Libia Higuita Wheeler

T.C. Summary Opinion 2021-42UNITED STATES TAX COURT
LIBIA HIGUITA WHEELER, 1 Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15169-18S. Filed December 9, 2021.
Libia Higuita Wheeler, pro se.
Aaron E. Cook and Susan S. Canavello, for respondent.
1
Petitioner filed her petition as “Libia Higuita Turner”. At trial she stated
that after her divorce from John Turner, see infra p. 3, she remarried, and her
surname is now “Wheeler”. We subsequently ordered a correction in petitioner’s
name pursuant to Rule 63(e), Tax Court Rules of Practice and Procedure.
Served 12/09/21
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SUMMARY OPINION
PUGH, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was filed. 2 Pursuant
to section 7463(b), the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other case.
In a notice of deficiency dated July 23, 2018, issued to petitioner in her
individual capacity, respondent determined the following deficiency and penalty:
Penalty
Year Deficiency sec. 6662(a)
2015 $12,059 1
$2,412
1
Respondent conceded this accuracy-related penalty.
The issue remaining for decision is whether petitioner is entitled to relief
from Federal income tax liability under section 66(c), which addresses the
treatment of community income.
2
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All monetary amounts are rounded to the
nearest dollar.
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Background
Some of the facts have been stipulated, and the stipulated facts are
incorporated in our findings by this reference. Petitioner resided in Texas when
she timely filed her petition.
Petitioner married John Turner in 2000. In October 2006 Turner
Investments & Consulting, Inc. (Turner Investments), was organized as an
S corporation; petitioner and Mr. Turner were each designated 50% shareholders.
Income reported on Schedule K-1, Shareholder’s Share of Income, Deductions,
Credits, etc., from Turner Investments was included on petitioner’s joint return
with Mr. Turner for the three years (2012-14) before the year in issue. She was
also issued Forms W-2, Wage and Tax Statement, reporting income from Turner
Investments in years before 2015 and during that year, and she signed several
checks for Turner Investments in 2013.
Petitioner and Mr. Turner filed for divorce on September 21, 2015, and their
divorce was finalized by decree on December 9, 2015. Both petitioner and Mr.
Turner acknowledged and signed the final divorce decree. It included provisions
addressing Federal income tax liability, information requests, and tax filing, which
distinguished between years before the year of divorce (2000-14) and the year of
divorce (2015).
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The section of the divorce decree titled “Liability for Federal Income Taxes
for Prior Year” stated that petitioner and Mr. Turner “shall be equally responsible
for all federal income tax liabilities of the parties from the date of marriage through
December 31, 2014.”
The section titled “Treatment/Allocation of Community Income for Year of
Divorce” included the following provisions:
IT IS ORDERED AND DECREED that, for the calendar year
2015, each party shall file an individual income tax return in
accordance with the Internal Revenue Code.
IT IS ORDERED AND DECREED that for calendar year 2015,
each party shall indemnify and hold the other party and his or her
property harmless from any tax liability associated with the reporting
party’s individual tax return for that year unless the parties have
agreed to allocate their tax liability in a manner different from that
reflected on their returns.
IT IS ORDERED AND DECREED that each party shall furnish
such information to the other party as is requested to prepare federal
income tax returns for 2015 within thirty days of receipt of a written
request for the information, and in no event shall the available
information be exchanged later than March 1, 2016. As requested
information becomes available after that date, it shall be provided
within ten days of receipt.
The decree also awarded Turner Investments to Mr. Turner and ordered that
petitioner “shall execute any and all documents necessary to remove her name
from the corporation and/or business within 5 days of receipt of same.”
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In compliance with the divorce decree, petitioner filed a separate 2015 Form
1040, U.S. Individual Income Tax Return (with the help of a tax preparer). For
2015 Turner Investments issued to petitioner a Form W-2; she reported this wage
income on her 2015 Form 1040. For 2015 Turner Investments also reported for
petitioner, as a 37.44856% shareholder for that year, on Schedule K-1, ordinary
business income of $63,083 and a net rental real estate loss of $1,681; she did not
report this net Schedule K-1 income. 3 Petitioner did not claim any estimated tax
payments on her 2015 return. 4
Respondent issued the notice of deficiency for tax year 2015 because of
petitioner’s omission of her Schedule K-1 income from Turner Investments.
After timely filing her petition, petitioner submitted Form 8857, Request for
Innocent Spouse Relief, for tax year 2015 to the IRS Cincinnati Centralized
3
For 2015 Turner Investments reported for Mr. Turner, as a 62.55144%
shareholder, Schedule K-1 income and loss. Mr. Turner filed a separate 2015
Form 1040, on which he reported his net Schedule K-1 income.
4
Turner Investments had made quarterly estimated tax payments for tax year
2015. For the first three quarters, these were joint estimated tax payments by
petitioner and Mr. Turner of $5,000, $7,500, and $8,000, respectively. For the
fourth quarter, after Turner Investments had been awarded to Mr. Turner by the
divorce decree, it made an estimated tax payment of $8,000. On his 2015 Form
1040, Mr. Turner claimed one-half of the joint estimated tax payments ($10,250)
plus the fourth quarter estimated tax payment ($8,000). This left unclaimed
estimated tax payments of $10,250 for 2015, which the Internal Revenue Service
(IRS) subsequently refunded to Mr. Turner.
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Innocent Spouse Operations unit (CCISO). CCISO denied her request for relief
under section 66(c). In its work papers CCISO stated that “Libia correctly filed
filing status single for 2015, since taxpayers’ divorce was final 12-09-2015 (before
the end of the tax year)” and that Turner Investments reported petitioner’s Form
W-2 and Schedule K-1 income separately from Mr. Turner’s.
Discussion
Petitioner does not dispute that she received the income reported by Turner
Investments on her 2015 Schedule K-1. 5 And she does not contest the refund of
the estimated tax payments to Mr. Turner. Instead, she contends that she is entitled
to relief under section 66(c).
A. Section 66(c)
Texas is a community property State, and under section 66, married couples
who do not file joint tax returns “generally must report half of the total community
income earned by the spouses during the taxable year” unless an exception applies.
5
Sec. 1366(a)(1) provides that in determining income tax liability an
S corporation shareholder shall take into account her pro rata share of the
S corporation’s items of income, loss, deduction, and credit (tax items) for the
S corporation’s taxable year ending with or in the shareholder’s taxable year. The
S corporation’s income is taxable to the shareholder regardless of whether any
income is distributed. Sec. 1.1366-1(a)(1), Income Tax Regs. Sec. 1377(a)(1)
allocates each item of an S corporation’s income or loss pro rata per share per day
of ownership.
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Sec. 1.66-1(a), Income Tax Regs. Section 66 provides that under certain
circumstances a taxpayer may be relieved of Federal income tax liability on
community property income earned by a spouse. Section 66(c) offers two types of
relief to a requesting spouse--“traditional” and “equitable”. Sec. 1.66-4, Income
Tax Regs.
B. Traditional relief under section 66(c)
To qualify for traditional relief under section 66(c), the requesting spouse
must satisfy four conditions under section 1.66-4(a)(1), Income Tax Regs.:
(i) The requesting spouse did not file a joint Federal income tax
return for the taxable year for which he or she seeks relief;
(ii) The requesting spouse did not include in gross income for
the taxable year an item of community income properly includible
therein, which, under the rules contained in section 879(a), would be
treated as the income of the nonrequesting spouse;
(iii) The requesting spouse establishes that he or she did not
know of, and had no reason to know of, the item of community
income; and
(iv) Taking into account all of the facts and circumstances, it is
inequitable to include the item of community income in the requesting
spouse’s individual gross income.
See also sec. 1.66-4(g)(2), Income Tax Regs. (defining “nonrequesting spouse” as
“the individual to whom the requesting spouse was married and whose income or
deduction gave rise to the tax liability from which the requesting spouse seeks
relief in whole or in part”).
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Respondent argues that petitioner does not satisfy the conditions for
traditional relief under section 66(c) because she is requesting relief from tax on
her own income and not on income of a nonrequesting spouse. We agree.
Petitioner is requesting relief from tax on income allocated to her as a
shareholder in Turner Investments and reported on her Schedule K-1. Petitioner is
not entitled to traditional relief because this income would not be treated as Mr.
Turner’s under the rules of section 879(a). 6 See sec. 1.66-4(a)(1)(ii), Income Tax
Regs. Under section 879(a), community income that is trade or business income is
treated as provided in section 1402(a)(5). Under section 1402(a)(5)(A), gross
income and deductions attributable to a jointly operated trade or business are
treated as the gross income and deductions of each spouse on the basis of their
respective distributive shares of the gross income and deductions. Therefore, the
rules contained in section 879(a) treat income from Turner Investments, a jointly
operated trade or business, as the income of petitioner and Mr. Turner on the basis
of their respective distributive shares. The income from petitioner’s 37.44856%
6
We do not refer to Mr. Turner here as the “nonrequesting spouse” because
the definition of that term in the regulation specifies that it is an individual “whose
income or deduction gave rise to the tax liability from which the requesting spouse
seeks relief in whole or in part.” Sec. 1.66-4(g)(2), Income Tax Regs. It was not
Mr. Turner’s Schedule K-1 income (or any other income or deduction of his) that
gave rise to the deficiency from which petitioner seeks relief; she seeks relief from
tax on her own Schedule K-1 income.
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ownership of Turner Investments and reported on her 2015 Schedule K-1 would
not be treated as income of a nonrequesting spouse, and she therefore does not
satisfy section 1.66-4(a)(1)(ii), Income Tax Regs. We therefore hold that
petitioner is not entitled to traditional relief under section 66(c).
Petitioner primarily argues that she is entitled to relief because she did not
know about the Schedule K-1 income. See sec. 1.66-4(a)(1)(iii), Income Tax
Regs. She states that Mr. Turner did not provide her with a 2015 Schedule K-1.
She further argues that her failure to claim the estimated tax payments and the
subsequent refund to Mr. Turner of those payments bolster her claim for relief and
demonstrate her lack of knowledge about Turner Investments.
But a taxpayer’s knowledge of an item of community income must be
determined by considering her knowledge of the particular income-producing
activity. See McGee v. Commissioner, 979 F.2d 66, 70 (5th Cir. 1992), aff’g T.C.
Memo. 1991-510; sec. 1.66-4(a)(2), Income Tax Regs. Petitioner was a
shareholder in Turner Investments and reported Schedule K-1 income for the three
years before 2015 on her Form 1040 jointly filed with Mr. Turner, received and
reported Form W-2 income from Turner Investments for 2015 (and prior years),
signed several checks for Turner Investments in 2013, and signed a divorce decree
that referenced Turner Investments and required her to execute documents to
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remove her name from it. See Felt v. Commissioner, T.C. Memo. 2009-245(finding that a requesting spouse knew the source of the income because she knew
the name of and had deposited checks from a nonrequesting spouse’s business that
generated family income), aff’d, 433 F. App’x 293 (5th Cir. 2011). Crediting her
testimony that she did not receive a Schedule K-1 for 2015 thus would not defeat a
finding that she knew of or had reason to know of Turner Investments as an
income-producing activity.
Moreover, the divorce decree gave petitioner the right to request information
“to prepare federal income tax returns for 2015” from Mr. Turner and required Mr.
Turner “to furnish such information to * * * [petitioner]” within a specified period.
Petitioner introduced no evidence that she requested such information or that Mr.
Turner blocked her from doing so; rather, she claims that he failed to provide the
Schedule K-1 for 2015. Her right to request information under the divorce decree
also was a means by which petitioner could have correctly reported her portion of
Turner Investments’ estimated tax payments. Petitioner also hired a tax return
preparer to assist her, mitigating her lack of tax knowledge. It is unfortunate that
petitioner did not exercise her right to request such information under the divorce
decree, which could have alerted her to both the Schedule K-1 and the estimated
tax payments. But it does not alter our conclusion that petitioner knew of or had
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reason to know of Turner Investments as an income-producing activity under
section 1.66-4(a)(2), Income Tax Regs.
C. Equitable relief under section 66(c)
If traditional relief is not available to a requesting spouse, equitable relief
may be available under the flush language of section 66(c), the last sentence of
which reads:
Under procedures prescribed by the Secretary, if, 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)
attributable to any item for which relief is not available under the
preceding sentence, the Secretary may relieve such individual of such
liability.
The Commissioner has specified the procedures governing equitable relief in
Rev. Proc. 2013-34, 2013-43 I.R.B. 397. 7 In a deficiency proceeding we may
review the IRS’ denial of equitable relief under the last sentence of section 66(c). 8
7
Rev. Proc. 2013-34, 2013-43 I.R.B. 397, which superseded Rev. Proc.
2003-61, 2003-2 C.B. 296, applies to requests for relief from joint and several
liability and income tax liability resulting from the operation of community
property law that were filed on or after September 16, 2013. Although we are not
bound by the guidelines set forth in Rev. Proc. 2013-34, supra, we consult those
guidelines in considering whether a taxpayer is entitled to equitable relief. See
Pullins v. Commissioner, 136 T.C. 432, 438-439 (2011).
8
We reached this conclusion in Beck v. Commissioner, T.C. Memo. 2001-
198, 2001 WL 854849, at *8, by first noting that the sec. 66(c) equitable relief
provision was enacted in the same section of the same legislation that created a
similar equitable relief provision under sec. 6015(f), see Internal Revenue Service
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The requesting spouse must satisfy five threshold conditions to be eligible to
submit a request for equitable relief under section 66(c). Rev. Proc. 2013-34,
sec. 4.01, 2013-43 I.R.B. at 399-400. One threshold condition is that “[t]he
income tax liability from which the requesting spouse seeks relief is attributable
(either in full or in part) to an item of the nonrequesting spouse or an
underpayment resulting from the nonrequesting spouse’s income.” Id. sec. 4.01(7),
2013-43 I.R.B. at 399.
Respondent argues that petitioner is not eligible for equitable relief for the
same reason she failed to satisfy the conditions for traditional relief: She is
Restructuring and Reform Act of 1998, Pub. L. No. 105-206, sec. 3201(b), 112
Stat. at 739, and then extending our reasoning from Butler v. Commissioner, 114
T.C. 276, 287-292 (2000), that in a deficiency proceeding initiated under
sec. 6213(a) the Court has jurisdiction to review the IRS’ denial of equitable relief
under sec. 6015(f). We also extended the standard of review enunciated in
Butler--abuse of discretion--from sec. 6015(f) to sec. 66(c). Following a 2006
amendment to sec. 6015(e)(1)(A), Butler was overruled by Porter v.
Commissioner, 132 T.C. 203 (2009). The Court has not addressed what effect, if
any, Porter has on the standard of review for denials of equitable relief under
sec. 66(c). See Felt v. Commissioner, T.C. Memo. 2009-245, 2009 WL 3460725,
at *18 n.15 (“We will figure out Porter’s effect on section 66(c) in some later
case.”), aff’d, 433 F. App’x 293 (5th Cir. 2011).
In this case, heard pursuant to sec. 7463(b) without objection, see Rule 171,
the standard of review is not dispositive: Petitioner would not prevail under either
a de novo or abuse of discretion standard of review. Therefore it is not an
appropriate “later case” to analyze Porter’s effect on sec. 66(c). We review the
IRS’ denial of petitioner’s claim for equitable relief under sec. 66(c) de novo
without deciding the issue, which also illustrates that the IRS’ denial should be
upheld under an abuse of discretion standard.
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requesting relief from tax on her own income. Once again, we agree. The income
tax liability from which petitioner seeks relief is not attributable (either in full or in
part) to an item or underpayment of another individual. See id. Rather, the
liability from which she seeks relief is attributable to her status as a 37.44856%
shareholder in Turner Investments (distinct from Mr. Turner’s status as a
62.55144% shareholder).
The exceptions for which “the Service will consider granting relief
regardless of whether the * * * deficiency * * * is attributable * * * to the
requesting spouse” under Rev. Proc. 2013-34, sec. 4.01(7), 2013-43 I.R.B.
at 399-400, are (a) attribution solely due to operation of community property law,
(b) nominal ownership, (c) misappropriation of funds, (d) abuse, and (e) fraud
committed by the nonrequesting spouse.
Petitioner does not meet any of these exceptions because: (a) the Schedule
K-1 income from Turner Investments is attributable to her under section 1366, not
solely by the operation of community property law; (b) the Schedule K-1 is in her
name, and she did not rebut the consequent presumption that the income is
attributable to her; (c) her failure to claim estimated tax payments (and the IRS’
subsequent refund of those excess payments to Mr. Turner pursuant to section
6402 and section 1.6654-2(e)(5)(ii), Income Tax Regs.) does not constitute
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misappropriation of funds; (d) she filed an individual return and did not establish
how any prior abuse by Mr. Turner would result in her inability to challenge the
treatment of items on a return that she filed individually after her divorce was
finalized and with the help of her own return preparer; and (e) she did not argue or
establish that fraud is the reason for an erroneous item. Nor are we persuaded that
her failure to claim the estimated tax payments and the subsequent refund to Mr.
Turner provided sufficient ground for equitable relief independent of these factors.
While the facts here are unfortunate, they were not unavoidable. We therefore
hold that petitioner is not entitled to equitable relief under section 66(c).
Any contentions we have not addressed we deem irrelevant, moot, or
meritless.
To reflect the foregoing,
An appropriate decision will be
entered.