Zaher v. Comm'r , 103 T.C.M. 1071 ( 2012 )

T.C. Memo. 2012-11
UNITED STATES TAX COURT
FARZANA ZAHER, Petitioner, AND MOHAMMAD ZAHER, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5984-10. Filed January 10, 2012.
Adam D. Christensen, for petitioner.
Mohammad Zaher, pro se.
Angela J. Kennedy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: This proceeding was commenced under section
6015 for review of respondent’s determination that petitioner is
not entitled to relief from joint and several liability for 2006
with respect to a Federal income tax return she filed with her
former spouse, intervenor. The issue for decision is whether
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petitioner is entitled to relief under section 6015(f). All
section references are to the Internal Revenue Code, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference. At the
time the petition was filed, petitioner resided in Indiana. At
the time the notice of intervention was filed, intervenor resided
in California.
Petitioner holds a bachelor’s degree and graduated from
dental school in 2004. During the marriage, intervenor
participated in various entrepreneurial activities, including
owning and operating a gas station through a corporate entity
that he owned and controlled, Zaher Enterprises, Inc. Intervenor
sold the gas station, and payments were made to intervenor during
2006. Petitioner had no ownership or controlling interest in
intervenor’s business activities, and petitioner had no access to
intervenor’s business bank account.
Petitioner’s involvement with the family finances was
limited. The couple had some joint accounts, but they also had
separate personal and business accounts. Intervenor generally
was responsible for filling out bank forms, applying for loans,
and ensuring that the couple’s tax returns were prepared by their
accountant and filed. Petitioner was not abused by intervenor,
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and petitioner did not suffer from mental or physical health
problems.
During 2006, petitioner and intervenor lived together in
Indiana with their two minor children. Petitioner was employed
as a dentist. Intervenor realized capital gains of $587,760 from
the sale of the gas station. After several loans associated with
the gas station operations were paid and payment was made for
work relating to a piece of investment property, the remainder of
the capital gains from the gas station sale (gas station
proceeds), approximately $315,000, was deposited in petitioner
and intervenor’s joint savings account. At the time, intervenor
told petitioner that any taxes owed with respect to the capital
gains would be paid from the 2006 net proceeds. No estimated tax
payments were made with respect to the 2006 capital gains.
Petitioner and intervenor began having marital difficulties
in December 2006. On August 1, 2007, only a week before
petitioner filed for divorce, intervenor transferred the gas
station proceeds from the couple’s joint savings account to his
business checking account. This transfer left the joint savings
account with a balance of less than $1,000 and was made without
petitioner’s knowledge, although petitioner did learn of the
transfer before filing for divorce.
A few days after transferring the gas station proceeds to
his business account, intervenor wrote a check drawn on his
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business account for $320,000 that was deposited in an account
owned by one of his brothers. At the time, petitioner had no
knowledge of the transfer to intervenor’s brother.
On August 8, 2007, petitioner filed for divorce in the
Circuit Court for Hamilton County, Indiana (circuit court), and
requested that the circuit court issue a financial restraining
order. On August 10, 2007, the circuit court issued a temporary
financial restraining order prohibiting petitioner or intervenor
from disposing of marital assets without written consent of both
parties or permission of the circuit court.
Petitioner and intervenor began living apart in November
2007. On November 20, 2007, intervenor sent an email to
petitioner stating that he had left a copy of the couple’s 2006
joint tax return at her home for her to review and sign. From
this email, petitioner learned for the first time that their 2006
tax return had not been filed by the due date and that there was
a significant amount of tax due. Intervenor advised petitioner
that they needed to sign and file the 2006 tax return and that he
had set up an appointment for petitioner to discuss the tax
return with their accountant.
In early December 2007, petitioner met with the accountant
to review the 2006 tax return, which reported a tax due of
$63,379. Petitioner then had her divorce attorney forward an
unsigned copy of the 2006 joint return to intervenor’s attorney
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for intervenor’s signature, because petitioner was afraid
intervenor would make unauthorized changes to the 2006 tax return
if she gave him a signed copy.
In a series of emails exchanged from November 2007 to
January 2008, petitioner and intervenor discussed the 2006 tax
return and how the tax due would be paid. Because petitioner no
longer had access to the gas station proceeds, she urged
intervenor to pay the tax. Intervenor responded that he did not
have the money and suggested that they first file the return,
then talk to the Internal Revenue Service (IRS) about a payment
plan. Intervenor also said he was seeking another accountant to
redo the 2006 return since he felt their accountant “went too
much by the book”.
In April 2008, in violation of the financial restraining
order, intervenor directed his brother to distribute to other
family members the gas station proceeds he had been holding for
intervenor. Intervenor eventually signed the 2006 return as
originally prepared and sent it back to petitioner in mid-2008.
Petitioner signed the return for filing with the IRS. By this
time, petitioner had learned of the transfer of the gas station
proceeds to the bank account of intervenor’s brother.
The 2006 joint return was filed on December 3, 2008. The
return reported petitioner’s wage income of $113,037,
intervenor’s capital gains of $587,760, rental losses of
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$137,781, and taxable interest income of $35,073. After
crediting petitioner’s wage withholding of $15,866, the joint
return showed tax due of $63,379, which petitioner and intervenor
did not pay when they filed the return. The reported balance due
for 2006 was solely attributable to intervenor.
Petitioner submitted a Form 8857, Request for Innocent
Spouse Relief, to the IRS dated April 30, 2009. An IRS tax
examiner reviewed petitioner’s request under the process
described in Rev. Proc. 2003-61, 2003-2 C.B. 296, and ultimately
denied her relief under section 6015. A final determination
letter dated December 10, 2009, was sent to petitioner.
According to the IRS’ workpaper, the denial was based, in large
part, on the examiner’s conclusion that petitioner had not
established that she had a reasonable belief when the return was
signed that the tax would be paid by intervenor and that
petitioner would not suffer economic hardship if relief was not
granted.
In March 2010, after several years of contentious
proceedings, petitioner and intervenor’s divorce became final.
In April and May 2010, the circuit court issued orders regarding
the couple’s property division and child custody issues.
Petitioner was granted full custody of the couple’s two children.
As to the property division, the circuit court included the
gas station proceeds in the marital estate because the court
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ruled that intervenor had wrongfully transferred the funds from
the couple’s joint account just before petitioner filed for
divorce. However, in the light of intervenor’s greater financial
contributions during the marriage and petitioner’s future earning
potential as a dentist, the circuit court awarded intervenor 55
percent and petitioner 45 percent of the marital assets. To
effect this property division, the circuit court required
petitioner to take on a much greater share of marital debt than
intervenor.
The circuit court also ruled that intervenor had violated the
financial restraining order on numerous occasions, including
instructing his brother to distribute the gas station proceeds to
other family members. Intervenor claimed that these distributions
were made to repay loans that family members made to petitioner
and intervenor during their marriage, but the circuit court ruled
that no credible evidence supported the existence of these claimed
family loans. The circuit court found it probable that the gas
station proceeds had been distributed to family members in a
scheme to funnel the money back to intervenor through “loans” and
“gifts” from the same family members. The circuit court further
concluded that intervenor had remained voluntarily unemployed
during the entire course of the divorce proceedings to avoid
“paying his fair share to raise his children” and had attempted to
foist all his financial responsibilities on petitioner. The
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divorce decree did not assign responsibility for the 2006 tax
liability.
On November 1, 2010, intervenor filed his notice of
intervention. Intervenor stated in his notice that he believed
petitioner should be responsible for all of the 2006 income tax
liability.
OPINION
Generally, married taxpayers may elect to file a joint
Federal income tax return. Sec. 6013(a). After making this
election, each spouse generally is jointly and severally liable
for the entire tax due for that taxable year. Sec. 6013(d)(3);
Butler v. Commissioner, 114 T.C. 276, 282 (2000). A requesting
spouse, however, may seek relief from joint and several 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), a requesting spouse may seek
equitable relief under section 6015(f). Because this case
involves failure to pay tax shown on a return, rather than a
deficiency, petitioner and respondent agree that petitioner is not
entitled to relief under section 6015(b) or (c). See Washington
v. Commissioner, 120 T.C. 137, 146-147 (2003).
Petitioner contends that she is entitled to relief under
section 6015(f) from joint and several liability. Section 6015(f)
gives the Commissioner the discretion to grant equitable relief
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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). In doing so, 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); Porter v. Commissioner,
130 T.C. 115, 117 (2008). Respondent disagrees, contending that
the proper standard of review is abuse of discretion and that the
proper scope of review is limited to the administrative record.
We decline to revisit Porter. The presence of intervenor as a
party in this case emphasizes the need to consider matters not in
the administrative record. See Porter v. Commissioner, 132 T.C.
at 219-220 (Gale, J., concurring). Petitioner bears the burden of
proving that she is entitled to relief under section 6015(f). See
Porter v. Commissioner, 132 T.C. at 210; see also Rule 142(a).
The Commissioner has outlined procedures for determining
whether a taxpayer qualifies for equitable relief under section
6015(f) from joint and several liability. See Rev. Proc. 2003-61,
supra. First, Rev. Proc. 2003-61, sec. 4.01, 2003-2 C.B. at
297-298, sets forth seven threshold conditions that must be
satisfied before the Commissioner will consider a request for
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equitable relief under section 6015(f). There is no dispute that
petitioner meets the threshold conditions.
If the threshold conditions are satisfied, the requesting
spouse will ordinarily be granted relief if he or she then
satisfies each requirement of the safe harbor provision found in
Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298: (1) On the
date of the request for relief, the requesting spouse is no longer
married to, or is legally separated from, the nonrequesting
spouse; (2) on the date the requesting spouse signed the joint
return, the requesting spouse had no knowledge or reason to know
that the nonrequesting spouse would not pay the income tax
liability; and (3) the requesting spouse will suffer economic
hardship if not granted relief. Petitioner concedes that she does
not satisfy the third condition. Accordingly, petitioner does not
qualify for relief under Rev. Proc. 2003-61, sec. 4.02.
When a requesting spouse satisfies the threshold conditions
but fails to satisfy the conditions in Rev. Proc. 2003-61, sec.
4.02, he or she still may be eligible for relief under section
6015(f) if, taking into account all the facts and circumstances,
it is inequitable to hold the requesting spouse liable for an
underpayment. Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B. at
298-299, lists nonexclusive factors to be considered in
determining whether to grant equitable relief under section
6015(f). No single factor is determinative, all factors are to be
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considered and weighed, and the list of factors is not intended to
be exhaustive. Id. These listed factors are: (1) Whether the
requesting spouse is separated or divorced from the nonrequesting
spouse; (2) whether the requesting spouse would suffer economic
hardship if not granted relief; (3) whether the requesting spouse
knew or had reason to know that the other spouse would not pay the
tax; (4) whether the nonrequesting spouse has a legal obligation
to pay the outstanding tax liability pursuant to a divorce decree
or agreement; (5) whether the requesting spouse received a
significant benefit (beyond normal support) from nonpayment of the
tax liability; and (6) whether the requesting spouse has made a
good-faith effort to comply with the tax laws for the taxable
years following the year to which the request for relief relates.
Other factors, if present, that favor equitable relief are: (1)
The nonrequesting spouse abused the requesting spouse, and (2) the
requesting spouse was in poor mental or physical health on the
date the return was signed or at the time relief was requested.
However, the absence of these last two factors will not weigh
against equitable relief. Id.
The IRS denied petitioner’s request for relief under section
6015(f) after reviewing and weighing these factors. Our analysis
of the relevant factors and circumstances is as follows.
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Marital Status
The first factor considered is whether the requesting spouse
is separated or divorced from the nonrequesting spouse.
Petitioner and intervenor were separated at the time of her
initial request for innocent spouse relief, and they have since
divorced. Therefore, this factor weighs in favor of relief for
petitioner.
Economic Hardship
The second factor considered is whether the requesting spouse
will suffer economic hardship if relief is not granted.
Petitioner concedes that she will not suffer economic hardship.
This factor weighs against relief.
Knowledge or Reason To Know
The third factor considered is whether the requesting spouse
had knowledge or reason to know that the nonrequesting spouse
would not pay the income tax liability. For this factor to weigh
in favor of a requesting spouse, the requesting spouse must
establish that (1) when he or she signed the return, he or she had
no knowledge or reason to know the nonrequesting spouse would not
pay the tax reported on the return; and (2) it was reasonable for
him or her to believe that the nonrequesting spouse would pay the
tax shown as due. See Collier v. Commissioner, T.C. Memo.
2002-144. Another relevant consideration is whether petitioner
believed that intervenor would pay the taxes “reasonably promptly
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after the filing of the joint return.” See Waldron v.
Commissioner, T.C. Memo. 2011-288; see also Schepers v.
Commissioner, T.C. Memo. 2010-80; Banderas v. Commissioner, T.C.
Memo. 2007-129. When petitioner signed the 2006 return reporting
an unpaid balance due that was filed with the IRS in December
2008, petitioner knew that intervenor had transferred the gas
station proceeds at least two times, first to intervenor’s
business account and then to intervenor’s brother. Intervenor
also told petitioner that he did not have the money. Furthermore,
although intervenor never explicitly stated that he was not going
to pay the tax, intervenor made it clear that he did not accept
sole responsibility for the tax that was due. Considering these
circumstances, it simply is not reasonable for petitioner to have
believed, at the time she signed the 2006 return that was filed in
late 2008, that intervenor would pay the tax that was due. This
factor weighs against relief for petitioner.
Nonrequesting Spouse’s Legal Obligation
This factor is concerned with whether the nonrequesting
spouse has a legal obligation to pay the outstanding tax liability
pursuant to a divorce decree or agreement. The parties agree that
petitioner and intervenor’s divorce decree does not determine who
has the legal obligation to pay the tax liability. Therefore,
this factor is neutral.
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Significant Benefit
The fifth factor considered is whether the requesting spouse
has received a significant benefit (beyond normal support) from
the unpaid income tax liability. Normal support is measured by
the circumstances of the particular parties. Porter v.
Commissioner, 132 T.C. at 212; Estate of Krock v. Commissioner, 93
T.C. 672, 678-679 (1989). At the administrative level, respondent
determined that petitioner had not received a significant benefit
beyond normal support. Now, respondent contends that petitioner
received a significant benefit beyond normal support because the
circuit court included the misappropriated gas station proceeds in
the marital estate subject to division, but not the tax liability,
and petitioner received substantial assets in the divorce
proceeding.
Before this controversy arose, intervenor was a successful
entrepreneur, and petitioner was a practicing dentist. In
accordance with their level of income, petitioner and intervenor
acquired substantial assets that had no connection with their
failure to pay the 2006 tax liability. The assets petitioner was
awarded in the property division were not acquired as a result of
the unpaid tax liability. In addition, the property division was
unequal, with petitioner receiving a smaller share than intervenor
and shouldering more of the couple’s debts than intervenor.
Furthermore, the record contains no evidence that, as a result of
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the unpaid tax liability, petitioner lived an unusually lavish
lifestyle, made extravagant purchases, or took expensive
vacations, typical hallmarks of significant benefits beyond normal
support. See Washington v. Commissioner, 120 T.C. at 151; Wiener
v. Commissioner, T.C. Memo. 2008-230. Accordingly, petitioner did
not receive a significant benefit beyond normal support. This
factor weighs in favor of relief.
Compliance With Income Tax Laws
This factor considers whether the requesting spouse has made
a good-faith effort to comply with income tax laws since the year
at issue. Respondent concedes that petitioner has made a good-
faith effort to comply with the income tax laws since 2006. This
factor weighs in favor of relief for petitioner. See Kruse v.
Commissioner, T.C. Memo. 2010-270; Chou v. Commissioner, T.C.
Memo. 2007-102.
Abuse and Mental or Physical Health
These factors consider whether the requesting spouse was
abused by the nonrequesting spouse and whether the requesting
spouse had mental or physical health problems at the time the
return at issue was signed or at the time he or she requested
relief. Petitioner concedes that she was not abused by intervenor
nor has she had any mental or physical health problems.
Therefore, these two factors are neutral.
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Analysis
Considering all the factors discussed above, three weigh in
favor of relief for petitioner, two weigh against relief, and
three are neutral. However, our analysis does not end here. The
factors listed in Rev. Proc. 2003-61, sec. 4.03 are nonexclusive,
and other relevant factors are to be considered. We have allowed
innocent spouse relief in cases where as few as two listed factors
favored relief when there were other relevant factors to consider.
See Bozick v. Commissioner, T.C. Memo. 2010-61 (the taxpayer was
“browbeaten” into signing the joint tax return); Wiener v.
Commissioner, supra (the taxpayer was in her 70s and in bad
health, and her husband had consistently misled her about their
tax problems).
Petitioner argues that the facts and circumstances regarding
intervenor’s sale of the business that resulted in the tax
liability and his subsequent evasiveness and deceit concerning the
funds that were to be used to pay the tax liability weigh in favor
of granting relief under section 6015(f). Intervenor
misappropriated the gas station proceeds, which could and should
have been used to pay the 2006 tax liability. Intervenor then
went to great lengths over several years to place the gas station
proceeds beyond petitioner’s reach, effectively preventing
petitioner from using these funds herself to pay the 2006 tax
liability. Equitable relief is more likely to be appropriate
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where concealment, overreaching, or other wrongdoing on the part
of the nonrequesting spouse is present. See Van Arsdalen v.
Commissioner, T.C. Memo. 2007-48 (citing Hayman v. Commissioner,
992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228).
Intervenor’s egregious misconduct weighs in favor of relief for
petitioner, and respondent acknowledged as much at trial.
Taking into account all of the facts and circumstances, we
hold that petitioner is entitled to relief from joint and several
liability under section 6015(f) with respect to any unpaid Federal
income tax liability for 2006. We have considered the arguments
of the parties not specifically addressed in this opinion. They
are either without merit or irrelevant to our decision. To
reflect the foregoing,
Decision will be entered
for petitioner.