Kathryn Cheshire v. Commissioner , 115 T.C. No. 15 ( 2000 )

115 T.C. No. 15UNITED STATES TAX COURT
KATHRYN CHESHIRE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3483-99. Filed August 30, 2000.
P and H filed a joint 1992 Federal income tax return
on which a portion of retirement distribution proceeds H
received and interest received from a joint bank account
were omitted from gross income. Although P acknowledges
that when she signed the joint return she had actual
knowledge of the omitted retirement distribution
proceeds, she posits that, relying on H’s false
statements, she had reason to believe that the omitted
retirement distribution proceeds were not taxable and
that she should be entitled to relief under sec. 6015(b),
(c), and/or (f), I.R.C., with respect thereto. Further,
P seeks innocent spouse relief with respect to the sec.
6662(a), I.R.C., accuracy-related penalty.
1. Held: P is not entitled to innocent spouse
relief with respect to the omitted items of income.
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2. Held, further, knowledge of the “item giving
rise to a deficiency” for purposes of sec. 6015(c)(3)(C),
I.R.C., does not mean knowledge of the tax consequences
of the item or that the entry on the return is incorrect.
3. Held, further, after taking into account all
the facts and circumstances presented in this case, R’s
denial of equitable relief to P under sec. 6015(f),
I.R.C., as it relates to the sec. 6662(a), I.R.C.,
penalty applicable to the omitted retirement distribution
proceeds, constitutes an abuse of his discretion.
John Edward Leeper, for petitioner.
Sheila R. Pattison and Gerald L. Brantley, for respondent.
JACOBS, Judge: Respondent determined a $66,069 deficiency in
Kathryn and David Cheshire’s 1992 Federal income tax, a $16,518
section 6651(a)(1) addition to tax, and a $13,214 section 6662(a)
accuracy-related penalty. Only Kathryn Cheshire has contested this
determination; she does so claiming innocent spouse relief under
section 6015(b), (c), and/or (f).
After concessions by respondent, see infra, the issue to be
resolved is whether Mrs. Cheshire is entitled to innocent spouse
relief with respect to: (1) The taxation of an omitted portion of
the distributions Mr. Cheshire received upon his retirement from
Southwestern Bell Telephone Co., and omitted interest income from
a joint bank account, and (2) the section 6662(a) accuracy-related
penalty.
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All section references are to the Internal Revenue Code as in
effect for the year under consideration. All Rule references are
to the Tax Court Rules of Practice and Procedure. All dollar
amounts are rounded.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated
herein by this reference.
Background
Petitioner resided in Cedar Creek, Texas, at the time she
filed her petition.
Petitioner and Mr. Cheshire were married on June 20, 1970;
they permanently separated on July 13, 1993, and were divorced on
December 5, 1994. For 1992, petitioner and Mr. Cheshire
(collectively, the Cheshires) filed a joint Federal income tax
return.
Petitioner received a bachelor of science degree in secondary
education. Upon graduating from college in 1970, she worked
approximately 3 years as an elementary school teacher, then stayed
home for approximately 10 years (1974-84) in order to raise her 2
children. She returned to teaching in 1984.
In September 1985, the Cheshires purchased property located at
24A Simpson Avenue, Cedar Creek, Texas, for use as the family
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residence. The Cheshires borrowed $99,000 to purchase the
property.
David Cheshire’s Retirement and Compensation Package
Mr. Cheshire took early retirement from Southwestern Bell
Telephone Co. (Southwestern Bell), effective January 1, 1992. As
a result, Mr. Cheshire received the following distributions (the
retirement distributions) in 1992:
Amount
Nations Bank of Texas, Trustee, for
“SBNCNPP EMP LUMP SUM” $199,771
Southwestern Bell LESOP for salaried employees 5,919
Southwestern Bell savings plan for salaried
employees 23,263
Southwestern Bell ESOP 971
Total 229,924
Of the $229,924, $42,183 was rolled over into a qualified account.
On January 31, 1992, Mr. Cheshire deposited $184,377 of the
retirement distributions into an account (account No. 9633-09) in
the name of “David D. Cheshire and Kathy Cheshire” at the Austin
Telco Federal Credit Union (the Austin Telco account).1 In 1992,
the funds in this account earned $1,168 in interest.
Petitioner was aware of Mr. Cheshire’s receipt of the
retirement distributions and the amount thereof, as well as the
interest earned on the Austin Telco account.
1
An additional $29,786 was deposited into this account
between Jan. 29 and Feb. 4, 1992. The record does not reveal the
source of these funds.
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The Cheshires’ Use of the Retirement Distributions
The Cheshires made several large disbursements out of the
Austin Telco account in 1992. Specifically, $99,425 was withdrawn
to pay off the mortgage on the family residence, and $20,189 was
withdrawn to purchase a 1992 Ford Explorer.
The retirement distributions were also used to pay family
expenses, provide startup capital for Mr. Cheshire’s newly formed
sole proprietorship, Academic Resources Management Systems (ARMS),
and for investments.2 In addition, the retirement distributions
were used to satisfy loans taken out to acquire a family truck and
a car for one of their children as well as to open a college bank
account for their daughter. The Cheshires retained joint ownership
of this account.
On September 22, 1992, Mr. Cheshire opened a second account
(account No. 25239-87) at the Austin Telco Federal Credit Union and
transferred the remaining proceeds of the retirement distributions
from account No. 9633-09 into this account. On November 12, 1992,
Mr. Cheshire wrote a check from this second account in the amount
of $6,300 payable to “A.R.M.S.”; this amount was subsequently
deposited into ARMS’ bank account. In 1992, the funds in account
No. 25239-87 earned $26 in interest.
2
On Apr. 24 and May 19, 1992, Mr. Cheshire deposited
$40,000 and $5,301, respectively, into a brokerage account at
Edward D. Jones & Co.
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Petitioner’s Separation and Divorce
Mr. Cheshire was arrested several times for driving while
intoxicated (DWI). In June 1993, he was involved in an alcohol-
related automobile accident. Approximately a month later,
petitioner and Mr. Cheshire permanently separated; they divorced 17
months after their separation.
Pursuant to a divorce decree, Mr. Cheshire transferred to
petitioner his interest in the property constituting the family
residence and title to the 1992 Ford Explorer. At the time of
transfer, the family residence and the Ford Explorer were
unencumbered.
The Cheshires’ 1992 Federal Income Tax Return
Mr. Cheshire prepared and filed his and Mrs. Cheshire’s joint
income tax returns. Mr. Cheshire prepared the Cheshires’ 1992
joint Federal income tax return (the 1992 return) in March 1993,
prior to beginning a jail sentence for a DWI conviction. Before
signing the return, petitioner questioned her husband about the
potential tax ramifications of the retirement distributions. Mr.
Cheshire falsely told petitioner he had consulted with a local
certified public accountant, J.D. Mican (Mr. Mican), and had been
advised that proceeds used to pay off the mortgage on their home
would reduce the taxable amount of the retirement distributions.
Accepting her husband’s answer, petitioner did not inquire further
and signed the 1992 return on March 14, 1993. Petitioner assumed
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that the 1992 return would be timely filed. On the 1992 return,
the Cheshires reported that they had received a $199,771 retirement
distribution and that $56,150 of that amount constituted taxable
income. In addition, they reported $477 in interest income, as
well as a $12,349 loss on their Schedule C, Profit or Loss From
Business.
In August 1994, petitioner received a letter from the Internal
Revenue Service (IRS) stating that it had not received the
Cheshires’ 1992 return. In searching for a copy of the 1992
return, petitioner discovered in a desk drawer the original 1992
return as well as a check for the amount of tax shown to be owing
($23.86). Petitioner immediately contacted Mr. Mican; he advised
her to file the 1992 return and enclose payment for the tax
liability reflected on the return as soon as possible. Petitioner
filed the 1992 return along with the remittance on August 15, 1994.
In early October 1994, petitioner received notification from
the IRS that $8,502 in estimated tax payments claimed on the
Cheshires’ 1992 return had not been paid. Despite Mr. Cheshire’s
reassurance that he had made the estimated tax payments, petitioner
discovered that the payments in fact had not been made. Upon the
advice of Mr. Mican, petitioner paid the estimated tax using
borrowed funds.
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Notice of Deficiency
Respondent determined that $187,741 of the retirement
distributions ($229,924 total distributions less the $42,183
rollover) constituted taxable income, and thus the Cheshires
understated the taxable amount of the retirement distributions by
$131,591 ($187,741 - $56,150). Respondent further determined that
the Cheshires understated (1) their interest income by $717, (2)
their dividend income and capital gains by $132 and $1,889,
respectively, and (3) their self-employment tax by $353. In
addition, respondent disallowed $14,843 in Schedule C expenses. As
a result of these determinations, as well as the late filing of the
1992 return, respondent determined that a section 6651(a)(1)
addition to tax and a section 6662(a) accuracy-related penalty
should be imposed.
Respondent’s Concessions
Prior to trial, respondent conceded that petitioner qualified
for innocent spouse relief with respect to the following:
Item Amount
Schedule C expenses $14,843
Self-employment taxes 353
Capital gains 1,889
Dividend income 132
Interest income 26
Southwestern Bell LESOP distribution 5,919
Southwestern Bell savings plan distribution 23,263
Southwestern Bell ESOP distribution 971
Section 6651(a)(1) addition to tax 16,518
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OPINION
As a general proposition, if a joint return is filed by a
husband and wife, liability with respect to any tax shown on the
return or found to be owing is joint and several. See sec.
6013(d)(3). In 1971, Congress enacted section 6013(e), the
predecessor to section 6015, in order to correct perceived grave
injustices often resulting from the imposition of joint and several
liability. See S. Rept. 91-1537, at 2 (1970), 1971-1 C.B. 606,
607; see also Act of Jan. 12, 1971, Pub. L. 91-679, sec. 1, 84
Stat. 2063 (enacted sec. 6013(e)), as amended by the Deficit
Reduction Act of 1984, Pub. L. 98-369, sec. 424, 98 Stat. 494, 801-
803.
As amended,3 section 6013(e) provided that a spouse could be
relieved of tax liability if the spouse proved: (1) A joint income
tax return was filed; (2) the return contained a substantial
understatement of tax attributable to grossly erroneous items of
the other spouse; (3) in signing the return, the spouse seeking
relief did not know, and had no reason to know, of the substantial
understatement; and (4) under the circumstances it would be
inequitable to hold the spouse seeking relief liable for the
3
Initially, sec. 6013(e) provided relief only in cases
involving an omission of income. In 1984, the scope of sec.
6013(e) was expanded to provide relief in erroneous deduction
cases. See Deficit Reduction Act of 1984, Pub. L. 98-369, sec.
424, 98 Stat. 494, 801-803; H. Conf. Rept. 98-861, at 1119
(1984), 1984-3 C.B. (Vol. 2) 1, 373.
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substantial understatement. The relief granted under section
6013(e) is commonly referred to as innocent spouse relief.
The Enactment of Section 6015
For many taxpayers, relief under section 6013(e) was difficult
to obtain. In order to make innocent spouse relief more
accessible, Congress repealed section 6013(e) and enacted a new
innocent spouse provision (section 6015) in 1998 as part of the
Internal Revenue Service Restructuring and Reform Act of 1998 (RRA
1998), Pub. L. 105-206, sec. 3201(a), 112 Stat. 734. See H. Conf.
Rept. 105-599, at 249 (1998). The newly enacted statute provided
three avenues of relief from joint and several liability: (1)
Section 6015(b)(1) (which is similar to former section 6013(e))
allows a spouse to escape completely joint and several liability;
(2) section 6015(b)(2) and (c) allow a spouse to elect limited
liability through relief from a portion of the understatement or
deficiency; and (3) section 6015(f) confers upon the Secretary
discretion to grant equitable relief in situations where relief is
unavailable under section 6015(b) or (c). Section 6015 generally
applies to any liability for tax arising after July 22, 1998, and
any liability for tax arising on or before July 22, 1998, that
remains unpaid as of such date. See H. Conf. Rept. 105-599, at 251
(1998).
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Applicable Statutory Provisions
Section 6015(b) provides:
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; and
(E) the other individual elects (in
such form as the Secretary may prescribe)
the benefits of this subsection not later
than the date which is 2 years after the
date the Secretary has begun collection
activities with respect to the individual
making the election,
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.
(2) Apportionment of relief.–-If an
individual who, but for paragraph (1)(C),
would be relieved of liability under paragraph
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(1), establishes that in signing the return
such individual did not know, and had no
reason to know, the extent of such
understatement, then such individual shall be
relieved of liability for tax (including
interest, penalties, and other amounts) for
such taxable year to the extent that such
liability is attributable to the portion of
such understatement of which such individual
did not know and had no reason to know.
Section 6015(c) provides in relevant part:
SEC. 6015(c). Procedures to Limit
Liability For Taxpayers No Longer Married or
Taxpayers Legally Separated or Not Living
Together.--
(1) In general.--Except as
provided in this subsection, if an
individual who has made a joint
return for any taxable year elects
the application of this subsection,
the individual’s liability for any
deficiency which is assessed with
respect to the return shall not
exceed the portion of such
deficiency properly allocable to the
individual under subsection (d).
* * * * * * *
(3)(C) Election not valid with
respect to certain deficiencies.–-If
the Secretary demonstrates that an
individual making an election under
this subsection had actual
knowledge, at the time such
individual signed the return, of any
item giving rise to a deficiency (or
portion thereof) which is not
allocable to such individual under
subsection (d), such election shall
not apply to such deficiency (or
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portion). This subparagraph shall
not apply where the individual with
actual knowledge establishes that
such individual signed the return
under duress.
Section 6015(d) specifies how an allocation under section
6015(c) is to be made, providing in relevant part:
SEC. 6015(d). Allocation of Deficiency.--For
purposes of [section 6015(c)]--
(1) In general.--The portion of any
deficiency on a joint return allocated to an
individual shall be the amount which bears the
same ratio to such deficiency as the net
amount of items taken into account in
computing the deficiency and allocable to the
individual * * * bears to the net amount of
all items taken into account in computing the
deficiency.
* * * * * * *
(3) Allocation Of Items Giving Rise To
The Deficiency.--For purpose of * * * [section
6015(c)]--
(A) In general.--Except as
provided in paragraphs (4) and (5),
any item giving rise to a deficiency
on a joint return shall be allocated
to individuals filing the return in
the same manner as it would have
been allocated if the individuals
had filed separate returns for the
taxable year.
(B) Exception where other
spouse benefits.--Under rules
prescribed by the Secretary, an item
otherwise allocable to an individual
under subparagraph (A) shall be
allocated to the other individual
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filing the joint return to the
extent the item gave rise to a tax
benefit on the joint return to the
other individual.
(C) Exception for fraud.--The
Secretary may provide for an
allocation of any item in a manner
not prescribed by subparagraph (A)
if the Secretary establishes that
such allocation is appropriate due
to fraud of one or both individuals.
The electing spouse has the burden of proof with respect to
establishing the portion of any deficiency allocable to such
individual. See sec. 6015(c)(2). As with section 6015(b), an
election for section 6015(c) relief must be made within 2 years
from the date the Secretary begins collection activities with
respect to the individual making the election. See sec.
6015(c)(3)(B).
Section 6015(f) provides:
SEC. 6015(f). Equitable Relief.–-Under procedures
prescribed by the Secretary, if–-
(1) 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 under subsection (b) or (c),
the Secretary may relieve such individual of such
liability.
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Availability of Relief to Petitioner
For the reasons that follow, we conclude that petitioner is
not entitled to innocent spouse relief except to the extent
provided below.
A. Relief Under Section 6015(b)
Neither party disputes that in this case the requirements of
subparagraphs (A), (B), and (E) of section 6015(b)(1) have been
satisfied.4 Their dispute involves whether the requirements of
subparagraphs (C) and (D) of section 6015(b)(1) have been met.
Section 6015(b)(1)(C) contains a no “knowledge of the
understatement” requirement. Petitioner maintains that the
standard of inquiry to be used in determining whether the putative
innocent spouse knew, or had reason to know of, an understatement
of tax is whether, at the time the return was signed, a reasonably
prudent taxpayer in the spouse’s position could be expected to know
that the stated tax liability was erroneous or that further
investigation was warranted. Based on this standard, petitioner
posits that even though she knew of the retirement distributions
and the interest income, she did not know that there was an
understatement of tax on the 1992 return.
4
Respondent has not objected to the manner in which
petitioner has raised a claim for innocent spouse relief under
sec. 6015. We thus treat the raising of innocent spouse relief
in the petition as a timely filed election. See Butler v.
Commissioner, 114 T.C. 276, 281-282 (2000); Charlton v.
Commissioner, 114 T.C. 333, 339 (2000).
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We do not agree with petitioner’s standard of inquiry. The no
knowledge of the understatement requirement of section
6015(b)(1)(C) is similar to that found in former section
6013(e)(1)(C). Where relief was requested under section 6013(e)
with respect to the omission of income (the situation involved
herein), both this Court and the Court of Appeals for the Fifth
Circuit, the court to which an appeal in this case would lie, have
concluded that where a spouse seeking relief has actual knowledge
of the underlying transaction that produced the omitted income,
innocent spouse relief is denied. See Reser v. Commissioner, 112
F.3d 1258, 1265 (5th Cir. 1997), affg. in part and revg. in part
T.C. Memo. 1995-572; Bokum v. Commissioner, 94 T.C. 126, 148
(1990), affd. 992 F.2d 1132 (11th Cir. 1993). We believe this
standard applies for section 6015(b)(1) relief as well.
Here, petitioner possessed actual knowledge of the underlying
transactions (the distribution of retirement proceeds and the
interest earned on the Austin Telco account) that gave rise to the
Cheshires’ understatement of tax. Petitioner had been informed by
Mr. Cheshire that he was contemplating retirement and was eligible
to receive a substantial sum of money from his retirement plan. By
the end of January 1992, petitioner was aware of both the
retirement distribution proceeds and the existence of the Austin
Telco account. In fact, Mr. Cheshire showed petitioner the deposit
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slip and discussed with her the purposes for which the retirement
distribution proceeds would be used.
Petitioner also had actual knowledge that interest was earned
on the Austin Telco account. At all times, petitioner was aware of
the balance in this account and frequently wrote checks drawn on
its funds. Moreover, bank statements and a Form 1099, Interest
Income, setting forth the amount of interest earned on the account
were sent to petitioner’s home. Thus, petitioner does not satisfy
the no knowledge of the understatement requirement of section
6015(b)(1)(C). Moreover, because petitioner knew, or had reason to
know, of the entire amount of the retirement distributions and the
interest earned on the Austin Telco account, she is not entitled to
proportionate relief under section 6015(b)(2).
B. Relief Under Section 6015(c)
In general, section 6015(c) allows proportionate tax relief
(if a timely election is made) through allocation of the deficiency
between individuals who filed a joint return and are no longer
married, are legally separated, or do not reside together for a 12-
month period. Such allocation, however, is not permitted if the
Secretary demonstrates that the individual electing relief had
actual knowledge, at the time the return was signed, of any item
giving rise to a deficiency (or portion thereof) which is not
allocable to such individual. See sec. 6015(c)(3)(C). For
purposes of section 6015(c), unlike for purposes of section 6015(b)
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and (f), equitable considerations in holding the putative innocent
spouse liable for unpaid tax or any deficiency are of no import.
In the instant case, neither party disputes that the principal
item giving rise to the deficiency is Mr. Cheshire’s receipt of the
retirement distribution proceeds,5 and that such item is allocable
to him under section 6015(d). Nor is there any dispute that
petitioner is entitled to make an election under section 6015(c) as
she and Mr. Cheshire were no longer married when petitioner filed
her petition in this Court. The dispute between the parties
involves whether petitioner had actual knowledge, at the time the
joint return was signed, of “any item giving rise to the deficiency
(or portion thereof)”.
Petitioner posits that because she did not know that the
taxable amount of the retirement distribution was misstated on the
1992 joint return, she is entitled to section 6015(c) relief.
Respondent, on the other hand, maintains that ignorance of the tax
law is of no import–-if petitioner knew of the event or transaction
giving rise to the deficiency (which she admits she did), then
petitioner cannot obtain relief under section 6015(c).
In our opinion, the knowledge requirement of section
6015(c)(3)(C) does not require the electing spouse to possess
knowledge of the tax consequences arising from the item giving rise
5
Petitioner does not claim sec. 6015(c) relief with
respect to the omitted interest income.
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to the deficiency or that the item reported on the return is
incorrect. Rather, the statute mandates only a showing that the
electing spouse actually knew of the item on the return that gave
rise to the deficiency (or portion thereof). See Wiksell v.
Commissioner, 215 F.3d 1335 (9th Cir. 2000) (“the actual knowledge
inquiry in section 6015(c)(3)(C) focuses on whether the taxpayer
had knowledge ‘of any item giving rise to a deficiency’, not on the
tax deficiency itself”; Court of Appeals held that spouse
demonstrated actual knowledge of certain tax items by questioning
her spouse about them), affg. without published opinion T.C. Memo.
1999-32. Here, when petitioner signed the joint return, she was
aware of the amount, the source, and the date of receipt of the
retirement distribution and interest. She was, however, under a
misapprehension as to the taxable amount of the retirement
distribution.
We believe the knowledge standard for purposes of section
6015(c)(3)(C) is an actual and clear awareness (as opposed to
reason to know) of the existence of an item which gives rise to the
deficiency (or portion thereof). In the case of omitted income
(such as the situation involved herein), the electing spouse must
have an actual and clear awareness of the omitted income.6
Section 6015(c)(3)(C) does not require actual knowledge on the part
6
We leave to another day the manner in which the actual
knowledge standard will be applied in erroneous deduction cases.
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of the electing spouse as to whether the entry on the return is or
is not correct.
We recognize that the Senate and conference reports contain
the statement that “if the IRS proves that the electing spouse had
actual knowledge that an item on a return is incorrect, the
election will not apply to the extent any deficiency is
attributable to such item.” H. Conf. Rept. 105-599, at 253
(1998); see S. Rept. 105-174, at 70 (1998). Arguably, this
statement conflicts with our knowledge standard for purposes of
section 6015(c)(3)(C). On the other hand, it can be read merely as
an example where relief is not warranted.
Section 6015(c)(3)(C) does not explicitly state or reasonably
imply that relief is denied only where the electing spouse has
actual knowledge that the item giving rise to the deficiency (or
any portion thereof) is incorrectly reported on the return. As the
Supreme Court has stated “courts must presume that a legislature
says in a statute what it means and means in a statute what it says
there”. Connecticut Natl. Bank v. Germain, 503 U.S. 249, 253-254
(1992). Were we to interpret section 6015(c)(3)(C) narrowly (by
denying relief only where the electing spouse actually knows that
the item giving rise to the deficiency is incorrectly reported on
the return), we would be redrafting the statute, something we may
not do.
We now turn to the meaning of the word “item” for purposes of
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section 6015(c)(3)(C). Although the word “item” is not defined in
section 6015(c)(3)(C), we believe that in omitted income situations
“item” refers to the item of income that should have been reported
on the return . An example contained in the report issued by the
Joint Committee on Taxation, accompanying RRA 1998, supports this
interpretation:
The rule that the election will not apply to the
extent any deficiency is attributable to an item the
electing spouse had actual knowledge of is expected to be
applied by treating the item as fully allocable to both
spouses. For example, a divorced couple filed a joint
return during their marriage with wage income of $150,000
allocable to the wife and $30,000 of self-employment
income allocable to the husband. On examination, an
additional $20,000 of the husband’s self-employment
income is discovered, resulting in a deficiency of
$9,000. The IRS proves that the wife had actual
knowledge of $5,000 of this additional self-employment
income, but had no knowledge of the remaining $15,000.
In this case, the husband would be liable for the full
amount of the deficiency, since the item giving rise to
the deficiency is fully allocable to him. In addition,
the wife would be liable for the amount that would have
been calculated as the deficiency based on the $5,000 of
unreported income of which she had actual knowledge.
Even if the wife elects to limit the liability for the
deficiency under this provision, the IRS would be allowed
to collect that amount from either spouse, while the
remainder of the deficiency could be collected only from
the husband. [Emphasis supplied.]
Staff of Joint Comm. on Taxation, General Explanation of Tax
Legislation Enacted in 1998, at 70 (J. Comm. Print 1998).
The meaning we give to an “item” that gives rise to a
deficiency, for purposes of the knowledge requirement found in
section 6015(c)(3)(C), is consistent with that of other sections of
the Code where the word “item” is used. See, e.g., CIA v. Sims,
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471 U.S. 159, 169 (1985) (Supreme Court looks to other statutes in
defining “intelligence sources” and “confidential source[s]”.) For
instance, the Code defines “item” in other contexts, as follows:
Section 6231(a)(3) defines “partnership item” as “any item required
to be taken into account for the partnership’s taxable year under
any provision of subtitle A”; section 6231(a)(5) defines “affected
item” as “any item to the extent such item is affected by a
partnership item”; and section 6245 defines a “subchapter S item”
as “any item of an S corporation to the extent regulations
prescribed by the Secretary provide that, for purposes of * * *
[subtitle F of the Code (Procedure and Administration)], such item
is more appropriately determined at the corporate level than at the
shareholder level.” In these circumstances, “item” is defined
without reference to its tax consequences. Moreover, it is clear
under section 61 that an “item” is gross income from a particular
source, including pensions (the type of omitted income involved in
this case).
Generally, ignorance of the tax law is not a defense to a
deficiency. As we have previously stated:
We reject [the taxpayer’s] assertion that she did not
have “reason to know” * * * because of her insufficient
legal acumen. As a practical matter, this argument is
tantamount to a claim that ignorance of the law is an
element of the innocent spouse defense, and, as such, is
incorrect. * * * A taxpayer is presumed to have knowledge
of the tax consequences of a transaction, but is not
presumed to have knowledge of the transaction itself.
- 23 -
Bokum v. Commissioner, 94 T.C. at 150 (quoting Stevens v.
Commissioner, 872 F.2d 1499, 1508 n.8 (11th Cir. 1989), affg. T.C.
Memo. 1988-63 (citations omitted)); Estate of Hall v. Commissioner,
T.C. Memo. 1996-93, affd. 103 F.3d 112 (3d Cir. 1996). Were we to
accept the knowledge standard petitioner advocates (i.e., the
putative innocent spouse is entitled to relief if she/he
misunderstood or lacked knowledge of the Internal Revenue Code (the
Code)), then potentially any spouse who is not a certified public
accountant or tax attorney would be allowed to escape paying income
tax. We do not believe Congress intended such a result.
To conclude, petitioner had actual knowledge of the disputed
item of income (the retirement distribution proceeds), as well as
the amount thereof, that gave rise to the deficiency at the time
she signed the joint 1992 return. The fact that petitioner did not
know that the amount of the retirement distribution was misstated
on the return is of no import. Consequently, the benefits of
section 6015(c) are unavailable to her.
C. Relief Under Section 6015(f)
Section 6015(f) confers discretion on the Secretary (and the
Secretary has delegated that discretion to respondent) to grant
innocent spouse relief to an individual (where relief is not
available under section 6015(b) or (c)) if taking into account all
the facts and circumstances, it is inequitable to hold the
individual liable for any unpaid tax or deficiency (or any portion
- 24 -
of either). In the instant case, petitioner sought but was denied
relief under section 6015(f). Petitioner maintains that
respondent’s refusal to grant relief to her was arbitrary,
capricious, and without sound basis in fact.
Respondent acknowledges that we have jurisdiction to review
his denial of innocent spouse relief under section 6015(f). See
Butler v. Commissioner, 114 T.C. 276 (2000); Fernandez v.
Commissioner, 114 T.C. 324 (2000); Charlton v. Commissioner, 114
T.C. 333 (2000). We review respondent’s denial of equitable relief
to petitioner under an abuse of discretion standard. See Butler v.
Commissioner, supra at 292; Mailman v. Commissioner, 91 T.C. 1079,
1083 (1988); Estate of Gardner v. Commissioner, 82 T.C. 989, 1000
(1984). This is a question of fact. See Hospital Corp. of Am. v.
Commissioner, 81 T.C. 520, 594 (1983); Foster v. Commissioner, 80
T.C. 34, 160, 178 (1983), affd. in part and revd. in part on
another ground 756 F.2d 1430 (9th Cir. 1985).
Petitioner’s claim for innocent spouse relief was initiated in
her petition to this Court. Prior to trial, respondent conceded
that petitioner was entitled to relief with respect to certain
items omitted from the 1992 joint return and was not liable for the
section 6651(a)(1) addition to tax. Presumably before doing so,
respondent followed standard procedures by reviewing his
administrative files and considered petitioner’s contentions.
Respondent opposes petitioner’s claim for equitable relief
- 25 -
with respect to the retirement distribution proceeds, the interest
income, and the section 6662(a) accuracy-related penalty on the
grounds that it would not be inequitable to hold petitioner liable
for the tax on these items and that she failed to demonstrate
reasonable cause in omitting these items. After taking into
account the facts and circumstances presented in this case, we do
not believe respondent abused his discretion in denying equitable
relief to petitioner with respect to the retirement distribution
proceeds and interest income or with respect to the section 6662
penalty as it relates to the omitted interest income. However, we
believe respondent’s denial of equitable relief to petitioner under
section 6015(f) to be an abuse of his discretion as it relates to
the section 6662(a) penalty applicable to the omitted retirement
distribution proceeds. The reasons for our overruling respondent’s
denial of relief regarding the section 6662(a) penalty applicable
to the retirement distribution proceeds are as follows:
Section 6662(a) does not apply to “any portion of an
underpayment if it is shown that there was a reasonable cause for
such portion and that the taxpayer acted in good faith with respect
to such portion.” Sec. 6664(c)(1). After carefully observing
petitioner while testifying, we are satisfied that at the time she
signed the 1992 tax return, petitioner believed that the portion of
retirement distribution proceeds used to pay off the mortgage on
- 26 -
the family residence would be nontaxable. Further, we believe
petitioner acted in good faith in reaching this erroneous
conclusion.
Petitioner trusted and relied upon Mr. Cheshire when it came
to the preparation of their tax returns. She is an elementary
school teacher, having taken no courses in accounting or tax return
preparation. She asked Mr. Cheshire about the potential tax
ramifications of the retirement distributions, and Mr. Cheshire
assured petitioner that he had consulted with a certified public
accountant and had been advised that the payment of the outstanding
mortgage on the family residence and any amount rolled over into a
qualified account reduced the taxable amount of the retirement
distributions. Mrs. Cheshire had no reason to doubt the
truthfulness of Mr. Cheshire’s statement, and in fact believed him.
Under these circumstances, we do not believe petitioner had an
obligation to inquire further.
We conclude that petitioner would have been justified in
believing that $58,163 ($199,771 - $42,183 (rollover) - $99,425
(mortgage repayment)) of the $199,771 retirement distributions was
taxable. Indeed, $199,771 in retirement distributions was reported
on the 1992 return, albeit only $56,150 was included in the
calculation of income. (The record does not reveal the $2,013
difference between $58,163 and $56,150; we deem the $2,013
difference to be de minimis.) In our opinion, it is an abuse of
- 27 -
discretion to deny relief under section 6015(f) in an addition to
tax or penalty situation when on an individual basis the putative
innocent spouse meets the statutory standard generally applied to
all taxpayers that shows the addition to tax or penalty is
inapplicable.
Given the facts and circumstances in this case, to hold
petitioner liable for the entire section 6662(a) penalty would be
inequitable. Consequently, we hold that respondent abused his
discretion in failing to grant petitioner innocent spouse relief
from the section 6662(a) penalty as it relates to the
understatement regarding the omitted retirement distribution
proceeds. However, we conclude that respondent did not abuse his
discretion in failing to grant petitioner innocent spouse relief
from the section 6662(a) penalty as it relates to the
understatement regarding the omitted interest income. Petitioner
knew of that income, and the record is devoid of any reason for its
omission. Consistent with these conclusions, the parties should
determine the exact amount of the section 6662(a) penalty due in
their Rule 155 calculation.
- 28 -
To reflect the foregoing and respondent’s concessions,
Decision will be
entered under Rule 155.
Reviewed by the Court.
WELLS, CHABOT, COHEN, RUWE, WHALEN, HALPERN, LARO, FOLEY, and
VASQUEZ, JJ., agree with this majority opinion.
CHIECHI, J., concurs in the result only.
- 29 -
THORNTON, J., concurring: No relief is available under
section 6015(c)(3)(C) if the Commissioner shows that the spouse
seeking relief had “actual knowledge * * * of any item giving rise
to a deficiency (or portion thereof)”. Majority op. p. 17. The
majority opinion appropriately construes this statutory language to
require, in the case of omitted income, “actual and clear awareness
of the omitted income.” Thus, I believe, the majority opinion
inherently rejects respondent’s argument that actual knowledge of
an “item” means actual knowledge merely of the event or transaction
giving rise to the deficiency. This result comports with the
ameliorative purposes of section 6015(c). It is also consistent
with the statutory framework. In particular, if a spouse qualifies
under section 6015(c), the relief provided under section 6015(d) is
an allocation between spouses of the “items” giving rise to the
deficiency. In this context, “item” clearly signifies the item of
omitted income, not the underlying event or transaction.
The majority opinion harmonizes with the legislative history.
The relevant Senate and conference reports state that section
6015(c) provides no relief if the Commissioner proves that the
spouse seeking relief had “actual knowledge that an item on a
return is incorrect.” What does it mean for an “item on a return”
(as opposed to the tax treatment of such an item) to be
“incorrect”? In the context of omitted income, and in the light of
the section 61 provisions defining gross income by reference to
- 30 -
various “items,” it most likely means that gross income from a
particular source, such as a pension, is incorrectly reported
(either by virtue of understatement or omission) on the return.
The other statements of legislative purpose cited by the dissent
evince no clear consensus about any other standard of general
applicability and dictate no contrary result.
Here the question is whether Mrs. Cheshire had actual
knowledge of the gross income from the pension that gave rise to
the deficiency. Clearly she did. Whether she believed the pension
proceeds distribution was nontaxable in whole or part on the ground
that it was used to pay down a mortgage or under some other
mistaken theory is immaterial.
WHALEN, HALPERN, LARO, FOLEY, and VASQUEZ, JJ., agree with
this concurring opinion.
- 31 -
PARR, J., dissenting: I have joined with Judge Colvin in his
dissenting opinion, because I believe the language of section
6015(c)(3)(C) is ambiguous and that we should consult legislative
history for guidance in resolving that ambiguity. I write
separately only to express my concern about the Court's application
of section 6013(e) case law to the case at hand.
Section 6015 is a remedial statute, therefore, its provisions
should be construed and applied liberally in favor of those whom
the statute was designed to benefit. Cf. Helvering v. Bliss, 293
U.S. 144, 150-151 (1934); Allen v. Commissioner, 514 F.2d 908, 915
(5th Cir. 1975). Moreover, it is apparent that Congress intended
section 6015 to provide broader relief than that provided by
section 6013(e).
In its discussion of section 6015(f), the majority has found--
and I agree--that, considering the facts and circumstances of this
case, it is not inequitable to hold petitioner liable for the
deficiency. Since equitable consideration is also a requirement
for relief under section 6015(b)(1)(D), the majority's discussion
of section 6015(b)(1)(C) is unnecessary. The word "understatement"
used in section 6015(b)(1)(C) is different from the word "item"
construed in the discussion of section 6015(c)(3)(C). Yet the
- 32 -
majority treats both as synonymous with "transaction". I would
defer this discussion to a case that required it.1
Accordingly, I respectfully dissent.
COLVIN and MARVEL, JJ., agree with this dissenting opinion.
1
The facts of Charlton v. Commissioner, 114 T.C. 333 (2000),
are distinguishable, and the discussion of sec. 6015(b) therein
is thus not determinative.
- 33 -
COLVIN, J., dissenting: Section 6015(c)(3)(C) provides that
the separate liability election is not available if the
Commissioner proves that the putative innocent spouse “had actual
knowledge * * * of any item giving rise to a deficiency”. The
majority holds that in omitted income cases:
Section 6015(c)(3)(C) does not require actual knowledge
on the part of the electing spouse as to whether the
entry on the return is or is not correct. [Majority op.
pp. 19-20.]
I respectfully dissent because the majority’s construction of
section 6015(c)(3)(C) squarely conflicts with the legislative
history of section 6015(c). I also dissent because the majority
fails to discuss Charlton v. Commissioner, 114 T.C. 333 (2000), and
relies on Wiksell v. Commissioner, 215 F.3d 1335 (9th Cir. 2000)
(unpublished), affg. T.C. Memo. 1999-32, which did not present the
issue we face here.
I. The Phrase “Item Giving Rise to a Deficiency” Is Ambiguous
Section 6015(c)(3)(C) provides in pertinent part that:
[i]f the Secretary demonstrates that an individual making
an election under this subsection had actual knowledge,
at the time such individual signed the return, of any
item giving rise to a deficiency (or portion thereof)
which is not allocable to such individual under
subsection (d), such election shall not apply to such
deficiency (or portion). * * * [Emphasis added.]
Sec. 6015(c)(3)(C).
Thus, section 6015(c) relief is not available if the
Commissioner proves that the putative innocent spouse had actual
knowledge of any “item giving rise to a deficiency”. That phrase
- 34 -
is ambiguous; the “item” of which the putative innocent spouse must
have had actual knowledge could be either of two things. First, it
might refer to a transaction or activity. If so, then, as
respondent contends, see majority op. at 18, a putative innocent
spouse would not qualify for the separate liability election under
section 6015(c) if the Commissioner showed that he or she knew that
an income-producing transaction or activity had occurred.
Alternatively, knowledge of an “item giving rise to a
deficiency” might refer to knowledge that an entry on a tax return
was incorrect. Under this interpretation, the putative innocent
spouse would not be disqualified under section 6015(c) merely
because he or she knew that the income-producing transaction or
activity giving rise to the deficiency had occurred. Instead, the
Commissioner would be required to show that the electing spouse had
actual knowledge that the treatment of the item on the tax return
was incorrect.1
1
That “item giving rise to a deficiency” could be
reasonably construed in either of these ways is demonstrated by
the fact that the Internal Revenue Code uses the term “item” to
refer both to an underlying activity and to the tax return
treatment of an activity. As an example of the former, sec.
61(a) provides that–
SEC. 61(a). * * * Except as otherwise provided
in this subtitle, gross income means all income from
whatever source derived, including (but not limited to)
the following items:
(1) Compensation for services, including
fees, commissions, fringe benefits, and
(continued...)
- 35 -
II. Statutory Context and Legislative History Make Section
6015(c) Clear
A. Section 6015(c) Compared to Former Section 6013(e)(1)(C)
In an unreported income case, a taxpayer failed to qualify for
innocent spouse relief under former section 6013(e)(1)(C) if the
taxpayer had knowledge of the transaction which led to the
understatement. See Reser v. Commissioner, 112 F.3d 1258, 1267
(5th Cir. 1997). The instant case is also an unreported income
case, and respondent contends we should apply the same standard
here. See majority op. at 18.
Congress enacted sweeping changes to the innocent spouse
provisions in 1998. In addition to liberalizing section
6013(e)(1)(C) in new section 6015(b), Congress also provided two
additional forms of innocent spouse relief: the separate liability
election (section 6015(c)) and authority for the Secretary to grant
relief on equitable grounds (section 6015(f)). Congress also
enacted a different knowledge requirement in section 6015(c)(3)(C)
than had applied in former section 6013(e)(1)(C). First, section
1
(...continued)
similar items;
(2) Gross income derived from business;
As an example of the latter, sec. 57(a) refers to various “items
of tax preference”, all of which are defined by reference to tax
consequences. Thus, the phrase “item giving rise to a
deficiency” in sec. 6015(c)(3)(C), actual knowledge of which
causes a putative innocent spouse to fail to qualify under sec.
6015(c), is reasonably subject to more than one interpretation.
- 36 -
6015(c)(3)(C) places the burden of proof on the Commissioner; under
former section 6013(e) it was on the taxpayer. Second, section
6015(c)(3)(C) requires that the putative innocent spouse’s
knowledge be actual; former section 6013(e)(1)(C) required only
that the putative innocent spouse “know or have reason to know”.
Third, section 6015(c) requires that the putative innocent spouse
had the requisite knowledge “at the time such individual signed the
return”; former section 6013(e)(1)(C) required that he or she had
the requisite knowledge “in signing the return”. Fourth, section
6015(c) requires that the putative innocent spouse have the
requisite knowledge of “any item giving rise to a deficiency”;
former section 6013(e)(1)(C) required that the putative innocent
spouse know “that there was such substantial understatement”.
These broad structural changes, and the specific changes to the
knowledge requirement, dictate that we be cautious in applying
interpretations of former section 6013(e)(1)(C) to section 6015(c).
B. Legislative History
As stated, the knowledge requirement in section 6015(c) is
reasonably subject to different interpretations. We may consider
legislative history to resolve statutory ambiguity. See Robinson
v. Shell Oil Co., 519 U.S. 337, 340 (1997); Golden Rod Farms, Inc.
v. United States, 115 F.3d 897, 899 (11th Cir. 1997). We
especially should respect legislative history where there is
unequivocal evidence of legislative purpose. See Huntsberry v.
- 37 -
Commissioner, 83 T.C. 742, 747-748 (1984).
The separate liability election provisions originated in the
Senate version of section 6015.2 The legislative history
consistently shows that Congress intended “actual knowledge” to be
knowledge that the return is incorrect.
First, the Senate Committee on Finance report states that a
putative innocent spouse will not qualify for relief under section
6015(c) if the Commissioner shows that he or she had actual
knowledge that any item on the return was incorrect. The Senate
Committee on Finance report provides that:
if the IRS proves that the electing spouse had actual
knowledge that an item on a return is incorrect, the
election will not apply to the extent any deficiency is
attributable to such item. [Emphasis added.]
S. Rept. 105-174, at 59 (1998).
Second, the Senate Committee on Finance report, in the “Reasons
for Change” section, stated the following with respect to the
separate liability election:
The Committee intends that this election be
available to limit the liability of spouses for tax
attributable to items of which they had no knowledge.
The Committee is concerned that taxpayers not be allowed
to abuse these rules by knowingly signing false returns,
2
Under the Senate version of sec. 6015(c), the separate
liability election was a complete substitute for innocent spouse
relief under sec. 6013(e). Under the conference agreement and as
enacted, sec. 6013(e) was repealed and reenacted in liberalized
form as sec. 6015(b), and the separate liability election was
provided as an alternative, available only to individuals no
longer married, legally separated, or living apart for at least
12 months.
- 38 -
or by transferring assets for the purpose of avoiding the
payment of tax by the use of this election. The
Committee believes that rules restricting the liability
of taxpayers to limit their liability in such situations
are appropriate. [Emphasis added.]
S. Rept. 105-174, at 55-56 (1998). Thus, the Senate Committee on
Finance equated “actual knowledge” with “knowingly signing [a] false
return”.
Third, Senator Graham said the following in offering amendments
to section 6015(c) (unanimously adopted by the Senate) on behalf
of himself and other Senate Committee on Finance members:
The primary exception [to allocable liability under
section 6015(c)] was that if the Secretary of the
Treasury could demonstrate–-and the burden is on the
Secretary of the Treasury to demonstrate-–that an
individual making this election to be taxed only for
their proportional share of the deficiency of the return,
that if they had actual knowledge of the conditions
within that return which led to this deficiency, then
they would be 100 percent responsible. [Senate Floor
Debate for Amendment No. 2369, 144 Cong. Rec. 56, S4473;
emphasis supplied]
Senator D’Amato, also a member of the Senate Committee on Finance,
said:
There were concerns, and rightly so, that some
taxpayers may try to abuse the innocent spouse rules by
knowingly signing false returns, or transferring assets
for the purpose of avoiding the payment of tax, and then
claim to be innocent. Obviously, no one would want to
open the door to that type of fraud. As such, language
was included in the bill that would prevent an individual
from electing the innocent spouse provision if they had
“actual knowledge of any item giving rise to a
deficiency.” [Emphasis added.]
Id.Fourth, using language identical to that used by the Senate
Committee on Finance, the conference report states that a putative
- 39 -
innocent spouse will not qualify for relief under section 6015(c)
if he or she had actual knowledge that any item on the return was
incorrect. The conference report states that:
if the IRS proves that the electing spouse had actual
knowledge that any item on a return is incorrect, the
election will not apply to the extent any deficiency is
attributable to such item. [Emphasis added.]
H. Conf. Rept. 105-599, at 253 (1998). Thus, the legislative
history unequivocally shows that Congress intended to require the
Commissioner to prove that the putative innocent spouse knew that
his or her tax return was incorrect.3
The passage from the legislative history on which the majority
relies relates to the allocation of items between the two spouses
when one qualifies for the separate liability election. See
majority op. at 21. It does not describe the knowledge requirement,
interpretation of which is at issue here, and thus does not address
this issue. Further, statutory language in the allocation rule
undermines the majority’s position. Section 6015(d)(3)(A) provides
that:
(A) In general.–Except as provided in paragraphs (4)
and (5), any item giving rise to a deficiency on a joint
return shall be allocated to individuals filing the
3
Contrary to the suggestion that this language might
merely be an example of a situation where relief is not
warranted, the above-quoted passage from the conference report
and the identical language from the Finance Committee report are
explanations of the statutory rule, not examples. The Finance
Committee report and the conference report have a specific way to
present examples. First, they state a general point; then they
state “For example, * * *” to illustrate the point. This pattern
is repeated seven times in the Finance Committee’s explanation of
sec. 6015 and seven times in the conference report’s explanation
of sec. 6015.
- 40 -
return in the same manner as it would have been allocated
if the individuals had filed separate returns for the
taxable year. [Emphasis added.]
The text of section 6015(d)(3)(A) implies that an “item giving rise
to a deficiency” is an item on the return rather than a underlying
transaction or activity because an amount on a return can be
allocated, i.e., split, but an underlying transaction or activity
cannot.
Thus, the legislative history accompanying enactment of section
6015(c) clearly shows that Congress intended the knowledge
requirement to mean knowledge that the return is incorrect, not
knowledge that there was an income-producing activity or
transaction. See S. Rept. 105-174, at 59 (1998), H. Conf. Rept.
105-599, at 253 (1998). The majority fails to apply that standard.
See majority op. at 20.
The majority’s reliance on the TEFRA partnership rules
(sections 6231 and 6245) to construe “item” is not persuasive
because those sections do not speak to the interpretative issue we
face under section 6015(c)(3)(C).
III. The Majority Disregards the Requirement in the Conference
Report That the Commissioner Prove That the Putative Innocent
Spouse Knew That an Item on the Return Was “Incorrect”
As stated above, the majority holds that, in omitted income
cases, section 6015(c)(3)(C) does not require actual knowledge on
the part of the electing spouse as to whether the entry on the
return is or is not correct. See majority op. at 20.4
4
The majority also suggests another standard; i.e., that
(continued...)
- 41 -
The majority concludes that petitioner inquired in good faith
as to whether her return was correct, she was assured that it was
correct, and she had no obligation to inquire further. See majority
op. at 26. In explaining its holding that it was an abuse of
discretion for respondent not to grant equitable relief under
section 6015(f) as to petitioner’s liability for the section 6662(a)
accuracy-related penalty, the majority states:
we are satisfied that at the time she signed the 1992 tax
return, petitioner believed that the portion of retirement
distribution proceeds used to pay off the mortgage on the
family residence would be nontaxable. Further, we believe
that petitioner acted in good faith in reaching this
erroneous conclusion.
* * * * * * *
[Petitioner] asked Mr. Cheshire about the potential tax
ramifications of the retirement distributions, and in
response, Mr. Cheshire assured petitioner that he had
consulted with a certified public accountant and had been
advised that the payment of the outstanding mortgage on
the family residence and any amount rolled over into a
qualified account reduced the taxable amount of the
retirement distributions. Mrs. Cheshire had no reason to
doubt the truthfulness of Mr. Cheshire’s statement, and in
fact believed him. Under these circumstances, we do not
believe petitioner had an obligation to inquire further.
Majority op. at 25-26. In short, the majority holds that petitioner
thought the reporting of the distributions on her tax return was
correct. Thus, in holding for respondent, the majority disregards
4
(...continued)
“the electing spouse must have an actual and clear awareness of
the omitted income.” See majority op. p. 19. If sec.
6015(c)(3)(C) is unambiguous, we need not create another
standard; if it is ambiguous, legislative history provides the
standard; i.e., that relief is not available if the Commissioner
proves that the electing spouse had actual knowledge that any
item on a return is incorrect.
- 42 -
the requirement in the Senate Committee on Finance report and
conference report that the putative innocent spouse know something
was “incorrect”. See majority op. at 20.
IV. Wiksell v. Commissioner
The taxpayer in Wiksell v. Commissioner, 215 F.3d 1335 (9th
Cir. 2000) (unpublished), affg. T.C. Memo. 1999-32, knew that checks
she received from her husband’s business had not been reported on
their 1994 and 1995 tax returns. See id. at 2000-1336, 88-983. She
also had actual knowledge that the return was incorrect. See the
findings of fact in Wiksell v. Commissioner, T.C. Memo. 1994-99.
The issue in Cheshire is whether knowledge of an “item giving
rise to a deficiency” refers to the putative innocent spouse’s
knowledge of the underlying activity, or knowledge that the income,
deduction, loss, or credit from the activity is incorrectly reported
on the tax return. The opinion of the U.S. Court of Appeals for the
Ninth Circuit in Wiksell v. Commissioner, supra, does not discuss
the “knowledge that any item on the return is incorrect” language
from the legislative history. The opinion of the Court of Appeals
does not say the parties disputed, or that the Court of Appeals
considered, whether the actual knowledge of “any item giving rise to
a deficiency” required by section 6015(c) is knowledge of an income-
producing transaction, or knowledge that it was reported
incorrectly. In fact, since Mrs. Wiksell knew her return was wrong,
the Court of Appeals had no need to consider that issue.
- 43 -
V. Charlton v. Commissioner
In Charlton v. Commissioner, 114 T.C. 333 (2000), the putative
innocent spouse knew of and had access to correct information about
his then-wife’s income-producing activity. See Charlton, 114 T.C.
at 341. Even though the putative innocent spouse in Charlton knew
that his wife had an income-producing Schedule C business, we
concluded that the Commissioner failed to show that the putative
innocent spouse had knowledge when he signed the return of any item
giving rise to a deficiency. See id. Thus, Charlton may be cited
for the proposition (contrary to respondent’s position in Cheshire,
majority op. at 18) that knowledge of the income-producing activity
does not bar relief under section 6015(c).
The majority finds that petitioner knew that Mr. Cheshire
received retirement distributions and interest on the Austin Telco
account in 1992, and that she knew the amounts of the retirement
distributions and interest. See majority op. pp. 4, 16, 23.
However, the majority’s failure to discuss Charlton will inevitably
cause confusion because, both here and in Charlton, we found that
the putative innocent spouse knew of the activity which gave rise to
the deficiency. Under the doctrine of stare decisis we generally
follow the holding of a previously decided published opinion of the
Tax Court or explain why we are not doing so. This is especially
true when our prior published opinion involves statutory
- 44 -
construction. See Hesselink v. Commissioner, 97 T.C. 94, 99-100
(1991).
The majority concludes that the knowledge requirement of
section 6015(c) does not require the electing spouse to know that
the item on the return is incorrect, see majority op. pp. 19-20, and
points out that petitioner knew the amount of the unreported income.
See majority op. p. 23. In contrast, the putative innocent spouse
in Charlton did not know the amount of unreported income from his
then-wife’s business. This might be how the majority would
distinguish Charlton from the instant case; i.e., that knowledge of
an income-producing transaction or activity does not cause a
putative innocent spouse to fail to qualify for the separate
liability election unless the putative innocent spouse knew the
amount of income involved. If the majority is promulgating this
factual distinction as a new standard, it should so state.
PARR, GALE, and MARVEL, JJ., agree with this dissenting
opinion.