Thursday, December 23, 2010

Taxpayer was denied Code Sec. 6015(b)relief from joint liabilities arising from claims made on her and husband's joint returns for improper dependency exemptions and inaccurate deductions of husband's lawn care business expenses: although taxpayer met Code Sec. 6015(b)(1)(B) 's attribution rule, in that portion of understatements relating to inaccurate business deductions and certain adjustments resulting therefrom was attributable solely to husband, she failed Code Sec. 6015(b)(1)(C) 's knowledge or reason to know provision because although lacking actual knowledge of those inaccurate expenses, and corresponding reduced business income claimed on subject returns, she had reason to know of/would have been alerted to same if she had made even cursory review of those returns on which they were claimed. Although they lived in separate states during part of year, they were still considered to be part of same household under Code Sec. 6015(c) that was for health reasons and was considered mere temporary absence, particularly when considering that taxpayer had no intention of remaining away other than temporarily and in fact did move back to primary residence once her health improved. It was also telling that even during time she lived away, she periodically came back to primary residence, kept her finances and husband's enmeshed, received regular support from him. James J. Kruse, et ux. v. Commissioner, TC Memo 2010-270 , Code Sec(s) 6015. ________________________________________ JAMES J. & BONITA KRUSE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Case Information: Code Sec(s): 6015 Docket: Dkt. No. 9894-08. Date Issued: 12/9/2010. Judge: Opinion by Cohen, J. Tax Year(s): Years 2003, 2004. Disposition: Decision for Commissioner. Married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). After making the election, each spouse generally is jointly and severally liable for the entire tax due for that taxable year. Sec. 6013(d)(3). A spouse (requesting spouse) may, however, seek relief from joint and several liability by following procedures established in section 6015. Sec. 6015(a). A requesting spouse may request relief from liability under section 6015(b) or, if eligible, may allocate liability under section 6015(c). Sec. 6015(a). If relief is not available under section 6015(b) or (c), an individual may seek equitable relief under section 6015(f). Section 6015(b) Analysis Section 6015(b) provides, in pertinent part, as follows: SEC. 6015(b). Procedures For Relief From Liability Applicable to All Joint Filers.— (1) In general.--Under procedures prescribed by the Secretary, if-- (A) a joint return has been made for a taxable year; (B) on such return there is an understatement of tax attributable to erroneous items of 1 individual filing the joint return; (C) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such understatement; (D) taking into account all the facts and circumstances, it is inequitable to hold the other individual liable for the deficiency in tax for such taxable year attributable to such understatement; *** *** then the other individual shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such understatement. The requirements of section 6015(b)(1) are stated in the conjunctive. Accordingly, a failure to meet any one of them prevents a requesting spouse from qualifying for the relief offered therein. Alt v. Commissioner, 119 T.C. 306, 313 (2002), affd. 101 Fed. Appx. 34 [93 AFTR 2d 2004-2561] (6th Cir. 2004). [pg. 1636] Respondent also contends that petitioner has not satisfied the requirements of section 6015(b)(1)(C) because she knew or should have known about the improper items on their joint return. Taxpayers seeking to prove that they had no knowledge or reason to know of an item giving rise to an understatement of tax must demonstrate, at a minimum, that they have fulfilled a “duty of inquiry” with respect to determining whether their correct tax liability was reported on the return for the year for which they seek relief. Stevens v. Commissioner, 872 F.2d 1499, 1505 [64 AFTR 2d 89-5589] (11th Cir. 1989), affg. T.C. Memo. 1988-63 [¶88,063 PH Memo TC]. When taxpayers fail to fulfill their duty of Section 6015(c) Analysis Section 6015(c) allows a taxpayer who is eligible and so elects, to limit his or her liability to the portion of a deficiency that is properly allocable to the taxpayer as provided in section 6015(d). Sec. 6015(c)(1). Under section 6015(d)(3)(A), generally, any items that give rise to a deficiency on a joint return shall be allocated to the individual filing the return in the same manner as they would have been allocated if the individual had filed a separate return for the taxable year. An election under this subsection, however, is available only when taxpayers who filed jointly are (1) no longer married or are legally sepa[pg. 1637] rated; or (2) are no longer members of the same household. Sec. 6015(c)(3)(A)(i). The regulations under section 6015(c) provide that A husband and wife who reside in two separate dwellings are considered members of the same household if the spouses are not estranged or one spouse is temporarily absent from the other's household *** . Sec. 1.6015-3(b)(3)(ii), Income Tax Regs. A spouse is considered to be temporarily absent from the household if: [I]t is reasonable to assume that the absent spouse will return to the household, and the household *** is maintained in anticipation of such return. Examples of temporary absences may include, but are not limited to, absence due to *** illness *** . Sec. 1.6015-3(b)(3)(i), Income Tax Regs. Throughout the years in question petitioners remained legally married, and respondent argues that petitioners remained part of the same household. Although they lived apart, petitioner does not contend that she had any intention other than to remain only temporarily absent from their home in Florida. In fact, she lived out of State for health reasons, a circumstance the regulations specifically contemplate to be a mere temporary absence. Although petitioners argue they maintained separate bank accounts, their finances remained enmeshed and petitioner received regular monetary assistance from her husband. She returned to their Florida home approximately three times per year, and in 2008, her health improved and she returned to live there full time. Because petitioners remained married and part of the same household throughout the years in question, petitioner does not meet the requirements to make an election under section 6015(c) and is therefore not entitled to relief under that section. Section 6015(f) Analysis Section 6015(f) provides an additional opportunity for relief to those taxpayers who do not otherwise meet the requirements of subsection (b) or (c) of section 6015. Specifically, section 6015(f) gives the Commissioner the discretion to grant equitable relief from joint and several liability if “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)”. We have jurisdiction to review respondent's denial of petitioner's request for equitable relief under section 6015(f). See sec. 6015(e)(1). We apply a de novo standard of review as well as a de novo scope of review. Porter v. Commissioner, 132 T.C. 203, 210 (2009). The requesting spouse bears the burden of proof. Id. As directed by section 6015(f), the Commissioner has prescribed procedures to use in determining whether a taxpayer qualifies for relief from joint and several liability. These procedures are set forth in Rev. Proc. 2003-61, supra. Rev. Proc. 2003-61 sec. 4.01, 2003-2 C.B. at 297, lists seven conditions (threshold conditions) that must be satisfied before the Commissioner will consider a request for relief under section 6015(f). Among these conditions is that the item in question be attributable only to the spouse not seeking relief from joint liability, unless one of four exceptions applies. With regard to the disallowed dependency exemption deduction, respondent concedes that petitioner meets six of the seven threshold requirements but contends that she fails to meet the requirement that the understatement arising from the item be attributable only to Mr. Kruse. As discussed above, the understatement related to the dependency exemption deduction is attributable to both spouses; likewise, the portion of the adjustments to the disallowed credits attributable to the disallowed dependency exemption deduction is attributable to petitioners jointly. The exceptions do not apply. Respondent further concedes that petitioner meets the seven threshold requirements as they relate to the disallowed Schedule C expenses. Though respondent argues otherwise, as under 6015(b) the proportional amount of the disallowed ACTC and EIC that corresponds to those particular deductions is also attributable to [pg. 1638] Mr. Kruse alone and therefore satisfies the threshold requirements. When a requesting spouse seeks relief from an understatement of income, if the threshold requirements are satisfied the Commissioner will consider the following nonexhaustive list of six factors weighing in favor of granting relief for the liability: (1) Whether the requesting spouse is separated or divorced from the nonrequesting spouse (temporary absences due to illness are not considered separation if it can reasonably be expected that the absent spouse will return); (2) whether the requesting spouse knew or had reason to know of the item giving rise to the deficiency; (3) whether the requesting spouse would suffer economic hardship if not granted relief; (4) whether the nonrequesting spouse has a legal obligation to pay the outstanding tax liability; (5) whether the requesting spouse received a significant benefit from nonpayment of the tax liability; (6) whether the requesting spouse has made a good-faith effort to comply with the tax laws for the tax years following the year to which the request for such relief relates. Rev. Proc. 2003-61, sec. 4.03(2)(a), 2003-2 C.B. at 298. In addition, if present, evidence of abuse of the requesting spouse by the nonrequesting spouse or the poor mental or physical health of the requesting spouse will weigh in favor of relief from liability. Rev. Proc. 2003-61, sec. 4.03(2)(b), 2003-2 C.B. at 299. Petitioner has presented little evidence that would justify relief from liability. As discussed above, petitioners' separate living arrangement was only temporary, and petitioner should have known about the erroneous deductions. When asked about the potential for economic hardship absent relief, petitioner stated she and her husband were “having a hard time making ends meet right now,” but offered no further evidence that her liability would cause undue financial strain. Petitioner has not presented any evidence necessary to apply the additional factors of spousal abuse or poor health. The health problems that led her to live outside Florida do not justify relieving her of liability because there is no indication that her health problems prevented meaningful review of the returns. The record does indicate some facts favorable to petitioner; namely, that she did not receive any significant benefit from the improper deductions and that she has been in compliance with tax laws in subsequent years. However, the totality of the circumstances in this case does not justify equitable relief under section 6015(f). We have considered the arguments of the parties not specifically addressed in this opinion. They are either without merit or irrelevant to our decision. We hold that petitioner is not entitled to relief from joint and several liability under section 6015. Decision will be entered for respondent consistent with the stipulation. 888-712-7690

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