The opinion
T.C. Memo. 2016-129
UNITED STATES TAX COURT
BONNIE MARIA ARMOUR, Petitioner AND MARK V. POULSEN, Intervenor
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7079-14. Filed July 11, 2016.
Bonnie Maria Armour, pro se.
John S. Pontius, Jr., Glen E. Frost, and Jessica F. Marine, for intervenor.
Timothy B. Heavner, Matthew S. Reddington, and Wendy C. Yan, for
respondent.
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[*2] MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: This case is before us with respect to respondent’s denial
of petitioner’s request for relief from joint and several liability under section 60151
for 2007, 2008, and 2009 (years involved). Petitioner and intervenor were married
during the years involved; they separated in 2009 and divorced in 2010 after
nearly 20 years of marriage. Petitioner and intervenor filed their 2007, 2008, and
2009 Forms 1040, U.S. Individual Income Tax Return, as married filing jointly.
Following an audit of petitioner and intervenor’s joint income tax returns, on
March 9, 2013, petitioner signed a Form 870-AD, Offer to Waive Restrictions on
Assessment and Collection of Tax Deficiency and to Accept Overassessment,
agreeing to the assessment and collection of income tax deficiencies and penalties
under section 6662(a) as follows:2
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended, at all relevant times. All dollar amounts are rounded
to the nearest dollar.
2
Intervenor has no legal obligation to pay the outstanding tax liability
pursuant to the divorce decree. Intervenor has paid approximately $75,000 of the
outstanding tax liability while petitioner has made no such payment. The record
does not reveal for which tax year(s) intervenor’s payment was applied.
Regardless of whether intervenor’s payment satisfied any year’s tax liability, that
payment does not render petitioner’s request for relief from joint and several
liability moot. See Kaufman v. Commissioner, T.C. Memo. 2010-89.
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[*3] Penalty
Year Deficiency sec. 6662(a)
2007 $24,186 $4,837
2008 73,343 14,018
2009 3,753 -0-
On the same day she signed the Form 870-AD, petitioner signed a Form 8857,
Request for Innocent Spouse Relief, and filed it with the Internal Revenue Service
(IRS). Petitioner’s request for relief was denied on March 17, 2014.
FINDINGS OF FACT
Some of the facts in this matter have been stipulated and are so found. At
the time she filed her petition, petitioner resided in Maryland. Petitioner holds a
high school diploma. She attended the University of Delaware for six months,
taking noncredit courses in data processing.
While married, petitioner and intervenor owned the marital home, two rental
properties and a farm. Because petitioner and intervenor had a large blended
family, they owned a large van in addition to two pickup trucks and an Oldsmobile
Cutlass, which intervenor described as a “classic car”. They took family vacations
each year, including trips to Bermuda and Mexico. They enjoyed camping, and
throughout the years they purchased several campers, which they used on family
camping trips every few months.
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[*4] Intervenor owned M.V.P. Builders,3 which was the primary source of the
family’s income. Established in the early 1980s, M.V.P. Builders is a home
improvement company focusing on residential remodeling. A carpenter by trade,
intervenor operated the business, but he did not have the bookkeeping background
to maintain the company’s records. He hired petitioner to be the company’s
bookkeeper and office manager. Their relationship blossomed, and they
eventually wed.
Petitioner was M.V.P. Builders’ bookkeeper/office manager for
approximately 20 years, including the years involved. She developed and
maintained the accounting program used by the business. Her duties included: (1)
managing the company’s financial records, bank accounts, and American Express
credit card account; (2) managing the company’s “end of the month check run”,
which reconciled all charge accounts that M.V.P. Builders had from its vendors,
roofing suppliers, lumber yards, plumbing supply houses, and other
subcontractors; (3) reconciling the company’s bank and credit card statements; (4)
managing the accounts payable and accounts receivable; (5) tracking inventory;
and (6) managing the company’s payroll. To these ends, petitioner had authority
3
During the years involved M.V.P. Builders was a sole proprietorship. It
was later incorporated at a time not specified in the record.
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[*5] to write and sign checks on behalf of M.V.P. Builders, deposit money into the
company’s accounts, and prepare checks and receipts for the business. Petitioner
was familiar with M.V.P. Builders’ clients and knew, or at least could have
learned, the amounts they paid the company. Before becoming M.V.P. Builders’
bookkeeper, petitioner had other experience in accounting.
When petitioner managed M.V.P. Builders’ finances, her duties included the
end-of-year accounting for the company. She reviewed the company’s books and
provided information and documents to the company’s certified public accountant
(C.P.A.), Joe Tigne, who prepared petitioner and intervenor’s joint tax returns.
She also met and interacted with Mr. Tigne during the years involved. She
admitted to “booking things wrong” for M.V.P. Builders and was advised that she
had done so by Mr. Tigne.
For 2007 petitioner and intervenor’s joint returns underreported income
attributable to M.V.P. Builders; for 2008 the returns underreported income and
overstated expenses attributable to M.V.P. Builders. The IRS made no
adjustments with respect to M.V.P. Builders for 2009.
In addition to working for M.V.P. Builders, petitioner operated a horse care
and boarding business on the farm that she and intervenor owned. She exclusively
controlled the business, and under her stewardship the business’ income for each
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[*6] of the years involved was underreported. All adjustments made by the IRS
for 2009 were due to underreported income with respect to the horse care and
boarding business.
Petitioner wrote checks drawn on M.V.P. Builders’ bank account to herself,
and she used the M.V.P. Builders’ American Express credit card to pay horse care
and boarding business and household expenses.
Petitioner was given the joint income tax returns for 2007, 2008, and 2009
before they were filed, but she did not review them before signing them.
Petitioner was not a victim of spousal abuse or domestic violence during the years
involved.
Respondent filed his posttrial brief on January 27, 2016. Intervenor notified
the Court on that same day that he would not file a brief. Petitioner’s reply brief
was due by April 13, 2016. No brief was filed by petitioner.
OPINION
I. Introduction to Relief From Joint and Several Liability
In general, married taxpayers who file a joint Federal income tax return
under the provisions of section 6013(a) and (d)(3) are jointly and severally liable
for the tax reported or reportable on the tax return. Section 6015(a)(1) provides
that a spouse who has made a joint return may elect to seek relief from joint and
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[*7] several liability under subsection (b). Section 6015(a)(2) provides that if an
individual is eligible to elect the application of subsection (c), that individual may,
in addition to any election under subsection (a)(1), elect to limit his/her liability
for any deficiency with respect to the joint return in a manner prescribed in
subsection (c) of section 6015.
II. Section 6015(b) Relief
Section 6015(b)(1) provides that a taxpayer will be relieved of liability for
an understatement of tax if: (A) a joint return was made for the taxable year in
question; (B) there is an understatement of tax attributable to erroneous items of
the nonrequesting spouse; (C) the requesting spouse “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 would
be inequitable to hold the requesting spouse liable for the deficiency attributable
to the understatement; and (E) the requesting spouse elects to invoke subsection
(b) within two years after the date the Secretary has begun collection actions with
respect to the requesting spouse.
The requirements of section 6015(b)(1) are conjunctive. Failure of a
requesting spouse to satisfy any one of the elements precludes relief. Alt v.
Commissioner, 119 T.C. 306, 313 (2002), aff’d, 101 F. App’x 34 (6th Cir. 2004).
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[*8] The requesting spouse bears the burden of proving entitlement to section
6015(b) relief. Id. at 311.
Respondent concedes that petitioner satisfies the requirements of section
6015(b)(1)(A) and (E) (petitioner and intervenor filed joint tax returns for 2007,
2008, and 2009, and petitioner sought relief within the two-year limitations
period) but asserts that petitioner does not meet the requirements of subparagraphs
(C) (the spouse requesting relief must establish he/she did not know, and had no
reason to know, of the understatement of tax on the returns4) and (D) (it would be
inequitable to hold the requesting spouse liable for the deficiency).
We agree with respondent that the requirements of section 6015(b)(1)(C)
have not been met in that petitioner did not establish that she did not know, and
had no reason to know, of the understatements of tax. As a preliminary matter,
petitioner concedes she is responsible for the understatement of tax attributable to
the horse care and boarding business and therefore she does not qualify for relief
with respect to the unpaid tax attributed thereto. Petitioner maintains she is
entitled to relief from liability with respect to the deficiencies attributable to
4
“The requirement in section 6015(b)(1)(C) * * * is virtually identical to the
same requirement of former section 6013(e)(1)(C); therefore, cases interpreting
former section 6013(e) remain instructive to our analysis.” Doyel v.
Commissioner, T.C. Memo. 2004-35, 2004 WL 238022, at *8.
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[*9] M.V.P. Builders because she was not the owner of the company and only
made data entries. We disagree. As M.V.P. Builders’ bookkeeper and office
manager for approximately two decades, including the years involved, petitioner
was directly responsible for maintaining all records relating to the company’s
finances. She had access to the business’ checking accounts, credit card account,
payroll, bills, receipts, and deposits; she wrote checks, made the bank deposits,
and reconciled the company’s bank records. She provided the information and
documentation that the C.P.A. used in connection with the preparation of
petitioner and intervenor’s joint income tax returns. And despite having access to
the information underlying the income and expenses reported on the joint income
tax returns, petitioner failed to review the returns, or inquire as to their accuracy,
before they were filed.
In sum, we find that petitioner knew of the understatements of tax on each
of the returns filed for each of the years involved within the meaning of section
6015(b)(1)(C). Accordingly, petitioner is not entitled to the requested relief from
joint and several liability under section 6015(b).5
5
Because we agree with respondent that the requirements of sec.
6015(b)(1)(C) have not been met, we do not address the requirements of subpara.
(D).
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[*10] III. Section 6015(c) Relief
Section 6015(c) provides that a divorced or legally separated spouse may
elect to limit liability for a deficiency on a joint return to the portion allocable to
him or her under subsection (d); i.e., the tax liability is allocated between the
individuals who filed a joint return in approximately the same way it would have
been had the individuals filed separately.
To be eligible for section 6015(c) relief, the electing spouse must establish
that: (1) the spouses filed joint returns for the years involved; (2) at the time the
election for relief was made, the spouses were legally separated, divorced, or had
not been members of the same household anytime during the previous 12 months;
and (3) the request for relief was made within two years of the first collection
activity. See sec. 6015(c)(1), (3). Moreover, no assets may be transferred between
the spouses in a fraudulent scheme. See sec. 6015(c)(3)(A)(ii). Respondent does
not dispute that petitioner meets these requirements.
Relief under section 6015(c) is not available where the Commissioner
demonstrates that the requesting spouse had actual knowledge at the time he/she
signed the return of any item giving rise to a deficiency which is not allocable to
the requesting spouse under section 6015(d). Sec. 6015(c)(3)(C). The knowledge
standard for purposes of section 6015(c)(3)(C) is “an actual and clear awareness
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[*11] (as opposed to reason to know) of the existence of an item which gives rise
to the deficiency (or portion thereof).” Cheshire v. Commissioner, 115 T.C. 183,
195 (2000), aff’d, 282 F.3d 326 (5th Cir. 2002); see also Grossman v.
Commissioner, 182 F.3d 275, 279 (4th Cir. 1999), aff’g T.C. Memo. 1996-452.
If an item of income is omitted, the requesting spouse must have actual
knowledge of the income, which includes knowledge of the receipt of the income.
Harrington v. Commissioner, T.C. Memo. 2012-285; sec. 1.6015-3(c)(2)(i)(A),
Income Tax Regs. We do not infer actual knowledge from a mere reason to know
of the omitted income. Harrington v. Commissioner, T.C. Memo. 2012-285; sec.
1.6015-3(c)(2)(iii), Income Tax Regs. Similarly, a requesting spouse must have
actual knowledge of an improperly deducted item on a return. In and of itself, the
requesting spouse’s knowledge that a deduction appears on the return is
insufficient. King v. Commissioner, 116 T.C. 198, 205 (2001). The requesting
spouse has actual knowledge of an erroneous deduction if he/she has knowledge
of the factual circumstances which made the item unallowable as a deduction. Id.
at 204; sec. 1.6015-3(c)(2)(i)(B)(1), Income Tax Regs.
With respect to the unpaid tax attributable to the horse care and boarding
business, petitioner concedes she is responsible for these amounts as she was
responsible for operating the horse care and boarding business. These amounts are
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[*12] therefore allocable to petitioner, i.e., the requesting spouse. With respect to
the unpaid tax attributable to M.V.P. Builders, we find that petitioner had actual
knowledge of the company’s unreported income and excessive deductions. As
previously stated, petitioner managed the company’s books and finances and was
well aware of the company’s actual income and outlays. Petitioner also collected
and provided the company’s financial information and documentation to the
family’s C.P.A., Mr. Tigne, to allow him to prepare her and intervenor’s joint
income tax returns. She was aware of M.V.P. Builders’ receipt of income. And
she had knowledge of the factual circumstances of the company’s expenses, giving
her knowledge of the factual circumstances which made the claimed expense items
unallowable as deductions.
We therefore hold that petitioner is not entitled to the requested relief from
joint and several liability under section 6015(c).
IV. Section 6015(f) Equitable Relief
Section 6015(f) provides for equitable relief under procedures prescribed by
the Secretary if: (1) taking into account all the facts and circumstances, it is
inequitable to hold the individual liable for any unpaid tax or any deficiency and
(2) relief is not available to the requesting spouse under subsection (b) or (c). The
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[*13] requesting spouse has the burden of proving that he/she is entitled to relief.
Alt v. Commissioner, 119 T.C. at 311. We apply a de novo scope and standard of
review in reviewing the requesting spouse’s prayer for relief. Porter v.
Commissioner, 132 T.C. 203, 210 (2009).
Respondent concedes that petitioner meets the requirement of section
6015(f)(2), in that relief is not available under subsection (b) or (c). With respect
to section 6015(f)(1), the Commissioner published Rev. Proc. 2013-34, 2013-43
I.R.B. 397, outlining the factors the IRS normally considers in deciding whether
section 6015(f) relief should be granted. While this Court is not bound by IRS
revenue procedures, we often look to them for guidance. Hollimon v.
Commissioner, T.C. Memo. 2015-157, at *7-*8; see Pullins v. Commissioner, 136
T.C. 432, 438-439 (2011).
Rev. Proc. 2013-34, sec. 4, 2013-43 I.R.B. at 399-403, sets forth a three-
step procedure to be followed in evaluating requests for relief: (1) section 4.01
lists seven threshold conditions which must be met; (2) section 4.02 lists
circumstances in which the IRS will make streamlined relief determinations; and
(3) section 4.03 sets forth nonexclusive factors that the IRS will consider in
determining whether equitable relief should be granted because it would be
inequitable to hold a requesting spouse jointly and severally liable.
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[*14] The seven eligibility conditions, all of which must be satisfied for the IRS to
consider a claim for equitable relief under section 6015(f), pursuant to Rev. Proc.
2013-34, sec. 4.01, are as follows:
(1) The requesting spouse filed a joint return for the taxable
year for which he or she seeks relief.
(2) Relief is not available to the requesting spouse under
section 6015(b) or (c).
(3) The claim for relief is timely filed * * *
(4) No assets were transferred between the spouses as part of a
fraudulent scheme by the spouses.
(5) The nonrequesting spouse did not transfer disqualified
assets to the requesting spouse * * *
(6) The requesting spouse did not knowingly participate in the
filing of a fraudulent joint return.
(7) The income tax liability from which the requesting spouse
seeks relief is attributable (either in full or in part) to an item of the
nonrequesting spouse or an underpayment resulting from the
nonrequesting spouse’s income. If the liability is partially
attributable to the requesting spouse, then relief can only be
considered for the portion of the liability attributable to the
nonrequesting spouse. Nonetheless, the Service will consider
granting relief regardless of whether the understatement, deficiency,
or underpayment is attributable (in full or in part) to the requesting
spouse if any of the following exceptions applies: (a) Attribution
solely due to the operation of community property law. * * *(b)
Nominal ownership. * * * (c) Misappropriation of funds. * * * (d)
Abuse. * * * (e) Fraud committed by nonrequesting spouse.
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[*15] Petitioner acknowledges that the understatement in tax arising from the
horse care and boarding business is attributable to her. Because condition 7 is not
satisfied, petitioner concedes she is ineligible for relief with respect to the
understatement of tax attributable to the horse care and boarding business.
However, with respect to the understatements attributable to M.V.P. Builders,
because petitioner did not hold an ownership interest in the company, and because
respondent concedes that petitioner meets all other threshold conditions set forth
in Rev. Proc. 2013-34, sec. 4.01, we move on to the next step in our analysis.
Rev. Proc. 2013-34, sec. 4.03,6 provides a list of nonexclusive factors to be
weighed by the IRS in making a decision. They include (a) marital status (i.e., do
the spouses remain together?); (b) economic hardship; (c) knowledge or reason to
know of the requesting spouse; (d) legal obligation arising from a divorce decree
or other binding agreement; (e) significant benefit gained by the requesting
spouse; (f) compliance with income tax laws; and (g) mental or physical health at
the time of filing the request for relief. No single factor is determinative, and all
factors are considered and weighed appropriately. Kellam v. Commissioner, T.C.
Memo. 2013-186, at *26.
6
Petitioner has not asserted that she qualifies for the streamlined procedures
for relief provided in Rev. Proc. 2013-34, sec. 4.02, 2013-43 I.R.B. 397, 400. We
therefore do not address them.
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[*16] Respondent concedes that (a) marital status and (f) compliance with tax
laws weigh in favor of relief. We therefore limit our inquiry to factors (b)
economic hardship, (c) knowledge or reason to know, (d) legal obligation, (e)
significant benefit, and (g) mental/physical health.
1. Economic Hardship
Rev. Proc. 2013-34, sec. 4.03(2)(b), provides that an economic hardship
“exists if satisfaction of the tax liability in whole or in part will cause the
requesting spouse to be unable to pay reasonable basic living expenses.” Whether
a requesting spouse will suffer economic hardship is based on rules similar to
those in section 301.6343-1(b)(4), Proced. & Admin. Regs. The facts and
circumstances considered include: (1) the requesting spouse’s age, employment
status and history, ability to earn, and number of dependents; (2) the amount
reasonably necessary for food, clothing, housing, medical expenses,
transportation, and current tax payments; and (3) any extraordinary circumstances
such as special educational expenses, a medical catastrophe, or a natural disaster.
Id. In addition, the IRS considers the requesting spouse’s current income
(including how the requesting spouse’s income compares to Federal poverty
guidelines) and assets in comparison with his/her expenses. Rev. Proc. 2013-34,
sec. 4.03(2)(b). Factor (b) (economic hardship) weighs in favor of relief where the
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[*17] requesting spouse would suffer economic hardship if relief were denied and
is neutral where the requesting spouse would not suffer such hardship if relief
were denied. Id. At trial petitioner established to the Court’s satisfaction that she
was in some economic difficulty.7 Consequently, we find that this factor weighs
in favor of relief.
2. Knowledge or Reason To Know
Under this factor we examine whether the requesting spouse knew, or had
reason to know, that there was an understatement or deficiency on the joint income
tax return, or did not know, or had reason to know, that the nonrequesting spouse
would not or could not pay a reported but unpaid tax liability. See id. sec.
4.03(2)(c)(ii). The factors enunciated in the revenue procedure are essentially the
same as those relied upon by section 6015(b)(1)(C) and (c). As discussed supra,
petitioner operated the horse care and boarding business and had charge of M.V.P.
Builders’ books and finances. Petitioner had reason to know of the
understatements of tax. Moreover, petitioner has not claimed that she was abused
7
We note the Cincinnati Centralized Innocent Spouse Operation’s
determination that the economic factor favored relief as petitioner’s gross income
was at 250% or less of the Federal poverty line and that she did not have sufficient
assets to make payments and still pay basic family living expenses. The IRS
Appeals officer’s own analysis indicated that petitioner’s household income was
below the Federal poverty line and her expenses were slightly less than her
income. Yet the Appeals officer found that this factor was neutral.
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[*18] by intervenor or that he restricted her access to financial information. We
find this factor weighs against relief.
3. Legal Obligation
Rev. Proc. 2013-34, sec. 4.03(d) provides that if the nonrequesting spouse
has the sole legal obligation to pay the outstanding income tax liability pursuant to
a divorce decree or other legally binding agreement, this factor will weigh in favor
of relief. There is no evidence that intervenor has any legal obligation to pay any
outstanding income tax liabilities for the years involved. We find this factor to be
neutral.
4. Significant Benefit
Under this factor we consider whether the requesting spouse received a
significant benefit, beyond normal support, from the unpaid income tax liability.
Id. sec. 4.03(2)(e). Normal support is measured by the circumstances of the
particular parties. Porter v. Commissioner, 132 T.C. at 212. This factor will
weigh in favor of relief if the nonrequesting spouse significantly benefited from
the unpaid tax or understatement and the requesting spouse had little or no benefit
or the nonrequesting spouse enjoyed the benefit to the requesting spouse’s
detriment. Id.
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[*19] Petitioner wrote checks to herself from M.V.P. Builders’ checking account
for personal use and to support her horse care and boarding business. We find this
factor weighs against relief.
5. Mental/Physical Health
There is no evidence that petitioner was ill when she signed the returns for
the years involved or when she requested relief. Nor did she appear to be in ill
health at trial. We find this factor weighs against relief. See Pullins v.
Commissioner, 136 T.C. at 454.
6. Conclusion
We conclude that petitioner is not entitled to relief from joint and several
liability under section 6015(f) for any of the years involved. The most significant
factor in reaching our conclusion is that petitioner had knowledge of the
understatements of tax or deficiencies with respect to the joint income tax returns.
Petitioner was directly responsible for the underreporting of income with respect
to the horse care and boarding business and, as M.V.P. Builders’
bookkeeper/office manager, she knew of the underreporting of income and
excessive expense deductions attributable to that business.
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[*20] To reflect the foregoing,
Decision will be entered
for respondent.