IRS abuse of discretion - section 6015 - Innocent Spouse

August 1, 2008

Code Sec. 6015


T.C. Memo. 2008-185

ALIOTOv. INTERNAL REVENUE.

UNITED STATES TAX COURT. Docket No. 14356-03. Filed July 31, 2008.


MEMORANDUM FINDINGS OF FACT AND OPINION


VASQUEZ, Judge: Respondent determined that petitioner did not qualify for relief from joint and several liability pursuant to section 6015 1 for 1995 and 1996.2 This case is before the Court on petitioner's motion to vacate order of dismissal, as supplemented, pursuant to Rule 162 and petitioner's motion for reconsideration. The Court will grant petitioner's motion to vacate order of dismissal, as supplemented, and will grant petitioner's motion for reconsideration. The issue for decision is whether petitioner is entitled to relief from joint and several liability pursuant to section 6015(f) for 1995 and 1996.
IV. Section 6015(f) Relief

Section 6015(f) allows relief to a requesting spouse "if --(1) taking into account all the facts and circumstances, it is inequitable to hold the individual liable". The Commissioner applies Rev. Proc. 2000-15 ,15 sec. 4.01 , 2000-1 C.B. 447, 448, to determine whether to grant equitable relief. See, e.g., Washington v. Commissioner , 120 T.C. 137, 147-152 (2003); Jonson v. Commissioner , 118 T.C. 106, 125-126 (2002), affd. 353 F.3d 1181 (10th Cir. 2003); Nihiser v. Commissioner , T.C. Memo. 2008-135.

Rev. Proc. 2000-15 , sec. 4.01 has seven general requirements that all requesting spouses must meet for relief pursuant to section 6015(f) . Respondent concedes that Mrs. Alioto meets the guidelines for relief set forth in Rev. Proc. 2000-15 , sec. 4.01(1)-(7) .

A. Safe Harbor: Rev. Proc. 2000-15 , Sec. 4.02

Revenue Procedure 2000-15 , supra , also has a safe harbor whereby the IRS ordinarily will grant relief pursuant to section 6015(f) (safe harbor). Nihiser v. Commissioner , supra ; Gonce v. Commissioner , T.C. Memo. 2007-328 (discussing identical provisions in Rev. Proc. 2003-61 , sec. 4.02 , 2003-2 C.B. 296, 298); Billings v. Commissioner , T.C. Memo. 2007-234 ("The procedure also has a safe harbor --three conditions that, if met, will ordinarily trigger a grant of relief."); Rev. Proc. 2000-15 , sec. 4.02 , 2000-1 C.B. at 448 (titled "Circumstances under which equitable relief under § 6015(f) will ordinarily be granted"). The safe harbor grants relief to a requesting spouse if the requesting spouse meets three conditions.16 Nihiser v. Commissioner , supra ; see Rev. Proc. 2000-15 , sec. 4.02 .


1. First Safe Harbor Condition

The first safe harbor condition is:

At the time relief is requested, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date relief was requested;

Rev. Proc. 2000-15 , sec. 4.02(1)(a) . Mayor Alioto died in January 1998. Accordingly, we conclude that Mrs. Alioto satisfied the first safe harbor condition.


2. Second Safe Harbor Condition

The second safe harbor condition is:

At the time the return was signed, the requesting spouse had no knowledge or reason to know that the tax would not be paid. The requesting spouse must establish that it was reasonable for the requesting spouse to believe that the nonrequesting spouse would pay the reported liability. If a requesting spouse would otherwise qualify for relief under this section, except for the fact that the requesting spouse had no knowledge or reason to know of only a portion of the unpaid liability, then the requesting spouse may be granted relief only to the extent that the liability is attributable to such portion; * * *

Id. sec. 4.02(1)(b) . This factor is satisfied if the taxpayer reasonably believed when the return was filed that the liability would be paid by the taxpayer's spouse. See Van Arsdalen v. Commissioner , T.C. Memo. 2007-48 (the taxpayer reasonably believed taxes owed would be paid by the spouse); Wiest v. Commissioner , T.C. Memo. 2003-91 (same).

Respondent argued that Mrs. Alioto would have seen or known about certain notices of Federal tax liens and levies that were filed on her community property. Respondent relies on the testimony of Revenue Officer Cheryl Matthews.

We determine the credibility of each witness, weigh each piece of evidence, draw appropriate inferences, and choose between conflicting inferences. See Neonatology Associates, P.A. v. Commissioner , 115 T.C. 43, 84 (2000), affd. 299 F.3d 221 (3d Cir. 2002); see also Gallick v. Baltimore & O.R. Co. , 372 U.S. 108, 114-115 (1963); Boehm v. Commissioner , 326 U.S. 287, 293 (1945); Wilmington Trust Co. v. Helvering , 316 U.S. 164, 167-168 (1942). We decide whether evidence is credible on the basis of objective facts, the reasonableness of the testimony, and the demeanor of the witness. Quock Ting v. United States , 140 U.S. 417, 420-421 (1891); Wood v. Commissioner , 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C. 593 (1964); Pinder v. United States , 330 F.2d 119, 124-125 (5th Cir. 1964); Concord Consumers Hous. Coop. v. Commissioner , 89 T.C. 105, 124 n.21 (1987). We have evaluated each witness's testimony by observing his or her candor, sincerity, and demeanor and by assigning weight to the elicited testimony. See Neonatology Associates, P.A. v. Commissioner , supra at 84.

We found Ms. Matthews's testimony to be general, vague, conclusory, and/or questionable in certain material respects. Under the circumstances presented here, we are not required to, and generally do not, rely on Ms. Matthews's testimony. See Lerch v. Commissioner , 877 F.2d 624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger v. Commissioner , 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159; Tokarski v. Commissioner , 87 T.C. 74, 77 (1986). The Court need not accept at face value a witness's testimony that is otherwise questionable. See Archer v. Commissioner , 227 F.2d 270, 273 (5th Cir. 1955), affg. a Memorandum Opinion of this Court dated Feb. 18, 1954; Weiss v. Commissioner , 221 F.2d 152, 156 (8th Cir. 1955), affg. T.C. Memo. 1954-51; Schroeder v. Commissioner , T.C. Memo. 1986-467. This is so even when the testimony is uncontroverted if it is improbable, unreasonable, or questionable. Archer v. Commissioner , supra ; Weiss v. Commissioner , supra ; see Quock Ting v. United States , supra .

We conclude the evidence that respondent relies on is not credible or probative and is insufficient to conclude that Mrs. Alioto saw or knew about any notices of liens or tax levies. Mrs. Alioto's testimony on this matter, however, was credible. Upon the basis of Mrs. Alioto's credible testimony, we find that Mrs. Alioto never saw or knew about any notices of liens or tax levies or any seizures of property until after Mayor Alioto's death.

Mrs. Alioto credibly testified that she did not learn about the tax liabilities in issue (for 1995 or 1996) until after Mayor Alioto's death and that she was not aware of Mayor Alioto's tax problems or any dispute with regard to the New England Patriots case fees when she signed the 1996 tax return. Mrs. Alioto never met with or spoke with anyone at the accounting firm that prepared Mayor Alioto and Mrs. Alioto's joint tax returns for the years in issue (or for any year she was married to Mayor Alioto). Furthermore, we find Mrs. Alioto's beliefs regarding her financial well-being and solvency --until she learned otherwise after Mayor Alioto's death in 1998 --to be credible.

Mrs. Alioto did not learn of the MSA Mayor Alioto had executed until after his death. At the time the 1995 and 1996 tax returns were filed, Mrs. Alioto did not know or have reason to know that Mayor Alioto had obligated himself to indemnify and defend Angelina with respect to Mayor Alioto and Angelina's outstanding joint Federal and State tax liabilities for 1976 and 1977.

The 1995 return, filed in October 1996 but which Mrs. Alioto did not sign and never discussed with Mayor Alioto, reported a total balance due of $63,115. At that time Mayor Alioto was due legal fees totaling approximately $2.1 million from the New England Patriots case. Mayor Alioto was involved in the New England Patriots case because the case involved Mrs. Alioto's family.

The 1996 return, filed in October 1997, reported a balance due of zero. Mrs. Alioto reviewed the 1996 return, and she saw an estimated tax payment of $838,311 and a total balance due of zero, before she signed it. When Mrs. Alioto signed the 1996 return, she reasonably believed that any tax liability shown on the 1996 return had been paid. Mrs. Alioto knew that Mayor Alioto had earned the New England Patriots case fees, that Mayor Alioto had earned another $1 million fee in 1997, and that Mayor Alioto had a number of other lawsuits that he was attorney of record for in which he would earn additional income. In fall 1997 Mrs. Alioto reasonably believed, on the basis of statements made by Mayor Alioto, that he had cases pending that would bring in more money than he had earned in his entire career.

During August through October 1997 Mayor Alioto and Mrs. Alioto met with an estate planning lawyer to discuss drafting an estate plan for each of them. Mayor Alioto gave the attorney a list of assets and liabilities and their approximate values. The attorney reasonably believed that at that time Mayor Alioto and Mrs. Alioto had a net worth of $16 million. Accordingly, we find that it was reasonable for Mrs. Alioto to believe that her net worth as of October 1997 was $16 million. Mrs. Alioto reasonably believed that she and her husband had a high net worth and that Mayor Alioto earned a lot of money every year that they were married.

In Gonce v. Commissioner , T.C. Memo. 2007-328, we held that the second criterion in Rev. Proc. 2000-15 , sec. 4.02 , that at the time the joint return was signed the requesting spouse had no knowledge or reason to know that the tax would not be paid and that it was reasonable to believe that the nonrequesting spouse would pay the liability, was not satisfied. In Gonce , the taxpayer and her husband reported underpayments on their 2000 and 2001 Federal tax returns, both of which were signed by the taxpayer, of $1,188 and $2,528, respectively. Id. When those returns were filed, the taxpayer knew that her husband always bought on credit and that she and her husband spent more than they made. We concluded that the taxpayer did not show that it was reasonable to rely on her husband to pay the tax due for those years.

The facts in the case at bar are diametrically opposed to those in Gonce . Mrs. Alioto credibly testified that Mayor Alioto had paid off over $18 million in debts. Mrs. Alioto reasonably believed, when the returns for 1995 and 1996 were filed, that Mayor Alioto would continue to pay off any debts that he owed. During Mayor Alioto's negotiations with the IRS regarding the Aliotos' outstanding joint tax liabilities for 1995 and 1996, Mayor Alioto worked arduously to protect the well-being and financial interests of Mrs. Alioto. Furthermore, if Mrs. Alioto had seen the 1995 return in October 1996, showing a balance due, she would have expected Mayor Alioto to pay the liability in full as she thought Mayor Alioto paid all their taxes. Mrs. Alioto credibly testified that she did not recall ever being asked to sign a joint tax return with Mayor Alioto that reflected a balance due. Mrs. Alioto credibly testified that had she seen a balance due on any tax return, she would have expected Mayor Alioto to pay it on account of his history of paying off their obligations/debts and the debts of his son.

During the years in issue Mrs. Alioto reasonably believed that Mayor Alioto was a man of wealth, a man who was on top of everything, and a man in control. The credible evidence establishes that Mayor Alioto believed it was his absolute duty to care and provide for his family. From 1980 to 1998 Mrs. Alioto cared for Mayor Alioto and raised their children. During this time Mayor Alioto did not want Mrs. Alioto to work outside the home. Furthermore, Mayor Alioto was in charge of the family finances and tax matters. Mrs. Alioto did not sign the 1995 return and was not aware that any tax was due for 1995 or 1996 until years later. These facts further support the conclusion that Mrs. Alioto did not know, or have reason to know, of the 1995 and 1996 underpayments. See Dowell v. Commissioner , T.C. Memo. 2007-326 (concluding that the taxpayer did not know, or have reason to know because: (1) The requesting spouse did not sign the return for the year in issue; (2) the requesting spouse was not aware that any tax was due for the year in issue until years later; and (3) the nonrequesting spouse handled all tax matters for the couple and did not inform the requesting spouse of financial matters).

Accordingly, we conclude that Mrs. Alioto satisfied the second safe harbor condition.


3. Third Safe Harbor Condition

The third safe harbor condition is:

The requesting spouse will suffer economic hardship if relief is not granted. For purposes of this section, the determination of whether a requesting spouse will suffer economic hardship will be made by the Commissioner or the Commissioner's delegate, and will be based on rules similar to those provided in § 301.6343-1(b)(4) of the Regulations on Procedure and Administration.

Rev. Proc. 2000-15 , sec. 4.02(1)(c) .

Generally, economic hardship exists if collection of the tax liability will cause the taxpayer to be unable to pay reasonable basic living expenses. Butner v. Commissioner , T.C. Memo. 2007-136. The ability to pay reasonable basic living expenses is determined by considering the following nonexclusive factors: (1) The taxpayer's age, employment status and history, ability to earn, and number of dependents; (2) an amount reasonably necessary for food, clothing, housing, medical expenses, transportation, current tax payments, and expenses necessary to the taxpayer's production of income; (3) the cost of living in the taxpayer's geographic area; (4) the amount of property available to satisfy the taxpayer's expenses; (5) any extraordinary circumstances; i.e., special education expenses, a medical catastrophe, or a natural disaster; and (6) any other factor bearing on economic hardship. Sec. 301.6343-1(b)(4) , Proced. & Admin. Regs.; see Gonce v. Commissioner , T.C. Memo. 2007-328; Van Arsdalen v. Commissioner , T.C. Memo. 2007-48. These provisions envision consideration of a taxpayer's retirement needs where appropriate. Van Arsdalen v. Commissioner , supra .

In 1966 Mrs. Alioto received a B.A. in English literature from Manhattanville College of the Sacred Heart in Purchase, New York, and she began work as a third grade teacher in Bedford-Stuyvesant, New York, at an annual salary of $5,400. For the next 3 years Mrs. Alioto worked as an elementary school teacher at P.S. 113 in Harlem, New York. She was paid less than $6,000 per year for this job. From 1971 to 1973 Mrs. Alioto taught emotionally disturbed children in an inner city neighborhood of Boston, Massachusetts. In 1973 Mrs. Alioto was elected a member of the Boston Public School Board. From 1974 to 1980 she served without pay as a member of the Boston Public School Board. During this period Mrs. Alioto went back to school, and in 1980 she earned a Ph.D. in education. From 1980 to 1998 Mrs. Alioto cared for Mayor Alioto, raised their children, and did not work outside the home.

In April 1998 administration of the estate was commenced. Creditors, including the IRS and the California State Franchise Tax Board, filed claims in excess of $74 million against the estate. The claim filed by the IRS in the probate case, including the liabilities in dispute in this case, totaled $4,239,834.34. At that time, Mrs. Alioto was shocked, surprised, and stunned to learn the amounts of the creditors' claims that were being asserted against the estate. After learning the magnitude of the claims against the estate and how much of her community property had already been used to pay Mayor Alioto's separate debts, Mrs. Alioto filed a creditor's claim in the probate proceeding. None of her claim will be paid.

When the IRS employee assigned to Mrs. Alioto's section 6015 case met with Mrs. Alioto's counsel, she was alerted to the number of creditors who had filed claims against the estate and the amounts of additional liabilities being discovered in Mayor Alioto's probate proceedings. Neither the IRS employee assigned to Mrs. Alioto's section 6015 case nor the Collection Division requested a financial statement from Mrs. Alioto.

During 2001 and 2002 Mrs. Alioto or her counsel provided respondent's Appeals Office copies of pleadings filed in the probate court and information about the probate proceedings. During 2002 the probate referee made a final recommendation that Mrs. Alioto's personal residence was community property. The probate judge decided that Mrs. Alioto's personal residence was to be sold to pay Mayor Alioto's creditors. Respondent's Appeals Office was advised of these decisions. Additionally, in January 2003 the Appeals officer assigned to Mrs. Alioto's case inserted into the administrative record a newspaper article that reported that Mrs. Alioto was being forced to sell her personal residence in order to pay Mayor Alioto's debts.

During 1998, Mrs. Alioto earned $50,000. Mrs. Alioto's family health insurance terminated in 1998 (at the time of Mayor Alioto's death). During 1999, Mrs. Alioto earned $179,000 --$30,000 of which was a fee from the estate. For 1999, Mrs. Alioto paid $79,000 in taxes. Mrs. Alioto incurred medical expenses for treating, among other things, her daughter's epilepsy. Mrs. Alioto reasonably estimated that she incurred medical expenses of approximately $22,000 in both 1998 and 1999.

During 2000, Mrs. Alioto secured a position as a fundraiser for the City College of San Francisco (City College). She still was employed in that position by City College as of the time of trial. However, this position is a year-to-year job with no tenure --Mrs. Alioto could lose her job at any time, especially if the chancellor or trustees of City College (who are elected every 2 years) changed.

In 2003 Mrs. Alioto earned $121,000. Mrs. Alioto received a 4-percent raise in 2004, but she received no raises before 2004. To have pension "rights" at City College, Mrs. Alioto would have to work for 10 years (until she was age 67).

In December 2, 2004, respondent served on the Clerk of the San Francisco Superior Court, Bank of the West, Oakland, California, Mrs. Alioto, and her counsel separate notices of levy with a total amount due of $1,628,235.48. The notices of levy indicated that $129,842.97 was for her 1995 tax year and that $1,498,392.51 was for her 1996 tax year.

As of the date of trial Mrs. Alioto had approximately $7,000 in a savings account and $99,000 deposited in retirement plans and did not own a car. The Social Security Administration estimated her benefits will be $600 per month. In June 2008 Mrs. Alioto turned 64 years old. As of December 20, 2006, Mrs. Alioto's balances due for 1995 and 1996 were $153,501 and $1,832,010, a very substantial sum given her financial situation. The liabilities in issue would cause Mrs. Alioto significant hardship, and she provided sufficient information to show her liabilities significantly exceeded her assets. See Farmer v. Commissioner , T.C. Memo. 2007-74.

Considering Mrs. Alioto's age, employment status and history, ability to earn, and number of dependents; the amounts reasonably necessary for food, clothing, housing, medical expenses, transportation, current tax payments, and expenses necessary to her production of income; the cost of living in her geographic area; and the amount of property available to satisfy her expenses, we find that she would suffer economic hardship because payment of the underlying liabilities would prevent her from paying reasonable basic living expenses. See sec. 301.6343-1(b)(4) , Proced. & Admin. Regs.; see also Butner v. Commissioner , T.C. Memo. 2007-136; Farmer v. Commissioner , supra . Accordingly, we conclude that Mrs. Alioto has satisfied the third safe harbor condition.

B. Conclusion

Mrs. Alioto satisfies the safe harbor conditions in Rev. Proc. 2000-15 , sec. 4.02 . Accordingly, respondent's determination that Mrs. Alioto did not qualify for relief pursuant to section 6015(f) was an abuse of discretion; i.e., it was arbitrary, capricious, and without sound basis in law or fact.

To reflect the foregoing,

An appropriate order and decision will be entered .

1 Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 In her petition, petitioner sought relief pursuant to sec. 6015 for 1993, 1994, 1995, and 1996. Since the petition was filed, respondent has collected amounts (payments from the Estate of Joseph Alioto) that fully satisfied the liabilities for 1993 and 1994, and the parties agree that these years are no longer at issue in this case.

3 From Jan. 8, 1968, through Jan. 8, 1976, petitioner's husband Joe Alioto served as mayor of San Francisco, California.

4 Mayor Alioto and Angelina, however, were jointly liable for this amount for 1976.

5 We use the term "premarital" for convenience. The 1976 and 1977 tax liabilities are "premarital" as regards petitioner (i.e., they predate petitioner's marriage to Mayor Alioto).

6 The same is true for Mrs. Alioto's 1993 and 1994 tax years, no longer in issue. Petitioner, however, does not contend that the 1993, 1994, and 1995 returns were not joint returns because she did not sign them.

7 Mrs. Alioto's father was a former owner of the New England Patriots.

8 We use the term "separate" for convenience. The 1976 and 1977 tax liabilities are "separate" as regards petitioner (i.e., they predate Mrs. Alioto's marriage to Mayor Alioto).

9 Mrs. Alioto could lose this job at any time --especially if the chancellor or trustees of City College (who are elected every 2 years) change.

10 On Oct. 3, 1997, the Alioto Living Trust document was executed.

11 Not including the IRS, the amount of outstanding creditors' claims as of Nov. 30, 2003, totaled $2,477,504.99.

12 The granting of a motion for reconsideration rests within the discretion of the Court, and we will not grant a motion for reconsideration unless the party seeking reconsideration shows unusual circumstances or substantial error. See, e.g., Alexander v. Commissioner , 95 T.C. 467, 469 (1990), affd. without published opinion sub nom. Stell v. Commissioner , 999 F.2d 544 (9th Cir. 1993).

13 In "Ewing I", Ewing v. Commissioner , 118 T.C. 494 (2002), revd. 439 F.3d 1009 (9th Cir. 2006), we held that the Court had jurisdiction to determine whether equitable relief was available to taxpayer for underpayment of tax shown on joint return (i.e., over "stand-alone" sec. 6015(f) cases).

14 We note that if we were limited to reviewing the administrative record, it is likely that the outcome in this case would be different.

15 Rev. Proc. 2000-15 , 2000-1 C.B. 447, has been superseded by Rev. Proc. 2003-61 , 2003-2 C.B. 296. The new revenue procedure applies only to requests for relief filed on or after Nov. 1, 2003, or those pending on Nov. 1, 2003, for which no preliminary determination letter has been issued as of that date. Id. sec. 7 , 2003-2 C.B. at 299. In May 2003 respondent determined Mrs. Alioto was not eligible for sec. 6015 relief. Accordingly, we apply Rev. Proc. 2000-15 , supra , to this case.

16 Relief that the Commissioner ordinarily grants pursuant Rev. Proc. 2000-15 , sec. 4.02(1) , 2000-1 C.B. at 448, is subject to the limitations set forth in Rev. Proc. 2000-15 , sec. 4.02 , 2000-1 C.B. at 448 --(a) if the return is or has been adjusted to reflect an understatement of tax, relief will be available only to the extent of the liability shown on the return before any such adjustment; and (b) relief will only be available to the extent that the unpaid liability is allocable to the nonrequesting spouse. Respondent did not address Rev. Proc. 2000-15 , sec. 4.02(2) , on brief. Accordingly, we deem that respondent has waived any issue regarding Rev. Proc. 2000-15 , sec. 4.02(2) . See Petzoldt v. Commissioner , 92 T.C. 661, 683 (1989); Levert v. Commissioner , T.C. Memo. 1989-333, affd. without published opinion 956 F.2d 264 (5th Cir. 1992).
buse of discretion - innocent spouse - section 6015