Fay Dalton, and Robert Dalton, Intervenor v. Commissioner , 2002 T.C. Memo. 288 ( 2002 )

T.C. Memo. 2002-288UNITED STATES TAX COURT
FAY DALTON, Petitioner, AND ROBERT DALTON, Intervenor v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8873-00. Filed November 25, 2002.
Fay Dalton, pro se.
Robert Dalton, pro se.
Ann L. Darnold, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency in
petitioner and intervenor’s Federal income tax for 1995 of
$4,123.
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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue.
The issue for decision is whether petitioner is entitled to
relief from joint and several liability under section 6015(b),
(c), or (f) with respect to the above 1995 tax deficiency
determined by respondent. Intervenor does not claim a right to
such relief. Rather, intervenor testified at trial solely to
contest petitioner’s right thereto.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner resided in
Oklahoma City, Oklahoma.
In 1995, petitioner and intervenor worked at various jobs,
and intervenor was unemployed for approximately 5 months.
On January 19, 1996, petitioner and intervenor were
divorced.
On their 1995 timely filed joint Federal income tax return,
petitioner and intervenor reported taxable income of $29,775.
Petitioner and intervenor’s return was prepared by a tax return
preparer.
On audit, respondent determined that petitioner and
intervenor received $15,626 in additional income not reported on
their 1995 joint Federal income tax return, as set forth below:
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Amount
Pension income $10,686
Unemployment compensation 4,280
Barter income 472
State income tax refund 188
Total $15,626
During 1995, petitioner knew that intervenor received the
above pension income, unemployment compensation, and State income
tax refund, and petitioner was aware that intervenor and Itex,
the company from which intervenor received the barter income, had
some relationship.
On April 23, 1997, respondent issued to petitioner and
intervenor the notice of deficiency for 1995 reflecting the above
additional items of income and the tax deficiency of $4,123.
Neither petitioner nor intervenor petitioned this Court for a
redetermination of the deficiency.
On September 22, 1997, respondent assessed the $4,123
deficiency against petitioner and intervenor. Subsequently,
respondent assessed $407 in interest and penalties against
petitioner and intervenor.
In collection of the above total $4,530 in tax, interest,
and penalties that had been assessed against petitioner and
intervenor, respondent applied a credit of $2,137 for funds that
had been withheld by respondent from intervenor’s 1995 pension
income. Also, respondent withheld from intervenor income tax
refunds due intervenor for 1996 and 1997 in the amounts of $411
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and $211, respectively. From petitioner, respondent withheld an
income tax refund due petitioner for 1997 in the amount of $940,
and respondent levied against petitioner’s wages and received
$133.1 Petitioner also made payments in accord with an
installment agreement entered into with respondent until the
balance of the total $4,530 assessed liability against petitioner
and intervenor was paid to respondent in full. The schedule
below sets forth the dates on which petitioner made payments to
respondent, the amount of the payments, and the source of each
payment:
Payments Made By Petitioner
Date Amount Source of Payment
Mar. 9, 1998 $940 1997 income tax refund
Mar. 19, 1998 133 Garnished wages
Apr. 22, 1998 200 Installment agreement
May 6, 1998 200 Installment agreement
May 28, 1998 135 Installment agreement
June 26, 1998 50 Installment agreement
July 23, 1998 150 Installment agreement
Total $1,8082
1
Petitioner introduced a pay stub from her employer
reflecting total garnished wages of $346. Petitioner, however,
has not provided evidence that the total $346 in garnished wages
shown on petitioner’s pay stub was completely paid to respondent.
We accept respondent’s evidence of the $133 relating to
petitioner’s wages that were levied against and applied as a
credit against petitioner’s 1995 tax liability.
2
Respondent refunded to petitioner certain additional
amounts representing overpayments of the $4,530 total due with
respect to petitioner and intervenor’s 1995 joint Federal income
tax liability.
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On February 8, 1999, petitioner filed with respondent
Form 8857, Request for Innocent Spouse Relief, in which
petitioner sought to be relieved of liability from and to be
refunded the above entire $1,808 she had paid.
Respondent considered petitioner’s request for relief under
section 6013(e) (for the payments that petitioner made prior to
July 22, 1998) and under section 6015(b), (c), and (f) (for the
one $150 payment petitioner made on July 23, 1998).
On January 25, 2000, respondent denied petitioner’s request
for relief from joint liability under section 6013(e). On
May 17, 2000, respondent issued to petitioner a final notice of
determination in which respondent denied petitioner’s request for
relief from joint liability under section 6015(b), (c), and (f).
OPINION
Generally, taxpayers filing joint Federal income tax returns
are jointly and severally liable for all taxes due. Sec.
6013(d)(3). In limited situations, however, taxpayers may be
relieved of joint liability.
Prior to enactment of section 6015, relief from joint and
several liability was available under section 6013(e) if a
taxpayer met the following requirements: (1) The joint return
contained a substantial understatement of tax attributable to
grossly erroneous items of the spouse not seeking relief; (2) the
spouse seeking relief established that in signing the return, the
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spouse did not know, and had no reason to know, of the
substantial understatement; and (3) under the circumstances, it
would be inequitable to hold the spouse liable for the tax
liability relating to the substantial understatement.
Based on Congress’s conclusion that the provisions of
section 6013(e) granting relief from joint liability were
inadequate, S. Rept. 105-174 at 55 (1998), 1998-3 C.B. 537, 591,
and to make relief from joint liability more accessible, H. Conf.
Rept. 105-599, at 249 (1998), 1998-3 C.B. 747, 1003, Congress in
1998 enacted section 6015. Internal Revenue Service
Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206,
sec. 3201(a), 112 Stat. 734.
Section 6015 applies to tax liabilities arising after
July 22, 1998, and to tax liabilities arising on or before
July 22, 1998, but remaining unpaid as of such date. RRA 1998
sec. 3201(g), 112 Stat. 740.
Respondent argues that our review of petitioner’s claim for
relief from joint liability under section 6015 is limited to $150
(the amount remaining unpaid as of July 22, 1998, the effective
date of section 6015).
Section 6015 has been applied to a taxpayer’s entire tax
liability where the liability arose before the effective date of
section 6015 but where the entire liability remained unpaid on
July 22, 1998. See Vetrano v. Commissioner, 116 T.C. 272 (2001);
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King v. Commissioner, 115 T.C. 118 (2000). No relief may be
granted under section 6015 to a taxpayer who files a stand-alone
petition for such relief and whose liability was paid in full
before the effective date of section 6015. See Brown v.
Commissioner, T.C. Memo. 2002-187. Respondent asks us to decide,
however, the extent to which a taxpayer may qualify for relief
under section 6015 where the taxpayer’s liability arose prior to
the effective date of section 6015, but where only a portion of
the liability remained unpaid as of the date of enactment.
Recently, in Flores v. United States, 51 Fed. Cl. 49 (2001),
the Court of Federal Claims ruled on this issue. The court
considered and granted, under section 6015(f), relief with
respect to a taxpayer’s entire tax liability including the
portion of the liability that was paid prior to July 22, 1998,
the effective date of section 6015. The court stated:
Congress * * * intended the effective date provision to
be consonant with the remainder of the statute, thereby
allowing the innocent spouse relief of section 6015(b)
and (c), and with them the relief afforded by section
6015(f), to apply to any liability for a particular
taxable year providing it was not fully paid as of the
effective date. [Id. at 55.]
In support of its holding in Flores, the Court of Federal
Claims compared the effective date language of section 6015 to
the language of section 6511(a) that triggers the statute of
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limitations for filing a timely claim for refund based upon when
a tax is “paid”.
Courts interpreting * * * [the sec. 6511(a) limitation
on filing a claim for refund, and not the sec. 6511(b)
limitation on the amount of the refund] have held that
the limitation period begins to run as to an entire tax
liability only when the last dollar of the liability is
paid, reasoning that “the tax liability is unitary and
not discharged until paid in full.” [Id. at 55
(quoting Union Trust Co. v. United States, 70 F.2d 629,
630 (2d Cir. 1934)).]
Our resolution of the facts in this case does not require us
to decide the Flores issue.
Relying on section 6015(b), (c), and (f), petitioner seeks
three grounds for relief from joint and several liability.
Relief is available under section 6015(b) (similar to former
section 6013(e)) if the following requirements are satisfied:
(1) The joint return contains an understatement of tax
attributable to the spouse not seeking relief; (2) the spouse
seeking relief establishes that in signing the return he or she
did not know, and had no reason to know, that there was an
understatement of tax; (3) taking into account all the facts and
circumstances, it would be inequitable to hold the spouse seeking
relief liable for the deficiency; and (4) the spouse seeking
relief timely elects the benefits of section 6015(b).
In general, this Court has concluded that a relief-seeking
spouse knows or has reason to know of an understatement of tax if
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such spouse knows of the transaction that gave rise to the
understatement. E.g., Jonson v. Commissioner, 118 T.C. 106, 115
(2002).
Relief is available under section 6015(c) only with respect
to a joint tax deficiency relating to taxpayers who are divorced,
legally separated, or otherwise living apart. A taxpayer’s
election under section 6015(c) is not valid, however, upon a
showing by respondent that the taxpayer had actual knowledge of
an item giving rise to the tax deficiency. Also under section
6015(e)(3)(A)3 no credit or refund is available under section
6015(c) with respect to amounts paid. Therefore, a taxpayer who
qualifies for relief under section 6015(c) can be relieved of
liability only with respect to an unpaid liability.
Lastly, under section 6015(f) respondent is granted
discretion to award relief where relief is otherwise unavailable
under section 6015(b) or (c) if the facts and circumstances
indicate that it would be inequitable to hold the spouse seeking
relief liable for the deficiency. Respondent’s denial of
equitable relief under section 6015(f) is reviewable under an
abuse of discretion standard. See Cheshire v. Commissioner, 115
T.C. 183, 198 (2000), affd. 282 F.3d 326 (5th Cir. 2002); Butler
v. Commissioner, 114 T.C. 276, 292 (2000).
3
Sec. 6015(e)(3)(A) was redesignated in 2000 as sec.
6015(g)(3). Consolidated Appropriations Act, 2001, Pub. L.
106-554, App. G, sec. 313, 114 Stat. 2763A-641.
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Because the 1995 tax liability was paid in full, no relief
is available to petitioner under section 6015(c). Petitioner
admits to knowing about the pension income, unemployment
compensation, and State income tax refund and is therefore not
eligible for relief from joint liability under section 6015(b)
with respect to those items of unreported income.
As to the $472 in barter income, respondent argues that
petitioner does not qualify for relief under section 6015(b)
because petitioner’s knowledge of intervenor’s relationship with
Itex gave petitioner reason to know of the income earned by
intervenor from the bartering activity. We agree.
Although some factors arguably support petitioner’s claim to
equitable relief under section 6015(f) as to the total $1,808
petitioner paid, the evidence does not establish that respondent
abused his discretion in denying such relief. We note
particularly petitioner’s actual knowledge of three of the four
items of unreported income, and we note petitioner’s various tax
protester arguments made herein.
Petitioner is not entitled to relief from any portion of the
tax, interest, and penalties she paid with respect to her 1995
joint Federal income tax liability.
Decision will be entered for
respondent.