UNITED STATES TAX COURT
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T.C. Memo. 2011-152
UNITED STATES TAX COURT
SUSAN G. BELL, Petitioner 1.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25055-08.
Filed June 29,
2011.
John W. Nelson, for petitioner.
Angela J. Kennedy and Derek W. Kaczmarek, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge:
Petitioner filed the petition in this case
in response to a so-called final appeals determination (notice of
determination) concerning petitioner's request for relief from
joint and several liability under section 60151-for her taxable
All section references are to the Internal Revenue Code in
(continued. . . )
ER\fED JUN M Nu
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year 2003.
We must decide whether petitioner is entitled to
relief under that section for that year.
We hold that she is to
the extent stated herein.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time petitioner filed the petition in this case, she
resided in Indiana.
Petitioner, who was born in 1951, completed the eleventh
grade of school, although she took certain courses at a community
college at times not established by the record.
Petitioner does
not have any educational background in business, finance, or
Federal, State, or local tax law.
Around 1990, petitioner suffered a work-related back injury
(petitioner's back injury) that resulted in a ruptured spinal
disc and sciatic damage.
During the period 1994 to 1997, peti-
tioner received workers' compensation with respect to petitioner's back injury.
In 1995, petitioner underwent back surgery for petitioner's
back injury during which metal rods were inserted in her back.
Petitioner continued to receive certain medical treatment for
petitioner's back injury until 1997.
From around 2003 until the
time of the trial in this case, petitioner did not maintain any
(...continued)
effect at all relevant times. All Rule references are to the Tax
Court Rules of Practice and Procedure.
- 3 health insurance .
Nor had petitioner sought treatment for any
medical condition since 2008 because she was unable to afford any
such treatment.
As of the time of the trial in this case,
petitioner continued to suffer from petitioner's back injury in
that she was unable to stand, sit, walk, or lie down for long
periods.
On April 15
1995, petitioner married Thomas Bell (Mr.
Bell), who was born around 1963.
(We shall sometimes refer
collectively to ÿetitioner and Mr. Bell as the Bells.)
do not have any åhildren together .
The Bells
At no time during their
marriage did Mr. Bell physically abuse petitioner.
During the Bells' marriage, petitioner did not maintain any
bank account in her sole name, Mr. Bell maintained a bank account
at Union Planters Bank (Mr. Bell's personal bank account) in his
sole name, and the Bells did not maintain any bank account in
their joint name .
Although petitioner did not have signatory
authority over Mt. Bell's personal bank account, she made deposits into, and reviewed bank statements of, that account.
Mr.
Bell paid from Mr. Bell's personal bank account, inter alia, all
of the Bells' hoúsehold bills.
During 2003, Mr. Bell wrote
certain checks džawn on Mr. Bell's personal bank account that
were payable to petitioner and that totaled $13,500.
Around 1997, the Bells began operating a business (toy
helicopter business) in which they sold toy helicopters at
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certain air shows, festivals, and similar events around the
country.
For several years, the Bells traveled extensively each
year in operating that business.
Around 2002, petitioner told
Mr. Bell that, because of petitioner's back injury, she was
unable to travel for the toy helicopter business as she had in
the past.
In 2002, the Bells stopped operating the toy helicop-
ter business.
On September 27, 2002, Mr. Bell incorporated under the laws
of Indiana Today I Can, Inc.
(Today I Can), which was to operate
an Internet sales business and which it did until its dissolution
at a time not established by the record.
At all relevant times,
that corporation was treated for Federal income tax (tax) purposes as an S corporation.
During the period 2002 to 2004, Mr. Bell and petitioner
owned 51 percent and 49 percent, respectively, of the outstanding
stock of Today I Can.
During that period, Mr. Bell maintained
total control over the operations and activities of that company.
At no time was petitioner authorized to enter into any agreements
or contracts on behalf of Today I Can.
At all relevant times, Today I Can maintained a bank account
at Union Planters Bank (Today I Can bank account), over which
petitioner did not have signatory authority.
Although only Mr.
Bell had signatory authority over that account, Mr. Bell gave to
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Kents Shipley (Mr. Shipley), an attorney for Today I Can, a socalled signature stamp with Mr. Bell's s¯ignature so that Mr.
Shipley was able to use that stamp on certain documents, including checks drawn on the Today I Can bank account.
At all relevant times, including during 2003, petitioner
worked for Today| I Can by performing bertain administrative and
bookkeeping tasks, including handling certain bills by, for
example, drafting certain checks for Mr. Bell's signature, making
certain appointments for Mr. Bell, taking centain customer
orders, and provïding certain customer service.
During 2003
Today I Can paid petitioner wages of $24,500
and withheld frob those wages tax of $2,320.41.
Today I Can
reported those amounts in.Form W-2, Wage and Tax Statement (Form
W-2), that it issued to petitioner for her taxable year 2003.
Petitioner deposited the wages that Today I- Can paidther during
2003 into Mr. Bell's personal bank account.
During 2003
Today I Can paid Mr. Bell wages of $28,500 and
withheld from those wages tax of $3,527162.
Today I Can reported
those amounts in Form W-2 that it issued to Mr. Bell for his
taxable year 2003.
On June 12, 2003, Today I Can filed Form 1120S, U.S. Income
Tax Return for an S Corporation (Form 11205); for its taxable
period September 27 through December 31, 2002 (2002 Today I Can
return).
In that return, Today I Can reported gross receipts or
- 6 sales of $778,887,
total income of $778,887, total deductions of
$728,125, and ordinary income from trade or business activities
of $50,762.
Today I Can attached to the 2002 Today I Can return
Schedule K-1, Shareholder's Share of Income, Credits, Deductions,
etc.
(Schedule K-1), that it completed with respect to Mr. Bell.
In that schedule, Today I Can reported that Mr. Bell owned 100
percent of its outstanding stock.
On September 11, 2003, the Bells jointly filed late Form
1040, U.S. Individual Income Tax Return (Form 1040), for their
taxable year 2001 (2001 joint return).
In that return, the Bells
claimed no withholding tax credit and showed tax due of $12,235.
When the Bells filed the 2001 joint return, a check for
$12,719.99 that was drawn on Mr. Bell's personal bank account was
included with that return.2
On September 16, 2003, the Bells jointly filed late Form
1040 for their taxable year 2002 (2002 joint return).
In that
return, the Bells claimed no withholding tax credit and showed
tax due of $83,475.
When the Bells filed the 2002 joint return,
a check for $20,000 that was drawn on Mr. Bell's personal bank
account was included with that return.
On October 18, November 3, and November 22, 2003, Mr. Bell
sent to the Internal Revenue Service (Service) payments of
2The record does not establish why a check for $12,719.99
was included with the 2001 joint return when that return showed
tax due of only $12,235.
- 7 $5, 522,' $15, 000, and $279, respectively.
The Service applied
each of those payments against a portion of the Bells' unpaid tax
for their taxable year 2002.
On November 22, 2003, the Bells jointly filed late Form 1040
for their taxabl
year 1999.
On December 1, 2003, Mr. Bell sent to the Service a payment
of $4,551.17 that the Service applied against a portion of the
Bells' unpaid liability for their taxable year 2001.3
On Decem-
ber 13, 2003, Mr. Bell sent to the Service a payment of $10,000
that the Service applied against a portion of the Bells' unpaid
tax for their taxable year 2002.
On December 25, 2003, the Bells separated, and Mr. Bell
moved from the marital residence in Indiana (marital residence)
to Florida.
At that time, Mr. Bell took the checkbook for the
Today I Can bank account, and petitioner ceased to have access to
that checkbook.
On January 20, 2004, Mr. Bell sent to the Service a payment
of $549.12 that the Service applied against a portion of the
Bells' unpaid tax for their taxable year 1999.
On January 31,
2004, Mr. Bell sent to the Service a payment of $1,000 that the
3As discussed above, the Bells filed late the 2001 joint
return and paid iate the tax shown due in that return. Although
the record does not establish the Bells' unpaid liability for
their taxable year 2001~, we presume that that liability consisted
of additions to tax for failure to file timely a return for that
taxable year and failure to pay timely the tax shown due in that
return as well as interest thereon as provided by law.
- 8 Service applied against a portion of the Bells' unpaid 'tax for
their taxable year 2002.
On March 15, 2004, Today I Can filed Form 1120S for its
taxable year 2003
(2003 Today I Can return).
In that return,
Today I Can reported gross receipts or sales of $2,042,913, total
income of $2,040,413, total deductions of $1,833,385, and ordinary income from trade or business activities of $207,028.
Today
I Can attached to the 2003 Today I Can return Schedule K-1 that
it completed with respect to Mr. Bell (2003 Schedule K-1).
In
that schedule, Today I Can reported that Mr. Bell owned 100
percent of its outstanding stock.
On March 23, 2004, Mr. Bell commenced in the Marion County
Superior Court (Superior Court) a divorce proceeding against
petitioner.
On March 29, 2004, Mr. Bell sent to the Service a payment of
$4,000 that the Service applied against a portion of the Bells'
unpaid tax for their taxable year 2002.
After the Service
applied that payment against that unpaid tax, the Bells' remaining unpaid tax for their taxable year 2002, including certain
penalties and interest, totaled approximately $40,500.
On July 10, 2004, petitioner and Mr. Bell executed and filed
with the Superior Court a property settlement agreement (property
agreement)
in which the Bells agreed to settle all of their
respective rights to property arising out of their marriage.
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Pursuant to the property agreement, petitioner was to receive a
Ford Expedition automobile (Ford Expedition) that was then in her
possession and was to have exclusive possession of the marital
residence and to make all payments on the mortgage loan with
respect to that residence.
4.
Today I Can,
Inc . :
The property agreement also provided:
Husband [Mr . Be ll]
shall re -
tain all interest in the business, Today I Can,
Inc. Wife [petitioner] agrees to sell any and all
shares, she owns in Today I Can, Inc. back to Today
I Can, Inc .
She will be paid ONE MILLION DOLLARS
($1,000,000.00) according to the Promissory Note
that is attached hereto and incorporated herein as
Exhibi "A" .
Wife agrees that this will be in
complete satisfaction of any and [all] claims she
has to either Husband's-interest in Today I Can,
Inc. and/or her individual interest in Today I
Can,
Inc.
I
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Tax Liability and General Indemnification: Husband specifically agrees to indemnify and hold
Wife härmless from any federal or state tax liability arising out of actions or omissions during
their marriage and/or arising out of actions or
omissions related to Today I Can, Inc., including
the cost of Wife's defense and attorney's fees or,
at Wife's option, the assumption of her defense.
6.
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8.
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Knowledge and Disclosure:
Each party acknowledges :
that they understand he or she is entitled to
thorough discovery, analysis, and investigation of
the other party's financial information and all
data and facts relevant to the dissolution proceedin< . Each party certifies that he or she has
4As discussed below, for reasons not established by the
record, Mr. Bell signed the promissory note for $1 million before
he and petitioner executed and signed the property agreement.
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full and adequate knowledge of all such relevant
financial information, data, and facts in order to
make a knowing, and voluntary decision to sign
this Agreement at this time.
On August 19, 2004, the Superior Court approved the property
agreement and entered a decree of divorce dissolving the Bells'
marriage.
On June 11, 2004, Mr. Bell executed an installment promissory note (2004 installment note) in the amount of $1 million
that was payable to petitioner.
That note was the note to which
paragraph 4 of the property agreement (quoted above) referred.
The 2004 installment note, which did not bear interest, provided
that Mr. Bell was to make payments to petitioner on that note as
follows:
Upon the 5th day of August 2004 and then the 5th day of
each month thereafter until paid in full, monthly
payments in the amount of Ten Thousand Dollars
($10,000.00) or until the expiration of 9 years from
the effective date, whichever occurs earlier.
The 2004 installment note also provided that if Mr. Bell were to
fail to make any payment within ten days of the date on which
that payment was due, he would be in default and any delinquent
payment would accrue interest at the rate of 5 percent per year
until paid.
As of April 2, 2008, Mr. Bell had not made any
payments under the 2004 installment note.
On July 29, 2004, the Bells jointly filed late respective
Forms 1040 for their taxable years 1997,
1998,
return), and 2003
In the 2000 joint return,
(2003 joint return).
2000
(2000 joint
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the Bells claimed no withholding tax credit and showed tax due of
$6,690.
When the Bells filed that return, a check for $1,000
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that was drawn on Mr. Bell's personal bank account was included
with that return.
In the 2003 joint return that the Bells filed jointly on
July 29, 2004, the Bells reported, inter alia,
$53,000,5 (2) ne
(1) wages of
business income of $2,195 from certain work Mr.
Bell performed on behalf of Today I Can,
$187,2346 from Today I Can,
$242,274, and (5)
(3) net income of
(4) adjusted gross income of
taxable income of $222,496.
In that return,
the Bells (1) showed tax of $54,869 and self-employment tax of
$310,
(2) claimed a withholding tax credit of $5,848,7 and
(3) showed tax due of $50,587.8
The Bells did not attach to the
I
sThe wages of $53,000 that the Bells reported in the 2003
joint return con isted of the $24,500 and the $28,500 that Today
I Can paid petitioner and Mr. Bell, respectively, during 2003.
'The net income of $187,234 from Today I Can that the Bells
reported in the 2003 joint return consisted of the difference
between ordinary income from trade or business activities of
$207,028 and a deduction under sec.
179 of $19,794.
7The $5,848 withholding tax credit that the Bells claimed in
the 2003 joint return consisted of $2,320.41 and $3,527.62,
respectively, that Today I Can withheld from the respective wages
that it paid petitioner and Mr. Bell during 2003. We note that
the Bells rounded to the nearest dollar the amount of the withholding tax credit that they claimed in the 2003 joint return.
"The tax due shown in the 2003 joint return included an
estimated tax penalty of $1,256.
- 12 2003 joint return the 2003 Schedule K-1.
When the Bells filed
that return, no payment was included.
On March 15,
taxable year 2004
2005,
Today I Can filed Form 1120S for its
(2004 Today I Can return).
In that return,
Today I Can reported gross receipts or sales of $2,103,124, total
income of $2,106,344, total deductions of $2,078,880, and ordinary business income of $27,464.
Today I Can attached to the
2004 Today I Can return respective Schedules K-1 that it completed with respect to petitioner and Mr. Bell.
In those sched-
ules, Today I Can reported that petitioner and Mr. Bell owned 21
percent and 79 percent, respectively, of its outstanding stock.
After August 19, 2004, the date on which the Superior Court
entered the decree of divorce dissolving the Bells' marriage,
petitioner and Mr. Bell continued to operate an Internet sales
business.
Petitioner continued that business with Mr. Bell
because (1) she did not have any other source of income and
(2) Mr. Bell maintained the business contacts and relationships
necessary for that business to succeed.
Around 2006, petitioner and Mr. Bell started a company known
as Earn and Learn which operated an Internet sales business
substantially identical to the business that Today I Can had
operated.
Earn and Learn was dissolved around 2008.
Petitioner
has not been employed since Earn and Learn was dissolved in 2008.
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On July 26, 2007, petitioner filed Form 8857, Request for
Innocent Spouse Relief
year 2003.
(Form 8857), with respect to her taxable
Petitioner included with that form Form 12510,
Questionnaire fo
Requesting Spouse (Form 12510) .
In Form 12510,
petitioner claim d (1) that she did not review the 2003 joint
return before signing it,
(2) that she first became aware of the
I
unpaid tax for hŠr taxable year 2003 "When the IRS contacted me
for an audit", and (3) that Mr. Bell verbally and mentally abused
her.
In petitioner's Form 12510, petitioner claimed total monthly
income of $7, 899 consisting of monthly wages of $2, 249 and .
monthly self-employment income of $5,650.
In that form, peti-
tioner claimed t½tal monthly expenses of $5,356 consisting of:
Claimed Monthly Expenses
Federal, State, and local taxes
Rent or mortgage
Amount
$2,249
1,123
Food
300
Utilities
Telephone
Car (inclüding insurance and gasoline
and repairs)
400
300
Medical expenses
Clothing
Total
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384
,
350
250
5, 356
On September 10, 2007, petitioner filed timely Form 1040 for
her taxable year 2006 (2006 return) .
In that return, petitioner
reported, inter alia, adjusted gross income of $246,865 and
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taxable income of $233,172.
In the 2006 return, petitioner
showed total tax of $63,538 and tax due of $59,668.
When she
filed that return, petitioner included a payment of $59,668.
On October 8, 2007, respondent sent to petitioner a statutory notice of balance due with respect to certain additions to
tax and interest totaling $3,824.94 that respondent had assessed
for petitioner's taxable year 2006.
On October 9, 2007, peti-
tioner sent to the Service a payment of $3,824.94.
An examiner working for the Service (respondent's examiner)
prepared an examination workpaper dated November 2, 2007
(exami-
nation workpaper) with respect to petitioner's request for relief
under section 6015 for her taxable year 2003.
In that workpaper,
respondent's examiner concluded that petitioner is not entitled
to relief under that section for any portion of the underpayment
for that year.
The examination workpaper stated, inter alia:
GENERAL INFORMATION
2003/UP [underpayment]/denied relief - no hardship has ability to make payments - considered abuse (however not a strong factor for granting relief) - considered health issues (RS has ability to work & pay tax
based on 2006 return) - part attributable to NES [nonelecting spouse] - knew NES has a history of not paying
tax - no belief - owes on prior joint returns - helped
with business - drafted checks for business - received
benefit through the divorce.
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- 15 EVALUATION PROCESS
Year 2003
IRC 6015(f)
Liability arose on or after July 22, 1998
Joint return is valid
There is enòugh information to determine the claim
No OIC accepted
Eligibility factors:
Underpaymen of tax - relief is not available under IRC
6015(b)
& 6015(c)
Filed a joint return
Claim filed timely
Liability unpaid, or RS [requesting spouse] may have
refundable payments
Not a fraudulent return
No fraudulent transfer of assets
No disqualified assets transferred
The underpaid tax is not solely attributable to the NRS
[nonrequesting spouse]
Attribution:
NES = 46,733.00
RS = 2,598.00
Partial attribution to the NRS.
Continue evaluating
for the portion attributable to the NRS. Deny relief
for the portion attributable to the RS.
Tier I factors (limited scope):
Taxpayers are currently divorced, widowed, legally
separated, or they had been members of separate households prior to the claim for at least 12 consecutive
months
Can't prove a belief that tax was to be paid
Explanation:
History of filing returns late with
balance dues [sic] - owes on prior joint
returns - when return was filed - did
not have access to NES' ability to pay
Tiet I factors (limited scope) not met
Tier II factors:
Taxpayers age currently divorced, widowed,
For
legally sepárated, or they had been members of
separate households prior to the claim for at
least 12 consecutive months
No economic hardship
Against
Explanation:
Per Form 12510 - has ability to make
- 16 payments - received 1,000,000.00 in 2004
for her shares for NES' business
Marital abuse
Explanation:
Fora
States mental & verbal abuse (not considered strong factor for granting relief) - RS worked for NES' business
Poor mental or physical health
For"°3
Explanation:
RS has back trouble & depression - however RS is [sic] ability to work
NRS has legal obligation
For
Legal Obligation: Per divorce decree NES is to pay tax
Knowledge:
Background:
RS - High school - culinary
NRS - Tenth grade
school
Involvement:
RS - States no joint
NRS accounts - states she
reviewed statements worked for business clerical/administrative
work - includes reviewing bills & drafting
checks for NES' signature
Lifestyle changes:
Not indicated
NRS's elusiveness:
Did not ask questions
Duty to inquire:
Did not review return
Living arrangements:
Separated 12/25/03
RS had no knowledge and no reason to know
For"
Explanation:
History of filing late returns with
balance due - owes on prior year joint
returns - when return filed - did not
have access to NES' ability to pay
9ha individual not identified in the record struck by hand
the typewritten word "For" in the examination workpaper.
°An individual not identified in the record struck by hand
the typewritten word "For" in the examination workpaper.
"An individual not identified in the record struck by hand
the typewritten word "For" in the examination workpaper and
inserted by hand the word "Against" immediately above i't.
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RS gained benefit
Against
Explanation:
Received 1,000,000.00 for her shares of
business - received marital home through
divorce
Made a good faith effort to comply with the tax For
laws
Explanation:
All future returns filed & paid - made
estimated payment on 2007
Unique circumstances: Although RS states health issues
- RS still has ability to earn
wages to pay taxes
Not meeting Tier II factors - deny claim
Tier II consideration:
Based on the above facts it is
equitable to hold the RS liable for the balance.
Tier II factors not met - deny
Claim denied under IRC 6015(f) - full scope
CONCLUSION
2003 - Deniéd under 6015(f)
On November 14, 2007, respondent issued to petitioner a
preliminary dete mination with respect to her request for relief
under section 6015 for her taxable year 2003.
In that letter,
respondent determined that petitioner is not 'entitled to that
relief because "fou [petitioner] did not show it would be unfair
to hold you responsible.
You did not prove, that at the time you
signed the return, you had reason to believE the tax would be
paid.
Also, the documentation you provided does not prove
economic hardship."
Around November 27, 2007, Mr. Bell commenced a bankruptcy
proceeding in the U.S. Bankruptcy Court for the Middle District
of Florida (Bankruptcy Court).
On April 2, 2008, petitioner
filed in the Bankruptcy Court an adversary complaint (peti-
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tioner's bankruptcy complaint) in that proceeding.
In that
complaint, petitioner alleged that Mr. Bell's obligations under
(1) the 2004 installment note and (2) the indemnification contained in paragraph 6 of the property agreement were
nondischargeable in bankruptcy.
In petitioner's bankruptcy
complaint, petitioner alleged, inter alia:
5.
During the period from approximately 2000
through 2004, while still married, Debtor [Mr. Bell]
and Sue [petitioner] were partners in a business called
Today I Can, Inc. ("TIC") whose primary purpose was
internet sales/e-commerce.
Further, TIC was organized
under the laws of the State of Indiana.
6.
The ownership structure of TIC was 51-49%,
with Debtor holding the majority interest and Sue
holding the minority interest.
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22.
Prior to the filing of the instant bankruptcy, Sue had instituted post-dissolution legal
proceedings in Indiana (Marion County) against Debtor
for the purpose of collecting on the Note and that said
proceedings were then-pending at the time of the filing
of this bankruptcy. Moreover, during the last half of
2007, Debtor had appeared in Indiana twice for hearings
on said legal matter and that further hearings were
scheduled.
23. Nevertheless, Debtor failed to disclose said
litigation as required under question no. 4 of his
Statement of Financial Affairs.
On April 30, 2008, Mr. Bell filed in the Bankruptcy Court an
answer to petitioner's bankruptcy complaint.
In that answer, Mr.
Bell admitted the allegations that petitioner made in paragraphs
5, 6, 22, and 23 of that complaint (quoted above).
- 19 Around early 2008, respondent assigned petitioner's request
for relief under section 6015 to an officer (respondent's Appeals
of f icer ) in respondent ' s Appeals Of f ice .
Af ter cons idering
petitioner's reqµest for relief, respondent's Appeals officer
prepared an appeals case memorandum dated June 27, 2008 (appeals
I
memorandum) .
In that memorandum, respondent ' s Appeals of f icer
concluded that petitioner is not entitled to relief under section
6015 for her taxable year 2003.
The appeals memorandum stated in
pertinent part:
SUMMARY AND RECOMMENDATION
Is the taxpayer entitled to relief from liability under
§6015(f)? There are hazards for both sides so an offer
was presented to the taxpayer, but she has ignored the
offer. She has not countered with an offer of her own,
either. Accordingly, the examiner's position will be
sustained.
BRIEF BACKGROUND
Taxpayer filed a joint income tax return with her
spouse for t ax year 2003 on or about July 29, 2004 . An
underpayment was reported on the form 1040 in the
amount of $50,587. Additional penalties and interest
were assessed because the tax return was filed after
the due date of April 15, 2004.
The taxpayer and her former spouse were equal partners
in a corporation and both earned wages during 2003.
He
had an additfional sole proprietorship during the year.
After allocating the tax liability, her former spouse's
share of the unpaid tax was $24,961.
DISCUSSION AND ANALYSIS
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The taxpayer cites O'Neill v. CIR (TC Memo 2004-183)
and discusses 6 factors that favor her in the determi-
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nation that she should be granted innocent spouse
relief under §6015(f)."E The factors discussed by the
Court are listed below with the taxpayer's position on
each factor explained.
1. Marital Status
The couple was divorced August 2005.
2. Economic Hardship
The taxpayer completed form 12510 and calculated
her current monthly household income and expenses.
She has about $2500 available income each month.
She did not receive the $1 million divorce settlement from her former spouse.
He has listed this
as an outstanding debt on his bankruptcy filings.
3. Abuse
The taxpayer completed form 12510 and stated that
she was the victim of mental and verbal abuse.
The divorce decree does not give a reason for the
marital troubles; it only accepts the property
settlement and grants the dissolution.
4. Knowledge
The taxpayer was aware of their income tax liability.
She knew that they had not filed income tax
returns for several years and were attempting to
become current during 2003 and 2004 calendar
years. Many of these returns were filed late and
with balances due. They have outstanding liabilities in excess of $40,000 from their 2000 and 2002
tax returns.
"We note that in O'Neill v. Commissioner, T.C. Memo. 2004183, we analyzed the taxpayer's request for relief under sec.
6015(f) under the factors set forth in Rev. Proc. 2000-15, 2000-1
C.B. 447 (Revenue Procedure 2000-15).
Proc. 2003-61,
2003-2 C.B. 296
We also note that Rev.
(Revenue Procedure 2003-61),
superseded Revenue Procedure 2000-15. Revenue Procedure 2003-61
is effective for requests for relief under sec. 6015(f) that were
filed on or after Nov.
1,
2003.
Id.
sec.
7,
2003-2 C.B. at 299.
Revenue Procedure 2003-61 is applicable in the instant case
because petitioner filed her request for innocent spouse relief
on July 26,
2007.
- 21 5. Divorce decree
The property settlement states that the former
spouse will hold the taxpayer harmless from any
federal tax liability arising during their marriage.
The couple had filed the 2003 form 1040
about 1 year prior to the divorce being granted.
She must have been aware that he had not paid the
tax liþbilities for that statement to be included
in the'decree.
6. Tax Liability
The taxpayer believes that all of the income reportedion the 2003 tax return belongs to her former spouse.
The taxpayer reported wages earned
during 2003 and listed her occupation as a business owner. At least some of the wages reported
as income on the tax return belonged to the tax-
payer.s The property settlement along with the
taxpayer's occupation on the 2003 tax return indicates that she was involved in the business.
She
was identified as a 50% owner of the company.
7. Significant Benefit
The taipayer was granted a $1 million property
settlement for her share of the corporation, title
to thelFord Expedition (listed as a corporate
asset)) and sole title to the couple's personal
residence.
She lived with her former spouse until
Christmas Day 2003.
8. Current Status
The taxpayer has filed her 2004-2006 tax returns.
There are no outstanding liabilities at this time.
She made estimated payments for the 2007 tax year.
The first factor is neutral or favors the Government
because the couple were married and living together all
but 1 week of 2003.
They were separated while the tax
return was prepared and at the time it was filed with
the Service.
The second factor is neutral or favors the Government
because the taxpayer has sufficient net income each
month to pay some of the liabilities.
The third factor is neutral. There isn't any evidence
of abuse during the marriage. The divorce decree is
silent on this topic.
- 22 -
The seventh factor is neutral.
Neither individual
received a significant benefit during the marriage from
the unpaid taxes.
Both enjoyed the same lifestyle.
The 6th factor favors the Government because the business was owned by both individuals equally. The taxpayer was granted a large settlement for her share of
the business at the time of the divorce. The income
reported by the corporation should be split between
them.
The fourth factor favors the Government because the
taxpayer was aware that the couple had unpaid liabilities at the time she signed the 2003 form 1040.
She
was aware that there were amounts owed on that return
along with others that had been filed within the last
year.
The fifth factor favors the taxpayer because the decree
holds the former spouse liable for taxes owed during
the marriage. He agreed to be responsible for the
unpaid taxes. Whether or not the taxpayer believed
this to be true, this is not known.
The eighth factor favors the taxpayer.
She has been
current in filing and paying her tax liabilities since
the couple separated.
3 out of 8 factors favor the taxpayer while 2 are
considered neutral.
This would allow the taxpayer 5
out of 8 factors on her side, or 60% concession by the
Government.
MY EVALUATION
I believe that there are hazards of litigating this
issue for both sides. There are factors that favor the
taxpayer and others that favor the Government. Although an offer was presented to the taxpayer, she has
refused it and decided not to counter it with an offer
of her own.
I recommend that the examiner's position
should be sustained in full.
On July 11, 2008, respondent issued to petitioner the notice
of determination.
In that notice, respondent denied petitioner's
request for relief under section 6015 for her taxable year 2003.
- 23 The notice of determination stated in pertinent part:
"The
information we hgve available does not show you meet the require-
ments for relief . "
On October 20, 2008, petitioner filed Form 1040 for her
taxable year 200
(2007 return) ."
In that return, petitioner
reported adjusted gross income of $133, 361 and taxable income of
$103,191.
In the 2007 return, petitioner showed total tax of
$26,644 and claimed (1) a withholding tax credit of $13,847,
(2) estimated ta
payments totaling $22, 500, and (3) . a refund of
approximately $9,700.
On November 17, 2008, respondent
(1) assessed against petitioner an estimated tax penalty of
$136.03 with resýect to her taxable year 2007 and (2) issued to
her a refund of $9,566.97 with respect to that year.
In May 2009, petitioner moved from the marital residence to
live with her older sister in Idaho.
Petitioner made that move
because she could no longer afford to live in Indiana and required assistance from family members who lived in Idaho.
at least May 200
From
until the time of the trial in this case,
petitioner's sister, who was suffering from certain medical
conditions including type II diabetes, back injuries, severe
asthma, and severe arthritis, was unemployed and was receiving
"Petitioner received an extension of time within which to
file the 2007 return to and including Oct. 15, 2008.
- 24 Social Security disability payments."
At the time of the trial
in this case, petitioner's sister contributed $600 monthly toward
the household expenses of petitioner and herself.
At the time petitioner moved to Idaho in May 2009, she
informed Wells Fargo Bank, N.A.
(Wells Fargo), the trustee for
the holders of the mortgage loan with respect to the marital
residence, that she was unable to make further payments on that
mortgage loan and that she would surrender possession of that
residence.
Around November 18, 2009, Wells Fargo instituted a
foreclosure proceeding against petitioner in the Hamilton Supe-
rior Court and filed a document in- that court entitled "AMENDED
COMPLAINT ON NOTE AND FOR FORECLOSURE OF MORTGAGE" with respect
to the'marital residence.
On November 30, 2009, petitioner and Mr. Bell entered into
a settlement agreement and release (bankruptcy settlement) with
respect to the claims that petitioner had made in petitioner's
bankruptcy complaint, which the Bankruptcy Court approved on
November 30, 2009."
That settlement provided in pertinent part:
1.
On August 19, 2004, Susan [petitioner] and
Thomas [Mr. Bell] were granted a divorce under the laws
of the State of Indiana (the "divorce").
Pursuant to
"As of the time of the trial in this case, petitioner had
applied for Social Security disability benefits but had not
received any response as to whether she qualified for such
benefits.
"Mr. Bell and petitioner executed the bankruptcy settlement
on Sept. 14 and Oct. 5, 2009, respectively.
- 25 -
the divorce, Susan and Thomas entered into a Property
Settlement Agreement (the "PSA") which outlined their
rights and obligations with respect to property, income
and assets related to their marriage. This Agreement
hereby incorporates said PSA by reference, including a
certain $1,000,000.00 promissory note dated June 11,
2004
(the "Note").
*
*
8.
*
*
Sbope of Agreement.
*
*
*
The Parties hereby agree
that this Agreement is intended to address Thomas'
liability with respect to the PSA, specifically including the Note and all federal and/or state tax liability
with respect to a certain internet business in which
Thomas and Susan were partners during their marriage,
namely, Today I Can,
Inc.
("TIC").
9.
Payment terms.
Subject to the satisfaction
of the contingencies set forth under paragraph seven
(7) above,"" the Parties hereby agree that Thomas
shall pay Susan the total sum of Three Hundred Twenty
Five Thousand Dollars and no cents ($325,000.00) (hereinafter the'"Settlement Amount") in full accord and
satisfaction of his obligations under the Note.
Subject to the "Method of Payment" set forth under paragraph (10) below, Thomas hereby agrees to pay the
Settlement Amount as follows:
(a) A lump sum payment of Ten Thousand Dollars
($10,000.00) to be paid not later than October 5,
2009; and
(b) Commencing on November 5, 2009, Thomas shall
pay Susan the sum of Four Thousand Two Hundred
Fifty Dollars ($4,250.00) per month for twelve
(12) consecutive monthly installment payments
($51,000.00 total),
and
(c) Conmencing on November 5, 2010, Thomas shall
pay Susan the sum of Three Thousand Dollars
($3,000.00) per month for eighty-eight (88) consecutive monthly installment payments ($264,000.00
total).
"The contingencies set forth in par. 7 of the bankruptcy
settlement were satisfied.
- 26 The aggregate total of the payments described
under paragraphs 9(a), (b) and (c) above amount to the
Settlement Amount of Three Hundred Twenty Five Thousand
Dollars ($325,000.00).
The last such payment of the
Settlement Amount shall be due and owing on February 5,
2018. All payments shall be due on the fifth day of
each month.
The Parties agree Thomas is solely responsible for the
payments set forth under this paragraph.
10. Method of Payment. The payments due under
paragraph nine shall be made as follows:
(a)
The lump-sum payment of $10,000.00, due October 5, 2009, shall be made payable to "Susan G.
Bell and John Nelson" and shall be mailed to the
following address:
John W. Nelson, Esquire, * * *
and
(b)
The first seven payments of $4,250.00, which
commence on November 5, 2009, shall be made payable to "Susan G. Bell and John Nelson," and shall
be mailed to the following address:
John W. Nelson, Esquire, * * * and
(c)
The remaining five payments of $4,250 as well
as all payments of $3,000.00 shall be made payable
to "Susan G. Bell" and shall be mailed to Susan at
. an address to be provided to Thomas at least thirty (30) days prior to the commencement of the
first such payment.
* * *
*
*
*
*
*
*
*
11. Taxes. Thomas agrees that he shall remain
subject to all tax liability related to TIC as set
forth under the PSA.
Further, Thomas agrees to indemnify Susan for any TIC related tax liability that is
ultimately assessed against her. As such, Thomas
hereby ratifies and reaffirms all TIC tax indemnification provisions as set forth under the PSA.
12. Default.
The Parties agree that in the event
Thomas fails to fully satisfy his obligations under
this Agreement, he shall be in default of this Agreement.
The Parties hereby agree that the occurence of
any of the following shall constitute an event of
- 27 default:
(a) Thomas' failure to make any payment due
under this Agreement by the due date scheduled for any
such payment, as set forth under paragraph nine above;
(b) Thomas' failure to timely indemnify Susan for any
tax payments made by Susan relating to TIC, as described under the PSA, as set forth under paragraph ten
above * * * and (c) payment of any amount less than the
scheduled amount.
In the event Thomas is in default
with respect to any payment scheduled hereunder, he
shall have ten (10) calendar days following the applicable due date in which to cure such default, provided
that Susan is in receipt of any such payment not later
than 12:00 midnight on the tenth calendar day following
the due date.
In the event of default and/or failure
to timely cure such default, the terms of this Agreement shall become null and void and the terms of the
Note shall evive and be of full legal force and effect.
From around October 2009 through around January 2010, Mr.
Bell paid petitioner $19,500 pursuant to the bankruptcy settlement.
Of that $19,500, petitioner used $9,000 to pay her attor-
ney.
From around February 2010 to the time of the trial in this
case, Mr. Bell did not make any monthly payments pursuant to the
bankruptcy settlement.
As of the time of that trial, petitioner
had not initiated any legal action to enforce the terms of the
bankruptcy settlement; nor had she taken any legal action to
enforce the terms of the 2004 installment note, which she had the
right to do under the bankruptcy settlement in the event Mr. Bell
defaulted on that settlement.
As of April 19,
with respect to
2010, the Bells owed a balance of $11,963.39
heir taxable year 2000.
As of that date, the
Bells owed a balance of $36,895.25 with respect to their taxable
year 2002.
- 28 -
At the time of the trial in this case, petitioner, who
remained unemployed, was still residing in Idaho with her older
sister.
From the time petitioner moved to Idaho in May 2009
until the time of that trial, the only funds that petitioner had
available on which to live were the payments that Mr. Bell had
made pursuant to the bankruptcy settlement from October 2009 to
January 2010 totaling $19,500 and certain savings, the amount of
which is not established by the record."
At the time of the
trial, petitioner's savings had been reduced to approximately
$100.
At the time of the trial in this case, petitioner's monthly
expenses included expenses for (1) rent of $875,
(2) utilities,
including electric, gas, telephone, water, and trash, of $425,
and (3) food of $350.
At that time, petitioner had certain
outstanding bills in amounts not established by the record for
medical care that had been provided to her before 2008.
OPINION
The parties' only dispute is whether petitioner is entitled
to relief under section 6015(f) for her taxable year 2003."
Petitioner bears the burden of proving that she is entitled to
"As discussed above, at the time of the trial in this case,
petitioner's sister was receiving Social Security disability
benefits and was contributing $600 monthly toward the household
expenses of petitioner and herself.
"Petitioner does not dispute that she is not entitled to
relief under sec. 6015(b) or (c) for her taxable year 2003.
- 29 -
such relief.
106,
113
See Rule 142(a); Jonson v. Commissioner, 118 T.C.
(2002),
affd.- 353 F.3d 1181
(10th Cir.
2003) .
Section 6015(f) provides:
SEC.
6015.
(f)
RELIEF FROM JOINT AND SEVERAL LIABILITY ON
JOINT RETURN.
E uitable Relief.--Under procedures pre-
scribed by the Secretary, if--
(i) taking into account all 'the facts and
circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency
(or any portion of either); and
(2) relief is not available to such individual uneler subsection (b) or (c) , the Secretary may
relieve such individual of such liability.
As directed by section 6015(f), the Commissioner of Internal
Revenue
(Commissioner) has prescribed procedures in Revenue
Procedure 2003-61 that are to be used in determining whether it
would be inequitable to find the requesting spouse liable for
part or all of the underpayment of tax.
Section 4.01 of that
revenue procedure lists the following threshold conditions
(threshold conditions) which must be satisfied before the Commis-
sioner will consider a request for relief under section 6015 (f) :
(1) The requesting spouse filed a joint tax return for the
taxable year for which such spouse seeks relief;
(2) relief is
not available to the requesting spouse under section 6015(b) or
(c);
(3) the requesting spouse applies for relief no later than
two years after the date of the Service's first collection
activity after July 22, 1998, with respect to the requesting
- 30 -
spouse;
(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 file or fail to file
the tax return in question with fraudulent intent; and (7) the
income tax liability from which the requesting spouse seeks
relief is attributable to an item of the nonrequesting spouse.
Rev. Proc.
2003-61,
sec. 4.01,
2003-2 C.B. at 297.
Respondent argues that petitioner has failed to satisfy the
threshold condition in section 4.01(7) of Revenue Procedure 200361 with respect to the respective portions of the underpayment
for her taxable year 2003 that are attributable to (1) 49 percent
of the net income of $187,234 from Today I Can that the Bells
reported in the 2003 joint return and (2) petitioner's wages of
$24,500 that the Bells reported in that return.
Petitioner
disagrees and argues that she satisfies all of the threshold
conditions with respect to the entire underpayment for her
taxable year 2003.
With respect to the net income of $187,234 from Today I Can
(2003 Today I Can net income) that the Bells reported in the 2003
joint return, respondent contends that 49 percent of that income
is attributable to petitioner because during 2003 petitioner
owned 49 percent of the stock of Today I Can.
In support of that
contention, respondent relies on (1) the allegations that peti-
- 31 -
tioner made in paragraphs 5 and 6 of petitioner' s bankruptcy
complaint that between 2000 and 2004 she owned 49 percent of the
stock of Today I Can and (2) Mr. Bell's admission of those
allegations in the answer to petitioner's bankruptcy complaint
that he filed in the Bankruptcy Court.
Petitioner contends that Mr. Bell owned 100 percent of Today
I Can and that therefore the 2003 Today I Can net income is
attributable entirely to him.
In support of that contention,
petitioner relies on the 2003 Schedule K-1 in which Today I Can
reported that Mr
stock.
Bell owned 100 percent of its outstanding
Petitionèr claims that in signing the 2003 joint return
she agreed with what was reported in that Schedule K-1; namely,
Mr. Bell owned 100 percent of the stock of Today I Can."
In
advancing that claim, petitioner ignores that the Bells did not
attach to their
003 joint return the 2003 Schedule K-1.
As a
result, petitioner could not have even been aware that Today I
Can had reported in that Schedule K-1 that Mr. Bell owned 100
percent of the stock of Today I Can.
Even if petitioner had been
aware that Today I Can had reported in the 2003 Schedule K-1 that
Mr. Bell owned 100 percent of that stock, we have held that "a
tax return does not establish the truth of the facts stated
"Petitioner relies on Jones v. Commissioner, T.C. Memo.
2010-112, in support of her claim that in signing the 2003 joint
return she agreedi with the 2003 Schedule K-1. We find Jones to
be materially distinguishable from the instant case and petitioner's reliance on that case to be misplaced.
- 32 therein."
Campbell v. Commissioner, T.C. Memo. 2011-15 (citing
Wilkinson v. Commissioner,
71 T.C.
633
(1979)).
More importantly, petitioner herself disputed what Today I
Can reported in the 2003 Schedule K-1.
In petitioner's bank-
ruptcy complaint, petitioner indicated that during 2000 through
2004 she owned 49 percent of the stock of Today I Can.
In Mr.
Bell's answer to that complaint Mr. Bell agreed with that statement.
In further support of petitioner's contention that the 2003
Today I Can net income is attributable entirely to Mr. Bell,
petitioner relies on section 4.01(7) (b) of Revenue Procedure
2003-61.
That section provides in pertinent part:
(b) Nominal ownership.
If the item is titled in
the name of the requesting spouse, the item is presumptively attributable to the requesting spouse. This
presumption is rebuttable.4°3 * * *
2oSec. 4.01(7) (b) of Revenue Procedure 2003-61 also provides
an example (nominal ownership example) of circumstances that
would establish that a requesting spouse's ownership was nominal:
For example, H opens an individual retirement account
(IRA) in W's name and forges W's signature on the IRA
in 1998. Thereafter, H makes contributions to the IRA
and in 2002 takes a taxable distribution from the IRA.
H and W file a joint return for the 2002 taxable year,
but do not report the taxable distribution on their
joint return. The Service later proposes a deficiency
relating to the taxable IRA distribution and assesses
the deficiency against H and W. W requests relief
* * * under section 6015. W establishes that W did not
contribute to the IRA, sign paperwork relating to the
IRA, or otherwise act as if W were the owner of the
IRA.
W thereby rebutted the presumption that the IRA
is attributable to W.
- 33 -
According tþ petitioner,
"the 51/49 allocation cited by
Respondent establishes * * * a presumption that petitioner owned
49% of the TIC
[Today I Can]
[stock] which can be rebutted by
evidence that any such interest was nominal".
Petitioner claims
I
that she has, ini fact, rebutted that presumption by showing that
her ownership interest in Today I Can was nominal because "Mr.
Bell wielded total control over the business" and "petitioner's
role with TIC was extremely limited"."
Even if petitioner were
correct that Mr. Bell controlled Today I Can, we would reject
petitioner's contention that her ownership interest in that
company was nominal.
The nominal ownership example set forth in
section 4.01(7) (b) of Revenue Procedure 2003-61 is instructive.
In that example, the requesting spouse established that she did
not "act as if * * *
[she] were the owner of the IRA."
Id.
In
the instant case, petitioner acted as if she were an owner of
Today I Can when she sold her stock in that business to Mr. Bell
as part of the divorce prdceedings between her and Mr. Bell.
In
this regard, we have found (1) that petitioner and Mr. Bell
"Petitioner relies on Wilson v. Commissioner, T.C. Memo.
2010-134, in support of her claim that her ownership interest in
Today I Can was nominal because Mr. Bell wielded control over
that company and her role in that company was limited.
In
Wilson, we addressed whether one-half of the income from an
unincorporated business operated by the nonrequesting spouse
should be attributed to the requesting spouse solely because the
requesting spouse' had performed certain clerical work as an
employee of that business. We find Wilson to be materially
distináuishable from the instant case and petitioner's reliance
on that case to be misplaced.
- 34 -
executed and filed with the Superior Court the property agreement
and (2) that that agreement provided, inter alia, that Mr. Bell
was to pay to petitioner $1 million for petitioner's stock in
Today I Can.
If petitioner's ownership interest in Today I Can
had been nominal, Mr. Bell would not have agreed to pay her a
substantial amount in exchange for that interest."
On the record before us, we find that 49 percent of the 2003
Today I Can net income is attributable to petitioner.
On that
record, we further find that petitioner has failed to carry her
burden of establishing that she satisfies all of the threshold
conditions with respect to the portion of the underpayment for
her taxable year 2003 that is attributable to that portion of
that net income.
See Rev. Proc. 2003-61, sec. 4.01(7).
On the
record before us, we find that petitioner has failed to carry her
burden of establishing that it would be inequitable to hold her
liable for the portion of that underpayment for her taxable year
2003 that is attributable to her 49-percent portion of the 2003
Today I Can net income.
On that record, we find that petitioner
has failed to carry her burden of establishing that she is
entitled for her taxable year 2003 to relief under section
6015(f) with respect to that portion of that underpayment.
"In the property agreement, Mr. Bell agreed to pay petitioner $1 million, which was equal to approximately one-half of
the gross receipts or sales that Today I Can reported in the 2003
Today I Can return.
- 35 With respect to the portion of the underpayment for petitioner's taxable year 2003 that is attributable to petitioner's
wages of $24,500 that the Bells reported in the 2003 joint
return, petitioner asserts:
In addition the 2003 federal 1040 [the 2003 joint
return] shows that the couple [the Bells] earned
$53,000.00 in wages that were paid by Today I Can, Inc.
This consisted of wages in the amount of $24,500 that
were paid to petitioner and wages of $28,500 that were
paid to the non-requesting spouse. Thus, all income
earned by the petitioner and nonrequesting spouse in
2003 was directly attributable to Today I Can, Inc.
It appears that petitioner is arguing that, because Today I
Can paid her $24, 00 of wages during 2003 and because Mr. Bell
owned 100 percent of the stock of that company during that year,
those wages are attributable to him.
reject petitione 's argument.
On the record before us, we
Regardless of who owns a company,
an employee is taxed on the wages that the company pays to the
employee.
Petitioner agrees that during 2003 she performed
services for Today I Can and that during that year Today I Can
paid her wages of $24,500 for those services.
On the reco d before us, we find that the wages that Today I
Can paid petitioner during 2003 are attributable to petitioner.
On that record, we further find that petitioner has failed to
carry her burden
f establishing that she satisfies all of the
threshold conditions with respect to the portion of the underpayment for her taxayle year 2003 that is attributable to those
wages.
See Rev. Êroc. 2003-61, sec. 4.01(7).
On the record
- 36 before us, we find that petitioner has failed to carry her burden
of establishing that it would be inequitable to hold her liable
for the portion of the underpayment for her taxable year 2003
that is attributable to the wages that Today I Can paid her
during that year.
On that record, we find that petitioner has
failed to carry her burden of establishing that she is entitled
for her taxable year 2003 to relief under section 6015(f) with
respect to that portion of that underpayment.
Respondent does not dispute that petitioner satisfies all of
the threshold conditions with respect to the portion of the
underpayment for petitioner's taxable year 2003 that is attribut-
able to Mr. Bell."
Where the requesting spouse satisfies the
threshold conditions, section 4.02(1) of Revenue Procedure 200361 sets forth the circumstances under which the Commissioner
ordinarily will grant relief to that spouse under section 6015(f)
in a case, like the instant case, where a liability is reported
in a joint return but not paid.
As pertinent here, those circum-
stances, which section 4.02 of Revenue Procedure 2003-61 and we
refer to as elements, are:
"The portion of the underpayment for petitioner's taxable
year 2003 that is attributable to Mr. Bell consists of the
underpayment for that year attributable to (1) the wages of
$28,500 that Today I Can paid Mr. Bell during that year, (2) the
net business income of $2,195 from certain work Mr. Bell performed on behalf of Today I Can that the Bells reported in the
2003 joint return, and (3) Mr. Bell's 51-percent share of the
2003 Today I Can net income.
- 37 -
(a) On the date of the request for relief, the
requesting pouse is no longer married to * * * the
nonrequesting spouse * * *;
(b) On the date the requesting spouse signed the
joint retur , the requesting spouse had no knowledge or
reason to know that the nonrequesting spouse would not
pay the income tax liability. The requesting spouse
must establish that it was reasonable for the requesting spouse to believe that the nonrequesting spouse
would pay the reported income tax liability. * * *; and
(c) The requesting spouse will suffer economic
hardship if the Service does not grant relief.
For
purposes of this revenue procedure, the Serviae will
base its determination of whether the requesting spouse
will suffer economic hardship on rules similar to those
provided in Treas.
Rev. Proc. 2003-61,
Reg.
§ 301.6343-1(b) (4).
sec. 4.02(1),
* * *
2003-2 C.B. at 298.
(We shall
hereinafter refer to the elements set forth in section
4.02(1) (a),
(b), and (c) of Revenue Procedure 2003-61 as the
marital status element, the knowledge or reason to know element,
and the economicihardship element, respectively.)
With respect to the portion of the underpayment for petitioner's taxable year 2003 that is attributable to Mr. Bell,"
(1) respondent concedes that the marital status element is
present, and (2) the parties dispute whether the knowledge or
reason to know element and the economic hardship element are
present.
With respect to the knowledge or reason to know element,
petitioner must establish that it was reasonable for her to
"See supra note 23.
- 38 -
believe that Mr. Bell would pay the tax shown due in the 2003
joint return.
See Rev. Proc. 2003-61, sec. 4.02(1) (b).
Respon-
dent argues that on July 29, 2004, the date on which petitioner
signed the 2003 joint return, she had knowledge or reason to know
that Mr. Bell would not pay the tax shown due in that return with
that return or within a reasonably prompt time."
That is be-
cause, according to respondent:
On July 29, 2004, petitioner (1) knew of the seven
late-filed income tax returns [for the Bells' taxable
years 1997,
1998,
1999,
2000,
2001,
2002,
and 2003],
(2) knew that the 2000 and 2002 joint income tax returns reported unpaid tax of $69,165.00, (3) knew or
had reason to know that Mr. Bell had made payments
towards the delinquent tax obligations for tax years
2000 and 2002 but that he had not remitted a payment
towards the liability since March 2004, (4) knew or had
reason to know that even after accounting for subsequent payments, the outstanding tax liabilities from
tax years 2000 and 2002 were in excess of $30,000.00,
in addition to penalties and interest, and (5) knew
that the 2003 return reported a tax due of $49,331.00.
[Cross-references omitted.]
"Respondent's argument that petitioner must believe that
the tax would be paid in a reasonably prompt time is based on
Banderas v. Commissioner, T.C. Memo. 2007-129.
In Banderas, we
held that in order for a belief that a liability would be paid to
be reasonable the requesting spouse must believe that the funds
to pay the liability would be on hand within a reasonably prompt
time. Respondent contends that that holding in Banderas is wrong
and that the requesting spouse must believe that the tax would be
paid by the later of the date on which the return was filed or
the date on which the tax is due to be paid. We need not revisit
our holding in Banderas as respondent invites us to do because,
as discussed below, even under that holding we sustain respondent's argument with respect to the knowledge or reason to know
element.
- 39 -
Petitioner counters that it was reasonable for petitioner to
believe that Mrd Bell would pay the tax shown due in the 2003
joint return.
According to petitioner:
At the timd petitioner signed the 2003 Joint Return,
she knew there was a balance due.
However, she understood that Tom [Mr. Bell] would pay all taxes due
according to his statement to her. * * * At that time,
Today I Can, Inc., * * * was in the midst of an impressive run of success. As shown on forms 1120S which
were filed for tax years 2003 and 2004, Today I Can,
Inc. had had total 2003 income of $2,040,413.00 and
total 2004 income of $2,106,344. * * *
Moreover, within the one year period prior to the
filing of the 2003 1040 (i.e. 09/11/03 through
03/29/04), Tom Bell had tangibly demonstrated his
ability and willingness to pay the tax liability as
shown by the tax payments totaling $74,620.29 and had
personally signed all the checks constituting those
payments.
Coupled with the fact that Tom Bell at that
time was approximately forty years old and entering his
prime earniþg years, any reasonable person would conclude, as dïd petitioner, that she would have no reason
to believe that Mr. Bell would not or, more importantly, could not, make the payments. [Cross-reference
and fn. ref . omitted.]
On the reco d before us, we reject petitioner's argument,
the cornerstone of which is that Today I Can reported gross
income of $2,040 413 and $2,106,344 for its taxable years 2003
and 2004, respectively.
Petitioner's argument fails to take into
account that Today I Can reported total deductions of $1,833,385
and $2,078,880 fór those respective years.
In addition, although
petitioner is correct that between September 11, 2003, and March
29, 2004, Mr. Bell remitted certain payments to the Service that
- 40 -
it applied against the Bells' unpaid tax for each of their
taxable years 1999, 2001, and 2002, after Mr. Bell made those
payments there remained unpaid tax for the Bells' taxable year
2002, including certain penalties and interest, of approximately
$40,500.
Moreover, we have found that on July 29, 2004, the date
on which petitioner signed the 2003 joint return,
(1) petitioner
signed the 2000 joint return in which the Bells showed tax due of
$6,690 and (2) when the Bells filed that return a check for only
$1,000 that was drawn on Mr. Bell's personal bank account was
included with that return.
In addition, when petitioner signed
the 2003 joint return she was aware that (1) between September
11, 2003, and July 29, 2004, she and Mr. Bell had filed late
respective tax returns for their taxable years 1997 through 2003;
(2) the 2000 joint return showed tax due of $6,690 that they did
not pay in full when they filed that return;
(3) the 2002 joint
return showed tax due of $83,475 that they did not pay in full
when they filed that return; and (4) the 2003 joint return showed
tax due of $50,587 that they did not pay in full when they filed
that return.
We have also found that in the property agreement
petitioner acknowledged that she had "full and adequate knowledge" of all relevant financial information pertaining to Mr.
Bell through July 10, 2004, the date on which petitioner executed
that agreement.
As a result, petitioner was or should have been
aware on that date, which was only 19 days before she signed the
- 41 -
2003 joint return, that Mr. Bell had not paid in full the unpaid
tax for the Bells' taxable year 2002 and that he had not made any
payments to the Service since March 29, 2004, with respect to
that unpaid tax.
On the record before us, we find that petitioner has failed
to carry her burden of establishing that at the time she signed
the 2003 joint return she reasonably believed that the tax shown
due in that return would be paid on or before the date on which
that tax was due.
On that record, we further find that peti-
tioner has failed to carry her burden of establishing that at
that time she reasonably believed that the funds to pay the tax
shown due in the 2003 joint return would be available within a
reasonably prompt time."
On the record before us, we find that
petitioner has feiled to carry her burden of establishing that at
the time she signed the 2003 joint return she did not know and
had no reason to know that the tax shown due -in that return would
not be paid.
t
On the reco¼d before us, we find that petitioner has failed
to carry her burden of establishing that she satisfies the
requirements of
he knowledge or reason to know element with
respect to the portion of the underpayment for her taxable year
2003 that is attributable to Mr. Bell.
sec. 4.02(1) (b).
See Rev. Proc. 2003-61,
On.that record, we find that petitioner has
"See supra note 25.
- 42 -
failed to carry her burden of establishing that all of the
elements of section 4.02 of Revenue Procedure 2003-61 are present
with respect to that portion of that underpayment."
See id.,
sec. 4.02(1).
Where, as here with respect to the portion of the underpay-
ment for petitioner's taxable year 2003 that is attributable to
Mr. Bell, the requesting spouse satisfies the threshold conditions but does not satisfy all of the requirements of section
4.02 of Revenue Procedure 2003-61, section 4.03 of that revenue
procedure sets forth the following factors that are to be considered in determining whether a requesting spouse is entitled to
relief under section 6015(f):
(1) Whether the requesting spouse
is separated or divorced from the nonrequesting spouse (marital
status factor);
(2) whether the requesting spouse would suffer
economic hardship if not granted relief.(economic hardship
factor);
(3) whether the requesting spouse knew or had reason to
know that the nonrequesting spouse would not pay the tax liability (knowledge factor);
(4) whether the nonrequesting spouse has
"In the light of our finding that petitioner has failed to
carry her burden of establishing that the knowledge or reason to
know element is present, we need not address here whether the
economic hardship element is present.
See Rev. Proc. 2003-61,
sec. 4.02(1)(c).
In discussing below the factors contained in
sec. 4.03 of Revenue Procedure 2003-61, we address whether
petitioner would suffer an economic hardship if relief under sec.
6015(-f) were not granted with respect to the portion of the
underpayment for petitioner's taxable year 2003 that is attributable to Mr. Bell.
- 43 a legal obligation to pay the outstanding tax liability pursuant
to a divorce decree or agreement (legal obligation factor);
(5) whether the requesting spouse received a significant benefit
from the unpaid tax liability (significant benefit factor) ; and
(6) whether the requesting spouse has made a good faith effort to
comply with the tax laws for the taxable years following the tax-
able year to which the request for such relief relates (compli|
ance factor).
Rev. Proc.
2003-61,
sec. 4.03(2) (a),
2003-2 C.B.
at 298.
Other factors that may be considered under Revenue Procedure
2003-61 are (1)
requesting spous
hether the nonrequesting spouse abused the
(abuse factor) and (2) whether the requesting
spouse was in poor mental or physical health (mental or physical
health factor) when he or she signed the tax return (return) or
when he or she requested relief.
4 . 03 (2) (b) .
Rev. Proc. 2003-61, sec.
In ghe event (1) the nonrequesting spouse abused the
requesting spouse or (2) the requesting spouse was in poor mental
or physical heal h when he or she signed the return or when he or
she requested relief, the abuse factor or the mental or physical
health factor, as the case may be, will be taken into account.
Id.
However, where (1) the nonrequesting spouse did not abuse
the requesting spouse and (2) the requesting spouse was not in
poor mental or physical health when she signed the return or when
she requested relief, those factors are not taken into account.
Id.
- 44 -
In making our determination under section 6015(f), we shall
consider all of the factors listed above and any other relevant
factors.
No single factor is to be determinative in any particu-
lar case, and all factors are to be considered and weighed
appropriately.
With respect to the marital status factor, the parties agree
that at the time of the trial in this case the Bells were divorced.
With respect to the economic hardship factor," petitioner
"In determining whether a requesting spouse will suffer
economic hardship, sec. 4.02(1) (c) of Revenue Procedure 2003-61
requires reliance on rules similar to those provided in sec.
301.6343-1(b) (4), Proced. & Admin. Regs.
That regulation generally provides that an individual suffers an economic hardship if
the individual is unable to pay his or her reasonable basic
living expenses.
Sec. 301.6343-1(b) (4),
Proced.
& Admin. Regs.,
provides in pertinent part:
(ii) Information from taxpayer.--In determining a
reasonable amount for basic living expenses the director will consider any information provided by the
taxpayer including-(A) The taxpayer's age, employment status and
history, ability to earn, number of dependents, and
status as a dependent of someone else;
(B) The amount reasonably necessary for food,
clothing, housing (including utilities, home-owner
insurance, home-owner dues, and the like), medical
expenses (including health insurance), transportation,
current tax payments (including federal, state, and
local), alimony, child support, or other court-ordered
payments, and expenses necessary to the taxpayer's
production of income (such as dues for a trade union or
professional organization, or child care payments which
allow the taxpayer to be gainfully employed);
(continued...)
- 45 claims on brief, and respondent does not dispute, that at the
time of the tri l in this case petitioner's monthly expenses
included expenses for (1) rent of $875,
and (3) food of $350.29
(2) utilities of $425,
Respòndent also does not dispute that
(1) at the time of that trial petitioner was unemployed,
(2) at
that time petitioner's sister contributed $600 monthly toward the
household expenses of petitioner and herself, and (3) from May
2009 until the time of the trial the only funds that petitioner
had available on which to live were the payments that Mr. Bell
"(...continued)
(C) The cost of living in the geographic area
in which the taxpayer resides;
(D) The amount of property exempt from levy
which is available to pay the taxpayer's expenses;
(E) Any extraordinary circumstances such as
special education expenses, a medical catastrophe, or
natural disaster; and
(F) Any other factor that the taxpayer claims
bears on economic hardship and brings to the attention
of the director.
"Petitioner claims on brief that the expenses listed in the
text do not include her additional expenses for transportation
and medical care
Petitioner does not identify the specific
nature and the amount of each of those respective expenses.
It
appears that (1) petitioner's transportation expenses would
include expenses (for gasoline and repairs and insurance on the
Ford Expedition that she owned and (2) petitioner's medical
expenses would include the outstanding bills that she had at the
time of the trial in this case for medical care that had been
provided to her before 2008.
Petitioner does not claim, and the
record does not establish, whether at the time of that trial
petitioner continued to have the clothing expense that she
claimed in her Form 12510.
- 46 -
had made pursuant to the bankruptcy settlement totaling $19,500
and certain savings, the amount of which is not established by
the record."
Instead, respondent argues:
Under the terms of a settlement agreement with Mr.
Bell in his bankruptcy proceeding [the bankruptcy
settlement], petitioner is entitled to receive
$4,250.00 per month for twelve months and then
$3,000.00 per month for 88 months, beginning in November 2009.
Since October 2009, Mr. Bell has paid petitioner $19,500.00. The agreement further specifies
that upon default the terms of the original Installment
Note [the 2004 installment note] shall revive and be of
full legal force and effect.
Because Mr. Bell is
currently in default on this agreement, petitioner is
entitled to collect the amounts due under the original
installment note of $10,000.00 per month.
Petitioner's
right to collect the amounts due under this installment
note is an asset which petitioner is entitled to pursue
to pay her 2003 joint income tax obligation. * * *
[Cross-references omitted.]
On the record before us, we reject respondent's argument
with respect to the economic hardship factor.
Respondent's
argument ignores respondent's concession that Mr. Bell is in
default on the bankruptcy settlement.
In addition, we have found
(1) that from around February 2010 to the time of the trial in
this case, a period of approximately three months, Mr. Bell did
not make any monthly payments pursuant to the bankruptcy settlement,
(2) that, of the $19,500 that Mr. Bell paid pursuant to the
bankruptcy settlement between October 2009 and January 2010,
petitioner used $9,000 to pay her attorney, and (3) that as of
"At the time of the trial, petitioner's savings had been
reduced to approximately $100.
April 2, 2008,
he date on which petitioner filed petitioner's
bankruptcy complaint, Mr. Bell had not made any payments under
the 2004 installment note.
It is reasqnable to conclude on the basis of the facts that
we have found regarding Mr. Bell's respective payment histories
under the 2004 installment note and the bankruptcy settlement
that Mr. Bell is unlikely to make voluntarily.the payments
required by that note and that settlement.
It is also reasonable
to conclude on the basis of those facts that it is likely
(1) that petitioner will be required to maintain court proceedings against Mr.: Bell in order to attempt to collect the respective unpaid amounts under the 2004 installment note and the
bankruptcy settlement and (2) that any such legal actions will
require petitioner to retain and pay an attorney to represent
her.
We are unable to conclude, however, on the basis of the
facts that we have found that petitioner will in fact be able to
collect those unpaid amounts from Mr. Bell.
It is also significant to our consideration of the economic
hardship factor that we have found that (1) since 2008 when Earn
and Learn was dissolved until the time of the trial in this case
petitioner has been unemployed,
(2) around 1990 petitioner
suffered petitioner's back injury,
(3) in 1995 petitioner under-
went back surgery for that back injury during which metal rods
were inserted in her back,
(4) as of the time of the trial in
- 48 -
this case petitioner continued to suffer from petitioner's back
injury in that she was unable to stand, sit, walk, or lie down
for long periods, and (5) at that time petitioner was approaching
60 years of age.
It is reasonable to conclude on the basis of
those facts that it is unlikely that petitioner will be able to
rejoin the workforce..
Even if petitioner were able to collect
from Mr. Bell any respective unpaid amounts under the 2004
installment note and the bankruptcy settlement, we believe on the
record before us that she would be using any such amounts in
order to pay her basic living expenses for the remainder of her
life.
In addressing the economic hardship factor, we have in mind
that petitioner's monthly expenses totaling $1,650 do not include
certain expenses that petitioner likely incurred or would have
incurred in the absence of her current financial difficulties.
First, at the time of the trial in this case petitioner had
certain outstanding bills in amounts not established- by the
record for medical care that was provided to her before 2008."
Second, petitioner's monthly expenses do not take into account
any expenses with respect to the Ford Expedition that she owned
even though she presumably incurred and will continue to incur
"See supra note 29.
- 49 -
expenses for thit vehicle, such as gasoline."
Third,
(1) from
around 2003 until the time of the trial in this case petitioner
did not maintain any health insurance and (2) since 2008 petitioner has not
ought treatment for any medical condition,
including petitioner's back injury, because she was unable to
afford any such treatment.
Fourth, petitioner's monthly expenses
do not take into account that petitioner remains liable for the
Bells' respective unpaid taxes for their taxable years 2000 and
2002, which as of April 19,
$36,895.25, respectively.
2010,
totaled $11,963.39,
and
Nor do petitioner's monthly expenses
take into account that we have found that petitioner has failed
to carry her burden of establishing that she -i-s entitled to
relief under section 6015(f) with respect to, and that therefore
she remains liable for, the respective portions of the underpayment for her taxable year 2003 that are attributable to
(1) petitioner's 49-percent share of the 2003 Today I Can net
income and (2) t e wages of $24,500 that Today I Can paid her
during 2003.
On the record before us, we find that petitioner has carried
her burden of establishing that she would suffer economic hardship if relief under section 6015(f) were not granted with
respect to the portion of the underpayment for her taxable year
2003 that is attributable to Mr. Bell.
"See supra note 29.
- 50 With respect to the knowledge factor, we have found that
petitioner has failed to carry her burden of establishing that at
the time she signed the 2003 joint return she did not know and
had no reason to know that the tax shown due in that return would
not be paid.
With respect to the legal obligation factor, section
4.03(2) (a) (iv) of Revenue Procedure 2003-61 provides that that
factor "will not weigh in favor of relief if 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."
Although respondent does not dispute
that under the property agreement Mr. Bell is legally obligated
to pay the remaining unpaid tax for the Bells' taxable year 2003,
respondent argues that at the time petitioner executed the
property agreement petitioner "knew or had reason to know that
Mr. Bell would not pay the outstanding joint income tax liabili-
ties."
We have found (1) that on July 10, 2004, petitioner and Mr.
Bell executed and filed with the Superior Court the property
-agreement, and (2) that on July 29, 2004, the Bells jointly filed
late the 2003 joint return.
On the record before us, we find
that when petitioner and Mr. Bell executed the property agreement
petitioner was not aware of the contents of¯the 2003 joint return
or that that return would show tax due.
On that record, we find
that at the time petitioner executed the property agreement she
- 51 did not know and had no reason to know that the tax shown due in
the 2003- joint return would not be paid.
With respedt to the significant benefit factor, respondent
argues that petitioner "received a significant benefit from the
nonpayment of t e 2003 tax liability."
That is because, accord-
ing to respondent:
All of petitioner's personal bills were paid from
the personal checking account at Union Planters Bank
[Mr. Bell's personal bank account] while she was married to Mr. Bell. This account also shows checks
totaling $13,500.00 were paid directly to petitioner
during 2003. As.all of petitioner's personal bills
were paid from the checking account, this $13,500.00
was completely at her disposal, and amounted to twentysix percent of the unpaid income tax liability for
2003. * * * [Cross-references omitted.]
On the record before us, we reject respondent's argument
that the checks drawn on Mr. Bell's personal bank account totaling $13,500 that petitioner received during 2003 constituted a
significant benefit.
We have found (1) that during their mar-
riage the Bells did not maintain any bank account in their joint
names and petitiöner did not maintain any bank account in her
sole name and (2
that petitioner deposited the wages of $24,500
that Today I Can paid her during 2003 into Mr. Bell's personal
bank account, an account over which petitioner did not have
signatory authority.
We consider the $13,500 in checks drawn on
Mr. Bell's personal bank account that Mr. Bell issued to petitioner during 20Ò3 to have been petitioner's own money, since
during that year she deposited into that account her wages of
- 52 -
$24,500.
Moreover, it is reasonable to conclude on the record
before us that petitioner needed some cash in order to pay
certain normal living expenses, such as buying certain meals
outside the marital residence, buying gasoline for her Ford
Expedition, buying certain personal effects, and buying certain
services and products at the beauty parlor.
It is also reason-
able to conclude on the record before us that the only means by
which petitioner was able to obtain funds in order to pay those
types of normal living expenses was to cash the checks drawn on
Mr. Bell's personal bank account that he issued to her.
On the
record before us, we find that petitioner did not receive a
significant benefit beyond normal support from the Bells' failure
to pay the tax shown due in the 2003 joint return.
With respect to the compliance factor, petitioner must
establish that she made a good faith effort to comply with the
tax laws after her taxable year 2003, the year at issue.
We have
found that on September 10, 2007, petitioner timely filed her
2006 return in which she showed tax due of $59,668 and with which
she included a payment of $59,668.
We have also found that on
October 20, 2008, petitioner filed her 2007 return in which she
claimed, inter alia, a refund of approximately $9,700.
Peti-
tioner's tax for her taxable year 2006 was due on April 15, 2007,
see sec. 6151, and her payment of that tax on September 10, 2007,
was approximately five months late.
Petitioner paid the tax
shown due in the 2006 return at the time that she filed that
- 53 return.
Although petitioner's 2007 return was due on October 15,
2008, she did not file that return until October 20, 2008.
However, it is not clear from the record whether that return was
timely filed.
see sec. 7502.
refund in her 2007 return.
In any event, petitioner claimed a
We also note that both respondent's
examiner and respondent's Appeals officer found that petitioner
had made a good faith effort to comply with the tax laws after
her taxable year 2003, despite the fact that petitioner had paid
late the tax for her taxable year 2006.
On the record before us,
we find that petitioner made a good faith effort to comply with
the tax laws after the -year at issue.
--
With respect to the abuse factor, 'we have found that at no
time during their marriage did Mr. Bell physically abuse petitioner.
In petitioner's Form 12510, she claimed that Mr. Bell
verbally and mentally abused her.
In support of that claim,
petitioner relies on her testimony at trial that
We didn't always agree on everything he did.
I guess I
came from the old school that you were to treat your
spouse -- I mean that the husband ran the family and
that's what I believed, you know.
So I -- I argued and
he would get very verbally abusive and he didn't care
who or what was around.
You know, it didn't matter.
We are unable to find on the basis of petitioner's above-quoted
testimony that Mr. Bell verbally or mentally abused her during
their marriage.
On the record before us, we find that petitioner
- 54 -
has failed to carry her burden of establishing that during their
marriage Mr. Bell verbally and mentally abused her.
With respect to the mental or physical health factor, we
have found that (1) around 1990 petitioner suffered petitioner's
back injury,
(2) in 1995 petitioner underwent back surgery for
that back injury during which metal rods were inserted in her
back,
(3) as of the time of the trial in this case petitioner
continued to suffer from petitioner's back injury in that she was
unable to stand,
sit, walk, or lie down for long periods, and
(4) petitioner stopped receiving medical treatment for that back
injury in 1997.
We have also found that at the time of the trial
petitioner had not sought treatment for any medical condition
since 2008 because she was unable to afford any such treatment.
On the record before us, we find that petitioner was in poor
physical health when (1) the Bells filed the 2003 joint return,
(2) she filed Form 8857, and (3) the trial in this case took
place.
Based upon our examination of the entire record before us,
we find that petitioner has carried her burden of establishing
that it would be inequitable to hold her liable for the portion
of the underpayment for her taxable year 2003 that is attributable to Mr. Bell.
On that record, we further find that peti-
- 55 -
tioner has carried her burden of establishing that she is entitled to relief under section 6015(f)
for that portion of that
underpayment .
We have considered all of the contentions and arguments of
the parties that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing,
Decision will be entered
under Rule 155.
I
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