The opinion
T.C. Memo. 2006-185
UNITED STATES TAX COURT
HELEN M. KORCHAK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 170-04, 13315-06. Filed August 30, 2006.
Robert W. Lynch, for petitioner.
Gerald A. Thorpe, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Pursuant to Madison Recycling Associates v.
Commissioner, T.C. Memo. 2001-85, affd. 295 F.3d 280 (2d Cir.
2002), respondent assessed against petitioner and petitioner’s
spouse Ernest I. Korchak (Mr. Korchak) a deficiency of $140,388
in their Federal income tax (tax) for their taxable year 1982.
In a so-called affected items notice of deficiency (affected
- 2 -
items notice), respondent determined for the taxable year 1982 of
petitioner and Mr. Korchak additions to tax under sections1
6653(a)(1)(A),2 6653(a)(1)(B),2 and 6659 of $7,019.40, 50 percent
of the interest due on an assessed deficiency of $140,388, and
$34,322.10, respectively.3
The only issue remaining for decision is whether petitioner
is entitled to relief under section 6015(b) or, in the alterna-
tive, under section 6015(f) with respect to her taxable year
1982. We hold that petitioner is entitled to relief under
section 6015(b) with respect to that year.
1
All section references are to the Internal Revenue Code in
effect for the year at issue.
2
In Korchak v. Commissioner, T.C. Memo. 2005-244, see infra
note 3, respondent conceded that the affected items notice
incorrectly referred to sec. 6653(a)(1)(A) and (B), instead of to
sec. 6653(a)(1) and (2).
3
On Feb. 28, 2005, respondent and petitioner entered into a
stipulation to be bound (stipulation to be bound) by the final
decision in Korchak v. Commissioner, docket No. 22105-03. That
case, which was based upon the affected items notice issued to
petitioner and Mr. Korchak, was commenced in the Court by Mr.
Korchak. The issue presented there was whether the deficiency in
tax that respondent assessed pursuant to Madison Recycling
Associates v. Commissioner, T.C. Memo. 2001-85, affd. 295 F.3d
280 (2d Cir. 2002), for the taxable year 1982 of petitioner and
Mr. Korchak is subject to additions to tax under secs. 6653(a)
and 6659. In the opinion that the Court issued in the case
involving Mr. Korchak, Korchak v. Commissioner, T.C. Memo. 2005-
244, the Court sustained respondent’s determinations under secs.
6653(a) and 6659. On Oct. 20, 2005, the Court entered its
decision in that case, which became final on Jan. 18, 2006. In
the stipulation to be bound, petitioner retained the right to
assert that she is entitled to relief under sec. 6015(b) or
(f) with respect to her taxable year 1982.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found
except as stated herein.
Petitioner resided in Bryn Mawr, Pennsylvania, when she
filed the petitions.
Petitioner was born in Australia in 1937. Mr. Korchak was
born in Czechoslovakia in 1934. In 1939, Mr. Korchak moved with
his family to the Netherlands. In 1952, Mr. Korchak moved with
his family to Australia, where he met petitioner. In 1959,
petitioner and Mr. Korchak married (and remained married as of
the time of the trial) and moved to the United States.
In 1958, petitioner received a B.S. degree in biochemistry
from the University of Melbourne. In 1962, she received a Ph.D.
in physiology from Tufts University. As of the time of the
trial, petitioner had never taken any tax, financial, or account-
ing courses.
In 1957, Mr. Korchak received a B.S. degree in chemical
engineering from the University of Melbourne. In 1964, he
received a Sc.D. in chemical engineering from the Massachusetts
Institute of Technology (MIT). Mr. Korchak audited an economics
class and an accounting class when he was studying at MIT.
During the period 1964 to 1976, petitioner was a full-time
homemaker and mother. From 1976 until 1986, petitioner worked as
a research scientist for New York University (NYU). From 1986
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until at least the time of the trial, petitioner worked as a
research scientist for the University of Pennsylvania. At the
time of the trial, her annual salary from the University of
Pennsylvania was $115,000.4 As of that time, petitioner intended
to retire in 2007.
In 1964, Mr. Korchak began working for Halcon International,
Inc. (Halcon). He worked for that company or one of its subsid-
iaries until 1986 when Halcon and its subsidiaries ceased busi-
ness operations. During the first few years Mr. Korchak worked
for Halcon, he was involved in research and development. His
duties included developing chemical processes and determining
whether such processes were economically feasible. If, after a
relatively short period of time, the processes that were being
developed did not appear to be economically feasible, no further
work was done with respect to such processes.
During 1981, Mr. Korchak was president of Halcon Research
and Development Corporation, a subsidiary of Halcon that was
involved in research and development. Sometime during 1981, Mr.
Korchak became president of Scientific Design Corporation,
another subsidiary of Halcon that was involved in engineering,
and held that position during 1982.
4
During 2004, the year before the trial took place, peti-
tioner received her salary from the University of Pennsylvania,
the amount of which is not disclosed by the record, and other
unidentified income totaling $270.
- 5 -
During 1981 and 1982, Mr. Korchak received compensation and
other taxable distributions from Halcon and/or its subsidiaries
(collectively, Halcon distributions) totaling $1,539,269 and
$466,309, respectively. Petitioner and Mr. Korchak made a
considered judgment not to change their family’s lifestyle in any
way as a result of Mr. Korchak’s having received such distribu-
tions. They made that judgment because they did not want to
spoil their children by having a lavish lifestyle. Mr. Korchak
invested a large portion of the Halcon distributions that he
received during 1981 and 1982. Although petitioner was generally
aware that Mr. Korchak invested a large portion of such distribu-
tions, she was not aware of the specific investments that he
made.
From the time in 1986 when Halcon and its subsidiaries
ceased business operations and no longer employed Mr. Korchak
until around 1995, Mr. Korchak received very little income.
Starting in 1990 until at least the time of the trial, Mr.
Korchak worked for Performance Coatings Corporation (Perfor-
mance), a new company that he and several others started in that
year. Mr. Korchak received very little, if any, compensation
from that company during the first several years of its exis-
tence. At the time of the trial, Mr. Korchak, who was 71 years
old, was president of Performance for which Performance paid him
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an annual salary of $90,000.5 As of that time, Mr. Korchak had
no intention of retiring.
Based on their respective personal and business backgrounds
and experiences, petitioner and Mr. Korchak believed throughout
their marriage that managing their family’s finances should be
Mr. Korchak’s responsibility and that Mr. Korchak was better
suited than petitioner to do so. Petitioner and Mr. Korchak also
believed throughout their marriage that maintaining their home
and rearing their three children6 should be petitioner’s respon-
sibility and that petitioner was better suited than Mr. Korchak
to do so. Consequently, throughout the marriage of petitioner
and Mr. Korchak, (1) Mr. Korchak assumed the responsibility of
managing their family’s finances, and petitioner relied upon him
to do so; and (2) petitioner assumed the responsibility of
maintaining their home and rearing their three children, and Mr.
Korchak relied on her to do so.
As part of his responsibility for managing the family’s
finances, Mr. Korchak made all the family’s financial decisions.
He did so without discussing those decisions with petitioner. If
5
During 2004, the year before the trial took place, Mr.
Korchak received a salary of $91,000 from Performance and the
following income: (1) A distribution of $13,586 from an individ-
ual retirement account (IRA), (2) $19,166 of Social Security
payments, and (3) a distribution of $26,981 from a pension.
6
The three children of petitioner and Mr. Korchak were born
in 1965, 1967, and 1969, respectively.
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petitioner had made any inquiries concerning the financial
decisions that Mr. Korchak made for their family, Mr. Korchak
would not have withheld any information from her with respect to
such decisions.
Throughout their marriage, petitioner was generally unaware
of bank accounts or brokerage or other investment accounts in Mr.
Korchak’s name alone or in the names of Mr. Korchak and peti-
tioner. During 1982, petitioner was not aware of any brokerage
accounts that Mr. Korchak may have had at that time. At least
during 1982, petitioner was aware of two joint checking accounts
in the names of Mr. Korchak and herself. At least during 1982,
petitioner’s salary from NYU of approximately $15,000 (peti-
tioner’s NYU salary) was deposited into one of those two joint
checking accounts (joint checking account into which petitioner’s
NYU salary was deposited), and petitioner used that joint check-
ing account to pay certain personal and household expenses. The
joint checking account into which petitioner’s NYU salary was
deposited was also used to pay any mortgage loan on the family
residence in which she and Mr. Korchak were living.
At all relevant times, Mr. Korchak was responsible for
opening and reviewing all the family’s mail, including bills, tax
notices, documents pertaining to investments and other financial
matters, and bank statements, including any joint checking
account statements, and petitioner relied upon him to do so.
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Prior to 1980, Mr. Korchak’s investment portfolio consisted
of stocks and bonds. During 1980, Mr. Korchak became a client of
Marcus V. Cole (Mr. Cole), who at that time worked for Merrill
Lynch and who was deceased at the time of the trial. During that
year, petitioner and Mr. Korchak purchased rental property
located on Hilton Head Island. In 1981, without consulting
petitioner, Mr. Korchak invested in a bus rental activity (Mr.
Korchak’s bus rental investment) and three oil and gas partner-
ships (Mr. Korchak’s three oil and gas partnership investments).7
Although Mr. Korchak did not consult petitioner before he in-
vested in that bus rental activity and those partnerships, he may
have mentioned to her that he had invested in a bus rental
activity. However, he would not have provided any details about
that activity to petitioner.
During 1982, Mr. Cole joined the staff of Hamilton Gregg &
Company, Inc. (Hamilton Gregg), a company engaged in the business
of providing financial planning advice to its clients. On or
about December 6, 1982, Mr. Korchak became a client of Hamilton
Gregg, and Mr. Korchak’s primary contact person at that company
was Mr. Cole.
On or about November 24, 1982, Mr. Cole delivered a private
offering memorandum (private offering memorandum) to Mr. Korchak
7
Mr. Korchak’s three oil and gas partnership investments
were Kelly-Brock Drilling Partners 1981-1, Odyssey Partners 81
Limited Partnership, and Matagorda Limited Partnership II.
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with respect to a partnership called Madison Recycling Associates
(Madison Recycling). According to the private offering memoran-
dum, Madison Recycling was a New York limited partnership formed
on October 1, 1982, that was to lease, as lessee, steam chest
molded expanded polystyrene recycling equipment called Sentinel
EPS Recyclers (EPS Recyclers). The private offering memorandum
further indicated that Madison Recycling and two other entities
were to engage in a joint venture in which the EPS Recyclers were
to be used in a process designed to recycle scrap polystyrene.
According to the private offering memorandum, the recycled
polystyrene was to be sold on the open market, and Madison
Recycling was to receive a share of the profits from such sales.
Mr. Korchak considered in some detail whether to invest in
Madison Recycling. That was because he knew a lot about the
business of recycling technologies. In considering whether to
invest in Madison Recycling, Mr. Korchak was also aware that
Congress was encouraging investment in recycling in order to
conserve energy.
After considering in detail whether to invest in Madison
Recycling, on November 30, 1982, without consulting petitioner,
Mr. Korchak purchased an interest in Madison Recycling for
$75,000 (Mr. Korchak’s Madison Recycling investment). Mr.
Korchak did not use the joint checking account into which peti-
tioner’s NYU salary was deposited in order to purchase Mr.
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Korchak’s Madison Recycling investment. Instead, he utilized a
cash management account (cash management account) that he used to
purchase all of the investments that he made.8
Petitioner became aware of Mr. Korchak’s Madison Recycling
investment on February 2, 1986, when she and Mr. Korchak signed
Form 872, Consent to Extend the Time to Assess Tax (Form 872),
with respect to their taxable year 1982. That form stated in
pertinent part:
The amount of any deficiency assessment is to be
limited to that resulting from any adjustment to:
(A) the taxpayer’s distributive share of any item of
income, gain, loss, deduction, or credit of, or distri-
bution from Madison Recycling, (B) the tax basis of the
taxpayer’s interest(s) in the aforementioned partner-
ship(s) or organization(s) treated by the taxpayer(s)
as a partnership, (C) any gain or loss (or the charac-
ter or timing thereof) realized upon the sale or ex-
change, abandonment, or other disposition of taxpayer’s
interest in such partnership(s) or organization(s)
treated by the taxpayer as a partnership, (D) items
affected by continuing tax effects caused by adjust-
ments to any prior tax return, and (E) any consequen-
tial changes to other items based on such adjustment.
In 1986, without consulting petitioner, Mr. Korchak pur-
chased a majority interest in Riverside Polymer Systems, Inc.
(Riverside), and ultimately invested approximately $700,000 in
that company. In 1989, Riverside filed for bankruptcy. As a
result of that bankruptcy proceeding, Mr. Korchak lost his entire
8
It is not clear from the record whether the cash management
account was held (1) at a bank or another type of financial
institution and (2) in the joint names of petitioner and Mr.
Korchak.
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investment in that company. It was only after Riverside filed
for bankruptcy in 1989 that petitioner became aware that Mr.
Korchak had invested approximately $700,000 in that company.
As was true of petitioner’s reliance on Mr. Korchak with
respect to their family’s finances, petitioner also relied upon
Mr. Korchak to retain a professional to prepare joint tax returns
for them. Petitioner’s role in the preparation of such returns
was limited to providing Mr. Korchak with any Forms W-2, Wage and
Tax Statement (Form W-2), and Internal Revenue Service (IRS)
information returns that she received as well as any other tax-
related information that she had.
Since around the mid-1970s until the time of the trial, the
professional that Mr. Korchak retained to prepare Form 1040, U.S.
Individual Income Tax Return, for petitioner and himself (joint
tax return) was Hilton Sokol (Mr. Sokol), a certified public
accountant. Mr. Sokol was an employee of Miller, Ellin and
Company (Miller Ellin) in New York, which provided accounting
services for, inter alia, Halcon. Many of Halcon’s executives
retained certified public accountants employed by Miller Ellin to
prepare their respective tax returns. Both petitioner and Mr.
Korchak trusted and relied on Mr. Sokol’s professional judgment
to prepare accurately their joint tax returns.
Since around the mid-1970s, the following general practice
remained the same with respect to (1) the preparation of joint
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tax returns for petitioner and Mr. Korchak, including the joint
tax return for their taxable year 1982, and (2) the review,
signing, and filing of such returns. Mr. Sokol prepared a joint
tax return for Mr. Korchak and petitioner based on any Forms W-2,
IRS information returns, and other information provided to him by
Mr. Korchak. Thereafter, Mr. Sokol gave that joint tax return to
Mr. Korchak who reviewed it. After Mr. Korchak reviewed and
approved the joint tax return that the return preparer prepared,
Mr. Korchak presented that return to petitioner for her signa-
ture. In presenting such joint tax return to petitioner, Mr.
Korchak had it open to the page on which petitioner and he were
to sign it. Before petitioner signed the joint tax return that
Mr. Korchak presented to her, Mr. Korchak did not discuss its
contents with her, and petitioner did not review, or make any
inquiries about, such return. The signature of the return
preparer on the joint tax return that Mr. Korchak presented to
petitioner indicated to her that such return was prepared accu-
rately.
On April 28, 1983, the return preparer signed the joint tax
return for the taxable year 1982 of petitioner and Mr. Korchak
(1982 joint tax return). The return preparer then sent that
return to Mr. Korchak.
The 1982 joint tax return showed, inter alia, the following:
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Amount Reported
1
Wages, salaries, tips, etc. $481,648
Interest income 55,633
Dividends 13,034
Refunds of State and local income taxes 6,056
2
Business income or (loss) from Schedule C (24,961)
Capital gain or (loss) from Schedule D (3,000)
Supplemental gains or (losses) from Form (1,283)
4797
Rents, royalties, partnerships, estates, (220,695)
trusts, etc. from Schedule E
Other income 11,352
Total income 317,784
Adjusted gross income 310,932
Itemized deductions 47,846
Taxable income 258,086
Tax 116,492
Total tax 116,492
Investment credit from Form 3468 116,492
Balance 0
Minimum tax 3,064
Tax from recapture of investment credit 134
Total Tax 3,198
Total payments 96,168
Refund 92,970
1
Of the $481,648 of wages, salaries, tips, etc., petitioner
received $15,339.46, and Mr. Korchak received the balance.
2
The entire loss of $24,961 from Schedule C, Profit or
(Loss) From Business or Profession, was with respect to Mr.
Korchak’s bus rental investment.
Of the loss of $220,695 from Schedule E, Supplemental Income
Schedule (Schedule E), claimed in the 1982 joint tax return,
$189,965 was attributable to certain claimed partnership losses
(claimed partnership losses of $189,965) that were not identified
in Schedule E, and the balance was attributable to two claimed
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rental losses (viz., a claimed rental loss of $7,627 with respect
to property located on Hilton Head Island and a claimed rental
loss of $22,383 with respect to a property identified as “Evian”)
and windfall profit tax withheld in 1982 of $720.
Schedule E had the following notation with respect to the
claimed partnership losses of $189,965: “SEE STATEMENT 2".
Statement 2 showed, inter alia, the following partnerships and
the following claimed loss of each such partnership that gave
rise to the total claimed partnership losses of $189,965 shown in
Schedule E:
Name of Partnership Partnership Loss
Kelly-Brock Drilling Partners 1981-11 $64,753
Odessey Partners 81 Limited Partnership1 57,087
Matagorda Limited Partnership II1 10,036
Madison Recycling 58,089
1
Petitioner and Mr. Korchak also claimed losses with respect
to Mr. Korchak’s three oil and gas partnerships for their taxable
year 1981.
There was nothing about the claimed $58,089 Madison Recycling
loss that would have made that claimed loss stand out in rela-
tionship to the other partnership losses claimed in the 1982
joint tax return.
Statement 2 also showed for each of the partnerships identi-
fied below the following amount as “PROPERTY QUALIFIED FOR
INVESTMENT CREDIT NEW RECOVERY PROPERTY - OTHER”:
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Property Qualified for
Investment Credit New
Name of Partnership Recovery Property - Other
Kelly-Brock Drilling Partners 1981-1 $11,447
Odessey Partners 81 Limited Partnership 8,161
Matagorda Limited Partnership II 1,246
Madison Recycling 577,500
Neither Schedule E nor Statement 2 referred to Form 3468,
Computation of Investment Credit (Form 3468), that was included
as part of the 1982 joint tax return.
Form 3468, “PART II. - Qualified Investment”, showed the
following:
(1) (2) (3) (4)
Qualified
Investment
Class of Unadjusted Applicable (Column 2 x
1 Recovery Property Line Property Basis percentage column 3)
New (a) 3-year 60
Property
Regular (b) Other 598,354 100 598,354
Percentage
Used (c) 3-year 60
Property
(d) Other 100
* * * * * * *
5 Total qualified investment in 10% property - Add lines
1(a) through 1(h), 2, 3, and 4 (See instructions for
special limits)[9] . . . . . . . . . . . . . . . . . . . . . 598,354
Form 3468, “PART III. - Tentative Regular Investment
Credit”, showed the following:
9
No entries were made on lines 1(e) through 1(h) and lines 2
through 4 of Form 3468.
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8 10% of line 5 . . . . . . . . . . . . . . . . . . . . . . . 59,835
* * * * * * *
14 Current year regular investment credit - Add lines 8
through 13[10]. . . . . . . . . . . . . . . . . . . . . . . . 59,835
* * * * * * *
17 Tentative regular investment credit - Add lines 14, 15,
and 16[11] . . . . . . . . . . . . . . . . . . . . . . . . . . 59,835
Form 3468, “PART IV. - Tax Liability Limitations”, showed
the following:
18 a Individuals - From Form 1040, enter tax from line 38, )
page 2, plus any additional taxes from Form 4970 . . . . )
b Estates and trusts - From Form 1041, enter tax from line )
26a, plus any section 644 tax on trusts . . . . . . . . .) 116,492
c Corporations (1120 filers) - From Form 1120, Schedule )
J, enter tax from line 3 . . . . . . . . . . . . . . . . )
d Other organizations - Enter tax before credits from )
return . . . . . . . . . . . . . . . . . . . . . . . . . )
19 a Individuals - From Form 1040, enter credits from lines 41)
and 42 of page 2 . . . . . . . . . . . . . . . . . . . .)
b Estates and trusts - From Form 1041, enter any foreign )
tax credit from line 27a . . . . . . . . . . . . . . . . )
c Corporations (1120 filers) - From Form 1120, Schedule ) 0
J, enter any foreign tax credit from line 4(a), plus )
any possessions tax credit from line 4(f) . . . . . . . .)
d Other organizations - Enter any foreign or possessions )
tax credit . . . . . . . . . . . . . . . . . . . . . . . )
20 Income tax liability as adjusted (subtract line 19 from line
18). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,492
21 a Enter smaller of line 20 or $25,000. See instruction for
line 21 . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
b If line 20 is more than $25,000 - Enter 90% of the
excess . . . . . . . . . . . . . . . . . . . . . . . . . 82,343
22 Regular investment credit limitation - Add lines 21a
and 21b . . . . . . . . . . . . . . . . . . . . . . . . . . 107,343
23 Allowed regular investment credit - Enter the smaller of
line 17 or line 22 . . . . . . . . . . . . . . . . . . . . . 59,835
10
No entries were made on lines 9 through 13 of Form 3468.
11
No entries were made on lines 15 and 16 of Form 3468.
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24 Business energy investment credit limitation - Subtract line
23 from line 20 . . . . . . . . . . . . . . . . . . . . . . 56,657
25 Business energy investment credit - From line 14 of Schedule
B (Form 3468) . . . . . . . . . . . . . . . . . . . . . . . 57,750
26 Allowed business energy investment credit - Enter smaller of
line 24 or line 25 . . . . . . . . . . . . . . . . . . . . . 56,657
27 Total allowed regular and business energy investment credit
- Add lines 23 and 26. Enter here and on Form 1040, line
43; Schedule J (Form 1120), line 4(b), page 3; or the proper
line on other returns . . . . . . . . . . . . . . . . . . . 116,492
Form 3468, Schedule B, Business Energy Investment Credit
(Schedule B), referred to on line 25 of “PART IV. - Tax Liability
Limitations” of Form 3468, showed the following:
(1) (2) (3) (4) (5) (6)
Class of Qualified
property investment
Type of or life Unadjusted Applicable (Column 4 x
Property Line years Code basis/Basis Percentage column 5)
Recovery (a) 3-Year 60
(b) Other C 577,500 100 577,500
Nonrecovery (c) 3 or more
but less 33 1/3
than 5
(d) 5 or more
but less 66 2/3
than 7
(e) 7 or more 100
2 Total 10% energy investment property - Add lines 1(a)
through 1(e), column (6) . . . . . . . . . . . . . . . . . . 577,500
* * * * * * *
7 Enter 10% of line 2 . . . . . . . . . . . . . . . . . . . . 57,750
* * * * * * *
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11 Current year business energy investment credit - Add lines
7 through 10[12] . . . . . . . . . . . . . . . . . . . . . . 57,750
* * * * * * *
14 Tentative business energy investment credit - Add lines
11 through 13.[13] Enter here and on line 25 of Form
3468 . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,750
The following appeared on the bottom of Schedule B of Form
3468:
TYPE OF PROPERTY 3-YEAR OTHER NONRECOVERY
C - RECYCLING 577,500.
It was not obvious from reviewing Form 3468 (1) that $57,750
of the $59,835 investment tax credit shown in Form 3468, “Part
III. - Tentative Regular Investment Credit”, was attributable to
Madison Recycling and (2) that the $56,657 business energy
investment tax credit shown in Schedule B of Form 3468
was attributable to Madison Recycling. (For convenience, we
shall sometimes refer collectively to the claimed $57,750 invest-
ment tax credit attributable to Madison Recycling and the claimed
$56,657 business energy investment tax credit attributable to
Madison Recycling as the claimed Madison Recycling tax credits of
$114,407.)
Prior to the preparation of the 1982 joint tax return, Mr.
Korchak never sought or received any tax advice from Mr. Sokol
12
No entries were made on lines 8 through 10 of Schedule B
of Form 3468.
13
No entries were made on lines 12 and 13 of Schedule B of
Form 3468.
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with respect to Madison Recycling. The only information that Mr.
Korchak provided to Mr. Sokol with respect to Madison Recycling
before that return was prepared was Schedule K-1, Partner’s Share
of Income, Credits, Deductions, Etc., that Madison Recycling
issued to Mr. Korchak (Madison Recycling 1982 Schedule K-1 issued
to Mr. Korchak).14
The information set forth in the Madison Recycling 1982
Schedule K-1 issued to Mr. Korchak was consistent with the
information that Madison Recycling reported in Form 1065, U.S.
Partnership Return of Income, for its taxable year ended December
31, 1982 (Madison Recycling’s 1982 return) that Madison Recycling
filed with the IRS on March 14, 1983. In Madison Recycling’s
1982 return, Madison Recycling claimed, inter alia, a loss of
$704,111 (Madison Recycling’s claimed $704,111 loss). In Form
3468, included as part of Madison Recycling’s 1982 return,
Madison Recycling claimed a basis of $7,000,000 for both invest-
ment tax credit purposes and business energy investment tax
credit purposes (Madison Recycling’s claimed $7,000,000 basis for
investment tax credit purposes and business energy investment tax
credit purposes).
If petitioner had asked Mr. Korchak before she signed the
14
The parties stipulated and attached as an exhibit to the
parties’ stipulation of facts a copy of the 1982 joint tax return
that petitioner and Mr. Korchak filed with the IRS. That return
did not include Madison Recycling 1982 Schedule K-1 issued to Mr.
Korchak.
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1982 joint tax return about the claimed $58,089 Madison Recycling
loss and the claimed Madison Recycling tax credits of $114,407,
which she did not, Mr. Korchak would have assured her that that
claimed loss and those claimed credits were proper.
On May 1, 1983, petitioner and Mr. Korchak signed the 1982
joint tax return, and on May 6, 1983, they filed it with the IRS.
On or about December 24, 1987, respondent issued a Notice of
Final Partnership Administrative Adjustment to Madison Recy-
cling’s tax matters partner for, inter alia, Madison Recycling’s
taxable year ended December 31, 1982 (FPAA). In the FPAA,
respondent, inter alia, disallowed Madison Recycling’s claimed
$704,111 loss and reduced to $0 Madison Recycling’s claimed
$7,000,000 basis for investment tax credit purposes and business
energy investment tax credit purposes (respondent’s reduction to
$0 of Madison Recycling’s claimed basis).
On February 16, 1988, respondent sent a copy of the FPAA to
Mr. Korchak and petitioner in an envelope addressed to both of
them. Consistent with his practice of opening the family’s mail,
Mr. Korchak opened that envelope and reviewed the FPAA. He
showed the FPAA to petitioner because he believed that she should
be aware that the IRS had raised questions about Madison Recy-
cling’s 1982 return, which, in turn, raised questions about the
claimed $58,089 Madison Recycling loss and claimed Madison
Recycling tax credits of $114,407 in their 1982 joint tax return.
- 21 -
On May 17, 1988, a partner other than the tax matters
partner commenced a case in the Court contesting the adjustments
made in the FPAA. Ultimately, the parties in that case agreed on
the adjustments made in the FPAA, but they disagreed over whether
the IRS timely issued the FPAA. Madison Recycling Associates v.
Commissioner, T.C. Memo. 2001-85. On April 9, 2001, the Court
issued its Opinion addressing that dispute and held that the
period for limitations for assessment had not expired and that
the FPAA was timely. Id. On August 1, 2001, pursuant to that
Opinion, the Court entered a decision sustaining, inter alia,
respondent’s disallowance of Madison Recycling’s claimed $704,111
loss and respondent’s reduction to $0 of Madison Recycling’s
claimed basis. That decision was affirmed on appeal. Madison
Recycling Associates v. Commissioner, 295 F.3d 280 (2d Cir.
2002).
Pursuant to Madison Recycling Associates v. Commissioner,
T.C. Memo. 2001-85, on October 3, 2003, respondent assessed
against petitioner and Mr. Korchak a deficiency of $140,388 in
tax for their taxable year 1982 and interest thereon of
$1,107,797.85 as provided by law resulting from the disallowance
of the claimed $58,089 Madison Recycling loss and the claimed
Madison Recycling tax credits of $114,407.15 As of the time of
15
In computing the liability for interest as of Oct. 3,
2003, respondent used the increased interest rate applicable to
underpayments attributable to tax-motivated transactions estab-
(continued...)
- 22 -
the trial, no part of that assessed deficiency or that assessed
interest had been paid.
Respondent issued an affected items notice to petitioner and
Mr. Korchak with respect to their taxable year 1982. In that
notice, respondent determined that petitioner and Mr. Korchak are
liable for their taxable year 1982 for additions to tax under
sections 6653(a)(1)(A),16 6653(a)(1)(B),16 and 6659 of $7,019.40,
50 percent of the interest due on an assessed deficiency of
$140,388, and $34,322.10, respectively.
In response to the affected items notice, Mr. Korchak filed
a petition with the Court in the case at docket No. 22105-03.
See supra note 3.
In response to the affected items notice, petitioner filed a
petition with the Court. In that petition, petitioner claimed
that she is entitled to relief under section 6015 with respect to
the additions to tax that respondent determined for her taxable
year 1982 as well as interest thereon as provided by law.
On July 30, 2004, respondent filed a motion to remand herein
(respondent’s motion to remand). In that motion, respondent
stated, inter alia:
4. Respondent has not considered petitioner’s
request for relief under I.R.C. § 6015. Specifically,
respondent has not made a determination with respect to
15
(...continued)
lished by sec. 6621(c).
16
See supra note 2.
- 23 -
relief under I.R.C. § 6015(f).
5. Petitioner’s counsel has indicated that peti-
tioner is seeking relief under I.R.C. § 6015(b) and
(f).
* * * * * * *
7. Respondent requests this Court grant his mo-
tion to remand so that he may have an opportunity to
make a determination with respect to petitioner’s claim
for relief from joint and several liability under
I.R.C. § 6015(b) and (f).
On August 10, 2004, the Court denied respondent’s motion to
remand but continued the trial. On August 11, 2004,17 respon-
dent’s counsel referred petitioner’s request for relief under
section 6015 to respondent’s Cincinnati Service Center.
On or about November 11, 2004, petitioner sent to respondent
Form 8857, Request for Innocent Spouse Relief (And Separation of
Liability and Equitable Relief), with respect to her taxable year
1982 (petitioner’s Form 8857). Petitioner attached to peti-
tioner’s Form 8857 Form 12510, Questionnaire for Requesting
Spouse (Form 12510), a preprinted form. The preprinted Form
12510 contained several parts identified as Part 1 through 5.
The instructions to Part 1 of Form 12510 stated: “Complete this
17
The parties stipulated that respondent referred peti-
tioner’s request for relief under sec. 6015 to respondent’s
Cincinnati Service Center on Aug. 11, 2003, and not on Aug. 11,
2004. That stipulation is clearly contrary to the facts that we
have found are established by the record, and we shall disregard
it. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195
(1989). The record establishes, and we have found, that respon-
dent referred petitioner’s request for relief under sec. 6015 to
the Cincinnati Service Center on Aug. 11, 2004.
- 24 -
part for all requests for relief”. The instructions to Part 2 of
Form 12510 stated: “Complete this part if you are requesting
relief for a balance due shown on your return when filed, but not
paid.” The instructions to Part 3 of Form 12510 stated: “Com-
plete this part if you are requesting relief for additional tax
as a result of an IRS examination”.
In Form 12510 that petitioner attached to petitioner’s Form
8857 (petitioner’s Form 12510), petitioner provided the responses
indicated to the following questions in Part 1 of petitioner’s
Form 12510 with respect to the filing and preparation of the 1982
return:
2. What is the current marital status between you and
the (ex)spouse with whom you filed the joint
return(s) for the year(s) you are requesting
relief
: Married and living together
* * * * * * *
3. Why did you file a joint return instead of your
own separate return
I did not make a decision whether to file a joint
return or a separate return. The tax returns were
always prepared by my husband and a CPA. The
filing status was already completed when I was
told to sign the return.
4. What was your involvement in the preparation of
the return(s)
I had no involvement at all in the preparation of
the return. I gave my husband my W-2 for the tax
year and signed the return when he told me to do
so.
- 25 -
5. Did you review the tax return(s) before signing.
9 Yes : No
If no, explain why not
My husband handles all the financial, banking and
tax matters for us. He is a business man and
company executive. In 1982, I was married to him
for 23 years and I always trusted him in these
matters. I was busy raising three young boys,
managing our house hold, and working full time.
* * * * * * *
7a. During the year(s) in question did you have your
own separate bank account(s). 9 Yes : No
9 Checking 9 Savings 9 Other
My husband had some separate accounts, I did
not.
* * * * * * *
8a. During the year(s) in question did you and your
(ex)spouse have any joint bank account(s).
: Yes 9 No
If yes, indicate the type of account(s).
: Checking 9 Savings 9 Other
A joint account for household matters. My husband
had other separate accounts.
8b. What access did you have to the account(s)
My salary was automatically, electronically
deposited into the joint checking account. I did
not review monthly bank statements, my husband
did. I used the account to pay for groceries and
some household expenses.
8c. What funds were deposited to the account(s)
My salary was electronically, automatically
deposited into the account, and I believe my
husband made some deposits also.
- 26 -
* * * * * * *
8e. What bills were paid out of the account(s)
I paid for groceries, clothing for me and the
children, and household necessities. My husband
paid other monthly household expenses. He had
other separate accounts I was not aware of in
1982.
8f. Who wrote the checks
I wrote some checks for groceries, clothes and
some household expenses. My husband also wrote
checks and managed the account. He picked up the
mail. I did not see the monthly bank statements.
8g. Did you review the monthly bank statements
9 Yes : No
8h. Did you balance the checkbook to the bank
statements
9 Yes : No
9. Did you pick up and open the household mail
9 Yes : No
* * * * * * *
12. What was your highest level of education during
the year(s) you are requesting relief.
Note any business or tax-related courses you
completed by that time.
I am a research scientist with a Ph.D. I also ran
the household, was the primary care giver, and
worked full time. My education was in the field
of physiology. I never had any business courses
or business experience.
13. What was your (ex)spouse’s highest level of
education during the year(s) you are requesting
relief.
Note any business or tax-related courses he or she
completed by that time.
My husband also has a Doctorate of Science. He is
an engineer and had business experience as a
- 27 -
company executive. He managed our financial
affairs and all tax matters. I had no idea he
invested in Madison Recycling or that it had tax
implications.
14. What business experience did you have during the
year(s) you are requesting relief
None.
15. Have any assets been transferred from your
(ex)spouse to you. : Yes 9 No
If yes, list the assets and the date of transfer.
Explain why they were transferred to you.
In 1987, before I learned about any tax problems,
we had wills prepared. The estate planning
attorney advised us to each have separate assets.
Our residence was transferred from joint ownership
to me. My husband already had other assets in his
name.
16. How was the extra money from the unpaid taxes
spent
I did not receive any money from a tax refund. I
later learned my husband used the refund to form a
new start up company called Riverside Polymer
Systems, Inc. The company went bankrupt in 1989
and the investment was lost.
17. Explain any other factors you feel should be
considered for granting relief
During 1982, I was completely consumed with
raising three sons, ages 17, 15, and 13. I was a
post doctorate research assistant working in the
field of immunology. I did not have time or
knowledge about business or tax matters to be
involved in those areas. My husband always took
it upon himself to manage financial/tax affairs
and it was not my place to do so. [Reproduced
literally.]
Petitioner did not complete Part 2 of petitioner’s Form
12510. That was because petitioner is not seeking relief under
- 28 -
section 6015 with respect to an underpayment of tax for her
taxable year 1982. Petitioner is seeking relief under section
6015 with respect to an understatement of tax for that year.
In Part 3 of petitioner's Form 12510, petitioner provided
the responses indicated to the following questions with respect
to petitioner’s knowledge of any items that caused the under-
statement:
1a. At the time of signing, were you concerned about
any item(s) omitted from or reported on the
return(s)
9 Yes : No
* * * * * * *
1c. At that time, describe how much you knew about
each of the incorrect item(s)
I did not know anything at all about the corrected
item, Madison Recycling, LLC. As previously
stated, I knew the return was prepared by our
accountant, a CPA, and by my husband of then 23
years. I signed the return when asked because I
trusted my husband completely. I believed that
since it had been reviewed and prepared by a CPA
and my husband, that everything was correct.
2. At the time of signing, if you were not concerned
about any item(s), when and how did your first
become aware of the incorrect item(s)
In 1988, the IRS sent a notice to us with a large
proposed 1982 tax liability because it intended to
disallow a deduction related to Madison Recycling.
I never knew about my husband’s investment in
Madison Recycling and the tax deduction until then
when he informed me for the first time.
Part 4 of Form 12510 listed, inter alia, various income
items and various expense items. For example, the various income
- 29 -
items listed in Part 4 of Form 12510 included wages, rent, inter-
est, and dividends. The various expense items listed in Part 4
of Form 12510 included rents, mortgage loans, food, and utili-
ties. The instructions to Part 4 of Form 12510 stated: “If you
completed Part 2, complete this part. If you completed Part 3,
completing this part is optional. However, doing so now may
expedite consideration of your claim.” Pursuant to those in-
structions, petitioner did not complete Part 4 of petitioner’s
Form 12510. That was because, pursuant to the instructions to
Part 2 of Form 12510, petitioner was not required to, and did
not, complete Part 2 of petitioner’s Form 12510 since petitioner
is not seeking relief under section 6015 with respect to an
underpayment of tax for her taxable year 1982. Petitioner is
seeking relief under section 6015 with respect to an understate-
ment of tax for that year.
Petitioner attached Form 12507, Innocent Spouse Statement
(petitioner’s Form 12507), to petitioner’s Form 8857. An attach-
ment to petitioner’s Form 12507 (petitioner’s attachment to
petitioner’s Form 12507) stated in pertinent part:
In 1964, Ernest [Mr. Korchak] accepted a position
with Halcon International, Inc., in Little Ferry, New
Jersey, and the couple [petitioner and Mr. Korchak]
moved to Hackensack. Their first child was born that
year. Helen [petitioner] discontinued her work outside
the home to be a full-time mother and homemaker. In
1967, the couple’s second child was born and, in 1969,
their third and final child was born. During the years
between 1964 through 1976, Helen was a full-time home-
maker. In 1969, the Korchak’s moved from Hackensack,
- 30 -
NJ, to Westport, Connecticut.
In 1976, Helen Korchak returned to her post-doc-
toral studies and was hired as a research scientist to
conduct research at New York University under a grant
from the National Institute of Health. During 1979
through 1980, Helen held a post-doctoral fellowship
with the Arthritis Foundation, conducting immunology
research while still being the primary homemaker and
care provider for her family.
As Ernest rose to more and more responsible posi-
tions with Halcon, he decided to engage the services of
Merrill Lynch as a financial advisor. In 1982, Ernest
received a substantial dividend distribution from
Halcon. He sought advice that year from Merrill Lynch,
which put him in touch with Hamilton Gregg, a financial
advisory group. Hamilton Gregg recommended the pur-
chase of Madison Recycling, a company that had devel-
oped environmentally friendly recycling technology.
Ernest always had a strong interest in protecting the
environment and was attracted by the investment possi-
bilities, coupled with tax incentives. In 1982, Ernest
purchased a limited partnership interest in Madison
Recycling based on the advise of Merrill Lynch. He did
so without consulting Helen or discussing his interest
in various other investment possibilities with her.
Helen Korchak had no idea that Ernest purchased a lim-
ited partnership interest in Madison Recycling, or even
as to the nature of Madison Recycling’s business opera-
tions, until 1988, six years after the 1982 investment.
In 1982, Helen earned $15,339.00. Ernest earned
$466,309.00.
Halcon went out of business in 1986, at a time
when there were no employment possibilities for people
in Ernest’s field with his experience. He was aware of
a small company, Riverside Polymer Systems, Inc., which
was in financial difficulty. The company specialized
in waterborne coating technology intended to replace
solvent-based coatings. Ernest thought the company
could become profitable and bought a majority interest
in Riverside. He investment approximately $700,000.00
in Riverside, using his savings, including the 1982
federal income tax refund, and money from re-mortgaging
the family home. Unfortunately, the acceptance of
waterborne technology was slower than expected. River-
side struggled for about three years before Ernest had
- 31 -
to declare the company bankrupt in 1989. He lost his
entire investment and the 1982 refund.
During their entire marriage, Ernest took exclu-
sive charge of all financial matters, giving Helen
money weekly for groceries and household necessities.
While she at times wrote checks for groceries, family
clothing, and household necessities, the monthly bank
account statements were maintained and reviewed solely
by Ernest. Helen was engrossed during these years as a
post-graduate student, a homemaker and mother. Her
time was fully consumed by raising her children, main-
taining the household and performing scientific re-
search work as an immunologist, first at New York Uni-
versity from 1976 through 1986, and then at the Univer-
sity of Pennsylvania from 1986 through the present.
She never studied business or accounting.
While Helen was aware that income tax returns had
to be prepared and filed each year, her only role was
to provide Ernest with a copy of her W-2 form during
those years in which she worked. On the other hand,
Ernest was an engineer with business skills, who held a
very responsible executive/management position. Fi-
nances were always an area of interest to him. He
regarded the management of family financial affairs as
his sole responsibility. He undertook to engage the
services of a highly reputable accountant in 1966, an
accountant who was providing services to his employer
and to other management personnel at Halcon during
those years.
Just as she did during all the years of their
marriage, Helen followed the instruction and direction
of her husband to simply sign the 1982 tax return once
it had been prepared by their accountant and presented
to her for signing. During forty-five years of what
could only be described as a wonderful, trusting mar-
riage relationship, Ernest Korchak perceived his role
as having sole responsibility for the financial affairs
of the family.
During the tax year in question, 1982, Helen
Korchak was completely consumed by her responsibilities
as a mother of three children, then ages 17, 15, and
13, as a homemaker, and by her passionate interest in
her medical research in the field of immunology. As an
engineer and corporate executive/businessman, Ernest
- 32 -
had decided that financial matters were his sole re-
sponsibility and did not seek to discuss tax matters or
investments with Helen. When he had questions, he
discussed issues with his accountant and with his fi-
nancial advisor, trusting upon their judgment.
As mentioned above, Helen Korchak first became
aware of Ernest’s investment in Madison Recycling in
1988, when Ernest showed her a February 16, 1988 notice
from the Internal Revenue Service * * *. Prior to that
time, she had no knowledge or awareness that Ernest
claimed a loss from his Madison recycling investment in
1982. She admittedly did not review the Form 1040
individual income tax return when it was presented to
her for signing where marked. It had been prepared by
Ernest and a certified public accountant, and she
trusted her husband’s judgment. It was not until Er-
nest showed Helen the notice from the Internal Revenue
Service in 1988 that she became aware of the tax loss
claimed and the refund generated. She never received
any financial benefit from the refund. Ernest used the
entire refund proceeds as a loan or capital contribu-
tion for a new startup company, Riverside Polymer Sys-
tems, Inc., that filed for bankruptcy in 1989 and was
ultimately liquidated. In total, not known to Helen
until after the fact, Ernest loaned or invested
$700,000.00 by the time it was ultimately lost in bank-
ruptcy.
Helen Korchak is eligible for retirement. She has
a retirement fund that she has long contributed to.
Unfortunately, she is now faced with the prospect of a
horrific federal tax liability in excess of $2 million,
with interest and penalties. Should she be punished
for being a loving, trusting wife, a homemaker and
mother who also had career aspirations and a keen in-
terest in science? Had she asked any questions about
Madison Recycling, her husband and the accountant would
have reassured her. She never benefited from her hus-
band’s decision to invest in Madison Recycling. The
1982 tax refund was lost as part of her husband’s in-
vestment in a new startup company. Her husband con-
trolled the family’s finances and tax return prepara-
tion. All the facts recited herein concerning the 1982
tax return were not learned by Mrs. Korchak until 1988
through the present. Considering the equities in this
matter, it would be unduly harsh to find Mrs. Korchak
liable for the 1982 tax in question. It would be egre-
- 33 -
gious to take away her retirement at an age when she
earned that right. The innocent spouse relief was
designed for these circumstances. Your favorable con-
sideration and finding that Mrs. Korchak is indeed an
innocent spouse is respectfully requested. [Reproduced
literally.]
Sometime between October 8, 2004, and January 10, 2005,
respondent received from Mr. Korchak Form 12508, Questionnaire
for Non-Requesting Spouse, with respect to petitioner’s taxable
year 1982 (Mr. Korchak’s Form 12508). In Mr. Korchak's Form
12508, Mr. Korchak provided the responses indicated to the fol-
lowing questions with respect to taxable year 1982:
1. What is the marital status between you and the
(ex)spouse with whom you filed the joint return(s)
for the year(s) relief is being requested?
: Married and living together
* * * * * * *
2. Why did you file a joint return instead of your
own separate return?
I always filed married-joint upon the advice of my
CPA.
3. What was your involvement in the preparation of
the return(s)? For example, did you gather the
receipts and cancelled checks, just provide your
W-2's, etc.
I gathered all the W-2's; K-1's; 1099's, receipts,
etc and sent them on to my CPA
4. Did your (ex)spouse review the tax return(s)
before signing? 9 Yes : No
4a. If no, explain why not.
Preparation of the return has always been my
responsibility - Helen has always trusted me and
- 34 -
my CPA to prepare the tax return properly
4b. If yes, did your (ex)spouse ask you or the return
preparer for an explanation of any items or
amounts on the tax returns?
N/A
* * * * * * *
5. During the year(s) in question, did you have your
own separate bank account(s)? 9 Yes : No
* * * * * * *
6. During the year(s) in question did you and your
(ex)spouse have any joint bank account(s)?
: Yes 9 No
If yes, indicate the type of account(s).
: Checking 9 Savings 9 Other
6a. What access did your (ex)spouse have to the
account(s)? (For example, permitted to make
deposits, write checks and withdraw funds)?
Helen’s paycheck was directly deposited & she
would write checks for groceries * * * [and
professional expenses.]
6b. What funds were deposited to the account(s)?
Our wages: in 1982 my wages were $466,309 * * *
while Helen’s were $15,339 * * *
6c. Who made these deposits?
I believe we used direct deposit.
6d. What bills were paid out of the account(s)?
All household bills
6e. Who wrote and signed the checks?
I was the primary bill payer. I believe Helen
- 35 -
wrote check for groceries & professional expenses
6f. Did you review the monthly bank statements?
: Yes 9 No
6g. Did you balance the checkbook to the bank
statements?
: Yes 9 No
7. Did you pick up and open the household mail?
: Yes 9 No
8. Identify any periods of separation between you and
your (ex)spouse during the year(s) in question.
None
9. What was your highest level of education during
the year(s) in question?
Note any business or tax related courses you
completed by that time.
Sc.D in chemical engineering from MIT. No
business or tax related courses.
10. What was your (ex)spouse’s highest level of
education during the year(s) in question?
Note any business or tax related courses he or she
completed by that time.
Ph.D in physiology from Tufts University. No
business or tax related courses.
11. Have any assets been transferred from you to your
(ex)spouse? : Yes 9 No
If yes, list the assets and the date of transfer.
Explain why the assets were transferred.
9/14/87. Transfer of principal residence from
joint ownership solely to my wife. For estate
planning reasons, in order to utilize our estate
tax exemptions
* * * * * * *
- 36 -
12a. Was your (ex)spouse aware of any financial
problems you were having such as bankruptcy, high
credit card debt or difficulty paying monthly
living expenses? If yes, please explain.
I did not have any financial problems at the time.
13. If the tax years in question were audited, what
items, if any, changed? Were the changed items
yours or your (ex)spouse’s? (For example,
unreported income, disallowed deductions,
unclaimed credits)
The audit of my LTD. partnership [Madison
Recycling] disallowed my deduction and tax
credits. This was solely my investment.
* * * * * * *
15. If the items changed by the audit were yours, did
your (ex)spouse benefit from them? Explain.
No: The losses and tax credits resulted in a
refund of my withholdings. The refund was
invested in another business venture of mine which
failed in 1990. [Reproduced literally.]
On December 15, 2004, respondent received a memorandum from
petitioner’s attorney of record herein (petitioner’s December 15,
2004 memorandum). Petitioner’s December 15, 2004 memorandum set
forth (1) factual contentions that are substantially the same as
those set forth in petitioner’s attachment to petitioner’s Form
12507 and (2) legal arguments that are substantially the same as
those set forth in the posttrial briefs that petitioner filed
herein. Petitioner’s December 15, 2004 memorandum also stated in
pertinent part:
In 1982, unknown to Helen Korchak [petitioner],
her husband Ernest [Mr. Korchak] invested in various
- 37 -
partnerships and claimed a Schedule E loss in the
amount of $220,695.00 on their Form 1040 joint income
tax return. Mr. and Mrs. Korchak’s Form 1040 for 1982,
together with schedules, consists of 36 pages! There
were also losses and investment credits for Schedule C
activity for rental of buses that generated a loss
deduction of $24,961.00, and net short-term and long-
term loss deductions for U.S. Treasury Bills. The
Schedule E deductions consisted of a $64,753.00 loss
from Kelly-Brock Drilling Partners, a $57,087.00 part-
nership loss from Odyssey Partners, a $10,036.00 part-
nership loss from Matagorda Ltd., a $58,089.00 partner-
ship loss from Madison Recycling Associates, and a
$30,010.00 loss from two rental properties. From all
those various, sophisticated investments, the Internal
Revenue Service disallowed only the loss deduction from
Madison Recycling Associates, which resulted in the
deficiency at issue.
In 1988, Ernest showed Helen a February 16, 1988
Notice from the Internal Revenue Service disallowing
the Madison Recycling Associates loss claimed on their
1982 income tax return. Until then, Helen had no
awareness or knowledge of Ernest’s various investments.
Helen’s only knowledge about the 1982 income tax return
was to provide Ernest with a copy of her W-2 reporting
wages in the amount of $15,339.00. As of today, the
disallowed Madison Recycling Associates loss and tax
credits, with interest and penalties, result in an
asserted deficiency exceeding two and one half million
dollars ($2,500,000). The potential tax liability
exceeds the net value of the Korchak’s assets. At age
67, Helen could be faced with Internal Revenue Service
collection activity that could levy upon her entire
pension benefits and her home - a terrible hardship for
reporting her $15,339.00 wages on a joint income tax
return. * * *
* * * * * * *
• Her husband purchased interests in various part-
nerships and only the loss deduction from one
investment, Madison Recycling Associates, was
disallowed
• Funds for the purchase came from her husband’s
income
- 38 -
• Her husband maintained separate accounts for his
investments that Helen did not have access to
[Reproduced literally.]
After conducting an examination, respondent’s examiner
prepared workpapers dated January 10, 2005, in which that exam-
iner concluded that petitioner was not entitled to relief under
section 6015 for her taxable year 1982. The workpapers of re-
spondent’s examiner stated in pertinent part:
GENERAL INFORMATION
Helen M. Korchak [petitioner] has filed a valid Form
8857 requesting relief of the understatement for tax
year 1982. TP’s are still married and maintaining a
home together and are not considering divorce or sepa-
ration.
SPOUSE’S RESPONSE
NRS [Mr. Korchak] states he handled all financial mat-
ters and the RS [petitioner] trusted him and they both
trusted the CPA to prepare the return properly.
EVALUATION PROCESS
Year 1982
IRC 6015(b)
Liability arose before July 22, 1998
A balance was due as of July 22, 1998
RS did not make payments before July 22, 1998
Understatement of tax
Taxpayers are currently not divorced, widowed or
legally separated, and did not live apart prior to the
claim-relief is not available under IRC 6015(c)
Filed a joint return
Joint return is valid
There is enough information to determine the claim
Balance due remaining
RS did not sign the amended return or a waiver
There was a defaulted Statutory Notice of Deficiency in
the RS’s name-unagreed assessment
No OIC accepted
Claimed filed timely
- 39 -
Over $1,500 of understatement-full scope
Understatement of tax attributable to both spouses
Erroneous items: Disallowed partnership losses on TP’s
joint Schedule E
RS’s attribution does not meet the attribution
exceptions. This portion will be denied under IRC
6015(f).
Continue IRC 6015(b) for the portion attributable to
the NRS
Knowledge factors:
Background:
RS-Education: Ph.D. in Physiology. NRS-Education: Doctorate
Occupation: Research Scientist. of Science in
Chemical Engineering.
Occupation: Executive.
Involvement:
RS-RS states there was a joint NRS-NRS states he was
checking account for household the primary bill
matters and that the NRS had payer and that he
other separate accounts. RS managed the account,
states she used the joint balanced the check-
account to write checks for book, reviewed the
groceries, clothing for monthly bank state-
herself and the children and ments and picked up
household necessities. and opened the
household mail.
Lifestyle changes: None indicated.
NRS’s elusiveness: No evidence of elusiveness or
deceit. NRS states he
gathered all information and
sent it to the CPA. He states
the preparation of the return
had always been his
responsibility. He states the
RS did not ask questions that
she trusted him and the CPA.
Duty to inquire: RS states she did not review
the return when signing. She
states the NRS handles all
financial matters and she
trusted him and the CPA. She
states she was busy raising
three boys, managing
- 40 -
their household and working
full time.
Living arrangements: Lived together entire tax
year. TP’s are married and
continue to maintain their
home together.
RS had constructive knowledge of all erroneous items
when return was signed
Explanation: RS has failed to establish
that she had no knowledge or
reason to know of the
overstated deductions. She
failed to satisfy her duty to
review the return and to
inquire as to the content.
The return resulted in a
refund of $95,488.96.[18]
Claim denied under IRC 6015(b)
* * * * * * *
IRC 6015(f)
Eligibility factors:
Evaluating the portion of deficiencies attributable to
the NRS only
Relief is not available under IRC 6015(b) & 6015(c)
Filed a joint return
Liability unpaid, or RS may have refundable payments
Not a fraudulent return
No fraudulent transfer of assets
No disqualified assets transferred
Tier II factors:
Taxpayers are currently not divorced, widowed or
legally separated, and did not live apart prior to the
claim for at least 12 consecutive months
No economic hardship Against
18
The 1982 joint tax return claimed a refund of $92,970.
- 41 -
Explanation: Economic hardship is not
indicated. TP’s are still
married and continue to
maintain their home together.
They continue to file joint
returns through the most
recently filed tax year and
the joint TXI is $227,674.00
No marital abuse
No poor mental or physical health
No legal obligation established
RS had knowledge or reason to know Against
Explanation: RS failed to satisfy her duty
to review the return or to
inquire. The return showed an
adjusted gross income of over
$300,000.00, a tax liability
of only $3198 and a refund of
$92,970. RS’ had reason to
know there was a substantial
loss taken.
No significant benefit gained For
Explanation: No significant benefit
evident.
Made a good faith effort to comply with For
the tax laws
Explanation: RS is compliant. TP’s have
continued to file joint tax
returns through the most
recently filed tax year.
Unique circumstances: TP’s state that in 1987 prior
to receiving notice of the
deficiency on this tax year
and as part of their estate
planning, the ownership of the
primary residence was
transferred from joint
ownership to the RS’s
individual ownership.
Not meeting Tier II factors - deny claim
- 42 -
Tier II consideration: Based on the above facts it is
equitable to hold the RS
liable for the balance. RS
failed to establish marital
status or economic hardship,
there are no extenuating
circumstances such as abuse,
poor health or legal
obligation and RS had reason
to know.
Tier II factors not met - deny
Claim denied under IRC 6015(f) - full scope
CONCLUSION
1982 - Denied under 6015(b),(c),(f) [Reproduced
literally.]
At the time of the trial, petitioner and/or Mr. Korchak
owned the following properties:
Owner Type of Property Value
Petitioner Personal Residence1 $750,000
Petitioner IRA 195,220
Petitioner Investment Insurance Trust 9,509
Petitioner 1999 Saturn Automobile 3,500
Petitioner Checking Account 59,000
Petitioner House Contents 10,000
Petitioner CRI2 1,000
Petitioner Annuity Contract 466,345
Petitioner and Joint Checking Account 28,000
Mr. Korchak
Mr. Korchak IRAs 448,595
Mr. Korchak Boat 1,000
Total $1,972,169
1
From Aug. 15, 1986, until Sept. 14, 1987, petitioner and Mr. Korchak
owned as tenants by the entirety the residence in which they were living. On
Sept. 14, 1987, for estate planning reasons, Mr. Korchak transferred to
petitioner for no consideration his interest in the residence in which they
were living.
2
The record does not indicate what “CRI” means.
- 43 -
At the time of the trial, the residence in which petitioner
and Mr. Korchak were living that petitioner owned was subject to
liabilities totaling $139,000.19
Petitioner filed a second petition with the Court with
respect to her taxable year 1982. In that petition, petitioner
claimed that she is entitled to relief under section 6015 with
respect to the deficiency in tax assessed against petitioner and
Mr. Korchak for their taxable year 1982 as well as interest
thereon as provided by law.
OPINION
Section 6015(b)
Introduction
Petitioner claims that she is entitled to relief under
section 6015(b) for her taxable year 1982.20 Section 6015(b)
provides in pertinent part:
SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON
JOINT RETURN.
* * * * * * *
(b) Procedures For Relief From Liability Applicable
to All Joint Filers.--
(1) In general.--Under procedures prescribed
by the Secretary, if–
19
The record does not disclose whether petitioner or Mr.
Korchak had any other liabilities at the time of the trial.
20
In the alternative, petitioner claims relief under sec.
6015(f) for her taxable year 1982.
- 44 -
(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 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.
Section 6015(b)(1) is similar to section 6013(e)(1). We may
look at cases interpreting section 6013(e)(1) for guidance when
analyzing parallel provisions of section 6015. See Jonson v.
Commissioner, 118 T.C. 106, 119 (2002), affd. 353 F.3d 1181 (10th
Cir. 2003). The failure by a spouse requesting relief (request-
ing spouse) under section 6015(b) to satisfy any of the require-
ments of that section prevents such spouse from qualifying for
- 45 -
such relief. Alt v. Commissioner, 119 T.C. 306, 313 (2002),
affd. 101 Fed. Appx. 34 (6th Cir. 2004).
The parties agree that petitioner satisfies section
6015(b)(1)(A), (B), and (E). Petitioner argues, and respondent
disputes, that she satisfies section 6015(b)(1)(C) and (D).
Section 6015(b)(1)(C)
Pursuant to section 6015(b)(1)(C), petitioner must establish
that in signing the 1982 joint tax return she did not know, and
had no reason to know, of the understatement of tax in that
return attributable to the claimed $58,089 Madison Recycling loss
and the claimed Madison Recycling tax credits of $114,407 (under-
statement in the 1982 joint tax return).
Respondent does not dispute that in signing the 1982 joint
tax return petitioner did not have actual knowledge of the
understatement in the 1982 joint tax return. The parties dispute
whether in signing the 1982 joint tax return petitioner had
reason to know of the understatement in the 1982 joint tax
return.
According to respondent, petitioner had constructive knowl-
edge of the items reported in the 1982 joint tax return. Respon-
dent is correct that a taxpayer who signs a tax return without
reviewing it is charged with constructive knowledge of its
contents. See Bokum v. Commissioner, 94 T.C. 126, 148 (1990),
affd. 992 F.2d 1132 (11th Cir. 1993). We must nonetheless
determine whether in signing the 1982 joint tax return petitioner
- 46 -
had reason to know of the understatement in the 1982 joint tax
return. In making that determination, we bear in mind that a
requesting spouse has reason to know of an understatement if a
reasonably prudent taxpayer under the circumstances of the
requesting spouse at the time of signing a tax return could have
been expected to know that the tax liability stated in such
return was erroneous or that further investigation was warranted.
Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989),
affg. T.C. Memo. 1988-63; Shea v. Commissioner, 780 F.2d 561, 566
(6th Cir. 1986), affg. in part and revg. in part on another
ground T.C. Memo. 1984-310; Bokum v. Commissioner, supra.
In resolving whether in signing a tax return a requesting
spouse had reason to know of the understatement in such return,
we consider whether the requesting spouse was aware of the
circumstances of the transaction(s) that gave rise to the er-
ror(s) in such return. See Bokum v. Commissioner, supra at 145-
146.21 In making that determination, we may examine several
factors, including: (1) The requesting spouse’s level of educa-
tion; (2) the requesting spouse’s involvement in the family’s
financial affairs; (3) the nonrequesting spouse’s evasiveness and
deceit concerning the family’s financial affairs; and (4) the
presence of expenditures that are lavish or unusual when compared
to the requesting spouse’s past standard of living. See Stevens
21
See also Hillman v. Commissioner, T.C. Memo. 1993-151.
- 47 -
v. Commissioner, supra; Butler v. Commissioner, 114 T.C. 276, 284
(2000); Flynn v. Commissioner, 93 T.C. 355, 365-366 (1989). (We
shall hereinafter refer to the above factors as the education
factor, the involvement in financial affairs factor, the evasive-
ness and deceit factor, and the lavish or unusual expenditures
factor, respectively.)
We now address whether at the time of signing the 1982 joint
tax return petitioner was aware of the circumstances of the
transactions in which Madison Recycling engaged that resulted in
the understatement in the 1982 joint tax return. See Bokum v.
Commissioner, supra.22 At the time she signed the 1982 joint tax
return, petitioner was not even aware of Mr. Korchak’s Madison
Recycling investment, let alone the circumstances of the transac-
tions in which Madison Recycling engaged that resulted in Madison
Recycling’s erroneously claimed $704,111 loss and erroneously
claimed $7 million basis for investment tax credit purposes and
business energy investment tax credit purposes.23
22
See also Hillman v. Commissioner, supra.
23
Madison Recycling’s erroneously claimed $704,111 loss and
erroneously claimed $7 million basis for investment tax credit
purposes and business energy investment tax credit purposes, in
turn, resulted in Mr. Korchak’s erroneously reporting in the 1982
joint tax return the claimed $58,089 Madison Recycling loss, the
claimed $577,500 of basis attributable to Madison Recycling for
investment tax credit purposes and business energy investment tax
credit purposes, and the claimed Madison Recycling tax credits of
$114,407.
- 48 -
We find the instant record to be materially distinguishable
from Bokum v. Commissioner, supra. In Bokum, we found that the
requesting spouse should have been alerted by the tax return
preparer’s failure to sign the tax return in question. Id. at
148. In contrast, we have found herein that the 1982 joint tax
return was signed by a return preparer and that the signature of
the return preparer on that return indicated to petitioner that
such return was prepared accurately. Moreover, in Bokum, we
found that at the time the requesting spouse signed the return in
question she was aware of the sale of a ranch, the tax treatment
of which was at issue, and that a cursory review of the tax
return would have brought to the requesting spouse’s attention
the distribution resulting from that sale as well as the tax
treatment of that distribution. Id. at 146-147. In contrast, we
have found herein that at the time petitioner signed the 1982
joint tax return she was not even aware of Mr. Korchak’s Madison
Recycling investment. We have also found (1) that there was
nothing about the claimed $58,089 Madison Recycling loss that
would have made it stand out in relationship to the other part-
nership losses claimed in the 1982 joint tax return and (2) that
it was not obvious from reviewing Form 3468 included as part of
the 1982 joint tax return that $57,750 of the claimed $59,835
investment tax credit was attributable to Madison Recycling and
that the claimed $56,657 business energy investment tax credit
- 49 -
was attributable to Madison Recycling.
With respect to the claimed $58,089 Madison Recycling loss,
although that loss was set forth in Statement 2, that statement
also showed the following respective claimed losses of the
following partnerships, which accounted for $131,876 of the total
claimed partnership losses of $189,965 shown in Schedule E:
Name of Partnership Partnership Loss
Kelly-Brock Drilling Partners 1981-1 $64,753
Odessey Partners 81 Limited Partnership 57,087
Matagorda Limited Partnership II 10,036
Thus, Statement 2 showed a claimed loss from the Kelly-Brock
Drilling Partners 1981-1 partnership that was greater than the
claimed $58,089 Madison Recycling loss and a claimed loss from
the Odessey Partners 81 Limited partnership that was approxi-
mately equal to the claimed $58,089 Madison Recycling loss.
With respect to the claimed Madison Recycling credits of
$114,407, neither Schedule E, which had a notation to Statement
2, nor Statement 2 referred to Form 3468, the form included with
the 1982 joint tax return in which the respective bases for any
claimed investment tax credit and any claimed business energy
investment tax credit and the computation of such respective
credits were to be detailed. Form 3468 included as part of the
joint 1982 tax return showed (1) a claimed $59,835 investment tax
credit and (2) a claimed $56,657 business energy investment tax
credit. That form did not, however, indicate the entity or
- 50 -
entities to which those respective claimed credits were attribut-
able.
It is also significant that an examination of the education
factor, the involvement in financial affairs factor, the evasive-
ness and deceit factor, and the lavish or unusual expenditures
factor further supports a finding that a reasonably prudent
taxpayer under petitioner’s circumstances at the time of signing
the 1982 joint tax return could not have been expected to know
that the tax liability stated in that return was erroneous.
With respect to the education factor, there is no question
that petitioner is highly educated. However, at the time of the
trial, petitioner did not have any education or work experience
in tax, financial, or accounting matters. We find nothing in the
record regarding petitioner’s education and experiences that
would, or should, have alerted her to the understatement in the
1982 joint tax return.
With respect to the involvement in financial affairs factor,
respondent concedes in the face of the instant record “that the
record supports petitioner’s contention that she had little
involvement in her family’s financial affairs.”24
24
We have found: (1) Based on their respective personal and
business backgrounds and experiences, petitioner and Mr. Korchak
believed throughout their marriage that managing their family’s
finances should be Mr. Korchak’s responsibility and that Mr.
Korchak was better suited than petitioner to do so; (2) Mr.
Korchak assumed the responsibility of managing their family’s
finances, and petitioner relied upon him to do so; (3) as part of
(continued...)
- 51 -
With respect to the evasiveness and deceit factor, peti-
tioner contends:
Ernest [Mr. Korchak] secretly and effectively excluded
petitioner from information concerning family finances.
He even concealed in a subsequent year the loss of a
$700,000.00 investment. His policy of secrecy and not
disclosing financial matters deceived the petitioner.
Respondent counters, and we agree on the record before us, that
Mr. Korchak was not evasive and did not deceive petitioner with
respect to their financial affairs. Nonetheless, as discussed
supra note 24, with respect to the involvement in financial
affairs factor, petitioner was not involved in managing her
family’s finances, making financial decisions for her family, or
the reporting of any tax consequences of such financial decisions
24
(...continued)
his responsibility for managing the family finances, Mr. Korchak
made all the family financial decisions; (4) Mr. Korchak did not
discuss those decisions with petitioner; (5) throughout their
marriage, petitioner was generally unaware of bank accounts or
brokerage or other investment accounts in Mr. Korchak’s name
alone or in the names of Mr. Korchak and petitioner; (6) at all
relevant times, Mr. Korchak was responsible for opening and
reviewing all the family’s mail, including bills, tax notices,
documents pertaining to investments and other financial matters,
bank statements, including any joint checking account statements,
and petitioner relied upon him to do so; and (7) petitioner did
not become aware of Mr. Korchak’s Madison Recycling investment
until Feb. 2, 1986, when she and Mr. Korchak signed Form 872 with
respect to their taxable year 1982. We have also found that
petitioner was not involved in the reporting of any tax conse-
quences of such financial decisions that were claimed in the
joint tax returns, including the 1982 joint tax return, that she
and Mr. Korchak filed. In this connection, we have found that
petitioner’s role in the preparation of such returns was limited
to providing Mr. Korchak with any Form W-2 and IRS information
returns that she received as well as any other tax-related
information that she had.
- 52 -
that were claimed in the joint tax returns, including the 1982
joint tax return, that petitioner and Mr. Korchak filed.
With respect to the lavish or unusual expenditures factor,
respondent concedes in the face of the instant record “that the
record does not reflect that the * * * taxes saved due to the
Madison loss deduction and investment tax credit led to signifi-
cant changes in petitioner’s and Mr. Korchak’s lifestyle or
spending patterns.”25
25
We have found: (1) During 1981 and 1982, Mr. Korchak
received Halcon distributions totaling $1,539,269 and $466,309,
respectively; (2) petitioner and Mr. Korchak made a considered
judgment not to change their family’s lifestyle in any way as a
result of Mr. Korchak’s having received such distributions; and
(3) they made that judgment because they did not want to spoil
their children by having a lavish lifestyle. Nothing in the
record suggests that the desire of petitioner and Mr. Korchak not
to spoil their children by having a lavish lifestyle was limited
to the Halcon distributions that Mr. Korchak received in 1981 and
1982. Moreover, in petitioner’s Form 12510 and petitioner’s
attachment to petitioner’s Form 12507, petitioner indicated, and
respondent does not dispute here, that Mr. Korchak, without
consulting her, invested the $92,970 refund claimed in the 1982
joint tax return in Riverside, which filed for bankruptcy in
1989, and that, as a result of that bankruptcy proceeding, Mr.
Korchak lost his entire $700,000 investment in that company. In
addition, in Mr. Korchak’s Form 12508, Mr. Korchak indicated, and
respondent does not dispute here, that Mr. Korchak invested the
$92,970 refund claimed in the 1982 joint tax return in a business
venture of his (namely, Riverside), which later failed. With
respect to the refund of $92,970 claimed in the 1982 joint tax
return, petitioner testified that she had no specific recollec-
tion regarding that return, that she and Mr. Korchak usually
received tax refunds, and that she had no specific recollection
of the refund of $92,970 claimed in the 1982 joint tax return,
although there may have been such a claimed refund. We are
unable to find on the record before us that at the time she
signed the 1982 joint tax return petitioner was aware of the
$92,970 refund claimed in that return. Even if petitioner were
aware at that time of that claimed refund, that would not change
(continued...)
- 53 -
On the record before us, we find that a reasonably prudent
taxpayer under petitioner’s circumstances at the time of signing
the 1982 joint tax return could not have been expected to know
that the tax liability stated in that return was erroneous.
It is respondent’s position that, even if the Court were to
find, as we have, that a reasonably prudent taxpayer under
petitioner’s circumstances at the time of signing the 1982 joint
tax return could not have been expected to know that the tax
liability stated in that return was erroneous, petitioner none-
theless had a duty to investigate further whether the tax liabil-
ity stated in that return was erroneous (duty to inquire). In
support of that position, respondent states:
Had petitioner reviewed the 1982 return, she would have
discovered that she and Mr. Korchak were claiming a
substantial loss and tax credit attributable to the
Madison investment, as that information was clearly set
forth in a schedule attached to the return. The Madi-
son loss [of $58,089] and tax credit [totaling
$114,407] were large enough to put her on notice that
further inquiry was warranted to determine the legiti-
macy of those tax benefits. Thus, under the Bokum
standard, she had reason to know of the understatement.
With respect to the claimed Madison Recycling credits of
$114,407, we disagree with respondent’s contention that those
claimed credits were “clearly set forth in a schedule attached to
the return.” As discussed above, we have found that it was not
obvious from reviewing Form 3468 included with the 1982 joint tax
25
(...continued)
our findings and conclusions herein.
- 54 -
return that $57,750 of the claimed $59,835 investment tax credit
was attributable to Madison Recycling and that the claimed
$56,657 business energy investment tax credit was attributable to
Madison Recycling.
With respect to the claimed $58,089 Madison Recycling loss,
we disagree with respondent’s contention that that claimed loss
was large enough to put petitioner on notice that further inquiry
was warranted to determine whether it was proper. As discussed
above, Statement 2 included with the 1982 joint tax return showed
a claimed loss from the Kelly-Brock Drilling Partners 1981-1
partnership that was greater than the claimed $58,089 Madison
Recycling loss and a claimed loss from the Odessey Partners 81
Limited partnership that was approximately equal to the claimed
$58,089 Madison Recycling loss. We have found that the amount of
the claimed $58,089 Madison Recycling loss would not have made
that claimed loss stand out in relationship to the other partner-
ship losses claimed in Statement 2.
Even if, as respondent argues, both the claimed $58,089
Madison Recycling loss and the claimed Madison Recycling credits
of $114,407 had been “clearly set forth in a schedule attached to
the return”, as discussed above, at the time petitioner signed
the 1982 joint tax return she must have had sufficient knowledge
of the circumstances of the transactions in which Madison Recy-
cling engaged that resulted in the understatement in that return
- 55 -
so as to permit her to inquire into the appropriate tax treatment
of such transactions. See Bokum v. Commissioner, 94 T.C. at
148.26 As also discussed above, at the time petitioner signed
the 1982 joint tax return, she was not even aware of Mr.
Korchak’s Madison Recycling investment, let alone the circum-
stances of the transactions in which Madison Recycling engaged
that resulted in Madison Recycling’s erroneously claimed $704,111
loss and erroneously claimed $7 million basis for investment tax
credit purposes and business energy investment tax credit pur-
poses.27
On the record before us, we find that a reasonably prudent
taxpayer under petitioner’s circumstances at the time of signing
the 1982 joint tax return would not have had a duty to investi-
gate further whether the tax liability stated in that return was
erroneous.28
26
See also Hillman v. Commissioner, T.C. Memo. 1993-151.
27
See supra note 23.
28
The Court has held that a requesting spouse may satisfy a
duty to inquire by questioning his or her spouse about the
accuracy of a joint tax return and receiving a plausible explana-
tion. See, e.g., Foley v. Commissioner, T.C. Memo. 1995-16;
Estate of Killian v. Commissioner, T.C. Memo. 1987-365. Assuming
arguendo that we had found that petitioner had a duty to inquire,
she would have satisfied that duty by asking Mr. Korchak before
she signed the 1982 joint tax return about the claimed $58,089
Madison Recycling loss and the claimed Madison Recycling tax
credits of $114,407 and receiving assurance from him that that
claimed loss and those claimed credits were proper. Mr. Korchak
testified credibly, and we have found, that if petitioner had
questioned him before she signed the 1982 joint tax return, he
(continued...)
- 56 -
Based upon our examination of the entire record before us,
we find that in signing the 1982 joint tax return petitioner did
not know, and had no reason to know, of the understatement in
that return. On that record, we further find that petitioner
satisfies section 6015(b)(1)(C) for her taxable year 1982.
Section 6015(b)(1)(D)
Pursuant to section 6015(b)(1)(D), petitioner must establish
that, taking into account all the facts and circumstances, it is
inequitable to hold her liable for the deficiency in tax attrib-
utable to the understatement in the 1982 joint tax return. The
requirement in section 6015(b)(1)(D) is virtually identical to
the requirement of former section 6013(e)(1)(D), and cases
interpreting former section 6013(e) remain instructive to our
analysis. Alt v. Commissioner, 119 T.C. at 313-314.
The factors that we consider in determining whether it would
be inequitable for purposes of section 6015(b)(1)(D) are the same
factors that we consider in determining whether it would be
inequitable for purposes of section 6015(f). See id. at 316.
One factor considered in determining whether it would be inequi-
table for purposes of section 6015(f) and thus for purposes of
28
(...continued)
would have assured her that the claimed $58,089 Madison Recycling
loss and the claimed Madison Recycling credits of $114,407 were
proper. We shall not penalize petitioner for failing to perform
the act of asking Mr. Korchak about that claimed loss and those
claimed credits where such an inquiry would have resulted in his
assuring her that that claimed loss and those claimed credits
were appropriate.
- 57 -
section 6015(b)(1)(D), see id., is whether in signing the tax
return the requesting spouse did not know, and had no reason to
know, of an understatement in that return, see Rev. Proc. 2003-
61, sec. 4.03(2)(a)(iii)(B), 2003-2 C.B. 296, 298. Moreover, in
determining whether a requesting spouse satisfies section
6015(b)(1)(D), we may consider, inter alia, whether such spouse
satisfies section 6015(b)(1)(C).29 We have found that petitioner
satisfies section 6015(b)(1)(C) for her taxable year 1982. We
further find that in signing the 1982 joint tax return petitioner
did not know, and had no reason to know, of the understatement in
that return for purposes of section 6015(b)(1)(D).
Other relevant factors that we may consider in determining
whether a requesting spouse satisfies section 6015(b)(1)(D)
include whether (1) the requesting spouse was deserted, divorced,
or separated (marital status factor); (2) the requesting spouse
would suffer economic hardship if relief were not granted (eco-
nomic hardship factor); and (3) the requesting spouse made a good
faith effort to comply with the tax laws for the taxable years
following the taxable year to which the request for relief
relates (tax compliance factor). See Washington v. Commissioner,
120 T.C. 137, 147 (2003); Alt v. Commissioner, supra at 314-316.
29
See Halton v. Commissioner, T.C. Memo. 2005-209.
- 58 -
With respect to the marital status factor, petitioner and
Mr. Korchak were still married and living together at the time of
the trial.
With respect to the economic hardship factor, pursuant to
Madison Recycling Associates v. Commissioner, T.C. Memo. 2001-85,
respondent assessed against petitioner and Mr. Korchak a defi-
ciency of $140,388 in tax for their taxable year 1982 and inter-
est thereon as of October 3, 2003, of $1,107,797.85 resulting
from the disallowance of the claimed $58,089 Madison Recycling
loss and the claimed Madison Recycling tax credits of $114,407.
If the Court were to deny petitioner’s claim under section 6015,
petitioner and Mr. Korchak would be jointly and severally liable
for that assessed deficiency and that assessed interest, none of
which had been paid as of the time of the trial. Moreover,
pursuant to Korchak v. Commissioner, T.C. Memo. 2005-244, and the
parties’ stipulation to be bound, see supra note 3, if the Court
were to deny petitioner’s claim under section 6015, petitioner
and Mr. Korchak would be jointly and severally liable for addi-
tions to tax for their taxable year 1982 under sections
6653(a)(1), 6653(a)(2), and 6659 of $7,019.40, 50 percent of the
interest due on the assessed deficiency of $140,388, and
$34,322.10, respectively.
Petitioner contends that at the time of the trial the total
liability with respect to her taxable year 1982 “greatly exceeds”
- 59 -
$2 million.30 Respondent contends that at that time that liabil-
ity was approximately $2 million. Suffice it to say that the
parties agree that at the time of the trial the total liability
with respect to petitioner’s taxable year 1982 was at least $2
million. Moreover, interest as provided by law continues to
accrue thereafter with the passage of time. See sec. 6601.
Thus, the total liability for taxable year 1982 continues to
increase with the passage of time (1982 total liability).
Respondent maintains, and petitioner does not dispute, that,
because petitioner and Mr. Korchak were still married at the time
of the trial, it is appropriate to consider the income, the
assets, and the liabilities of both of them in determining
whether petitioner would suffer an economic hardship if she were
required to pay the 1982 total liability. The parties agree that
at the time of the trial the total value of the assets of peti-
tioner and Mr. Korchak was $1,972,169. The parties also agree
that at that time the residence in which petitioner and Mr.
Korchak were living that petitioner owned was subject to liabili-
ties totaling $139,000.31
30
In petitioner’s December 15, 2004 memorandum that she
submitted to respondent during the consideration by respondent’s
examiner of petitioner’s claim under sec. 6015, petitioner
indicated that, as of Dec. 13, 2004, the total liability with
respect to her taxable year 1982 exceeded $2.5 million.
31
See supra note 19.
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If petitioner and Mr. Korchak were to use all of the assets
owned at the time of the trial, they would be unable to pay even
the $2 million of the liability for their taxable year 1982 that,
at a minimum, the parties agree existed at that time. And they
would be left with no assets to pay the balance of that liabil-
ity, including the interest as provided by law that continues to
accrue and that causes that liability to continue to increase.
All that petitioner and Mr. Korchak would be left with to pay the
balance of the 1982 total liability, as well as all of their
basic reasonable living expenses,32 would be petitioner’s annual
salary of $115,000 and Mr. Korchak’s annual salary of $90,000
that they were receiving at the time of the trial.33 Of course,
those salaries would be subject to Federal and State income taxes
and Social Security taxes, as required by law. Moreover, as of
the time of the trial, petitioner intended to retire in 2007 at
age 70.34
32
The basic reasonable living expenses of petitioner and Mr.
Korchak include the expenses with respect to the $139,000 of
liabilities to which their residence that petitioner owned at the
time of the trial was subject.
33
During 2004, the year before the trial took place, in
addition to the respective salaries of petitioner and Mr.
Korchak, they received other income from various sources totaling
$60,003. The record does not disclose how much, if any, income
from such sources petitioner and Mr. Korchak expect to receive
after 2004.
34
Although Mr. Korchak testified that as of the time of the
trial he had no intention of retiring, we note that he was 71
years old at that time.
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On the record before us, we find that petitioner would
suffer an economic hardship if she were required to pay the 1982
total liability.
With respect to the tax compliance factor, petitioner
contends, and respondent does not dispute, that she complied with
the tax laws for her taxable years following her taxable year
1982.
Based upon our examination of the entire record before us,
we find that, taking into account all the facts and circum-
stances, it is inequitable to hold petitioner liable for the
deficiency in, and additions to, tax (as well as interest thereon
as provided by law) attributable to the understatement in the
1982 joint tax return. On that record, we further find that
petitioner satisfies section 6015(b)(1)(D) for her taxable year
1982.
Conclusion
Based upon our examination of the entire record before us,
we find that petitioner is entitled to relief under section
6015(b) with respect to her taxable year 1982.35
We have considered all of the parties’ contentions and
arguments that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
35
In light of our finding that petitioner is entitled to
relief under sec. 6015(b) with respect to her taxable year 1982,
we need not address petitioner’s alternative claim for relief
under sec. 6015(f) for that year.
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To reflect the foregoing,
Appropriate decisions for
petitioner will be entered.