Thursday, August 9, 2007
Tax Help: Innocent Spouse Relief Granted
--A wife who filed joint individual income tax returns with her husband was not liable for deficiencies on those returns under the "innocent spouse" provisions of Code Sec. 6015. The wife had satisfied the requirements of Code Sec. 6015(b) and was, therefore, entitled to innocent spouse relief. The tax items giving rise to the deficiency were properly attributable to her husband, the taxpayer did not know or have reason to know of the understatement when she signed the returns for the years of the deficiencies, and it would have been inequitable to hold the taxpayer liable for the tax deficiencies under the facts and circumstances of the case.
Rhonda K. Juell, a.k.a. Rhonda K. Juell-Podlak, Petitioner, and Glenn M. Evans, Intervenor v. Commissioner., Dkt. No. 9631-06 , TC Memo. 2007-219, August 8, 2007.
MEMORANDUM FINDINGS OF FACT AND OPINION
The issue for decision is whether petitioner Rhonda Juell is entitled to relief from joint and several liability under section 6015(b), (c), or (f) with respect to the entire amount of each of the above tax deficiencies determined by respondent. Intervenor Glenn Evans (Glenn) objects to petitioner's right to any relief under section 6015.
Generally, taxpayers filing joint Federal income tax returns are jointly and severally liable for all taxes due. Sec. 6013(d)(3). However, relief from joint liability may be available in circumstances described in section 6015(b), (c), and (f).
Petitioner claims that she is entitled to additional relief from joint liability under section 6015(b), (c), and (f), beyond the two-thirds relief already granted by respondent.
A taxpayer spouse who meets certain qualifications may elect relief under section 6015(b). Generally, to qualify for relief under section 6015(b)(1), the electing spouse must establish that:
(A) A joint return was filed;
(B) there is an understatement of tax on the return which is attributable to the erroneous items of the nonelecting spouse;
(C) in signing the return, the electing spouse did not know, and had no reason to know, that there was such an understatement;
(D) taking into account all the facts and circumstances, it is inequitable to hold the electing spouse liable for the deficiency in tax for the taxable year attributable to the understatement; and
(E) a timely election has been made.
Respondent does not dispute that petitioner meets the requirements of subparagraphs (A) and (E) of section 6015(b)(1), but respondent contends that petitioner has not satisfied the requirements of subparagraphs (B), (C), and (D).
Section 6015(b)(1)(B): Attributable to Nonelecting Spouse
When determining whether an erroneous item is attributable to a nonelecting spouse, we look not only to how ownership is nominally held between the spouses but also to each spouse's level of participation in the activity which gave rise to the erroneous item.
Joint ownership, by itself, is not determinative of whether the erroneous item is attributable to one or both spouses. See Rowe v. Commissioner, T.C. Memo. 2001-325; Buchine v. Commissioner, T.C. Memo. 1992-36, affd. 20 F.3d 173 (5th Cir. 1994). A key factor is whether and to what extent the electing spouse voluntarily participated in the investment which gave rise to the erroneous item.
Generally, an electing spouse who voluntarily agrees to enter into an investment and who actively participates in it is precluded from attributing the entire investment to the nonelecting spouse. See Abelein v. Commissioner, T.C. Memo. 2004-274; Capehart v. Commissioner, T.C. Memo. 2004-268, affd. 204 Fed. Appx. 618 (9th Cir. 2006); Bartak v. Commissioner, T.C. Memo. 2004-83, affd. 158 Fed. Appx. 43 (9th Cir. 2005); Ellison v. Commissioner, T.C. Memo. 2004-57; Doyel v. Commissioner, T.C. Memo. 2004-35.
However, if the electing spouse is not an active participant, the electing spouse may qualify for relief even though being named as a shareholder or partner. See McKnight v. Commissioner, T.C. Memo. 2006-155 (in the context of section 6015(c) and (f)); Rowe v. Commissioner, supra; Buchine v. Commissioner, supra.
In Bartak v. Commissioner, supra, Ellison v. Commissioner, supra, and Doyel v. Commissioner, supra, the electing spouses each agreed to invest in the investments which gave rise to the erroneous items and did so jointly with their spouses by using funds from joint bank accounts. Further, the electing spouses considered the investments to be their own, as well as their husbands', and were denied relief because the erroneous items were not entirely attributable to their husbands.
Similarly, in Abelein v. Commissioner, supra, and Capehart v. Commissioner, supra, the electing spouses not only used funds from joint accounts to invest, but also met and toured with persons associated with the business activities, contacted them on occasion, and received and read materials relating to them.
In contrast, in McKnight v. Commissioner, supra, Rowe v. Commissioner, supra, and Buchine v. Commissioner, supra, because they did not participate in the business activity, the electing spouses were granted relief despite being named as shareholders or partners. In Rowe the electing spouse did not make or participate in any decision relating to the activity, did not sign any checks relating to the activity, and was not otherwise involved in the activity. In Buchine , the electing spouse's name appeared as shareholder and partner, but she had no knowledge of being named on the Schedule K-1, and she only attended one promotional meeting.
In McKnight v. Commissioner, supra, erroneous items were attributed entirely to the nonelecting spouse, even though the electing spouse signed organizational documents relating to the investment and was listed as a director. We noted that the spouse signed the documents at her husband's insistence, after assurances from him that he was sole owner of the business and without awareness on her part of the legal significance.
On the facts before us, petitioner more closely resembles the spouses who were granted relief in Rowe v. Commissioner, supra, and Buchine v. Commissioner, supra. Petitioner participated in the Hoyt partnerships in name only. Petitioner repeatedly objected to Glenn's involvement in the Hoyt partnerships. Petitioner never agreed to invest in the Hoyt partnerships, and petitioner signed Hoyt documents solely because of Glenn's representations and insistence and without being aware of the legal significance thereof.
At no time did petitioner invest any of her funds in the Hoyt partnerships. Petitioner did not attend any meetings, make any contact, or read any promotional materials. Glenn made all payments to the Hoyt partnerships from his separate accounts, accounts to which petitioner had no access. Mail relating to the Hoyt partnerships was left unopened for Glenn.
Respondent argues that introductory language in the closing agreement petitioner entered into with respondent constitutes an admission by petitioner that she was a partner in and agreed to the investment in the Hoyt partnerships. To the contrary, that particular language simply associates the Hoyt partnerships with the tax deficiencies and does not constitute an admission as to the level of petitioner's involvement in the Hoyt partnerships. See Zaentz v. Commissioner, 90 T.C. 753, 762 (1988).
Because the understatements are attributable entirely to Glenn, petitioner satisfies section 6015(b)(1)(B).
Section 6015(b)(1)(C): Know or Reason To Know2
A spouse seeking relief from joint liability under section 6015(b) must not have known or had reason to know at the time of signing a joint tax return that there was an understatement of tax on a return. Sec. 6015(b)(1)(C). In deduction cases, the United States Court of Appeals for the Eighth Circuit has adopted the standard set forth in Price v. Commissioner, 887 F.2d 959, 963-965 (9th Cir. 1989). See Erdahl v. Commissioner, 930 F.2d 585, 589 (8th Cir. 1991), revg. T.C. Memo. 1990-101.3
Under the Price standard, the Court inquires as to whether "'a reasonably prudent taxpayer under the circumstances of the spouse at the time of signing the return could be expected to know that the tax liability stated was erroneous or that further investigation was warranted.'" Id. at 590 (quoting Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989), affg. T.C. Memo. 1988-63).
Even if a spouse is not aware of sufficient facts to give her reason to know of the substantial understatement, she nevertheless may know enough facts to put her on notice that an understatement exists. Price v. Commissioner, supra at 965. The question to ask is whether "a reasonably prudent taxpayer in her position [would] be led to question the legitimacy of the deduction." Guth v. Commissioner, 897 F.2d 441, 445 (9th Cir. 1990) (citing Price v. Commissioner, supra at 975) (emphasis removed), affg. T.C. Memo. 1987-522).
A spouse electing relief may satisfy the duty to inquire by questioning the deductions and receiving assurances as to their legitimacy. Erdahl v. Commissioner, supra at 590 n.7. These assurances may come from the electing spouse's husband. See Price v. Commissioner, supra at 966 (duty of inquiry satisfied where spouse questioned husband about large deductions who assured her that the returns were prepared by a C.P.A.); Foley v. Commissioner, T.C. Memo. 1995-16 (spouse satisfied duty of inquiry by asking husband about tax shelter deductions, hearing that she should not worry because he invested in tax shelters and because return preparer had signed return); Estate of Killian v. Commissioner, T.C. Memo. 1987-365 (spouse took reasonable steps to determine the accuracy of the return by questioning husband about sham losses, who assured her that the losses were due to an investment recommended by a C.P.A. who prepared the return).
The factors established in Price v. Commissioner, supra, as to whether the electing spouse had reason to know or a duty to inquire include the spouse's level of education, the spouse's involvement in family financial affairs, the evasiveness or deceit of the culpable spouse, and any unusual or lavish expenditures inconsistent with the family's ordinary standard of living. Erdahl v. Commissioner, supra at 591 (quoting Guth v. Commissioner, supra at 444).
On the facts before us, we find that petitioner did not know and did not have reason to know of the understatements on the tax returns when she signed them. Petitioner satisfied her duty of inquiry by questioning her husband and receiving strong and repeated assurances from him.
All four factors discussed in Price v. Commissioner, supra, weigh in favor of granting petitioner relief. Petitioner had no experience academically or practically regarding business, taxes, or investments and has worked as an elementary school teacher. Petitioner's involvement in the family financial affairs was limited to paying routine bills out of the joint account. Glenn was deceptive in that he told petitioner she had to file joint Federal income tax returns with him and that the Hoyt partnerships would be his responsibility. Finally, there occurred no unusual or lavish family expenditures that would have notified petitioner of the understatement.
Respondent contends that the size of the deductions on the tax returns was sufficient to instill in petitioner a duty to inquire. Even if such a duty arose, petitioner satisfied the duty of inquiry by confronting Glenn each year and questioning the Hoyt partnership-related items.
Because petitioner did not know or have a reason to know that the deductions were erroneous, and because she satisfied her duty of inquiry, petitioner satisfies section 6015(b)(1)(C).
Section 6015(b)(1)(D): Inequity
Whether it would be inequitable to hold a spouse liable for a tax deficiency is determined by "taking into account all the facts and circumstances." Sec. 6015(b)(1)(D).4 The two most often cited factors to be considered are: (1) Whether there has been a significant benefit to the spouse claiming relief, and (2) whether the failure to report the correct tax liability on the joint return results from concealment, overreaching, or any other wrongdoing on the part of the other spouse. Alt v. Commissioner, 119 T.C. 306, 314 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004). We also consider factors utilized in determining "inequity" in the context of section 6015(f).5 Normal support is not considered a significant benefit. Estate of Krock v. Commissioner, 93 T.C. 672, 678 (1989). Where the electing spouse's standard of living remains constant, significant benefit may still be found if the tax savings are "immensely beneficial". Jonson v. Commissioner, 118 T.C. 106, 119-120 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).
Because, as stated previously, petitioner's standard of living remained constant throughout the years in issue and because the claimed tax refunds and savings were not needed or used to support petitioner but were returned to the Hoyt partnerships by Glenn, petitioner received no benefit as a result of the erroneously claimed Hoyt partnership-related tax benefits.
Respondent contends that petitioner could have received a significant benefit from the refunds even though they were reinvested and cites Capehart v. Commissioner, T.C. Memo. 2004-268 (spouse benefited from receiving refund despite reinvestment in Hoyt partnerships).
The determinative fact, however, is not that a refund was received but who benefited from it. In particular, we have held that, where a refund was used to benefit an electing spouse in a manner beyond normal support or where an electing spouse chooses to invest a refund in business activities, a significant benefit was received. See Abelein v. Commissioner, T.C. Memo. 2004-274 (spouse and her husband reinvested portions of refund into a business activity); Pierce v. Commissioner, T.C. Memo. 2003-188 (spouse used refund to contribute capital and lend funds to an investment); French v. Commissioner, T.C. Memo. 1996-38 (spouse used refund to jointly purchase several certificates of deposit in large denominations); Schlosser v. Commissioner, T.C. Memo. 1992-233 (spouse used refund for investments and to pay off debts), affd. without published opinion 2 F.3d 404 (11th Cir. 1993).
If, however, a tax refund is used only by a nonelecting spouse for his or her own investment, the electing spouse would not necessarily have received a significant benefit. See Hillman v. Commissioner, T.C. Memo. 1993-151 (nonelecting spouse used refund to buy himself a Porsche automobile and a Rolex watch and to invest in a motion picture); Estate of Killian v. Commissioner, T.C. Memo. 1987-365 (nonelecting spouse used refund to pay off his personal loans and to invest in a limited partnership).
Petitioner resembles the innocent spouses in Hillman and Killian, in that the funds were not used to benefit her in any way but were funneled into Glenn's investments in the Hoyt partnerships.
Because petitioner received little to no benefit from the erroneously claimed Hoyt partnership-related tax benefits, we find that this factor weighs heavily in favor of granting petitioner relief.
The second prominent factor --namely, concealment or wrongdoing by the nonrequesting spouse, also weighs in petitioner's favor. As stated, Glenn repeatedly told petitioner that they were required to file joint Federal income tax returns, that the Hoyt partnerships were his investments, and that he would be responsible for them. This factor, combined with other factors, demonstrates that it would be inequitable to hold petitioner liable. We note that petitioner is divorced from Glenn, that none of the erroneous deductions is attributable to her, that she did not know and had no reason to know of the substantial understatements, that she satisfied her duty of inquiry, and that she has subsequently made a good faith effort to comply with the tax laws.
The facts that weigh against granting relief, such as petitioner's lack of financial hardship, are insufficient to deny petitioner relief. Petitioner satisfies section 6015(b)(1)(D).
Section 6015(c) and (f)
Because petitioner qualifies under section 6015(b) for relief from joint liability with regard to 100 percent of the tax deficiencies relating to the Hoyt partnership investments, we need not address petitioner's eligibility for relief under subsections (c) and (f) of section 6015.
To reflect the foregoing,
Decision will be entered for petitioner.
1 For a detailed description of the Hoyt partnerships see Bulger v. Commissioner, T.C. Memo. 2005-147.
2 "The requirement in sec. 6015(b)(1)(C) * * * is virtually identical to the same requirement of former sec. 6013(e)(1)(C); therefore, cases interpreting former sec. 6013(e) remain instructive to our analysis." Doyel v. Commissioner, T.C. Memo. 2004-35.
3 Because an appeal in this case would lie in the U.S. Court of Appeals for the Eighth Circuit, we follow Eighth Circuit law. See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
4 "The requirement in sec. 6015(b)(1)(D) * * * is virtually identical to the same requirement of former sec. 6013(e)(1)(D); therefore cases interpreting former sec. 6013(e) remain instructive to our analysis." Doyel v. Commissioner, T.C. Memo. 2004-35.
5 Rev. Proc. 2000-15, sec. 4.03, 2000-1 C.B. 447, 448-449, lists nonexclusive factors to be considered in determining whether it is inequitable to hold the electing spouse liable for all or part of a deficiency under sec. 6015(f).
Alvin S. Brown, Esq.
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