The opinion
T.C. Memo. 2011-237
UNITED STATES TAX COURT
KHATCHATOUR AKOPIAN AND RUZANNA TERFANYAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 31191-08. Filed October 3, 2011.
R determined that Ps had unreported income which
caused deficiencies in Federal income taxes and that Ps
are liable for accuracy-related penalties pursuant to
sec. 6662(a), I.R.C., for their 2005 and 2006 tax
years.
Held: Ps had unreported income and are liable for the
deficiencies in Federal income taxes and the penalties.
Held, further: P-W is not entitled to relief from
joint and several liability for the deficiencies pursuant to
sec. 6015, I.R.C.
Akop Baltayan, for petitioner Khatchatour Akopian.
Kathryn I. Phillips, for petitioner Ruzanna Terfanyan.
Kris H. An, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for redetermination of petitioners’ liabilities for income taxes
and accuracy-related penalties for the 2005 and 2006 tax years.
After concessions by respondent on brief regarding unreported
dividend income, the issues for decision are:
(1) Whether petitioners received unreported income of
$1,219,969.48 and $464,843.97 for the 2005 and 2006 tax years,
respectively;
(2) whether petitioners are liable for the section 6662(a)1
accuracy-related penalties for the 2005 and 2006 tax years; and
(3) whether petitioner Ruzanna Terfanyan is entitled to
relief from joint and several liability for taxes under section
6015(b) or (f) for the 2005 and 2006 tax years.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts and the accompanying exhibits are hereby incorporated by
this reference. At the time they filed their petition,
petitioners resided in California.
Petitioners Ruzanna Terfanyan (Ms. Terfanyan) and
Khatchatour Akopian (Mr. Akopian) are currently married and
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended and in effect for the
tax years at issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
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reside together. They were married in 2000. When they decided
to marry, they purchased a condominium (condo) to serve as their
home. Ms. Terfanyan believed that in 2005 Mr. Akopian took out a
line of credit on the condo of $100,000, using $50,000 for
business needs.
During the years at issue Ms. Terfanyan coowned and operated
Ruz Meg Legal Services.2 The company provided services relating
to tax preparation, public notarization, immigration, and
corporations. Ms. Terfanyan personally provided the notary
public and individual tax return services.
Ms. Terfanyan prepared petitioners’ tax returns for the 2005
and 2006 tax years. She determined her husband’s income by
asking him “at the end of the year” if he was making any money,
to which he responded in the negative. Ms. Terfanyan never saw
any documentation with regard to Mr. Akopian’s earnings.
Sometime in 2004 a longtime acquaintance, Vardan Gevorgian
(Mr. Gevorgian), approached Mr. Akopian with information about
investing in an Armenian movie production company in Yerevan,
Armenia. To make the investment and find other investors, Mr.
Akopian organized Media Fox Enterprises, Inc. (Media Fox), a
Nevada corporation, on December 1, 2004. Mr. Akopian was
president, secretary, and treasurer of Media Fox. Mr. Akopian
2
At trial Ms. Terfanyan’s counsel referred to Ms.
Terfanyan’s former business as “Lux Med”; however, on brief the
parties refer to Ms. Terfanyan’s former business as Ruz Meg.
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had the only signature authority over Media Fox’s bank account
during 2005.
Because Mr. Akopian had never produced a movie or made this
type of investment before, Mr. Gevorgian was supposed to act as
the middle person between Media Fox and the Armenian company.
Mr. Gevorgian provided consulting services and did “all the
paperwork what [sic] has to be done to do the movie production”.
On October 4, 2005, Media Fox was dissolved into Global Glen
Group, Inc. (Global Glen), which had been organized on August 25,
2005, as a Nevada corporation, to invest in the movies and
advertising business. Mr. Akopian began Global Glen with his
friend of 20 years, Grigor Bagdasarian (Mr. Bagdasarian). Mr.
Bagdasarian took the helm as president of Global Glen and Mr.
Akopian handled the finances as treasurer. Mr. Akopian had the
sole signature authority over the Global Glen bank account during
2005 and 2006. Mr. Akopian and Mr. Bagdasarian agreed orally to
share the profits of Global Glen equally. No formal (or written)
agreements were ever made between Mr. Akopian and Mr.
Bagdasarian. Apparently, Mr. Gevorgian would advise Global Glen
on how much and when money should be sent.
Mr. Akopian used some of Media Fox’s and Global Glen’s money
to pay personal expenses. The table below (table 1) shows the
banking activities of Media Fox and Global Glen but excludes
checks written from the accounts. It shows the total amounts of
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customer withdrawals, ATM card purchases and withdrawals,
payments made to BMW Financial Services for car loan or lease
payments, and amounts of wired funds.3
ATM BMW Wired
Corporation Withdrawals Card Use Payments Amounts
Media Fox
2005 $742,297 $8,271 $4,932 $500,000
Global Glen
2005 38,000 --- --- ---
Global Glen
2006 125,743 9,213 --- 715,000
Total 906,040 17,484 4,932 1,215,000
In addition to the above banking activities of Media Fox and
Global Glen, Mr. Akopian wrote corporate checks to Ms. Terfanyan
and for other personal expenses. The table below (table 2) shows
the total amounts of the checks written from Media Fox and Global
Glen to: Mr. Akopian, cash, Ms. Terfanyan, CitiMortgage, Ruz
Meg, Audi Financial Services, Wonder Year Child Care, home owners
association (HOA) fees, and travelers insurance payments.4
3
All numbers have been rounded to the nearest whole number.
4
In addition to the amounts listed in table 2, in 2006, for
example, Mr. Akopian wrote Global Glen checks to: LA County Tax
totaling $1,051, Wells Fargo totaling $3,025, IKEA totaling $859,
Water & Power Comm Credit Union totaling $2,032, DMV for $211,
and other seemingly personal expenses including passport services
and clothing stores, totaling $827. All of the these amounts are
included when we refer to petitioners’ personal expenses.
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Wond. Trav-
Mr. Ms. Citi Ruz Year el-
Akopian Cash Terfanyan Mort. Meg Audi Child HOA ers
Media
Fox
2005 $124,080 $254,428 $16,850 $4,052 $1,500 $455 $425 $1,120 $162
Global
Glen
2005 18,400 5,000 100 805 --- --- --- 237 162
Global
Glen
2006 267,760 --- 37,515 6,443 2,600 3,186 3,850 1,893 1,728
Total 410,240 259,428 54,465 11,300 4,100 3,641 4,275 3,250 2,052
In October of 2005 Mr. Bagdasarian went to Yerevan to
confirm that the movie was actually being made. Mr. Bagdasarian
was satisfied that the money being sent to the Armenian company
was apparently for the most part used appropriately.
Things suddenly went bad when Mr. Gevorgian disappeared.
Mr. Bagdasarian made a second trip to Yerevan in search of Mr.
Gevorgian and the president of the Armenian company. He was
unable to find either man; and after he inquired about the
president of the movie company, his car was hit and three men
assaulted him, inflicting grievous bodily injury.5
While respondent’s revenue agent was examining canceled
checks in an unrelated audit, he noticed that some checks were
written to Global Glen and Media Fox. The revenue agent then
determined that Global Glen and Media Fox had not filed corporate
5
Mr. Bagdasarian made a third trip to Yerevan in February
and March of 2009 when he heard from a singer that Mr. Gevorgian
might be there. He was again unable to find him or the president
of the movie company, Armen Shumanian.
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tax returns and, through the Web site of the secretary of state
for Nevada, ascertained that Mr. Akopian was the president of
Media Fox and the treasurer of Global Glen.
Respondent requested all of the books and records for the
corporations. After petitioners failed to comply with his
request, respondent summoned the corporations’ bank for relevant
documents. From those documents respondent determined that
petitioners had unreported income, on the basis of money
withdrawn from the accounts by Mr. Akopian, checks written from
the corporation to Mr. Akopian and Ms. Terfanyan personally and
made out to cash, and the use of corporate funds to pay
petitioners’ personal expenses.
In the notice of deficiency, issued on September 30, 2008,
respondent determined that petitioners had unreported qualified
dividends of $1,944,301.50 and $1,237,006.64 in 2005 and 2006,
respectively.6 He also determined income tax deficiencies of
6
The notice of deficiency also disallowed certain itemized
deductions and exemptions. Petitioners did not contest
respondent’s adjustments of $10,075 and $13,037 to itemized
deductions for 2005 and 2006, respectively. They also did not
contest his $12,800 and $13,200 adjustments to exemptions for
2005 and 2006, respectively. Therefore, except as they are the
result of any correlative computational adjustments which require
adjustment as the result of this opinion, we deem those statutory
notice of deficiency adjustments conceded. See Levin v.
Commissioner, 87 T.C. 698, 722-723 (1986) (citing Rule 142(a) for
the proposition that because “petitioners have made no argument
with respect to * * * deductions claimed * * * [, they] are
deemed to have conceded their nondeductibility”), affd. 832 F.2d
403 (7th Cir. 1987).
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$294,068 and $183,080 for the 2005 and 2006 tax years,
respectively, and section 6662(a) penalties of $58,813.60 and
$36,616 for the 2005 and 2006 tax years, respectively.
Petitioners filed a timely petition with this Court on December
29, 2008, denying that they owed the deficiencies and claiming
innocent spouse status for Ms. Terfanyan.
Despite repeated requests from respondent, petitioners never
provided ownership or holding period information to entitle them
to the lower tax rates afforded for qualified dividends.
Therefore respondent filed a motion for leave to file an amended
answer out of time. It was granted by the Court on May 4, 2010.
Respondent recharacterized the unreported income from the
corporation as petitioners’ income and not as qualified
dividends. He also increased the determined deficiency for 2005
by $122,799 to $416,867 with a corresponding $24,559.80 increase
of the section 6662(a) penalty to $83,373.40. A trial was held
on June 18, 2010, in Los Angeles, California.
OPINION
I. Burden of Proof
Section 61(a) specifies that “Except as otherwise provided”
gross income includes “all income from whatever source
derived”. The Commissioner’s determination of a taxpayer’s
liability for an income tax deficiency is generally presumed
correct, and the taxpayer bears the burden of proving that the
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determination is improper. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933).
The Court of Appeals for the Ninth Circuit, to which an
appeal would lie absent a stipulation to the contrary, has held
that in unreported income cases, the presumption of correctness
applies only after the Commissioner introduces some substantive
evidence that the taxpayer received unreported income. Edwards
v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982);
Weimerskirch v. Commissioner, 596 F.2d 358, 360-362 (9th Cir.
1979), revg. 67 T.C. 672 (1977). If the Commissioner introduces
such evidence, the burden shifts to the taxpayer to show by a
preponderance of the evidence that the deficiency was arbitrary
or erroneous. See Hardy v. Commissioner, 181 F.3d 1002, 1004
(9th Cir. 1999), affg. T.C. Memo. 1997-97.
By introducing the banking information of Media Fox and
Global Glen, which establishes that only Mr. Akopian could draw
on the corporate accounts, that the accounts were used to provide
cash and to pay personal expenses, and that amounts were given
directly to Mr. Akopian, respondent has introduced sufficient
evidence connecting petitioners with the unreported income.
Consequently, respondent’s determination is entitled to the
presumption of correctness.
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II. Recordkeeping Requirements
Taxpayers must maintain adequate records to substantiate
their income and deductions. Sec. 6001 (the taxpayer “shall keep
such records”); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992). As in this case, when the taxpayers fail to maintain
adequate books and records, the Commissioner is authorized to use
whatever method he deems appropriate to determine the existence
and amount of the taxpayers’ income so long as, in the
Commissioner’s reasonable opinion, the method clearly reflects
income. Sec. 446(b); Mallette Bros. Constr. Co. v. United
States, 695 F.2d 145, 148 (5th Cir. 1983); Gowni v. Commissioner,
T.C. Memo. 2004-154. The Commissioner has wide discretion in
determining which method to apply, and reconstruction of the
taxpayers’ income “need only be reasonable in light of all
surrounding facts and circumstances.” Gowni v. Commissioner,
supra.
III. Unreported Income
By examining the banking activities of Media Fox and Global
Glen, respondent determined on the basis of withdrawals, ATM
purchases, payments made to BMW, and checks written from the
corporations that petitioners had unreported income. In
respondent’s view, because Mr. Akopian has failed to show
appropriate financial operation of the corporations and had
unrestricted control over all of these distributions, under the
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claim of right doctrine petitioners must include all of the
amounts in gross income.7 N. Am. Oil Consol. Co. v. Burnet, 286
U.S. 417 (1932).
A. Withdrawals, Checks Written to Mr. Akopian, and
Cash
According to the bank statements of both Media Fox and
Global Glen in 2005 and 2006 there was a total of $906,040
withdrawn at the bank by Mr. Akopian. As shown in table 2 above,
in 2005 and 2006 checks totaling $410,240 were written to Mr.
Akopian and checks totaling $259,428 were written to cash from
the Media Fox and Global Glen bank accounts. As Mr. Akopian was
the sole signatory on the bank accounts, only he could make the
withdrawals and sign the checks.
According to Mr. Akopian, the Armenian company wanted cash
because it would make producing the movie less expensive and
because Armenian banks could not provide proper banking. To
provide the cash, Mr. Akopian said that he would draw cash or
cashier’s checks in his name from Media Fox and then have a
transferring service wire the money to Armenia and/or Russia.
Also, according to Mr. Akopian’s and Mr. Bagdasarian’s testimony,
as with Media Fox, Global Glen sent money to the Armenian company
7
Under the claim of right doctrine a taxpayer must include
in income any amounts that the taxpayer has unrestricted control
over the use or disposition of and treats as his own. N. Am. Oil
Consol. Co. v. Burnet, 286 U.S. 417 (1932).
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by drawing either cash or cashier’s checks in Mr. Akopian’s name
from the Global Glen bank account.
Petitioners claim that the withdrawals and the checks
written to Mr. Akopian and to cash were used to transfer money
from the corporations to the Armenian company. Petitioners argue
that Mr. Akopian was a mere conduit for the money and thus “need
not treat as income moneys which he did not receive under a claim
of right, which were not his to keep, and which he was required
to transmit to someone else”. Diamond v. Commissioner, 56 T.C.
530, 541 (1971), affd. 492 F.2d 286 (7th Cir. 1974).
We cannot find that there is sufficient credible evidence
corroborating Mr. Akopian’s and Mr. Bagdasarian’s testimony that
the amounts should not be includable in petitioners’ income.
Although both Mr. Akopian and Mr. Bagdasarian testified that
Media Fox and then Global Glen would wire the Armenian company
cash, there is not one shred of documentary evidence
corroborating those statements. Overall their testimony was
inconsistent, fanciful, and not credible.
Mr. Akopian testified that all of the corporations’
documents disappeared along with Mr. Gevorgian.8 However, had
8
We are extremely skeptical that Mr. Gevorgian conveniently
disappeared with all of the documents. According to Mr. Akopian
he was a longtime acquaintance whom Mr. Akopian trusted enough to
form a company for and to invest over a million dollars in his
idea.
(continued...)
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petitioners simply presented their own bank documents (which, if
they exist, petitioners might have easily acquired), they could
have shown that the money was not deposited into their accounts
and circumstantially shown that it was not used for personal
expenses. Petitioners’ failure to introduce evidence “which, if
true, would be favorable to [them], gives rise to the presumption
that if produced it would be unfavorable”. Wichita Terminal
Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162
F.2d 513 (10th Cir. 1947).
The bank documents themselves are further evidence that this
money was not transferred to the Armenian movie company. Media
Fox’s bank statements show that towards the end of both 2005 and
2006, significant amounts of money were wired to foreign
entities. The fact that the corporation was directly wiring
money to a foreign entity tends to discredit claims that Mr.
Akopian was required to write himself a check or write a check
for cash in order to transfer the money to Armenia.
Except for the self-serving testimony of Mr. Akopian and Mr.
Bagdasarian, there is absolutely no evidence concerning Media Fox
8
(...continued)
Also, this testimony is inconsistent with the examining
agent’s written record of the initial interview with Mr.
Akopian’s attorney admitted by stipulation in this case. On July
3, 2008, during an initial interview with the examining agent,
when asked why Mr. Akopian did not have copies of the bank
records, Mr. Akopian’s attorney stated that Mr. Akopian “did not
know what he was doing. So he basically threw away everything
when it came in.”
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or Global Glen, no contracts, invoices, minutes, spreadsheets, or
even an old email discussing the business purpose of the
corporations. There is also no evidence of the existence of the
Armenian company or even a movie being made. Nothing. Therefore
we find that Mr. Akopian received the amounts under a claim of
right and must include those amounts in gross income. See Ludwig
v. Commissioner, T.C. Memo. 1983-678, affd. without published
opinion 779 F.2d 51 (6th Cir. 1985).
B. ATM Card Use, BMW Payments, Checks Written to Ms.
Terfanyan and Ruz Meg and for Personal Expenses
Petitioners advance two theories as to why the amounts
received from Media Fox and Global Glen for personal expenses in
2005 and 2006 were not income. First, petitioners argue that Mr.
Akopian took out a line of credit against petitioners’ condo of
$100,000 and injected $50,000 of it into the business and that
the check written to Ms. Terfanyan were repayments of that line
of credit. Second, petitioners argue that the corporate funds
used to pay petitioners’ personal expenses were loans.
Other than petitioners’ own self-serving testimony, there is
simply no evidence that a line of credit was ever taken out
against petitioners’ home. Although allegedly all of the
corporate documents disappeared along with Mr. Gevorgian, a copy
of the loan documentation could have been obtained from the bank
or other lender issuing the line of credit. Petitioners’ failure
to introduce this evidence, which would have been in their favor,
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again gives rise to the presumption that it would have been
unfavorable. See Wichita Terminal Elevator Co. v. Commissioner,
supra at 1165. In the absence of loan and payment documents and
records, we do not find that the use of corporate funds for
petitioners’ personal expenses constituted a repayment of a line
of credit.
We are also unpersuaded by petitioners’ vague self-serving
testimony that the amounts were loans from the corporations which
Mr. Akopian was expected to repay. See Page v. Commissioner, 58
F.3d 1342, 1346 (8th Cir. 1995), affg. T.C. Memo. 1993-398;
Schneebalg v. Commissioner, T.C. Memo. 1988-563. Mr. Bagdasarian
explained that Mr. Akopian was allowed to spend the corporations’
money and that it was “regarded as a loan”. He explained that
there was no formal agreement for the loan because they “always
did things verbally, and * * * trusted each other.”
Even more egregious than the fact that there is no
documentation of the loan, there is no evidence that Mr. Akopian
was even keeping track of the amounts of the corporations’ money
that he used for personal expenses. Mr. Akopian treated the
corporations as his personal piggy bank. He used corporate money
to make mortgage payments, pay his HOA dues, buy clothing, and
even pay for his child’s daycare. We do not find that the use of
the corporate money for personal expenses was a loan.9
9
We further note, ignoring possible timing differences, that
(continued...)
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Therefore petitioners must include in income all of the
amounts at issue discussed above.
IV. Section 6662(a) Penalties
Respondent determined that petitioners are liable for
section 6662(a) accuracy-related penalties for their 2005 and
2006 tax years. Pursuant to section 7491(c), the Commissioner
has the burden of production with respect to a taxpayer’s
liability for a penalty and is, therefore, required to “come
forward with sufficient evidence indicating that it is
appropriate to impose the relevant penalty.” See Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). However, “once the
Commissioner meets his burden of production, the taxpayer must
come forward with evidence sufficient to persuade a Court that
the Commissioner’s determination is incorrect.” Id. at 447.
Subsection (a) of section 6662 imposes an accuracy-related
penalty of 20 percent of any underpayment attributable to causes
specified in subsection (b). Respondent asserts two causes
justifying the penalty: A substantial understatement of income
tax, subsec. (b)(2), and negligence, subsec. (b)(1).
9
(...continued)
the discharge of indebtedness is a source of income. Sec.
61(a)(12). Mr. Bagdasarian explained that because the
corporation never succeeded, “there was no money, and there was
no income for Khatchatour to be able to repay the corporation.”
Where, as here, the taxpayer is not required to repay the “loan”,
the proceeds are income to the taxpayer in the year of the
“loan”. See United States v. Kirby Lumber Co., 284 U.S. 1, 2
(1931).
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There is a “substantial understatement” of income tax for
any tax year where the amount of the understatement exceeds the
greater of (1) 10 percent of the tax required to be shown on the
return for the tax year or in the case of an individual (2)
$5,000. Sec. 6662(d)(1)(A). “[N]egligence” is “any failure to
make a reasonable attempt to comply with the provisions of this
title” (i.e., the Internal Revenue Code). Sec. 6662(c). Under
caselaw, “‘Negligence is a lack of due care or the failure to do
what a reasonable and ordinarily prudent person would do under
the circumstances.’” Freytag v. Commissioner, 89 T.C. 849, 887
(1987) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th
Cir. 1967), affg. on this issue 43 T.C. 168 (1964) and T.C. Memo.
1964-299), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501 U.S.
868 (1991).
There is an exception to the section 6662(a) penalty when a
taxpayer can demonstrate: (1) Reasonable cause for the
underpayment and (2) that the taxpayer acted in good faith with
respect to the underpayment. Sec. 6664(c)(1). Regulations
promulgated under section 6664(c) provide that the determination
of reasonable cause and good faith “is made on a case-by-case
basis, taking into account all pertinent facts and
circumstances”. Sec. 1.6664-4(b)(1), Income Tax Regs.
Respondent met his burden of production under both causes,
and petitioners did not address the section 6662(a) penalties at
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trial. Petitioners presented no evidence that they had
reasonable cause for any portion of any underpayment. See Basile
v. Commissioner, T.C. Memo. 2005-51 (“Because petitioners did not
contest the additions to tax or penalties in the petitions, they
are deemed conceded.” (citing Rule 34(b)(4) and Swain v.
Commissioner, 118 T.C. 358, 364-365 (2002))). Petitioners, while
contesting the income tax liabilities on which the penalties are
based, have never specifically pleaded that there was reasonable
cause for any negligence or substantial understatement of income
tax. Petitioners are liable for the penalties.
V. Section 6015 Relief
In general, married taxpayers may elect to file a joint
income tax return. Sec. 6013(a). After making the election,
each spouse is jointly and severally liable for the entire
Federal income tax liability for that year, whether as reported
on the joint income tax return or subsequently determined to be
due. Sec. 6013(d)(3); see sec. 1.6013-4(b), Income Tax Regs. A
spouse or former spouse may petition the Commissioner for relief
from joint and several liability in certain circumstances. See
sec. 6015(a). Ms. Terfanyan asserts that she is entitled to
relief under either section 6015(b) or (f). The Court’s scope
and standard of review are de novo. Porter v. Commissioner, 132
T.C. 203, 210 (2009).
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A. Relief Under Section 6015(b)
Section 6015(b) provides:
SEC. 6015(b). Procedures for Relief From
Liability Applicable to All Joint Filers.--
(1) In general.--Under procedures prescribed
by the Secretary, if--
(A) a joint return has been made for a
taxable year;
(B) on such return there is an
understatement of tax attributable to
erroneous items of 1 individual filing the
joint return;
(C) the other individual filing the
joint return establishes that in signing the
return he or she 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.
“The requirements of section 6015(b)(1) are stated in the
conjunctive. Accordingly, a failure to meet any one of them
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prevents a requesting spouse from qualifying for relief”. Alt v.
Commissioner, 119 T.C. 306, 313 (2002), affd. 101 Fed. Appx. 34
(6th Cir. 2004). There is no dispute that Ms. Terfanyan
satisfies subparagraphs (A), (B), and (E) of section 6015 (b)(1).
Nor is there any doubt that Ms. Terfanyan does not satisfy
subparagraph (C). Under this requirement, the individual seeking
relief under section 6015(b) must establish “that in signing the
return he or she did not know, and had no reason to know” that
there was an understatement attributable to the erroneous items
of the other spouse. Sec. 6015(b)(1)(C); Cheshire v.
Commissioner, 115 T.C. 183, 192-193 (2000), affd. 282 F.3d 326
(5th Cir. 2002).
Ms. Terfanyan knew that Mr. Akopian had an ownership
interest in Media Fox during 2005 and an ownership interest in
Global Glen in 2005 and 2006. She also knew that Mr. Akopian was
“taking care of some of the expenses” with corporate money. In
fact Ms. Terfanyan received checks from the company in her own
right and to her own company, Ruz Meg. She also prepared the tax
returns at issue relying, if on anything, only on her husband’s
oral claims he had no income, a fact that with her tax experience
she should have known to be untrue. Consequently, Ms. Terfanyan
is ineligible for relief under section 6015(b)(1).
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B. Relief Under Section 6015(f)(1)
The Commissioner may relieve a spouse or former spouse from
joint and several liability if, taking into account all the facts
and circumstances, it would be inequitable to hold the taxpayer
liable for any unpaid tax or deficiency. Sec. 6015(f)(1). The
Commissioner has outlined procedures for determining whether a
requesting spouse qualifies for equitable relief under section
6015(f). See Rev. Proc. 2003-61, 2003-2 C.B. 296. We now
analyze the facts under these procedures to determine whether Ms.
Terfanyan qualifies for equitable relief.
1. Threshold Conditions
Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at 297-298, sets
forth seven threshold conditions that must be satisfied before
the Commissioner will consider a request for equitable relief
under section 6015(f), as follows: (i) The requesting spouse
filed a joint income tax return for the taxable year for which he
or she seeks relief; (ii) relief is not available to the
requesting spouse under section 6015(b) or (c); (iii) the
requesting spouse applies for relief no later than 2 years after
the date of the Commissioner’s first collection activity; (iv) no
assets were transferred between the spouses as part of a
fraudulent scheme by the spouses; (v) the nonrequesting spouse
did not transfer disqualified assets to the requesting spouse;
(vi) the requesting spouse did not file or fail to file the
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return with fraudulent intent; and (vii) the Federal income tax
liability from which the requesting spouse seeks relief is
attributable to an item of the individual with whom the
requesting spouse filed the joint income tax return. Respondent
concedes that Ms. Terfanyan satisfies the seven threshold
conditions.
2. Safe Harbor Conditions
If the threshold conditions are met, the Commissioner
ordinarily will grant equitable relief under section 6015(f) with
respect to an underpayment of income tax reported on a joint
Federal income tax return, provided the following three safe
harbor conditions are satisfied: (i) On the date of the request
for relief, the requesting spouse is no longer married to, or is
legally separated from, the nonrequesting spouse; (ii) on the
date the requesting spouse signed the joint income tax return,
the requesting spouse did not know, and had no reason to know,
that the nonrequesting spouse would not pay the tax liability;
and (iii) the requesting spouse will suffer economic hardship if
the Commissioner does not grant relief. Id. sec. 4.02, 2003-2
C.B. at 298.
Ms. Terfanyan is still married to and lives with Mr.
Akopian. Therefore she does not satisfy the first condition.
Accordingly, because Ms. Terfanyan does not meet all the
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requirements of the safe harbor, she does not qualify for relief
under Rev. Proc. 2003-61, sec. 4.02.
3. Facts and Circumstances Test
A requesting spouse, such as Ms. Terfanyan, who satisfies
the threshold conditions but fails to satisfy the safe harbor
conditions under Rev. Proc. 2003-61, sec. 4.02, is nevertheless
eligible for relief under section 6015(f) if, taking into account
all the facts and circumstances, it is inequitable to hold the
requesting spouse liable for an underpayment. Rev. Proc.
2003-61, sec. 4.03, 2003-2 C.B. at 298-299, lists various
nonexclusive factors to be considered in deciding whether to
grant equitable relief under section 6015(f). No single factor
is determinative, all factors are to considered and weighed
appropriately, and the list of factors is not intended to be
exhaustive. Id. Our analysis of the relevant factors and
circumstances is as follows.
a. Marital Status
Ms. Terfanyan is still married to and lives with Mr.
Akopian. This factor weighs against relief.
b. Economic Hardship If Relief Were Denied
The second factor under Rev. Proc. 2003-61, sec. 4.03, is
whether the requesting spouse will suffer economic hardship if
relief is not granted. Economic hardship for these purposes is
defined as the inability to pay reasonable basic living expenses
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if the requesting spouse is held liable for the tax owed. See
sec. 301.6343-1(b)(4), Proced. & Admin. Regs. The ability to pay
reasonable basic living expenses is determined by considering
among other things the following nonexclusive factors: The
taxpayer’s age; employment status; ability to earn; number of
dependents; and expenses for food, clothing, housing, medical,
and transportation; and any extraordinary circumstances. Id.
Ms. Terfanyan computed her monthly household income as
$7,450 and her monthly household expenses as $7,949. She is
still living with her husband and thus these numbers presumably
include his income and expenses as well. Ms. Terfanyan is
therefore demonstrating that the tax deficiency will make a
hardship on her household whether or not she is granted relief
from joint liability. Accordingly, this factor favors Ms.
Terfanyan.
c. Knowledge or Reason To Know That the
Nonrequesting Spouse Would Not Pay the Income
Tax Liability
Ms. Terfanyan knew that Mr. Akopian was using corporate
money to pay their personal expenses. She must have known that
petitioners did not have the money to pay all of their expenses.
Even her innocent spouse relief application shows that her
household’s expenses exceed their income. Therefore, Ms.
Terfanyan knew that Mr. Akopian could not pay the tax
liabilities. This factor weighs against granting relief.
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d. Nonrequesting Spouse’s Legal Obligation To
Pay the Outstanding Liability
Because Ms. Terfanyan and Mr. Akopian remained married, this
factor is neutral.
e. Significant Economic Benefit
A fifth factor is whether the requesting party received a
significant economic benefit from the unpaid income tax liability
in excess of normal support. Mr. Akopian used corporate money to
pay petitioners’ personal expenses. Petitioners certainly
received an economic benefit from the unreported income. To the
extent that it would have been less because of tax, petitioners
received a significant economic benefit from the unpaid income
tax. This factor weighs against granting relief.
f. Subsequent Compliance With Income Tax Laws
A sixth factor is whether the requesting spouse made a good
faith effort to comply with Federal income tax laws in subsequent
years. Because of the lack of evidence this factor is neutral.
g. Abuse
A seventh factor is abuse of the requesting spouse. The
record does not indicate Ms. Terfanyan suffered abuse; thus this
factor is neutral.
h. Poor Health When Signing the Return or
Requesting Relief
The final factor is whether the requesting spouse was in
poor health when signing the return or requesting relief. The
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record does not indicate that Ms. Terfanyan was in poor health
when she signed the 2005 and 2006 joint income tax returns.
Therefore, this factor is neutral.
C. Conclusion About Equitable Relief
After weighing the testimony and other evidence, we
conclude that Ms. Terfanyan is not entitled to equitable relief
for either year. Ms. Terfanyan is knowledgeable about tax law
and tax return preparation. She prepared the tax returns at
issue here knowing they did not report all of petitioners’
income and that the true and correct tax owed was very unlikely
to be paid, at least voluntarily. Accordingly, the Court finds
that Ms. Terfanyan is not entitled to any “equitable” relief
under section 6015(f).
VI. Conclusion
Petitioners are liable for the deficiencies in income tax
and the section 6662(c) penalties for 2005 and 2006. Ms.
Terfanyan is not entitled to relief from joint liability under
section 6015.
The Court has considered all of petitioner’s contentions,
arguments, requests, and statements. To the extent not
discussed herein, we conclude that they are meritless, moot, or
irrelevant.
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To reflect the foregoing,
Decision will be entered
under Rule 155.