||
No knowledge or | ||
reason to know | ||
Economic hardship if | ||
relief not granted | ||
Tax liability not | ||
attributable to | ||
Karen | ||
No divorce decree |
Thus, Karen has five factors weighing in favor of relief and only one weighing against. But the factor weighing against her has little weight; although Karen's compliance was never clearly *196 established, neither was any serious or bad faith lack of compliance. On the other hand, the knowledge factor weighing in favor of relief--an "extremely strong factor,"
1. In the trust world, a grantor is the person who contributes assets to a trust. A grantor trust is created if the grantor retains enough control of or interest in the assets that the trust is ignored for income tax purposes--in other words, the IRS continues to treat the assets as belonging to the grantor.↩
2. This excerpt from the transcript of the first trial was typical: "Call your first witness, then." "I have no witnesses." "Well, how about yourself?" "Okay." "You count." "I count?" "Yes."↩
3. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue.↩
4. As is always the case in administrative law, general principles yield to any specific governing statute. See, e.g.,
5. Karen Wilson filed Form 8857 in March 2002. The procedure in effect when she filed her request for relief was
6.
7. To decide whether a spouse seeking relief will suffer economic hardship, the revenue procedure directs us to the test in
Jonson v. Commissioner , 353 F.3d 1181 ( 2003 )
Quang v. NGUYEN, Plaintiff-Appellant, v. Donna E. SHALALA, ... , 43 F.3d 1400 ( 1994 )
William D. Morris v. Donald H. Rumsfeld, Secretary of ... , 420 F.3d 287 ( 2005 )
Commissioner of Internal Revenue v. Gwendolyn A. Ewing, ... , 439 F.3d 1009 ( 2006 )
Timmons v. Caldera , 314 F.3d 1229 ( 2003 )
Security State Bank v. Commissioner , 214 F.3d 1254 ( 2000 )
Karnail Singh Virk v. Immigration & Naturalization Service , 295 F.3d 1055 ( 2002 )
Porter v. Comm'r , 130 T.C. 115 ( 2008 )
Florida Power & Light Co. v. Lorion , 105 S. Ct. 1598 ( 1985 )
Jonson v. Comm'r , 118 T.C. 106 ( 2002 )
Billings v. Comm'r , 127 T.C. 7 ( 2006 )
Hesselink v. Commissioner , 97 T.C. 94 ( 1991 )