Waldron v. Comm'r

T.C. Memo. 2011-288

UNITED STATES TAX COURT

HOLLY WALDRON a.k.a. HOLLY HOPS, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

HOLLY B. HOPS a.k.a. HOLLY B. WALDRON, Petitioner v. COMMISSIONER

OF INTERNAL REVENUE, Respondent

Docket Nos. 14440-09, 24026-09. Filed December 15, 2011.

Steven M. Cyr, for petitioner.

John D. Davis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge: In these consolidated cases, petitioner

seeks relief pursuant to section 6015(f) from joint and several

liability for unpaid Federal income taxes for 1998 and 2000.1

1

Unless otherwise indicated, all section references are to

(continued...)

- 2 -

FINDINGS OF FACT

The parties have stipulated some facts, which we incorporate

by this reference.2 When she petitioned the Court, petitioner

resided in Oregon. During the years at issue petitioner and her

former spouse, David Waldron (Mr. Waldron), resided in New

Mexico, a community property State.

Background

Petitioner holds a Ph.D. in clinical psychology, and during

the years at issue she was employed as a professor at the

University of New Mexico. In 1998 Mr. Waldron was also employed

there and had a fledgling consulting business. By 2000 his

consulting business was his sole source of income.

Financial problems plagued the couple, and in 1998 they

separated. In 2001 they divorced. The final divorce decree,

filed in August 2001, required each spouse to assume and to

1

(...continued)

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

2

Petitioner was ordered to file posttrial briefs but failed

to do so. As a consequence we could hold petitioner to have

conceded or waived all issues on which she has the burden of

proof. See Stringer v. Commissioner, 84 T.C. 693, 706-708

(1985), affd. without published opinion 789 F.2d 917 (4th Cir.

1986). We decide this case, however, on the record as it stands,

basing our understanding of petitioner’s positions on her

petition, her pretrial memorandum, and the presentation of her

case at trial. See Scholet v. Commissioner, T.C. Memo. 2005-140.

As discussed infra, petitioner’s failure to file posttrial briefs

has resulted in our deeming petitioner to have conceded some

factual matters and has contributed to her failure to carry her

burden of persuasion as to certain issues.

- 3 -

indemnify the other spouse for various specified debts, including

“½ of taxes owed $10,000.00.” The divorce decree also required

petitioner to assume $21,000, and Mr. Waldron to assume $7,000,

of other specified community debts. The divorce decree provided

that “Any debt not listed shall be the sole responsibility of the

party who created it.”

Petitioner has remarried and is gainfully employed.

1998 and 2000 Joint Tax Returns

On or about February 19, 2003, petitioner and Mr. Waldron

filed untimely joint Forms 1040, U.S. Individual Income Tax

Return, for their 1998 and 2000 taxable years.3 When she signed

the returns petitioner suffered no abuse and had no mental or

physical health problem.

According to the Form 1040 for 1998, petitioner earned

$59,350 in wages, Mr. Waldron earned $27,969 in wages, and they

had incidental amounts of income from other sources. Their 1998

return showed total tax liability of $12,659, an estimated tax

penalty of $150, and, after taking into account Federal income

tax withholding of $7,654, an underpayment of $5,155.

According to the Form 1040 for 2000, petitioner earned

$75,503 in wages, and Mr. Waldron earned $20,607 through his

consulting business. Their 2000 return also listed $32,900 for

3

Respondent asserts that on the same date petitioner and Mr.

Waldron also filed their 1999 joint return and that it also

showed a balance due.

- 4 -

taxable pension and annuity distributions received by Mr. Waldron

and incidental amounts of other income. Their 2000 return showed

total tax liability of $29,072, an estimated tax penalty of $472,

and, after taking into account Federal income tax withholding of

$10,106, an underpayment of $19,438.

Installment Agreement

In April 2003 petitioner and Mr. Waldron secured an

installment agreement to pay $760 a month on their unpaid tax

liabilities for various years, including 1998, 1999, and 2000.4

Petitioner and Mr. Waldron established a joint checking account

for making the monthly installment payments. For about 3 years

she deposited $530 into this account each month and Mr. Waldron

deposited $230 each month. In July 2003 the first $760 payment

to the Internal Revenue Service (IRS) was made from this joint

account.5 Monthly payments of $760 continued until June 2006,

when the payments stopped and the installment agreement

terminated, leaving unpaid balances for 1998 and 2000.6

4

The administrative record contains no copy of this

installment agreement and does not otherwise disclose its terms

with any specificity.

5

An earlier payment of $760 was tendered to the IRS in June

2003, but the check was dishonored.

6

For reasons unexplained in the record, the IRS applied the

payments mainly toward the 1999 tax liability.

- 5 -

Requests for Innocent Spouse Relief

On May 13, 2008, petitioner submitted Form 8857, Request for

Innocent Spouse Relief, with respect to tax years 1999, 2000, and

2001. On July 18, 2008, she submitted another Form 8857,

requesting relief for tax year 1998. The Forms 8857 indicated

identically that she had not reviewed the returns in question

before signing them and that she had no knowledge of the tax law

or data used to prepare them. On the Form 8857 for 1998, she

indicated that when she signed the 1998 joint return she knew

some amount was owed to the IRS for that year; on the Form 8857

for the other years she indicated the opposite with respect to

the joint returns for those years.7 The Forms 8857 indicated

identically that, as of the time of the request for relief,

petitioner’s household had $25,848 in monthly income and $24,376

in monthly expenses.

Final Determinations

Petitioner’s requests for relief for 1998 and for the other

years, including 2000, were assigned to different IRS personnel.

In his final determination dated April 15, 2009, respondent

denied petitioner’s request for relief for 1998. The final

determination recites relevant considerations for determining

7

The parties have stipulated that petitioner indicated on

Form 8857 that she knew there was a balance due on her 2000 joint

return when she signed it. We disregard this stipulation as

contrary to the facts disclosed by the record. See Cal-Maine

Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989).

- 6 -

relief under section 6015(f) but does not indicate how respondent

applied those considerations in considering petitioner’s request

for relief.

In a separate final Appeals determination dated August 13,

2009, respondent denied petitioner’s request for relief for

2000.8 The only reason stated in the determination for denial of

relief is: “You did not show it would be unfair to hold you

responsible.”

OPINION

Generally, married taxpayers may elect to file a joint

Federal income tax return. Sec. 6013(a). After making the

election, each spouse is jointly and severally liable for the

entire tax due on their aggregate income. Sec. 6013(d)(3). An

individual may seek relief from joint and several liability under

section 6015, which offers three avenues of possible relief under

subsections (b), (c), and (f). In general, section 6015(b)

provides full or apportioned relief from joint and several

liability with respect to an understatement; section 6015(c)

provides proportionate tax relief to divorced or separated

taxpayers with respect to a deficiency; and in certain

8

The record does not conclusively indicate why this

determination did not address petitioner’s request for relief for

1999 and 2001. From such clues as we find in the record, it

appears possible that the 1999 liability was paid off pursuant to

an installment agreement, discussed infra, and that petitioner

paid off the 2001 liability separately. In any event, the years

1999 and 2001 are not in dispute in this case.

- 7 -

circumstances section 6015(f) provides equitable relief if relief

is unavailable under section 6015(b) or (c).

In determining the appropriate relief available under

section 6015, we apply a de novo scope and standard of review.

See Porter v. Commissioner, 132 T.C. 203, 210 (2009).9 The

burden is on petitioner to prove that she is entitled to

equitable relief under section 6015(f).10 See Rule 142(a);

Porter v. Commissioner, supra at 210.

Relief is available under section 6015(b) or (c) only with

respect to understatements of tax. Because petitioner’s

liabilities are due to underpayments rather than understatements

of tax, her sole avenue of relief is section 6015(f). See sec.

6015(f)(2); Washington v. Commissioner, 120 T.C. 137, 146-147

(2003).

A taxpayer who does not qualify for relief under section

6015(b) or (c) can qualify for relief under section 6015(f) if,

9

Respondent argues vigorously on brief that we should review

the Appeals officers’ determinations for abuse of discretion on

the basis of the administrative record. We decline respondent’s

invitation to repudiate this Court’s precedents. We observe,

however, that any review for abuse of discretion on the

administrative record would be complicated by the fact that the

final determinations upon which this case is predicated are

devoid of any meaningful explanation. Moreover, as discussed

infra, insofar as we are able to discern the basis for these

determinations in the assorted papers in the administrative

record, these determinations in certain aspects appear

contradictory or incomplete.

10

Petitioner does not contend that the burden of proof

should shift to respondent under sec. 7491(a).

- 8 -

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). Rev. Proc. 2003-61, 2003-2 C.B.

296 (the revenue procedure), prescribes guidelines for

determining whether an individual qualifies for relief under

section 6015(f). This Court has looked to the revenue procedure

as providing relevant factors for reviewing the IRS’ denial of

relief. See Washington v. Commissioner, supra at 147-152; McGhee

v. Commissioner, T.C. Memo. 2010-259 n.8.

A. Threshold Conditions

The revenue procedure sets forth seven threshold conditions

that the requesting spouse must satisfy before the Commissioner

will consider a request for relief under section 6015(f). Rev.

Proc. 2003-61, sec. 4.01(1)-(7), 2003-2 C.B. at 297. One

threshold condition is that, subject to certain specified

exceptions that do not pertain to this case, the income tax

liability from which the requesting spouse seeks relief must be

attributable to the other spouse. Id. sec. 4.01(7).

Respondent acknowledges that for 1998 and 2000 petitioner

meets six of the threshold requirements but contends that she

only partially satisfies this last-mentioned requirement.

According to respondent, citing certain workpapers in the

administrative file, only $320 of the 1998 underpayment and

$15,259 of the 2000 underpayment are attributable to Mr. Waldron.

- 9 -

Petitioner has not disputed these assertions or offered any

evidence in this regard. We deem petitioner to have conceded

these matters. Accordingly, after taking into account the

threshold conditions, petitioner’s relief under section 6015(f)

cannot exceed $320 for 1998 and $15,259 for 2000. To determine

whether she is eligible for relief with respect to any portion of

either amount, we turn to the next step of the analysis.

B. Safe Harbor Requirements for Relief

Insofar as the requesting spouse meets the threshold

conditions, she ordinarily will qualify for equitable relief

under section 6015(f) if she meets three “safe harbor”

requirements. As discussed below, petitioner meets two of the

safe harbor requirements wholly or partially but does not meet

the third.

1. Marital Status

Petitioner satisfies this requirement because she and Mr.

Waldron were divorced when she applied for relief. See Rev.

Proc. 2003-61, sec. 4.02(1)(a), 2003-2 C.B. at 298.

2. Knowledge or Reason To Know

To satisfy this safe harbor requirement, the requesting

spouse, when she signed the joint return, must not have known or

have had reason to know that the nonrequesting spouse would not

pay the income tax liability. Id. sec. 4.02(1)(b).

If a requesting spouse would otherwise qualify for relief

under this section, except for the fact that the requesting

- 10 -

spouse’s lack of knowledge or reason to know relates only to

a portion of the unpaid income tax liability, then the

requesting spouse may receive relief to the extent that the

income tax liability is attributable to that portion. [Id.]

Petitioner testified that when she signed the joint returns

in question, she believed that Mr. Waldron would pay the tax

shown on the returns because he told her he would. We take this

testimony with a grain of salt because petitioner also

acknowledged that Mr. Waldron had a history of late filing and of

paying the couple’s taxes late and that money problems were part

of the reason they ultimately divorced. The relevant

consideration is not whether she believed that Mr. Waldron would

eventually pay the taxes but whether she believed that the taxes

would be paid reasonably promptly after the filing of the joint

return. See Schepers v. Commissioner, T.C. Memo. 2010-80;

Banderas v. Commissioner, T.C. Memo. 2007-129.

About 2 months after filing the joint returns, petitioner

and Mr. Waldron secured an installment agreement with the IRS to

pay $760 a month toward their unpaid tax liabilities for 1998,

1999, and 2000. They set up a joint checking account for this

purpose. Petitioner testified that the original understanding

was that she and Mr. Waldron would each “put in half of the $760”

each month. But she also testified that “I was concerned that

once again my ex-husband would be irresponsible and pay late, and

so to make sure there was enough money in there I paid $530 a

month”. Mr. Waldron paid $230 each month, which was almost

- 11 -

exactly 30 percent of the $760 installment payment. This payment

arrangement lasted for 3 years, when for reasons not clearly

explained by the record, the payments stopped.11

Because the signing of the joint returns in question and the

securing of the installment agreement were so nearly

contemporaneous, we believe the installment agreement arrangement

provides strong evidence of petitioner’s beliefs and expectations

as of the time she signed the joint returns. And that evidence

strongly suggests that when she signed the joint returns she

reasonably believed that Mr. Waldron would pay 30 percent of the

unpaid liabilities--a belief borne out by Mr. Waldron’s actually

paying this portion of the monthly installments for 3 years

before the arrangement terminated. Further supporting a

conclusion that petitioner believed that Mr. Waldron would pay 30

percent of the tax liabilities, petitioner testified that upon

her divorce she took on, and paid through a repayment plan, 70

percent of the couple’s credit card debt.

In reaching our conclusions, we put little stock in

petitioner’s uncorroborated testimony that the original

understanding was that Mr. Waldron would contribute one-half of

the installment payments. Commencing with the very first

11

In her pretrial memorandum petitioner suggested that the

payments stopped because Mr. Waldron embezzled money from the

joint account. But petitioner presented no evidence in this

regard.

- 12 -

installment payment, it appears that petitioner assumed

responsibility for 70 percent of the payments, just as she had

assumed 70 percent of other community debts. We are not

persuaded that petitioner ever believed that Mr. Waldron would

pay more than 30 percent of the tax liabilities.12

On brief respondent asserts that the Appeals officers

properly found that petitioner lacked a reasonable belief that

Mr. Waldron would pay the tax liabilities in question because:

(1) She admitted on the Forms 8857 that she knew there were

underpayments on both her 1998 and 2000 joint returns when she

signed them;13 (2) petitioner and Mr. Waldron had balances due

for other years when she signed the returns;14 (3) Mr. Waldron

had a long history of noncompliance; and (4) petitioner and Mr.

Waldron had ceased to comply with their installment agreement.

But the relevant question is not whether petitioner knew there

were underpayments on the returns for 1998 and 2000 (or for other

years) but whether she knew or had reason to know, when she

12

On brief respondent acknowledges that the Appeals officer

who made the final determination for 2000 found that the

installment agreement and divorce decree “may suggest a belief

that * * * [petitioner’s] spouse would satisfy one half of the

underpayment.” But it appears that the Appeals officer was

unaware that petitioner actually made 70 percent of the

installment payments.

13

Actually, petitioner’s Form 8857 for 2000 indicated the

opposite. See supra note 7 and associated text.

14

The record is inconclusive on this point.

- 13 -

signed these returns, that Mr. Waldron would not pay the 1998 and

2000 taxes. See Rev. Proc. 2003-61, sec. 4.02(1)(b). And

although Mr. Waldron’s track record in paying late might be a

relevant consideration, the divorce decree and the installment

agreement, as one Appeals officer acknowledged, see supra note

12, mitigated this consideration--especially in the light of the

fact that Mr. Waldron actually made timely contributions toward

the installment payments for 3 years. And the eventual

noncompliance with the installment agreement, coming 3 years

after petitioner signed the joint returns, has scant bearing on

what petitioner reasonably believed when she signed them.

We conclude that when she signed the joint returns in

question petitioner reasonably believed that Mr. Waldron would

pay 30 percent of the unpaid tax liabilities. Accordingly, this

consideration weighs in favor of relief to the extent of 30

percent of the amounts as to which petitioner is eligible for

relief after application of the threshold factors, as discussed

above.

3. Economic Hardship

To satisfy the safe harbor requirements, the requesting

spouse must also show that she will suffer economic hardship if

relief is not granted. Economic hardship exists if satisfaction

of a debt in whole or in part will cause an individual taxpayer

to be unable to pay his or her reasonable basic living expenses.

- 14 -

Sec. 301.6343-1(b)(4), Proced. & Admin. Regs.; Rev. Proc. 2003-

61, sec. 4.02(1)(c).

Petitioner’s only argument that she will suffer economic

hardship, as expressed in her pretrial memorandum, is that she no

longer has the high-paying practice that she had in the early

2000s. Petitioner reported on her Forms 8857 that, as of the

time the forms were filed in 2008, her household had $25,848 in

monthly income and $24,376 in monthly expenses. Petitioner

presented no evidence at trial that would indicate that these

representations were incorrect or that her financial situation

has deteriorated. Because the forms indicate that petitioner’s

household has a monthly budget surplus of $1,472, we are not

persuaded that paying the tax liabilities in question would

render her unable to pay reasonable basic living expenses as

necessary to establish economic hardship.

4. Summary of Conclusions About Safe Harbor Relief

In sum, petitioner meets, at least partially, two of the

safe harbor requirements but fails the economic hardship

requirement. Consequently, the safe harbor relief is not

available. We turn to the next step of the analysis.

C. Facts and Circumstances Test

A requesting spouse such as petitioner who satisfies the

threshold conditions under the revenue procedure but does not

qualify for safe harbor relief is nevertheless eligible for

- 15 -

relief under section 6015(f) if, taking into account all facts

and circumstances, it is inequitable to hold the requesting

spouse liable for an underpayment on a joint return. The revenue

procedure lists various factors to be considered in deciding

whether to grant equitable relief under section 6015(f). Rev.

Proc. 2003-61, sec. 4.03(2), 2003-2 C.B. at 298-299. No single

factor is determinative, all factors are to be appropriately

considered, and the listing of factors is not intended to be

exhaustive. Id.; see Porter v. Commissioner, 132 T.C. at 214.

Our analysis of the relevant facts and circumstances is set forth

below.

1. Marital Status

As previously discussed, this factor is favorable to

petitioner.

2. Knowledge or Reason To Know

As previously discussed, this factor weighs in favor of

granting petitioner relief to the extent of 30 percent of the

amounts of the underpayments that are attributable to Mr.

Waldron.

3. Economic Hardship

As previously discussed, this factor weighs against relief.

4. Nonrequesting Spouse’s Legal Obligation To Pay

Pursuant to a Divorce Decree or Agreement

If the nonrequesting spouse has a legal obligation to pay

the outstanding tax liability pursuant to a divorce decree or

- 16 -

agreement, this factor weighs in favor of relief unless “the

requesting spouse knew or had reason to know, when entering into

the divorce decree or agreement, that the nonrequesting spouse

would not pay the income tax liability.” Rev. Proc. 2003-61,

sec. 4.03(2)(a)(iv).

Respondent does not dispute that Mr. Waldron had a legal

obligation under the divorce decree to pay one-half of the joint

taxes owed.15 To the contrary, respondent asserts on brief that

the Appeals officers who considered petitioner’s requests for

relief properly evaluated this factor adversely to petitioner

because “the nonrequesting spouse’s legal obligation under the

divorce decree only applied to half of their joint tax

liabilities.” For the same reason that a reasonable belief that

the nonrequesting spouse will pay only a portion of an unpaid

income tax liability counts toward partial relief, see id. sec.

4.02(1)(b), we believe that the nonrequesting spouse’s legal

obligation to pay a portion of an outstanding relief should

similarly count toward partial relief.

On brief respondent also suggests that the divorce decree is

irrelevant because it was signed before the joint returns in

15

The divorce decree required petitioner and Mr. Waldron

each to pay “½ of the taxes owed $10,000.00.” Although this

wording is not free of ambiguity, we believe that, read in

conjunction with other provisions of the divorce decree, it is

fairly construed to require each spouse to pay one-half of their

joint tax liabilities.

- 17 -

question were filed. But, as just discussed, respondent has

effectively conceded that the divorce decree obligated Mr.

Waldron to pay one-half of joint taxes owed. In the light of

that concession, the pertinent question is not whether the joint

returns were filed after the divorce decree was signed but

whether, as of the date the divorce decree was signed, petitioner

knew or should have known that Mr. Waldron would not honor the

obligation that the divorce decree imposed upon him.

As previously discussed, upon her divorce petitioner assumed

70 percent of the community debts and Mr. Waldron assumed the

other 30 percent. As we have seen, this 70-30 split carried over

and governed the couple’s contributions to the tax installment

payments, notwithstanding that the divorce decree obligated Mr.

Waldron to pay one-half of the tax liabilities. These

circumstances strongly suggest that when the divorce decree was

signed petitioner reasonably believed that Mr. Waldron would pay

at least 30 percent of community debts, including tax

liabilities. To that extent, this factor is favorable to

petitioner.

5. Significant Benefit

This factor weighs against relief if the requesting spouse

“received significant benefit (beyond normal support) from the

unpaid income tax liability or item giving rise to the

deficiency.” Rev. Proc. 2003-61, sec. 4.03(2)(a)(v), 2003-2 C.B.

- 18 -

at 299. Respondent’s Appeals officers found that petitioner

received no significant benefit from the unpaid income tax

liability. Respondent does not contend otherwise in this

proceeding. This factor supports granting relief.

6. Abuse

Petitioner suffered no abuse when she signed the returns.

This factor is neutral.

7. Health Problems

Petitioner suffered no serious health problems when she

signed the returns. This factor is neutral.

8. Compliance With Federal Tax Laws

This factor weighs in favor of relief if the requesting

spouse has made a good-faith effort to comply with income tax

laws in taxable years following the years for which she requests

relief. Id. sec. 4.03(2)(a)(vi). According to the

administrative record, the Appeals officers made seemingly

contradictory findings about this factor. The Appeals officer

who denied petitioner’s request for relief for 1998 found that

she had failed to make a good-faith effort to comply with the tax

laws for tax years 2001 and 2003 through 2006. By contrast, the

Appeals officer who denied petitioner’s request for relief for

2000 found that she had made a good-faith effort to comply with

the tax laws. But we need not attempt to referee these competing

administrative determinations because, as discussed in more

- 19 -

detail below, resolution of this factor does not affect our

ultimate conclusion under the facts and circumstances test.

9. Summary of Conclusions Under Facts and

Circumstances Test

Four factors favor at least partial relief--petitioner’s

marital status, her reasonable belief that Mr. Waldron would pay

30 percent of the joint tax liabilities, his legal obligations

under the divorce decree, and the lack of significant benefit to

petitioner. Two factors are neutral--lack of abuse and lack of

health problems. Setting aside for the moment the issue of

whether petitioner made a good-faith effort to comply with tax

laws for later years, the only factor weighing against relief is

petitioner’s lack of economic hardship. Even if we were to

assume, for sake of argument, that petitioner failed the

compliance requirement, the totality of factors would still favor

relief.

D. Conclusion

For the reasons discussed above, petitioner is entitled to

relief under section 6015(f) for 30 percent of the underpayments

that are attributable to Mr. Waldron’s items of income.

To reflect the foregoing,

Decisions will be entered

under Rule 155.