The opinion
T.C. Memo. 2007-234
UNITED STATES TAX COURT
DAVID BRUCE BILLINGS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6148-03. Filed August 16, 2007.
Patrick Wiesner, for petitioner.
Vicki L. Miller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HOLMES, Judge: David Billings, the petitioner, began this
case to be relieved from liability for the tax owed on money that
his wife embezzled from her employer without his knowledge. When
this case was first before us, we dismissed it for lack of
jurisdiction. Billings v. Commissioner, 127 T.C. 7 (2006)
(Billings I). Billings appealed our decision and, while his
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appeal was pending, Congress amended the Code to give us
jurisdiction over cases like his. His case was remanded to us
for reconsideration in light of the new law. We examine first
whether the new law gives us jurisdiction. Concluding that it
does, we then move on to consider the merits of his case.
FINDINGS OF FACT
The parties submitted this case for decision on stipulated
facts, which means that the “Background” section of our previous
opinion can now be more properly labeled “Findings of Fact.” The
facts are set out in greater detail in Billings I, 127 T.C. at 8-
11, but to recapitulate briefly: David Billings married Rosalee
in 1996. He was working at General Motors, and she was a payroll
clerk at the local electric company. The Billingses kept two
checking accounts, and while both were jointly held, David and
Rosalee each kept almost exclusive control over one of them. In
1999, Rosalee transferred money from her employer’s payroll
account into the checking account that she controlled and into
which she had her own pay directly deposited.
Her embezzlement continued into 2000, but Rosalee kept it
secret from her husband until the company caught her. She then
told her husband what she had done and hired a lawyer. By the
time that she was caught, Rosalee and her husband had already
filed their joint 1999 tax return, and she had left off the
nearly $40,000 that she had stolen that year. Her lawyer advised
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her to report the embezzlement income on an amended return
because, he said, a judge would probably be more lenient in
sentencing her if she took responsibility for her actions. But
section 1.6013-1(a)(1) of the income tax regulations created a
problem.1 It prohibits spouses who have already filed a joint
return for a particular year from filing amended returns changing
their status to married-filing-separately once the deadline to
file returns has passed. The due date for the Billingses’ 1999
tax year--April 15, 2000--was long past, and so David signed the
amended return.
That return showed an increase in taxable income, and an
increase in tax of over $16,000. When David signed the amended
return, he knew that neither he nor his wife expected to be able
to pay this increased tax. In 2002, the Billingses filed for
bankruptcy and received a discharge, which affected neither
Rosalee’s obligation to repay the money she’d embezzled nor her
own liability for the unpaid 1999 taxes. 11 U.S.C. secs.
523(a)(1), 507(a)(8) (2000). David retired and began collecting
a pension--although, as of the date the case was originally
submitted, he continued to work two other jobs. He and his wife
have filed timely tax returns for later years as they came due.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code and regulations in effect for the year
in issue.
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David asked the IRS for relief from joint liability for the
unpaid 1999 tax but, in November 2002, the IRS denied his request
based on “all the facts and circumstances,” particularly because:
you failed to establish that it was
reasonable for you to believe the tax
liability was paid or was going to be paid
at the time you signed the amended return.
David appealed, and the IRS issued its final determination, again
denying him relief because he did not believe when he signed the
amended return that the tax would be paid.
David then petitioned our Court to overturn the
Commissioner’s determination. Such a petition is called a
nondeficiency stand-alone petition--“nondeficiency” because the
IRS accepted his amended return as filed and asserted no
deficiency against him, and “stand-alone” because his claim for
innocent-spouse relief was made under section 6015 and not as
part of a deficiency action or in response to an IRS decision to
begin collecting his tax debt through liens or levies. When this
case was first before us, our jurisdiction over such petitions
was controversial. We had first held that we did have
jurisdiction, Ewing v. Commissioner, 118 T.C. 494 (2002), but
then the Ninth Circuit reversed us in Commissioner v. Ewing, 439
F.3d 1009 (9th Cir. 2006), and the Eighth Circuit followed in
Bartman v. Commissioner, 446 F.3d 785, 787-788 (8th Cir. 2006),
affg. in part, vacating in part T.C. Memo. 2004-93. After these
two cases, we revisited the question and in Billings I followed
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those circuit courts and dismissed David’s case for a lack of
jurisdiction.
David appealed our decision to the Tenth Circuit (he was a
resident of Kansas when he filed his petition). Congress amended
section 6015 to give us jurisdiction over nondeficiency stand-
alone cases, and the Tenth Circuit remanded the case to us for
reconsideration. We then ordered the parties to report whether
the Billingses’ tax liability remained unpaid, and they recently
filed a stipulation agreeing that it did.
OPINION
As we summarized this part of tax law in our earlier
opinion, Billings I, 127 T.C. at 11-12, a married couple who file
their Federal tax return jointly are both responsible for the
return’s accuracy and are both jointly and severally liable for
the entire tax due. Sec. 6013(d)(3); Butler v. Commissioner, 114
T.C. 276, 282 (2000). Section 6015, however, directs the
Commissioner to relieve qualifying innocent spouses from that
liability under certain circumstances. Sec. 6015(a). An
innocent spouse may seek relief from liability under section
6015(b) if he can show that he was justifiably ignorant of
unreported income or inflated deductions. He may have his tax
liability allocated between himself and an estranged or former
spouse under section 6015(c). Or, like David, he may look to
section 6015(f) for relief. Subsection (f) relief is available
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only to a spouse who is ineligible for relief under subsections
(b) and (c) and who shows that "taking into account all the facts
and circumstances, it is inequitable to hold [him] liable for any
unpaid tax or any deficiency (or any portion of either).”
David and the Commissioner stipulated that he did not
qualify for relief under either section 6015(b) or (c) because no
deficiency was ever asserted against him and his wife. They were
right to do so, because both those subsections require a
deficiency as a condition of relief. See, e.g., Block v.
Commissioner, 120 T.C. 62, 66 (2003). That left David able to
look only for equitable relief under subsection (f), and when the
Commissioner denied it to him, left him with the problem of where
to seek judicial review. When he first came to us, section
6015's jurisdictional provision read:
SEC. 6015(e). Petition for Review by Tax Court.
(1) In general.--In the case of an
individual against whom a deficiency has been
asserted and who elects to have subsection
(b) or (c) apply--[Emphasis added.]
(A) In general.--In addition to
any other remedy provided by law, the
individual may petition the Tax Court
(and the Tax Court shall have
jurisdiction) to determine the
appropriate relief available to the
individual under this section if such
petition is filed--
This was the language we construed in Billings I to require
petitioners like David--i.e., those filing stand-alone section
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6015(f) petitions--to have had a deficiency asserted against
them. But Congress amended section 6015(e) after we released
Billings I to insert “or in the case of an individual who
requests equitable relief under section 6015(f)” into section
6015(e). The Tax Relief and Health Care Act of 2006 (TRHCA),
Pub. L. 109-432, div. C, sec. 408(a), 120 Stat. 2922, 3061. The
opening line of section 6015(e) now reads:
SEC. 6015(e). Petition for Review by Tax Court.
(1) In general.--In the case of an
individual against whom a deficiency has been
asserted and who elects to have subsection
(b) or (c) apply, or in the case of an
individual who requests equitable relief
under subsection (f)--
The amendment is effective for liabilities remaining unpaid
on December 20, 2006. TRHCA sec. 408(c), 120 Stat. 3062. No
suspense here: The parties’ stipulation that David’s 1999 tax
liability remains unpaid assures us that we do have jurisdiction
to review the Commissioner’s decision to deny him relief.
We are mindful that our review of that decision is for abuse
of discretion. See Butler v. Commissioner, 114 T.C. 276, 287-92
(2000). This standard does not ask us to decide whether in our
own opinion we should grant relief, but whether the Commissioner,
in refusing to do so, exercised his discretion “arbitrarily,
capriciously, or without sound basis in fact.” Jonson v.
Commissioner, 118 T.C. 106, 125 (2002), affd. 353 F.3d 1181 (10th
Cir. 2003). When deciding whether to grant 6015(f) relief, the
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Commissioner should take “into account all the facts and
circumstances,” which means that his determination rarely depends
on any one factor. See sec. 6015(f); Rev. Proc. 2000-15, sec.
4.03, 2000-1 C.B. at 448. To guide IRS employees in exercising
their discretion, the Commissioner has issued revenue procedures
that list the factors they should consider.2 We also use the
revenue procedure when we determine whether the Commissioner
abused his discretion. See, e.g., Washington v. Commissioner,
120 T.C. 137, 147-52 (2003); Jonson v. Commissioner, 118 T.C. at
125-26.
The revenue procedure begins with a list of seven conditions
for equitable relief that a taxpayer must meet. Rev. Proc. 2000-
15, sec. 4.01, 2000-1 C.B. at 448. Both parties agree that David
met all of these threshold conditions. The procedure also has a
safe harbor--three conditions that, if met, will ordinarily
trigger a grant of relief. Rev. Proc. 2000-15, sec. 4.02, 2000-1
C.B. at 448. David does not qualify for this safe harbor,
though, because one of the three conditions is that a requesting
spouse be divorced or separated from the nonrequesting spouse,
2
The procedure in effect when David filed his request for
relief was Revenue Procedure 2000-15, 2000-1 C.B. at 447. It has
since been replaced by Revenue Procedure 2003-61, 2003-2 C.B. at
296, but the new procedure applies only to requests for relief
filed on or after November 1, 2003 or those pending on November
1, 2003, for which no preliminary determination letter has been
issued as of November 1, 2003. Rev. Proc. 2003-61, sec. 7, 2003-
2 C.B. at 299.
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Rev. Proc. 2000-15, sec. 4.02(1)(a), 2000-1 C.B. at 448, and
David and Rosalee have remained married throughout her ordeal.
This leaves an eight-factor balancing test to decide whether
relief would be "equitable." Id., sec. 4.03. Those factors, and
the circumstances under which they are to weigh for or against
relief or be treated as neutral, are easily summarized in a
chart. Here we list those factors about which the parties agree
in italics.
Weighs against
Weighs for Relief Neutral
Relief
No knowledge of Knowledge
the underpayment
or item giving
rise to the
deficiency
Economic hardship No economic hardship
No significant Significant benefit
benefit3
Later compliance with No later compliance
Federal tax laws with Federal tax
laws
Liability Liability
attributable to attributable to
nonrequesting petitioner
spouse
3
Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. at 448, does
not state that the absence of a significant benefit will weigh in
a petitioner’s favor, but only that a significant benefit will
weigh against relief. Nonetheless, we decided in Ewing v.
Commissioner, 122 T.C. 32, 45 (2004), vacated 439 F.2d 1009 (9th
Cir. 2006) (and other cases cited), that the absence of a
significant benefit should be a positive factor for petitioners.
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Weighs against
Weighs for Relief Neutral
Relief
Nonrequesting No divorce decree Petitioner
spouse responsible responsible for tax
for tax under under divorce decree
divorce decree
Separated or Still married
divorced
Abuse present No abuse present
These are not the only factors that either the Commissioner or we
can look at, but they are where we start. Id. In this case, the
parties contest only two factors: knowledge and significant
benefit.
A. Knowledge
The basic problem in analyzing the Commissioner’s decision
that David flunks the knowledge factor is that the revenue
procedure is quite unclear about when a person’s knowledge should
be measured. The procedure tells us that the knowledge factor
weighs in favor of relief when:
In the case of a liability that was properly
reported but not paid, the requesting spouse
did not know and had no reason to know that
the liability would not be paid. In the case
of a liability that arose from a deficiency,
the requesting spouse did not know and had no
reason to know of the items giving rise to
the deficiency.
Rev. Proc. 2000-15, sec. 4.03(1)(d), 2000-1 C.B. at 449. The
first sentence in the quoted section would seem to be the one
that applies--since there’s no deficiency here--and it tells us
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to look at whether “the requesting spouse did not know and had no
reason to know that the liability would not be paid.”
But what did David not know and when did he not know it?
The parties agree that David was ignorant of his wife’s
embezzlement when he signed the original return. They also agree
that when he signed the amended return he knew about the
embezzled income and that the taxes on it would not be paid.
Looking at the procedure’s description of when the knowledge
factor weighs against relief doesn’t help much either. That part
of the procedure tells us to ask whether a “requesting spouse
knew or had reason to know of the item giving rise to a
deficiency or that the reported liability would be unpaid at the
time the return was signed.” Rev. Proc. 2000-15, sec.
4.03(2)(b), 2000-1 C.B. at 449. Neither section tells us when to
measure the knowledge of a requesting spouse who signed both an
original and an amended return.
When the Commissioner made his determination, he assumed
that the right time to measure the state of David’s knowledge was
when David signed the amended return, but he didn’t explain his
assumption. The problem for us on review is that it would have
been just as reasonable for the Commissioner to measure David’s
knowledge when he signed the original return. If he had done so,
David’s conceded ignorance of the embezzled income when he signed
the original return would have caused the Commissioner to find
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that the knowledge factor weighed in David’s favor. We thus need
to look elsewhere to decide at which time the Commissioner should
have measured David’s knowledge.
The first place we look is at a case where a wife who
requested relief didn’t know about an IRA distribution that her
husband failed to report when she signed the original return.
She learned about the distribution only after her husband’s
death, and then filed an amended return that corrected the
omission. In that case, the Commissioner also measured her
knowledge at the time she signed the amended return. We found
his determination to be an abuse of discretion because:
It is unpersuasive to argue, as does
respondent, that petitioner’s voluntary
filing of an amended 1996 return and her
attendant payment of the delinquent taxes
attributable to the omission of income
from the original 1996 return militate
against equitable relief simply because
she had to have known of the omission
before she filed the amended return and
made the payment.
Rosenthal v. Commissioner, T.C. Memo. 2004-89.
We acknowledge that in Rosenthal the requesting spouse paid
the taxes she owed on the omitted income when she filed her
amended return, but we find that this fact does not distinguish
David’s case--in both cases the innocent spouses were ignorant of
the key facts at the time they signed the original return.
A second place we can look to for help is in section
6015(b). That section gives relief when a spouse is reasonably
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ignorant of an understatement of tax that gives rise to a
deficiency. Indeed, the Commissioner argues here that:
Instead of filing an amended return,
[Rosalee] could have contacted respondent and
informed him of the unreported embezzlement
income. Once informed, respondent could have
proceeded with examination procedures and
[Rosalee] could have agreed to respondent’s
determination of additional tax.
Resp. Br. at 30. This would have led to the determination of a
deficiency and presumably allowed David to file a successful
request for relief under section 6015(b). See, e.g., Haltom v.
Commissioner, T.C. Memo. 2005-209 (ignorance of embezzlement
income).
It would seem a trap for the unwary--and an inefficient
requirement from the IRS’s perspective--to require spouses to go
through an audit whose outcome is preordained in a situation like
that faced by the widow Rosenthal or Mr. Billings, rather than
fess up by filing an amended return.
Tax law is of course filled with such traps and has never
been viewed as a garden of efficiency, but Congress itself has
directed the Commissioner--at least in this area--to take a
somewhat more open-ended view of the law. Section 6015(f)
directs him to consider “all the facts and circumstances.” The
revenue procedure likewise counsels the Commissioner’s employees
that, in weighing an application for relief, “No single factor
will be determinative of whether equitable relief will or will
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not be granted in any particular case. Rather, all factors will
be considered and weighed appropriately. The list is not
intended to be exhaustive.” Rev. Proc. 2000-15, sec. 4.03,
2000-1 C.B. at 448.
We conclude from this that, in choosing an interpretation of
the knowledge factor that was unexplained, “unpersuasive” (as we
called it in Rosenthal), and seemingly contrary to the
Commissioner’s own interest in having taxpayers amend their
returns when they discover their spouses’ misreporting, the
Commissioner was acting arbitrarily and so abused his discretion.
We therefore find that the knowledge factor in this case weighs
in favor of relief, not against it.
B. Significant Benefit
The second contested factor is whether David ”significantly
benefited (beyond normal support) from the unpaid liability or
items giving rise to the deficiency.” Rev. Proc. 2000-15, sec.
4.03(2)(c), 2000-1 C.B. at 448-49. A spouse’s benefit exceeds
"normal support" when the money in question was used to pay for a
child’s education, Jonson, 118 T.C. at 119-20, or special
purchases for the couple or their children, Alt v. Commissioner,
119 T.C. 306, 314 (2002), affd. 101 Fed. Appx. 34 (6th Cir.
2004), or for unusually frequent travel, Barranco v.
Commissioner, T.C. Memo. 2003-18 (lifestyle as a whole, which
included several European vacations, was a significant benefit).
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We must examine whether David benefited from either the
embezzlement income itself or from not paying the taxes on that
income. If he did significantly benefit, the factor weighs
against relief; otherwise (under our precedents), it weighs in
his favor. See supra note 3.
The Commissioner argues that David significantly benefited
from his wife’s embezzlement because it allowed them to continue
their free-spending lifestyle, and still have the means to buy a
larger house in 2000, the year the embezzlement ended. He also
points out that the spending did not stop after Rosalee’s
employer discovered the embezzlement, and that the Billingses
even bought three new vehicles after she was discovered. David
counters that it wasn’t Rosalee’s embezzlement that supported
their lifestyle--it was the two paychecks he earned and the
liberal use of his credit cards.
To determine whether the Commissioner erred on this point we
can trace the embezzlement income to see where it was spent and
by whom. Looking first to see where the money went, in 1999,
Rosalee deposited $71,100 into her account and withdrew about
$67,500. Of her withdrawals, $7,200 went into a savings account
she shared with David, $4,100 went toward her car, and $7,500
went toward her credit cards. While some of the remaining
$48,700 paid for their basic living expenses, David received
little marginal benefit from his wife’s extra cash. She spent
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most of it on small-money items that benefited only her. She
also gave some of the money to her children and her ex-husband.
Of the $7,200 she put into their joint savings account in 1999,
David withdrew about $1,670. But in their life--a life where
they chose to spend nearly all their legitimate 1999 income of
$100,000--this extra income was not “significant”.
We also ask whether David significantly benefited from not
paying the tax. See Rev. Proc. 2000-15, sec. 4.03(2)(c), 2000-1
C.B. at 448; Mellen v. Commissioner, T.C. Memo. 2002-280. Here,
we think it is important that the Billingses filed for bankruptcy
under chapter 7 in May 2002. Chapter 7 required them to
liquidate all of their nonexempt assets, and turn that money over
to a trustee. Rosalee’s tax debt was not dischargeable, however,
and so she will continue to owe the IRS until that debt (which
the parties stipulated was close to $30,000 by the end of 2006)
is paid in full. We therefore do not consider David to have this
unpaid tax money available for his personal use, and we find that
the Commissioner clearly erred when he found that David
significantly benefited from the partial nonpayment of the
Billingses’ 1999 taxes.
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Based on our findings, the chart looks like this:
Weighs for Relief Neutral Weighs against
Relief
No knowledge of
the embezzled
funds at the time
the original
return was filed
No economic hardship
No significant
benefit
Later compliance with
Federal tax laws
Liability
attributable to
nonrequesting
spouse.
No divorce decree
Still married
No abuse present
Thus, of the eight factors described in the revenue
procedure, three weigh toward relief, five are neutral, and only
one weighs against relief. David’s mere lack of economic
hardship being too thin a justification for denying him relief,
we conclude that the Commissioner abused his discretion in
denying David relief, and
Decision will be entered
for petitioner.