David C. Jonson and Estate of Barbara J. Jonson v. Commissioner

118 T.C. No. 6UNITED STATES TAX COURT
DAVID C. JONSON AND ESTATE OF BARBARA J. JONSON, DECEASED,
DAVID C. JONSON, SUCCESSOR IN INTEREST, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21648-87. Filed February 8, 2002.
H and W filed joint Federal income tax returns for
1981 and 1982 on which they took large deductions
attributable to a tax shelter investment. R disallowed
the deductions. W claimed relief from joint liability
under sec. 6013(e), I.R.C., which was repealed and
replaced by sec. 6015, I.R.C. W died while still
married to and living with H. Ps concede the
deficiencies but pursue the sec. 6015, I.R.C. claim on
behalf of W. Ps allege that, although W was aware of
the tax shelter investment, the anticipated tax
savings, and the tax risks, she qualifies for relief
under sec. 6015(b)(1), (c), and (f), I.R.C. Ps allege
that H, as W’s personal representative, is eligible to
elect relief under sec. 6015(c), I.R.C., because, at
the time he filed such election, W was “no longer
married to” H. See sec. 6015(c)(3)(A)(i), I.R.C.
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1. Held: W had reason to know of the
understatement attributable to the disallowed
deductions, and, therefore, W is not entitled to
relief under sec. 6015(b)(1)(C), I.R.C.
2. Held, further, it would not be inequitable to
hold W liable for the deficiencies in tax, and,
therefore, W is not entitled to relief under
sec. 6015(b)(1)(D), I.R.C.
3. Held, further, because W did not satisfy the
eligibility requirements of sec. 6015(c)(3)(A)(i),
I.R.C., prior to her death, H, as personal
representative, is not entitled to elect relief under
sec. 6015(c), I.R.C.
4. Held, further, under the facts and
circumstances, R’s denial of equitable relief under
sec. 6015(f), I.R.C., does not constitute an abuse of
discretion.
Declan J. O’Donnell, for petitioners.
Randall L. Preheim, for respondent.
HALPERN, Judge: By notice of deficiency dated April 14,
1987, respondent determined deficiencies in, and additions to,
the Federal income tax liabilities of David C. and Barbara J.
Jonson (separately, David or Barbara; together, the Jonsons), as
follows:1
1
The petition in this case was filed on July 6, 1987, on
behalf of six individuals, including David C. and Barbara J.
Jonson. Pursuant to an order of this Court dated June 12, 1990,
such individuals other than the Jonsons were severed as
petitioners in this case, and the caption of this case was
amended to read “David C. Jonson and Barbara J. Jonson,
Petitioners v. Commissioner of Internal Revenue, Respondent”.
Barbara died on Mar. 16, 1996, and, upon motion thereafter made
by respondent, “Estate of Barbara J. Johnson, Deceased, David C.
Jonson, Successor in Interest” was substituted for Barbara as a
(continued...)
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Tax Year Ending Sec. 6659
Dec. 31 Deficiency Addition
1981 $32,998 $9,862
1982 33,504 10,038
On account of concessions made by the parties (which we
accept),2 the sole issue for our decision is whether Barbara is
relieved of any liability for tax pursuant to the provisions of
section 6015.3
Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the years at issue, and Rule
1
(...continued)
petitioner.
2
Petitioners have conceded the underlying deficiencies;
respondent has conceded that there are no additions to tax; and
petitioners have conceded that the deficiencies constitute
substantial underpayments attributable to tax-motivated
transactions for purposes of computing deficiency interest under
sec. 6621(c).
3
By amendment to petition filed Jan. 6, 1994, the Jonsons
raised the affirmative defense that Barbara should be relieved of
liability as a so-called innocent spouse under sec. 6013(e). In
1998, sec. 6013(e) was repealed and replaced with sec. 6015.
Internal Revenue Service Restructuring and Reform Act of 1998
(RRA 1998), Pub. L. 105-206, sec. 3201, 112 Stat. 685, 734. The
RRA 1998 generally revised and expanded the relief available to
joint filers. Moreover, the RRA 1998 gave sec. 6015 retroactive
effect in that it was made applicable to any liability for tax
arising after July 22, 1998, and to any liability for tax arising
on or before such date that remained unpaid as of July 22, 1998.
RRA 1998 sec. 3201(g)(1), 112 Stat. 740; Corson v. Commissioner,
114 T.C. 354, 359 (2000). Sec. 6015 is thus the proper section
under which petitioners should be claiming relief for Barbara.
Petitioners, however, did not amend the petition to claim relief
from liability under sec. 6015 (rather than sec. 6013(e)).
Nevertheless, the trial of this case proceeded on the basis that
Barbara’s claim was for relief under sec. 6015 rather than for
relief under sec. 6013(e). We shall treat that claim as if it
had been made in the pleadings. See Rule 41(b)(1).
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references are to the Tax Court Rules of Practice and Procedure.
For convenience, monetary amounts have been rounded to the
nearest dollar.
FINDINGS OF FACT4
Some facts are stipulated and are so found. The stipulation
of facts, with accompanying exhibits, is incorporated herein by
this reference.
4
In part, Rule 151 provides as follows:
RULE 151. BRIEFS
* * * * * * *
(e) Form and Content: * * *
* * * * * * *
(3) * * * In an answering or reply brief, the party
shall set forth any objections, together with the reasons
therefor, to any proposed findings of any other party,
showing the numbers of the statements to which the
objections are directed; in addition, the party may set
forth alternative proposed findings of fact.
Petitioners have filed an answering brief, but petitioners
have failed therein to set forth objections to the proposed
findings of fact made by respondent. Accordingly, we must
conclude that petitioners have conceded respondent's proposed
findings of fact as correct except to the extent that
petitioners’ proposed findings of fact are clearly inconsistent
therewith. See Estate of Freeman v. Commissioner, T.C. Memo.
1996-372; Fein v. Commissioner, T.C. Memo. 1994-370; Estate of
Stimson v. Commissioner, T.C. Memo. 1992-242; Cunningham v.
Commissioner, T.C. Memo. 1989-260.
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Residence
At the time of the petition, the Jonsons resided in Golden,
Colorado.
The Joint Returns
For 1981 and 1982 (the audit years), the Jonsons made joint
returns of income (the 1981 joint return, the 1982 joint return,
and, collectively, the joint returns). Among the attachments to
the 1981 joint return is a Schedule K-1, Partner’s Share of
Income, Credits, Deductions, Etc. – 1981, identifying David as a
limited partner in a partnership, Vulcan Oil Technology (Vulcan),
and showing, as a “distributive share item”, a loss of $75,620.
Such loss is further reflected on a Schedule E, Supplemental
Income and Loss Schedule, attached to the 1981 joint return and
in a composite figure carried from such Schedule E to the first
page of the 1981 joint return, where such composite figure is
deducted. The Schedule K-1 also shows that David’s interest in
Vulcan’s profits, losses, and capital is 1.415 percent. The
facts are similar for 1982, except that the amount of the loss is
$71,078 (the losses for 1981 and 1982 being referred to,
collectively, as the Vulcan losses).
David prepared the joint returns. Barbara knew that the
Vulcan losses were claimed on those returns.
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Respondent’s Adjustments
Respondent’s adjustments giving rise to the deficiencies
here in question (sometimes, the deficiencies) result from
respondent’s disallowances of the Vulcan losses and a small
credit (without distinction, the Vulcan losses) claimed on the
joint returns. In the notice, respondent explains the
disallowances as follows:
It is determined that you incurred no deductible loss
for the taxable years 1981 and 1982 from the Vulcan Oil
Technology a partnership in which you own an interest.
It has not been established that the partnership
incurred any loss for the taxable years 1981 and 1982,
nor has it been established that if the partnership did
have a loss for the taxable years 1981 and 1982, that
you are entitled to deduct any portion of that loss on
your income tax return. Accordingly, your taxable
income for the years 1981 and 1982 is increased by
$75,620.00 and $71,078.00.
After the initiation of this action, and following
respondent’s prevailing in certain test cases involving
investments similar to Vulcan (the test cases),5 petitioners
conceded the deficiencies.
The Jonsons
Barbara was born on March 21, 1930. She received an
associate’s degree from Colorado Women’s College in 1949, a
5
On brief, petitioners identify those cases as follows:
Krause v. Commissioner, 99 T.C. 132 (1992), affd. sub nom.
Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994); and
Acierno v. Commissioner, T.C. Memo. 1997-441, affd. 185 F.3d 861(3d Cir. 1999).
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bachelor’s degree in physical education from the University of
Colorado in 1952, and a master’s degree in gifted and talented
education from the University of Denver in 1979. She was an
elementary and high school teacher and a member of the National
Science Teachers’ Association and the Colorado Association of
Science Teachers. She was also an instructor at the University
of Colorado. After college, in connection with her teaching
activities, Barbara attended numerous teacher training sessions.
During the audit years, Barbara was employed as a teacher,
reporting wages therefrom of $23,602 in 1981 and $27,146 in 1982.
During the audit years, David was a consulting geologist,
carrying on that business as a sole proprietor out of the
Jonsons’ home. He reported earnings from such business of
$85,183 and $99,878, for 1981 and 1982, respectively. Sometime
during the early 1990s, David incorporated his consulting
business as Johnson Management, Inc.
For the audit years, in addition to Barbara’s wages and
David’s business income, the Jonsons reported $12,538 and $29,317
for 1981 and 1982, respectively, as interest, dividends, and
capital gains.
The Jonsons’ Marriage
The Jonsons were married on January 7, 1956. They lived
together as a married couple (and were not legally separated) on
March 16, 1996, the date of Barbara’s death.
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The Jonsons had three children, all of whom were in college
during the audit years. Aside from some unspecified amounts of
money from student loans and the children’s summer employment,
the Jonsons paid for their children’s college educations. For at
least a portion of the audit years, they had a Guatemalan
exchange student living with them.
Barbara’s Estate
Barbara died testate, leaving her entire estate (the estate)
to David. The estate had a value of $365,204, and it consisted
primarily of Barbara’s retirement savings. On December 2, 1996,
David disclaimed his interest in the estate pursuant to a
document that directed that the residual estate “be advanced to
their three children in equal shares, in [stock of] Jonson
Management Company, Inc.” and that he, David, “continue to manage
that corporation under his contract”.6
The Jonsons’ Financial Affairs
During the audit years, the Jonsons maintained only one
checking account and one savings account, over both of which each
had signature authority. During those years, Barbara reconciled
6
We note that David’s directive regarding Barbara’s
residual estate appears not to satisfy sec. 2518(b)(4), which
provides, in pertinent part, that a “qualified disclaimer” is an
“unqualified refusal by a person to accept an interest in
property”, provided that the disclaimed interest “passes without
any direction on the part of the person making the disclaimer”.
(Emphasis added.) See also sec. 2046. Because neither party has
raised any issue with respect to sec. 2518(b)(4), we do not
further discuss it.
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and balanced the bank statements and wrote checks on the checking
account (the joint checking account) to pay routine household
bills.
Barbara managed her retirement savings. During the audit
years, she and David were both partners in a partnership,
Continental South Apartments. In 1980, Barbara recommended to
David that they sell an apartment house they owned because
Barbara thought they were not making money on the investment.
David followed her recommendation, and they sold the apartment
house in the same year. Neither David nor Barbara made any
attempt to deceive the other with regard to his or her respective
financial affairs. Barbara participated in financial matters
with David, who valued her advice and participation.
Vulcan
Vulcan was a limited partnership formed to invest in
technology for the recovery of oil and gas. David invested in
Vulcan on October 2, 1981. On that date, he signed the “Vulcan
Oil Technology Partners Subscription Agreement” (the subscription
agreement), and he delivered to the promoters of Vulcan a check
in the amount of $18,750 and two promissory notes in like
amounts, which notes he subsequently paid, also by check. All
three checks were drawn on the joint checking account. Because
she routinely balanced the checkbook, Barbara saw the checks when
they cleared.
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Although Barbara was not present when David met the
promoters of Vulcan and executed the subscription agreement and
the notes, she later reviewed the subscription agreement, and
David gave her a general explanation of the nature of the
investment, expressing the view that it would provide substantial
tax savings to them.
The subscription agreement contained the following
representation by all those purchasing a limited partnership
interest:
I am aware that the tax effects which may be expected
by the Partnership are not susceptible to certain
prediction, and new developments in rulings of the
Internal Revenue Service, court decisions, or
legislative changes may have an adverse effect on one
or more of the tax consequences sought by the
Partnership.
Request for Section 6015 Relief
On June 13, 2000, David submitted to respondent a Form 8857,
Request for Innocent Spouse Relief (And Separation of Liability
and Equitable Relief) (the Form 8857), on behalf of the “Estate
of Barbara J. Jonson”. David signed the Form 8857: “David C.
Jonson (Personal Representative)”. Among the attachments to the
Form 8857 is a document entitled “Statement of Estate of Barbara
J. Jonson * * * by David C. Jonson, Personal Representative”, in
which David states: “Any financial benefits that resulted to the
Jonson family [from Vulcan] went into the general funds
administered by David. It eventually contributed to their normal
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middle class lifestyle and the education of 3 children and
service of credit card and other debt.” Among the attachments to
the Form 8857 is a questionnaire answered by Barbara before her
death and containing the following question and answer pertaining
to her knowledge of the circumstances surrounding David’s
investment in Vulcan:
Q. Explain what you knew about the investment and how
you learned about the investment.
A. This investment was recommended by a banker friend
of my husband. My husband explained that the
investment was entirely legal and proper,
according to the lawyers and accountants
associated with this tax shelter. Even the
Attorney General for the U.S. at the time, William
French Smith, thought it was proper (see attached
news clipping). At the time, IRS tax rates for
the upper brackets were very high and we had three
kids in college. We were desperate for some tax
relief to make ends meet. I took my husband’s
word that it was OK.
The referenced news article, from the May 13, 1982, edition
of the Rocky Mountain News, reported that Attorney General Smith
considered some $66,000 in deductions attributable to a $16,500
“investment in a risky energy tax shelter” to be “proper”, but it
quoted a Justice Department spokesman as stating that Mr. Smith
“will look into it to reassure himself”. The article cited a
Washington Post report quoting “experts” as describing the
venture “as ‘one of the most aggressive and perhaps questionable
tax shelters available to wealthy Americans’”. The report was
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also quoted as saying that Attorney General Smith and other
investors “hope to beat an IRS challenge in court.”
OPINION
I. Introduction
The Jonsons made joint returns of income for the audit
years, and respondent determined deficiencies in the taxes shown
on those returns, which deficiencies petitioners concede.
Normally, therefore, on account of section 6013(d)(3), Barbara
would be jointly and severally liable for the payment of the
deficiencies (along with interest). Section 6013(d)(3) provides:
“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.” In certain situations, however, a joint
return filer can avoid such joint and several liability. In
pertinent part, section 6015(a) provides:
SEC. 6015(a). In General.–-Notwithstanding section
6013(d)(3)--
(1) an individual who has made a joint return may
elect to seek relief under the procedures prescribed
under subsection (b), and
(2) if such individual is eligible to elect the
application of subsection (c), such individual may, in
addition to any election under paragraph (1), elect to
limit such individual’s liability for any deficiency
with respect to such joint return in the manner
prescribed under subsection (c).
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Section 6015(f) provides a joint filer an additional alternative
for relief from joint and several liability, at the discretion of
the Secretary.
Petitioners ask the Court to find that Barbara is entitled
to section 6015 relief with respect to the deficiencies (and
interest), alternatively, under subsection (b) (relief applicable
to all joint filers), (c) (limited liability for taxpayers no
longer married, legally separated, or living apart), or (f)
(discretionary relief) of section 6015. Respondent denies that
Barbara is entitled to relief under any provision of section
6015.
Except as otherwise provided in section 6015, petitioners
bear the burden of proof. See Rule 142(a).
II. Relief Under Section 6015(b)(1)
A. Statutory Language
Section 6015(b)(1) provides:
SEC. 6015(b). Procedures for Relief From Liability
Applicable to All Joint Filers.--
(1) In general.--Under procedures prescribed by the
Secretary, if--
(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
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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 (in such form as
the Secretary may prescribe) 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,
then the other individual shall be relieved of
liability for tax (including interest, penalties, and
other amounts) for such taxable year to the extent such
liability is attributable to such understatement.
B. Application to Barbara
1. In General
Respondent does not dispute that Barbara satisfies the
requirements of subparagraphs (A), (B), and (E) of section
6015(b)(1). The parties disagree as to whether Barbara satisfies
the requirements of subparagraphs (C) and (D); viz, whether
(1) Barbara had actual or constructive knowledge of the
understatements of tax (here, equal to the deficiencies (the
understatements)) attributable to the losses and (2) is entitled
to equitable relief.
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2. Section 6015(b)(1)(C)
a. Introduction
(1) Similarity to Section 6013(e)
The no-knowledge-of-the-understatement requirement of
section 6015(b)(1)(C) is similar to the corresponding requirement
in former section 6013(e)(1)(C). Cheshire v. Commissioner, 115
T.C. 183, 192 (2000). Both provisions require the relief-seeking
spouse to establish that “in signing the return, he or she did
not know, and had no reason to know” of the understatement.
Because of the similarity between the two provisions, we have
held that “cases interpreting old section 6013(e) remain
instructive as to our analysis of whether a taxpayer ‘knew or had
reason to know’ of an understatement pursuant to new section
6015(b).” Butler v. Commissioner, 114 T.C. 276, 283 (2000).
(2) Application of Knowledge Requirement in Deduction
Cases
The relief-seeking spouse knows of an understatement of tax
if she knows of the transaction that gave rise to the
understatement. E.g., Purcell v. Commissioner, 826 F.2d 470,
473-474 (6th Cir. 1987), affg. 86 T.C. 228 (1986); see also Smith
v. Commissioner, 70 T.C. 651, 672 (1978). She has reason to know
of the understatement if she has reason to know of the
transaction that gave rise to the understatement. See, e.g.,
Bokum v. Commissioner, 94 T.C. 126, 146 (1990), affd. 992 F.2d
1132 (11th Cir. 1993). While courts consistently apply this
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approach to omission of income cases, certain of the Courts of
Appeals, beginning with the Court of Appeals for the Ninth
Circuit, have adopted what may be a more lenient approach to
deduction cases, which requires "a spouse seeking relief to
establish that she did not know and did not have reason to know
that the deduction would give rise to a substantial
understatement."7 See Price v. Commissioner, 887 F.2d 959, 963
(9th Cir. 1989), revg. an Oral Opinion of this Court; see also
Reser v. Commissioner, 112 F.3d 1258 (5th Cir. 1997), affg. in
part and revg. in part T.C. Memo. 1995-572; Resser v.
Commissioner, 74 F.3d 1528 (7th Cir. 1996), revg. and remanding
T.C. Memo. 1994-241; Kistner v. Commissioner, 18 F.3d 1521 (11th
Cir. 1994), revg. and remanding T.C. Memo. 1991-463; Hayman v.
Commissioner, 992 F.2d 1256, 1261 (2d Cir. 1993), affg. T.C.
Memo. 1992-228; Erdahl v. Commissioner, 930 F.2d 585, 589 (8th
Cir. 1991), revg. and remanding T.C. Memo. 1990-101. In Bokum v.
Commissioner, supra at 153, however, we declined to apply the
Price approach to deduction cases.8
7
The Internal Revenue Service Restructuring and Reform Act
of 1998, Pub. L. 105-206, sec. 1301, 112 Stat. 685, 734,
eliminated the requirement of former sec. 6013(e)(1)(C) that the
understatement be “substantial”.
8
Of course, under the rule established in Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971), we are bound to defer to the decision of a Court of
Appeals squarely on point, where that Court of Appeals is the
likely venue for appeal.
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The Court of Appeals for the Tenth Circuit is the likely
venue for any appeal of this case. We have found no published
authority of the Court of Appeals for the Tenth Circuit adopting
the Price approach. In an unpublished order and judgment,
however, the Court of Appeals for the Tenth Circuit recently
quoted Price, as follows: “A spouse has ‘reason to know’ of the
substantial understatement if a reasonably prudent taxpayer in
her position at the time she signed the return could be expected
to know that the return contained the substantial
understatement.” Estate of Sympson v. Commissioner, 79 AFTR 2d
97-2942, at 97-2944, 97-1 USTC par. 50,484, at 88,288 (10th Cir.
1997).
Because we believe that Barbara had reason to know of the
understatements under the more lenient approach followed by the
Court of Appeals for the Ninth Circuit in Price v. Commissioner,
supra, any disparity between our interpretation of section
6015(b)(1)(C) and that of a court following Price is immaterial
to our disposition of this case.
b. Reason to Know
(1) Introduction
In Price v. Commissioner, supra at 965, the Court of Appeals
for the Ninth Circuit said:
A spouse has "reason to know" of the substantial
understatement if a reasonably prudent taxpayer in her
position at the time she signed the return could be
expected to know that the return contained the
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substantial understatement. Factors to consider in
analyzing whether the alleged innocent spouse had
"reason to know" of the substantial understatement
include: (1) the spouse's level of education; (2) the
spouse's involvement in the family's business and
financial affairs; (3) the presence of expenditures
that appear lavish or unusual when compared to the
family's past levels of income, standard of living, and
spending patterns; and (4) the culpable spouse's
evasiveness and deceit concerning the couple's
finances. [Citations omitted.]
(2) Discussion
(a) Education
Barbara was highly educated, with a master’s degree relating
to education, her chosen professional field.
(b) Involvement in Financial Affairs
Barbara was peripherally involved in David’s consulting
business; she kept him advised of collections and reminded him to
pursue delinquent accounts. She had full responsibility for
writing the checks for household bills, reviewing the bank
statements, and balancing the family checkbook. She controlled
the investment of her own retirement savings. She was a
coinvestor with David in a real estate limited partnership, and
she was a coowner with him of an apartment building, which
building they sold, at least in part, on the basis of her advice
to David that the investment was unprofitable. She was shown the
documents relating to the investment in Vulcan and understood
that it would result in substantial tax savings. She was also
aware of the large deductions taken on the returns for the audit
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years that were attributable to the Vulcan investment, and she
was made aware of the tax risks by the Vulcan subscription
agreement, with its reference to tax risks, and (for 1982) by the
May 13, 1982, newspaper article confirming Vulcan’s status as an
“aggressive” and “questionable” tax shelter subject to potential
IRS attack. For all of those reasons, it is clear that Barbara
had significant involvement in the family’s financial affairs.
In particular, she had reason to know of the tax benefits and
potential tax risks associated with the investment in Vulcan.
(c) Expenditure Levels, Standard of Living, Etc.
There is no evidence that the tax savings generated by the
investment in Vulcan resulted in lavish or unusual expenditures
benefiting Barbara when compared to prior years’ spending
patterns. That factor is not determinative, however, as to
whether Barbara benefited from such tax savings. See Hayman v.
Commissioner, supra at 1263. In this case, it is clear that the
tax savings were immensely beneficial to both David and Barbara.
For each of the audit years, the losses sheltered in excess of 80
percent of David’s income. The losses, thus, reduced the
Jonsons’ taxes and contributed to their ability to pay for their
children’s college educations and still maintain their normal
standard of living. As Barbara freely admitted in filling out
the innocent spouse questionnaire sent to her by petitioners’
counsel, “IRS tax rates for the upper brackets were very high and
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we had three kids in college. We were desperate for some tax
relief to make ends meet.”
(d) Other Spouse’s Evasiveness and Deceit Regarding
Finances
David made clear during his trial testimony that Barbara was
aware of his investments, she had access to all of his files and
to his office, and he made no effort to deceive her with respect
to his financial affairs.
(3) Conclusion
All the foregoing factors support a finding that Barbara had
reason to know of the understatements. It is significant that
Barbara knew (1) of the investment in Vulcan, (2) that it was
designed to generate large deductions that, in turn, would result
in substantial tax savings, (3) that those deductions were taken
on the joint returns for the audit years, and (4) that there was
a risk that the deductions might be attacked by respondent and
disallowed on audit. “Tax returns setting forth large
deductions, such as tax shelter losses offsetting income from
other sources and substantially reducing * * * the couple’s tax
liability, generally put a taxpayer on notice that there may be
an understatement of tax liability.” Hayman v. Commissioner, 992
F.2d at 1262. See also Price v. Commissioner, 887 F.2d at 964,
where the Court of Appeals stated:
[I]f a spouse knows virtually all of the facts
pertaining to the transaction which underlies the
substantial understatement, her defense in essence is
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premised solely on ignorance of law. * * * In such a
scenario, regardless of whether the spouse possesses
knowledge of the tax consequences of the item at issue,
she is considered as a matter of law to have reason to
know of the * * * understatement * * *.
Therefore, applying the approach of Price v. Commissioner, supra,
we find that Barbara had reason to know of the understatements.
3. Section 6015(b)(1)(D)
a. Introduction
Because the requirements of section 6015(b)(1) are stated in
the conjunctive, Barbara’s failure to satisfy the lack of
knowledge requirement of section 6015(b)(1)(C) is a sufficient
condition for us to find that she does not qualify for relief
under section 6015(b). Nevertheless, since, in light of the
facts and circumstances of this case, we believe that it would
not be inequitable to hold her liable for the deficiencies, we
discuss the application of section 6015(b)(1)(D).
b. Discussion
The requirement, in section 6015(b)(1)(D), that it be
inequitable to hold the requesting spouse liable for an
understatement on a joint return, is virtually identical to the
same requirement of former section 6013(e)(1)(C). Therefore, as
in the case of the no-knowledge-of-the-understatement requirement
of section 6015(b)(1)(C), cases interpreting former section
6013(e) remain instructive as to our analysis. See Butler v.
Commissioner, 114 T.C. at 283.
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Whether it is inequitable to hold a spouse liable for a
deficiency is determined “taking into account all the facts and
circumstances”. Sec. 6015(b)(1)(D). Most often cited as
material factors to be considered are (1) whether there has been
a significant benefit to the spouse claiming relief, and
(2) 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 other spouse. See, e.g.,
Hayman v. Commissioner, 992 F.2d at 1262. Normal support is not
considered a significant benefit. Id.
As noted in connection with our discussion of the
application, to Barbara, of the lack of knowledge requirement of
section 6015(b)(1)(C), it is clear that the tax savings were
immensely beneficial to both David and Barbara, in that the
savings contributed to their ability to pay for their children’s
college educations and still maintain their standard of living.
In Barbara’s own words, the tax savings enabled her and David “to
make ends meet”. Without the tax savings generated by the Vulcan
investment, David and Barbara would not have had a sufficient
cashflow to cover their family expenditures, including their
children’s educations.
It is also clear that there was no “concealment” on David’s
part. As noted supra p. 20, Barbara had access to David’s files
and to his office, and he never tried to deceive her with respect
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to his financial affairs. Barbara was fully aware of the Vulcan
investment, of the tax benefits to be derived, and of the risk
that those benefits might be challenged by the IRS on audit.
Under the foregoing circumstances, we find that it would not
be inequitable to hold Barbara liable for the deficiencies
arising out of the Vulcan investment.
C. Conclusion
Barbara has failed to satisfy the requirements of either
section 6015(b)(1)(C) or (D).
III. Relief Under Section 6015(c)
A. Statutory Language
Section 6015(c) provides in pertinent part:
SEC. 6015(c). Procedures To Limit Liability for
Taxpayers No Longer Married or Taxpayers Legally
Separated or Not Living Together.--
(1) In general.--Except as provided in this
subsection, if an individual who has made a joint
return for any taxable year elects the application
of this subsection, the individual’s liability for
any deficiency which is assessed with respect to
the return shall not exceed the portion of such
deficiency properly allocable to the individual
under subsection (d).
* * * * * * *
(3) Election.--
(A) Individuals eligible to make election.--
(i) In general.--An individual shall
only be eligible to elect the application of
this subsection if--
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(I) at the time such election is filed, such
individual is no longer married to, or is legally
separated from, the individual with whom such
individual filed the joint return to which the
election relates; or
(II) such individual was not a member of the
same household as the individual with whom such
joint return was filed at any time during the 12-
month period ending on the date such election is
filed.
* * * * * * *
(C) Election not valid with respect to certain
deficiencies.–-If the Secretary demonstrates that an
individual making an election under this subsection had
actual knowledge, at the time such individual signed
the return, of any item giving rise to a deficiency (or
portion thereof) which is not allocable to such
individual under subsection (d), such election shall
not apply to such deficiency (or portion). This
subparagraph shall not apply where the individual with
actual knowledge establishes that such individual
signed the return under duress.
Section 6015(d) specifies how an individual’s separate
liability under section 6015(c) is to be determined.
B. Application to Barbara
1. Introduction: Eligibility; Validity
Prior to Barbara’s death on March 16, 1996, she did not
satisfy the eligibility requirements of section 6015(c)(3)(A)(i)
(sometimes, the eligibility requirements), because she was
married to, not legally separated from, and a member of the same
household as David. On June 13, 2000, David, as “Personal
Representative”, submitted to respondent the Form 8857, by which,
petitioners argue, David elected separate liability treatment for
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Barbara under section 6015(c). Respondent does not challenge
David’s authority, as personal representative, to make such
election. Respondent challenges petitioners’ claim that Barbara
satisfies the eligibility requirements. Petitioners claim that,
on June 13, 2000, Barbara (having died more than 4 years earlier)
was not married to David and had not been part of his household
for more than 1 year, thereby satisfying two of the three
alternative eligibility requirements of section 6015(c)(3)(A)(i).
Respondent further argues that, even if we were to decide that
Barbara satisfies the eligibility requirements, David cannot make
a valid election with respect to the understatements because
respondent has demonstrated that, at the time Barbara signed the
joint returns, she had actual knowledge of the items giving rise
to the understatements (i.e. the Vulcan transaction). See sec.
6015(c)(3)(C). Because we agree with respondent that Barbara did
not satisfy the eligibility requirements, we need not determine
whether David’s election was invalid solely on account of section
6015(c)(3)(C).
2. Eligibility
a. Introduction
Section 6015(a)(2) provides that an individual who has made
a joint return (and who is eligible to elect the application of
section 6015(c)) may elect to limit his or her joint return
liability in the manner prescribed in section 6015(c). Nowhere
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is it provided that anyone other than the joint return filer can
elect to limit the joint return filer’s liability. Therefore, we
assume that David was acting in a representative capacity (for
Barbara) in attempting to elect the application of section
6015(c). See sec. 6903(a); Natl. Taxpayers Union, Inc. v. United
States, 68 F.3d 1428, 1436 (D.C. Cir. 1995) (“A person, such as
an executor, acting in a representative capacity, assumes ‘the
powers, rights, duties, and privileges’ of the principal under
the Internal Revenue Code.”); Estate of Jayne v. Commissioner,
61 T.C. 744, 750 (1974) (in carrying forward the wishes of a
deceased taxpayer, an executor “acts in a representative
capacity” (citing Miller Music Corp. v. Daniels, Inc., 362 U.S.
373 (1960)); Fox Film Corp. v. Knowles, 261 U.S. 326 (1923)). In
a representative capacity, an executor “merely stands in the
shoes of the deceased.” Estate of Jayne v. Commissioner, supra.
In Estate of Jayne, the question was whether the acquisition of
property by a surviving spouse replaced property sold under
threat of condemnation by the deceased spouse so as to defer the
recognition of gain on such sale pursuant to section 1033. We
stated that the right to use the nonrecognition provisions of
section 1033 does not terminate per se on the death of a
taxpayer. Estate of Jayne v. Commissioner, supra at 750. We
added: “A person found to be acting on behalf of the deceased
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taxpayer is given the same rights * * * under section 1033 as the
taxpayer possessed prior to his death.” Id.
On the face of it, then, because, prior to her death,
Barbara did not satisfy the eligibility requirements, David,
acting in her stead, is ineligible to elect to limit her joint
return liability. We do, nevertheless, consider whether Congress
intended a spouse’s eligibility to arise on account of her death.
b. Legislative History
Both petitioners and respondent refer to the history of
section 6015(c) in support of their opposing claims with respect
to Barbara and the eligibility requirements. We have examined
that history and find nothing therein to controvert the rule that
David, as personal representative, possessed rights no greater
than those Barbara possessed immediately prior to her death.
Section 6015 was added to the Internal Revenue Code by
section 3201 of the Internal Revenue Service Restructuring and
Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3201, 112
Stat. 734, which enacted H.R. 2676, 105th Cong. (1997) (H.R.
2676). Section 3201 of RRA 1998 generally revised and expanded
the relief previously available to joint filers under section
6013(e). The provisions of section 6015(c) originated as a
Senate amendment to H.R. 2676 (the Senate amendment). With
certain restrictions, the Senate amendment allowed any spouse to
elect separate liability treatment. The eligibility requirements
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were added by the conference agreement reconciling the differing
versions of H.R. 2676 passed by the House of Representatives and
the Senate, respectively. See H. Conf. Rept. 105-599, at 251
(1998), 1998-3 C.B. 747, 1005. The reasons for the change with
respect to the Senate amendment are described in pertinent part
as follows in the report of the Committee on Finance that
accompanied H.R. 2676, S. Rept. 105-174, at 55 (1998), 1998-3
C.B. 537, 591:
Reasons for Change
The Committee is concerned that the innocent
spouse provisions of present law are inadequate. The
Committee believes that a system based on separate
liabilities will provide better protection for innocent
spouses than the current system. The Committee
generally believes that an electing spouse’s liability
should be satisfied by the payment of the tax
attributable to that spouse’s income and that an
election to limit a spouse’s liability to that amount
is appropriate.
The conferees did not explain their addition of the
eligibility requirements. See H. Conf. Rept. 105-559, supra at
251, 1998-3 C.B. at 1005. They did however state that, for
purposes of the eligibility requirements, a taxpayer is no longer
married if he or she is widowed. Id. at 252 n.16, 1998-3 C.B. at
1006. Statements on the floor of the Senate, in support of the
Senate amendment, indicate the speakers’ concerns for a wife
whose husband had left town or who had otherwise left her with
the full joint and several liability imposed by section 6013(d).
See statements of Senators Graham and Abraham, reported at 144
- 29 -
Cong. Rec. S4473-4474 and S4493 (daily ed. May 7, 1998),
respectively. Such concerns square with the restrictions added
by the eligibility requirements and are consistent with treating
a widow or widower as no longer married. Such concerns are not
ignored by treating a spouse such as Barbara, who, the record
indicates, was happily married to her husband at the time she
died, as failing to meet the eligibility requirements.
Petitioners’ claim to section 6015(c) relief turns the statute on
its head, in that David became a widower; Barbara was never
widowed. We are not convinced by the relevant legislative
history that Congress’s purpose in allowing separate liability
treatment to eligible spouses would be furthered by allowing
David to elect such treatment on behalf of Barbara.9
c. Conclusion
At the time of her death, Barbara did not satisfy the
eligibility requirements.
9
In fact, separate liability treatment would be
particularly inappropriate in this case. Barbara left her entire
estate to David. Although David disclaimed his inheritance in
favor of the children, the disclaimer provided for the investment
of the assets (in exchange for stock issued to the children) in
Jonson Management Co., Inc., David’s geological consulting
corporation (formed after the audit years). The conclusion is
inescapable that David, the nonrequesting spouse, stands to
benefit as much as anyone should the assets of Barbara’s estate
be immune from the collection of deficiencies for which both
David and Barbara normally would be jointly liable.
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C. Conclusion
Because, at the time of her death, Barbara did not satisfy
the eligibility requirements, David, as her personal
representative, cannot elect to limit Barbara’s joint return
liability in the manner prescribed in section 6015(c).
IV. Relief Under Section 6015(f)
A. Statutory Language
Section 6015(f) provides:
SEC. 6015(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.
B. Application to Barbara
1. Introduction
Respondent has denied Barbara relief under section 6015(f).
We have jurisdiction to review such denial of relief. Butler v.
Commissioner, 114 T.C. at 292. We review such denial of relief
to determine whether respondent abused his discretion by acting
arbitrarily, capriciously, or without sound basis in fact. See
id.; Pac. First Fed. Sav. Bank v. Commissioner, 101 T.C. 117, 121
(1993). Petitioners have failed to make that showing.
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2. Discussion
As directed by section 6015(f), respondent has prescribed
procedures to use in determining whether a relief-seeking spouse
qualifies for relief under section 6015(f). Those procedures are
found in Rev. Proc. 2000-15 (the revenue procedure), 2000-5
I.R.B. 447, modifying and superseding Notice 98-61, 1998-51
I.R.B. 13. Section 7 of the revenue procedure states that it is
effective on January 18, 2000, which precedes David’s submission
to respondent of the Form 8857 on June 13, 2000. Section 4.03 of
the revenue procedure, applicable to a relief-seeking spouse in
Barbara’s situation, provides: “The Secretary may grant
equitable relief under § 6015(f) * * * if, taking into account
all the facts and circumstances, it is inequitable to hold the
requesting spouse liable for all or part of the unpaid liability
or deficiency.” The revenue procedure includes a partial list of
positive and negative factors that will be taken into account in
determining whether to grant full or partial relief and cautions
that no single factor will be determinative of whether equitable
relief will or will not be granted in any particular case. It
states: “Rather, all factors will be considered and weighed
appropriately.”
Petitioners have failed to introduce any evidence showing
the basis for respondent’s rejection of their claim for equitable
relief for Barbara. Nevertheless, the revenue procedure
establishes as factors weighing against equitable relief whether
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the relief-seeking spouse (1) had knowledge or reason to know of
the items giving rise to the deficiency, (2) has significantly
benefited (beyond normal support) from those items, and (3) will
not experience economic hardship if relief from the liability is
not granted. Barbara was aware of the Vulcan investment, of the
resulting reported losses, and of the risk of an IRS challenge to
the tax reductions claimed to result from those reported losses.
Clearly, then, she had reason to know of the items giving rise to
the deficiencies. She benefited from the items in that the
losses, among other things, reduced the Jonsons’ taxes and
contributed to their ability to pay for their children’s college
educations, which Barbara admitted was important to her. Because
Barbara is deceased, there can be no economic hardship to her
personally if equitable relief is denied. We cannot conclude
that respondent acted arbitrarily, capriciously, or without sound
basis in fact in denying Barbara equitable relief.
3. Conclusion
Under the facts and circumstances of this case, we hold that
respondent did not abuse his discretion in denying equitable
relief to Barbara under section 6015(f).
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V. Conclusion
Barbara is not entitled to any relief under section 6015.
An appropriate decision
will be entered for respondent
with respect to the
deficiencies and for
petitioners with respect to
the additions to tax under
section 6659.