Chou v. Comm'r

T.C. Memo. 2007-102
UNITED STATES TAX COURT
JEFFREY CHOU AND CINDY CHOU, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19015-05L. Filed April 25, 2007.
Robert L. Sommers, for petitioners.
Alvah Lavar Taylor, for petitioner Cindy Chou.
Jonathan A. Neumann and Shannon Edelstone, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: This action was commenced in response to
Notices of Determination Concerning Collection Action(s) Under
Section 6320 and/or 6330. The issues for decision are
(1) whether the Court should determine petitioners’ tax liability
for 2001 after that liability has been conceded by respondent and
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respondent has abated an assessment based on petitioners’ amended
return for 2001 and (2) whether petitioner Cindy Chou (Mrs. Chou)
qualifies for relief under section 6015(f). Unless otherwise
indicated, all section references are to the Internal Revenue
Code.
These issues arise in the context of a frequently occurring
factual situation involving the alternative minimum tax (AMT) on
incentive stock options (ISOs) exercised in 2000, followed by a
drop in the value of the shares, a claim by the taxpayer that the
taxable event occurred in a later year when the value of the
shares was lower, and attempts to avoid or compromise the
outstanding AMT liability.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioners resided in California at the time that their petition
was filed.
Petitioners have been married at all times since 1996. They
have two children, the older of whom was born on August 1, 2000.
Mrs. Chou graduated from the University of Texas with a degree in
radio, television, and film and studied interior decorating after
college. Mrs. Chou has a small interior design business, but she
is mainly a stay-at-home mother for petitioners’ two children.
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Petitioner Jeffrey Chou (Mr. Chou) has never abused Mrs. Chou at
any time.
In 1996, Mr. Chou began employment as a hardware engineer
for Granite Systems (Granite). As part of his employment
package, Mr. Chou received 80,000 ISOs with an exercise price of
$0.05 per share. The ISOs vested over a 4-year period. Several
weeks after Mr. Chou began his employment, Granite merged with
Cisco Systems (Cisco). Cisco converted Mr. Chou’s Granite ISOs
into Cisco ISOs, and, through stock splits, Mr. Chou’s ISOs grew
to approximately 153,000 over the next several years. Mr. Chou
received the Cisco ISOs in connection with his status as a Cisco
employee.
In 2000, Mr. Chou exercised 106,560 of his Cisco ISOs when
the fair market value of the Cisco stock had an average price of
$64.69 per share. Mr. Chou did not sell any of the Cisco shares
acquired by him through the exercise of the ISOs during 2000. By
the end of 2000, the price per share of Cisco stock was
approximately $40.
In March 2001, petitioners had their tax return prepared and
were told that they owed $1,962,365 in tentative AMT because of
the exercise of Mr. Chou’s stock options. By April 2001, the
price per share of Cisco stock was $17.64.
Petitioners filed a joint Form 1040, U.S. Individual Income
Tax Return, for 2000 in April 2001. On the line for “amount you
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owe”, the sum of $1,928,732 was reported. Mrs. Chou’s signature
on the return appeared approximately 1-1/2 inches below the line
for “amount you owe”. Her occupation was shown as interior
designer.
On November 19, 2001, petitioners filed an offer-in-
compromise (OIC) on “Doubt as to Liability” for 2000, citing
pending Federal legislation. On December 6, 2001, while their
OIC was pending, the Internal Revenue Service sent them a notice
of intent to levy for 2000. They ultimately withdrew their OIC
for 2000 based on “Doubt as to Liability”, and, on February 4,
2002, submitted an OIC based on “Effective Tax Administration”
or, in the alternative, “Doubt as to Liability with Special
Circumstances”. Their OIC was rejected on August 26, 2002, and
petitioners sought review by the Appeals Office. On March 20,
2003, the Appeals Office sustained rejection of the OIC for 2000.
Petitioners sought judicial review of that rejection more than
30 days after the offer was rejected.
Petitioners’ Federal income tax return for 2001 was timely
filed in April 2002. On or about July 20, 2003, petitioners
filed joint amended returns for 2000 and 2001, claiming that the
transaction involving the Cisco shares originally reported on
their 2000 tax return should have been reported in 2001.
Petitioners explained their position as follows:
Taxpayers amend their 2001 personal income tax
return to report their * * * [AMT] preference in tax
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year 2001 instead of tax year 2000. Taxpayers received
stock pursuant to IRC Sec. 422 through the exercise of
an * * * [ISO] in tax year 2000, and initially treated
the stock as an AMT preference item in tax year 2000.
However, the stock contained a substantial restriction
of forfeiture under IRC Sec. 83(c)(1); therefore, the
stock vested for AMT preference purposes when the
restriction lapsed in tax year 2001. Taxpayers have
filed an amended return for 2000 reflecting this
change.
* * * * * * *
In taxpayers’ case, they exercised an ISO under
IRC Sec. 422. To qualify for the capital gain benefits
provided by the statute, taxpayers were required to
hold the stock for at least 12 months. This 12-month
restriction constitutes a substantial risk of
forfeiture since rights in property were conditioned
upon the occurrence of a specified event (the 12-month
holding period) related to the transfer, and the
failure to hold the stock for 12 months causes a
substantial forfeiture (the loss of capital gain
benefits under IRC Sec. 422).
When stock is subject to a substantial risk of
forfeiture as defined in IRC Sec. 83, the date for the
calculation of the AMT preference and for inclusion
thereof in AMT is the date the restrictions lapse. The
12-month restriction lapsed in 2001 and the value of
the stock on the date the restriction lapsed will be
used for AMT purposes.
The liability shown on petitioners’ 2000 return filed in
April 2001 was assessed based on petitioners’ reporting. The IRS
accepted petitioners’ amended return for 2001 and made a second
assessment against petitioners in the amount of $578,052 on
September 29, 2003. The IRS did not accept petitioners’ amended
return for 2000. On November 10, 2003, the IRS sent petitioners
a Notice of Intent to Levy for 2001. On the same date, the IRS
sent petitioners a collection letter showing the unpaid balance
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of petitioners’ liability for 2000 to be $2,703,152.90. On
November 13, 2003, the IRS sent petitioners a Notice of Federal
Tax Lien for 2001.
On December 4, 2003, petitioners filed a Request for a
Collection Due Process Hearing for 2000 and 2001 in response to
the Notice of Intent to Levy. On December 16, 2003, petitioners
filed a Request for a Collection Due Process Hearing for 2000 and
2001 in response to the Notice of Federal Tax Lien.
On April 8, 2004, petitioners filed a refund action for 2001
in the U.S. District Court for the Northern District of
California. On July 6, 2004, the District Court action was
dismissed for lack of subject matter jurisdiction. The dismissal
was appealed to the U.S. Court of Appeals for the Ninth Circuit,
but the appeal was dismissed on November 23, 2005.
On April 9, 2004, the IRS notified petitioners that their
amended return for 2000 was being audited. On May 13, 2004,
respondent’s Appeals Office sent a Decision Letter Concerning
Equivalent Hearing to petitioners regarding their tax liability
for 2000. An equivalency hearing had been conducted because no
request for a hearing was filed within the 30-day period
prescribed by section 6320 and/or 6330 with respect to
petitioners’ liability for 2000. In the decision letter, a
Notice of Intent to Levy dated December 6, 2001, was not
sustained because petitioners’ OIC was pending at the time that
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the levy notice was issued. No Notice of Determination
Concerning Collection Action(s) Under Section 6320 and/or 6330
for 2000 has ever been issued.
In an OIC submitted with respect to the requested section
6330 hearing and signed by each petitioner on July 27, 2004, it
was represented: “In March, 2001, Jeff and Cindy had their tax
returns prepared and were told that they owed $1,962,365 in
tentative AMT because of the exercise of his stock options.”
On January 31, 2005, Mrs. Chou filed a Form 8857, Request
for Innocent Spouse Relief, for 2000 and 2001. The letter
submitting Mrs. Chou’s claims stated that the claim was being
submitted as part of petitioners’ section 6330 hearing for 2001.
The request asserted: “If Jeff and Cindy’s OIC is not granted,
then Cindy’s claim for innocent spouse relief should be granted
as to her since she did not cause the AMT liability and received
no economic benefit from Jeff’s exercise of his Cisco ISOs.” No
representation was made in the Form 8857 concerning Mrs. Chou’s
knowledge of the tax due for 2000 at the time the return was
filed.
Appeals Officer Lawrence Dorr (Dorr) was assigned
petitioners’ OIC, the proposed levy and lien actions with respect
to collection of petitioners’ reported liability for 2001, and
Mrs. Chou’s section 6015(f) relief claim. On July 27, 2005,
responding to an inquiry from Dorr about her thoughts regarding
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the payment of tax when she signed the 2000 tax return,
petitioners submitted a handwritten statement from her as
follows:
At the time I signed the 2000 tax return, it was
my understanding that my husband would take care of
paying the taxes since the increase in our taxes was
the result of employee stock options occurring in his
separate stock account. I did not receive any
brokerage statements for this account and did not know
the amount of funds in this account. Ever since we’ve
been married, my husband has always taken care of all
our tax filings and at the time I signed the 2000 tax
return, I had no reason to believe otherwise.
The transmittal letter by Mrs. Chou’s counsel noted that the
knowledge factor “is just one of several factors to be considered
and is not a conclusive factor.”
The section 6015(f) claim, in accordance with IRS procedure,
was sent to a centralized unit in Cincinnati, Ohio. The file
relating to the section 6015(f) claim was then transmitted from
Cincinnati to Oakland, California, but was lost in transit. In
order to consider Mrs. Chou’s claim, Dorr recreated the file
relating to that claim. In recreating the file, Dorr failed to
maintain a complete case activity record and did not prepare any
document supporting his determination with respect to Mrs. Chou’s
section 6015(f) claim. The file that has been stipulated as the
“administrative record” in this case omitted at least four other
items that should have been included in the administrative
record. Those items are: (1) A true and complete copy of the
Notice of Intent to Levy dated November 10, 2003, and the Letter
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3174(P) dated November 10, 2003; (2) a true and complete copy of
a Request for a Collection Due Process Hearing for 2000 and 2001
that petitioners filed on December 4, 2003, in response to the
Notice of Intent to Levy issued by the IRS on November 10, 2003;
(3) a letter sent by petitioners’ counsel Robert L. Sommers
(Sommers) to Appeals Officer Dorr on May 4, 2005; and (4) a
letter sent by Sommers to Appeals Officer Dorr on July 27, 2005.
On September 13, 2005, the Appeals Office sent to
petitioners Notices of Determination Concerning Collection
Action(s) under Section 6320 and/or 6330 with respect to 2001.
Those notices contained an explanation, in relevant part, as
follows:
Your representative has advanced several arguments for
applying the * * * [AMT] on the exercise of the stock
options at issue in 2001 rather than 2000.
The first argument is that the exercise of the options
was restricted in such a way as to subject you to a
“substantial risk of forfeiture”.
The “restriction” cited by your representative is the
provision of IRC Section 422 that provides for capital
gain treatment on the sale of stock held for at least
twelve months. Your representative refers to this as
“the required 12-month holding period” and argues that
your rights in the stock were conditioned on the
12-month holding period. Your representative cites
Prentice I. Robinson, CA-1, 86-2 USTC 9790. In that
case the Court held that the petitioner did not own
transferable rights to stock acquired from his employer
for the first year after receipt of the stock.
However, that decision was based on a specific sell-
back agreement requiring that the petitioner sell his
shares back to the corporation at the original cost if
he wished to dispose of them in less than one year.
That agreement created a “substantial risk of
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forfeiture” and rendered the stock non-transferable for
one year on its own terms, not because of Section 422.
No such agreement exists in the present case. When you
acquired the stock in early 2000 it was acquired
without restriction.
The provisions of IRC Section 422 impose no restriction
on the sale of stock. They do provide favorable tax
treatment if the stock is held for one year. While
this might have disadvantaged you for tax purposes had
you sold the stock before holding it for a year, it in
no way restricted your ability to sell or otherwise
dispose of the stock at any point.
Your representative also argues that the Service has a
“duty of consistency” which requires that it treat the
options as subject to * * * [AMT] in 2001, not 2000.
In support of that he cites Estate of Hilda Ashman,
CA-9, * * * [2000-2] USTC 50,806. In short, that case
states that a taxpayer cannot take a position which is
to his advantage in one year and then take an opposite
position after that year is barred by the statute of
limitations. The statutes for both 2000 and 2001 are
still open by virtue of your claim for refund. In
Orange Securities Corp., CA-5, 42-2 USTC 9735, the
Court held that there is a “duty of consistency on both
the taxpayer and the Commissioner”.
You originally filed your 2000 return and reported the
* * * [AMT] for that year. The Service accepted that
return. When you filed amended returns for both 2000
and 2001 to shift the * * * [AMT] to the later year the
Service accepted the amended return for 2001 but not
the one for 2000. Thus you found yourselves assessed
very substantial * * * [AMT] for both years for the
same underlying exercise of stock options. Your
representative argues that since the Service accepted
the amended return for 2001 and assessed the * * *
[AMT] shown thereon, it must–-to be consistent–-accept
the amended return for 2000 and abate the AMT for that
year.
The Service has not taken inconsistent positions. It
has consistently argued that the liability attaches to
2000. Further, the Service has taken the position that
the resolution of the inconsistency can be achieved by
simply abating the AMT for 2001. This is the position
taken by the Revenue Agent in the examination of the
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amended returns. Your claim for refund is under
consideration in Appeals and will be submitted
sustaining the application of the AMT in 2000 and
proposing abatement of the AMT for 2001.
Incentive stock options were issued to you by Cisco
Systems as part of your compensation for services. You
exercised the options in 2000 and 106,560 shares of
Cisco stock were transferred to you unconditionally and
without restriction. The * * * [AMT] liability
produced by these transactions attaches to the year
2000.
The lien notice stated:
Addressing Efficient Collection with Concern Over the
Intrusiveness of Collection
Internal Revenue Manual 5.12.1.13 provides for the
filing of a Notice of Federal Tax Lien for balances due
of over $5,000.00.
The lien is intrusive but it is appropriate in this
instance to protect the government’s interest. You
have made no payments toward either 2000 or 2001 and
there is no indication that the liability for 2000 will
be paid voluntarily. In terms of alternatives to
collection, you have filed an * * * [OIC] based on
doubt as to liability, doubt as to collectibility, and
effective tax administration. That offer is being
rejected on all three grounds. It is the Service’s
position that ultimately there will be no AMT liability
for 2001. However, until the issue is finally decided
in the various venues to which you have turned for
relief the lien continues to be appropriate.
The levy notice stated:
Addressing Efficient Collection with Concern Over the
Intrusiveness of Collection
IRC Section 6330(c)(3)(C) requires that the
determination by an Appeals Officer under this
subsection shall take into consideration whether any
proposed collection action balances the needs for the
efficient collection of taxes with the legitimate
concern of the taxpayer that any collection action be
no more intrusive than necessary.
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The levy is intrusive but it is appropriate in this
instance to protect the government’s interest. You
have made no payments toward either 2000 or 2001 and
there is no indication that the liability for 2000 will
be paid voluntarily. In terms of alternatives to
collection, you have filed an * * * [OIC] based on
doubt as to liability, doubt as to collectibility, and
effective tax administration. That offer is being
rejected on all three grounds. It is the Service’s
position that ultimately there will be no AMT liability
for 2001. However, until the issue is finally decided
in the various venues to which you have turned for
relief the levy notice continues to be appropriate.
On September 29, 2005, the IRS Appeals Office sent Mrs. Chou
a Notice of Determination Concerning Your Request for Relief
under the Equitable Relief Provision of Section 6015(f) that
denied Mrs. Chou’s request for innocent spouse relief for 2000
and 2001. The notice simply stated, in relevant part:
We’ve determined that, for the above tax year(s), we:
- cannot allow your request.
No further explanation was given. No further explanation was
placed in the administrative file.
By notice served March 24, 2006, this case was set for trial
in San Francisco, California, on August 28, 2006. On July 24,
2006, respondent filed a motion for continuance of trial,
representing, in part:
5. Respondent concedes that the determination set
forth in the Notice of Determination Concerning
Collection Action(s) under Section 6320 and/or 6330
issued to petitioners on September 13, 2005, for
petitioners’ income tax liability for the taxable year
2001 will not be sustained.
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6. On July 19, 2006, respondent’s Appeals Officer
requested a full abatement of the entire tax liability
assessed against petitioners for the taxable year 2001.
7. Petitioner Cindy Chou’s claim for relief from
joint and several liability under I.R.C. sec. 6015(f)
for the taxable year 2001 is moot, as respondent has
requested an abatement of all tax owed by petitioners
for the taxable year 2001.
8. The only issue remaining in this case concerns
whether Petitioner Cindy Chou is entitled to relief
from joint and several liability under I.R.C. sec.
6015(f) for the taxable year 2000.
9. Because a Notice of Determination was not
issued for a Collection Due Process appeal with respect
to the taxable year 2000, I.R.C. secs. 6320 and 6330 do
not provide the Court with jurisdiction to hear an
appeal of Petitioner Cindy Chou’s claim for relief
under I.R.C. sec. 6015(f) for the taxable year 2000.
Thus, the only basis for the Tax Court to review
respondent’s section 6015(f) determination in this case
is section 6015(e).
Respondent’s motion for continuance was based on then-outstanding
caselaw to the effect that the Court would not have jurisdiction
to hear Mrs. Chou’s section 6015(f) claim because no deficiency
had been determined. (Respondent now concedes jurisdiction over
that issue based on subsequently enacted legislation, as
discussed below.)
Petitioners objected to respondent’s motion for continuance.
Petitioners also objected to respondent’s abatement of the
assessment for 2001, accusing respondent of attempting to deprive
the Court of jurisdiction over that year. Respondent’s motion
for continuance was denied.
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OPINION
This is an unusual case, in which petitioners insist that we
should reject respondent’s concession that they owe no tax
liability for 2001, that the assessment based on petitioners’
amended return for that year will be abated, and that no
collection action will be taken with respect to that assessment.
Petitioners ask the Court to determine that they owe tax of
$578,052 for 2001. Petitioners’ obvious purpose is to have the
Court determine that they do not owe the tax that they originally
reported for 2000, a question that is not properly before the
Court in this case.
The parties were able to cooperate with respect to a fairly
complete stipulation, but not otherwise. Petitioners’ rhetoric
includes irresponsible accusations against respondent, and
respondent unnecessarily attacks the credibility of petitioners’
testimony, even after the Court commented at trial that their
testimony was credible. We do not condone or address at length
such overzealous advocacy and meritless arguments. Lack of
objectivity serves no purpose other than unreasonably to protract
these proceedings. For the reasons set forth below, we conclude
that there is only one issue properly before the Court, and that
is Mrs. Chou’s entitlement to relief under section 6015(f) for
2000.
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Section 6330 and Liability for 2001
Our jurisdiction in this case is predicated upon section
6330(d)(1)(A), which gives the Tax Court jurisdiction “with
respect to such matter” as set forth in the determination of the
Appeals Office. Greene-Thapedi v. Commissioner, 126 T.C. 1, 6
(2006); Freije v. Commissioner, 125 T.C. 14, 25 (2005).
Petitioners originally reported almost $2 million in AMT
liability for 2000 as a result of Mr. Chou’s exercise of his
Cisco options. Stunned by the consequence and unable to secure
relief through an OIC, petitioners then filed amended returns
claiming that the liability should have been reported in 2001,
when it would be substantially lower because of the reduced value
of the stock. Petitioners now contend that, by assessing the tax
based on their amended 2001 return, the IRS “accepted” their
position and is required, by the “duty of consistency”, to abate
the liability for 2000.
In their amended returns, in their OIC, and in their briefs,
petitioners assert that the capital gains holding period under
section 422 renders the stock that they acquired through exercise
of Cisco ISOs nontransferable for 12 months without “forfeiture”
of the favorable tax rates on capital gains. Their argument
cites section 83(a), which deals with the time for recognizing
income from property transferred in connection with the
performance of services. This “risk of forfeiture” argument is
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untenable, because that term applies to a condition that renders
a taxpayer’s beneficial ownership of stock subject to
termination. See Kadillak v. Commissioner, 127 T.C. 184 (2006);
Montgomery v. Commissioner, 127 T.C. 43 (2006); Spitz v.
Commissioner, T.C. Memo. 2006-168; Racine v. Commissioner, T.C.
Memo. 2006-162; Facq v. Commissioner, T.C. Memo. 2006-111; Merlo
v. Commissioner, T.C. Memo. 2005-178; see also United States v.
Tuff, 469 F.3d 1249 (9th Cir. 2006); Guzak v. United States, 75
Fed. Cl. 304, 311 (2007). Mr. Chou testified: “I exercised
because I could, the stock was vested and I just happened to not
sell.” There is neither logic nor authority supporting the
argument that consideration of tax consequences is a risk of
forfeiture within the meaning of section 83(a). There is no
evidence of any nontax reason for Mr. Chou not to sell the stock
that he acquired in 2000.
Petitioners raise a series of arguments that they are
entitled to a windfall as a result of the assessment, now abated,
for 2001. (They accuse respondent of “gamesmanship”, apparently
believing that the best defense is a strong offense.) We cannot
conclude that the abatement and concession should be rejected.
Respondent’s position, as set forth in detail in the
September 13, 2005, notices of determination quoted at length
above, was not unreasonable. Assuming that the 2001 tax
liability should have been abated earlier, however, and
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paraphrasing Justice Frankfurter, we believe that wisdom comes
too seldom, and it should not be rejected merely because it comes
late. (“Wisdom too often never comes, and so one ought not to
reject it merely because it comes late.” Henslee v. Union
Planters Natl. Bank & Trust Co., 335 U.S. 595, 600 (1949)
(Frankfurter, J., dissenting).)
Respondent contends that the concession and abatement with
respect to 2001 render petitioners’ claims with respect to that
year moot. We agree. Our jurisdiction under section 6330 is
generally limited to reviewing whether a proposed lien or levy
action is proper. Once respondent concedes that there is no
unpaid liability for the year in dispute upon which a lien or
levy could be based, the case is moot. Greene-Thapedi v.
Commissioner, supra at 7; Gerakios v. Commissioner, T.C. Memo.
2004-203; Chocallo v. Commissioner, T.C. Memo. 2004-152. We need
say no more about the issue for 2001.
Section 6015(f)
Generally, spouses filing joint Federal income tax returns
are jointly and severally liable for the taxes due on those
returns. Sec. 6013(d)(3). Section 6015 provides relief from
liability in certain circumstances. Because the relief sought in
this case is from a liability shown on petitioners’ original 2000
return and assessed based on that return, only section 6015(f) is
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applicable. See Washington v. Commissioner, 120 T.C. 137, 147
(2003).
At the time of the motion to continue, respondent’s position
was that Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006),
revg. 118 T.C. 494 (2002) and vacating 122 T.C. 32 (2004), was
controlling in this case. In that case, the Court of Appeals
held that the Tax Court did not have jurisdiction to hear cases
involving relief under section 6015(f) where there was no
determination of a deficiency. Respondent now concedes, however,
that the Tax Relief and Health Care Act of 2006, Pub. L. 109-432,
120 Stat. 2922, which amended section 6015(e), confers the
necessary jurisdiction with respect to Mrs. Chou’s claim for
relief for the year 2000. Respondent contends, and we agree,
that her claim for 2001 is moot for the reasons discussed above.
The testimony of petitioners at trial with respect to the
allocation of household responsibilities between them was brief
and was credible. It was credible because petitioners did not
make the improbable claims that now appear in the briefs authored
by their counsel, as discussed below.
Respondent asserts that we should disregard the testimony of
petitioners because we should consider only the “administrative
record” in deciding whether it was an abuse of discretion to deny
the relief sought by Mrs. Chou. Respondent acknowledges that
this Court has held that the determination to deny relief under
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section 6015(f) is subject to de novo review by the Court, but
relies on our opinion as having been vacated on jurisdictional
grounds. See Ewing v. Commissioner, 122 T.C. 32, 38-39 (2004),
revd. in part and vacated in part on jurisdictional issue
Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006). Though we
may have occasion in the future to reconsider the Court’s
approach to these cases, as explained in Ewing v. Commissioner,
122 T.C. 32 (2004), and applied in numerous other cases, we do
not do so here. Respondent found it necessary to call Dorr to
explain his reasons for rejecting Mrs. Chou’s claim, because his
reasons were not anywhere in the administrative record.
Respondent stipulated that at least four other documents that
should have been included in the administrative record were not.
The administrative record had to be “recreated” by Dorr because
the parts relating to Mrs. Chou’s claim were lost in transmittal
between IRS offices. The testimony at trial will be considered
in determining whether Mrs. Chou is entitled to relief.
As directed by section 6015(f), the Commissioner has
prescribed guidelines under which a taxpayer may qualify for
equitable relief from liability on a joint return. See Rev.
Proc. 2003-61, 2003-2 C.B. 296. Rev. Proc. 2003-61, sec. 4.02,
2003-2 C.B. at 298, provides in relevant part that relief
ordinarily will be granted if three criteria are met. The first
criterion, that the requesting spouse is no longer married to or
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is legally separated from the nonrequesting spouse, or is not a
member of the same household at anytime during the 12 months
prior to the request for relief, is not satisfied in this case.
The other two criteria are in dispute. They are (1) whether, on
the date the requesting spouse signed the joint return, she had
no knowledge or reason to know that the nonrequesting spouse
would not pay the income tax liability and (2) that the
requesting spouse would suffer economic hardship if relief is not
granted.
Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at 298-299,
provides a nonexclusive list of factors that may be considered in
determining whether, taking into account all of the facts and
circumstances, it would be inequitable to hold a taxpayer such as
Mrs. Chou liable for any part or all of the unpaid liability. No
single factor is determinative. Respondent concedes that
Mrs. Chou has made a good faith effort to comply with the income
tax laws in the years following the years in issue, which is one
of the factors favoring relief. Respondent argues, however, that
factors weighing against relief in this case include lack of
economic hardship, knowledge or reason to know that the taxes
would not be paid, and significant benefit (beyond normal
support) from the unpaid tax liability. Respondent asserts that
the remaining factors (that Mrs. Chou was still married to
Mr. Chou, the absence of abuse, and the absence of any mental or
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physical health condition) are neutral. Petitioners focus on the
hardship, benefit, knowledge, and health factors.
Petitioners assert that, before analyzing the above factors,
we must determine whether petitioners actually owe the taxes
reported on their original return for 2000. We assume that they
do, because, absent compromise, there is no tenable argument that
they do not. We do not comment on the prospects for compromise.
Both parties, however, rely solely on material submitted in
relation to the OIC in their discussion of financial matters.
Petitioners provided no testimony or direct evidence at trial as
to their basic living expenses or Mr. Chou’s continuing ability
to pay them. Petitioners’ hardship argument is essentially that,
if all of the assets owned by petitioners were liquidated and
paid towards the unpaid assessment for 2000, petitioners would
still owe more than $1 million. While this may be an appropriate
analysis with respect to the OIC, it does not establish hardship
in the current record. See sec. 301.6343-1(b)(4), Proced. &
Admin. Regs. (defining hardship as the inability to pay
reasonable basic living expenses). So far as the record
reflects, Mr. Chou continues to earn a substantial income and to
provide more than basic support to the family.
With respect to the significant benefit factor, petitioners
essentially argue that neither petitioner received a benefit from
the unpaid taxes, because the taxes accrued on value that they
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never received from exercise of the stock options. The parties
dispute the significance of Mr. Chou’s pledge of the Cisco stock
to support a loan and use of the proceeds of the loan for
purposes other than payment of taxes. On the record in this
case, we conclude that the benefit factor neither favors nor
precludes relief.
With regard to health factors, the briefs authored by
petitioners’ counsel repeatedly assert that Mrs. Chou had
recently given birth and was caring for a newborn infant. Within
the briefs, filed in January and March 2007, the infant is at
various places described as born in “late 2000”, newborn, 6
months old, 8 months old, and 9 months old. While thus so
careless with the facts on which they rely, the briefs accuse
respondent of “inaccuracies” and “shoddy analysis”. These
arguments are unsupported, unpersuasive, and inexcusable.
The briefs frequently assert “the physical and mental
demands on the mother of a newborn infant” as a health issue and
as excusing lack of knowledge of the unpaid liability, but
nothing in the record supports that characterization. Mrs. Chou
testified that her child was born on August 1, 2000, and the
return was signed in April 2001. The extent of her testimony
with respect to the “demands” of motherhood was as follows:
Q [Mrs. Chou’s counsel] Lot of work taking care
of an infant?
A [Mrs. Chou] Yes, definitely.
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We conclude that there are no special mental or physical health
factors in this case.
Petitioners’ briefs similarly overstate the record with
respect to Mrs. Chou’s lack of knowledge that the taxes would be
paid at the time she signed the return. Petitioners each
testified that Mr. Chou handled the family’s finances, consulted
with the accountant, and paid for the household expenses. They
also testified that they did not have any joint checking accounts
or credit cards. Mrs. Chou’s testimony about her state of mind
at the time that she signed the return was as follows:
Q [Mrs. Chou’s counsel] Do you remember looking
at the 2000 return when you signed it, do you remember
actually signing the 2000 return?
A [Mrs. Chou] I’m sure I signed it. I don’t
remember that specific one as different as the–-any
other particular year.
In relation to the OIC, petitioners had submitted a factual
statement asserting that they learned of the AMT liability in
March 2001. When she signed the joint income tax return in
April, the amount shown as owing, $1,928,732, appeared
approximately 1-1/2 inches above her signature. In her
Form 8857, Mrs. Chou did not claim that she did not know of the
liability. The July 27, 2005, statement that she submitted in
response to Dorr’s inquiry was similarly more cautious and candid
in asserting the state of her knowledge, to the effect that she
was aware of the increased taxes resulting from the stock options
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but that she assumed that her husband would take care of paying
the taxes. Mr. Chou testified as follows:
A [Mr. Chou] I had some clue at the time of AMT
but the gravity of the situation did not occur to me
until my tax returns were finalized by my CPA.
Q [Mrs. Chou’s counsel] Okay, if I use the term
“AMT-ISO” or “AMT-ISO situation”, it just means a
shorthand for the alternative minimum tax as caused by
the exercise of incentive stock options, so you’ll
understand what I mean by that.
After this occurred, after your AMT-ISO situation
occurred, did you engage in any activities regarding
this?
A Yes. I engaged in numerous activities. First
I reported my tax and I went public with my story and I
started an organization called Reform AMT-dot-org.
We’re a national grassroots organization. We have over
2000 members across 48 states.
And our mission is to appeal to Congress and try
to fix the law.
Q Did you engage in any legislative efforts?
A Yes. Reform AMT has been heavily involved with
our Congress representatives and senators in trying to
introduce bills, and, hopefully, pass bills.
Mr. Chou also testified that he met with the National Taxpayer
Advocate and thereafter filed the OIC. Apparently, challenging
the liability was the strategy adopted when the return was filed
without even partial payment.
There is no suggestion by anyone that Mr. Chou ever deceived
Mrs. Chou or concealed anything from her. Unfortunately, no
party on direct or cross-examination asked Mrs. Chou in detail
about her knowledge of the almost $2 million liability. We
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assume that, if she had been asked, she would have been truthful.
In the absence of further explanation, it is improbable that
Mrs. Chou did not know that, rather than paying the tax,
petitioners would be challenging their liability. She certainly
did not satisfy her well-established duty of inquiry. See, e.g.,
Albin v. Commissioner, T.C. Memo. 2004-230; Demirjian v.
Commissioner, T.C. Memo. 2004-22 (and cases cited therein). On
the entire record, we conclude that Mrs. Chou knew or had reason
to know that the tax would not be paid at the time that she
signed the return. We do not question petitioners’ allocation of
responsibility for family matters between themselves, but they
have not shown that Mrs. Chou should be relieved of their joint
liability on the 2000 return.
We have reviewed the other arguments of the parties. They
are without merit, irrelevant, or moot.
An order of dismissal with
respect to 2001 and a decision for
respondent will be entered.