Laura E. Mercado, Petitioner

r T.C. Summary Opinion 2011-77 UNITED STATES TAX COURT LAURA E. MERCAÙO, Petitioner V. COMMIS$IONER OF INTEP AL REVENUE, Respondent Docket No. 1O578-10S.

Filed June 29, 2011.

Laura E . Mercado, pro se .

James C. Hughes, for respo dent.

GERBER, Judge: This case as heard pursuant to the provisions of sec ion 7463 of the Internal Revenue Code in effect when the petition was filed.¹ Pursuant to section 7463(b), the decision to be entered is not reviewable by any other coùrt, and Unless othei-wise indicated, all section references are to the Internal Revenue Code as currently in effect, and all Rule references are to the Tax Court Rules of Practice and Procedure.

ERVED JUN 29 2011

this opinion shall not be treated as precedent for any other case.

This proceeding was commenced under section 6015(e) for review of respondent's detereination that petitioner is nòt entitled to relief from joint and several liability with respect to underpayments of Federal income tax reported on joint Federal income tax returns filed for 1997 and 2000.2 Background Petitioner resided in Cali.fornia at the time her petition was filed.

She married David Schoenbrun (Mr. Schoenbrun) on August 25, 1991, and they were divorced on May 4, 2004.

For the II years 1991 through 1996 petitioner and Mr. Schoenbrun filed separate Federal income tax returns. During 1997, however, petitioner stopped working, häd no inclome, and was attending graduate school.

She paid her tuition' by means of student loans and financial assistancë but relied oniMr. Schoenbrun for household living expenses, including food, rent, utilities, etc.

During 1998 petitioner received a master's degree in social welfare.

Mr. Schoenbrun's income tax returns were prepared by a professional tax preparer. Regarding the 1997 income tax return, the tax preparer advised Mr. Schoenbrun to request that 2Petitioner agrees that she is noti entitled to relief for the 2000 tax year and petitions solelyifor review of year.

the 1997 tax petitioner file joint income täx return with Mrs Schöenbrun in order to decrease his tex liability.

He asked petitioner to file jointly for 1997",7 and she was leiuctant because she had a source of income and wäs ä student at the time. Out .of daution petitioner had filed separate returns before 1997 evën during years that she had income beaäusë of her wish not to be liable' for Mr. Schoenbrun's obligatiots. Mr.sSchoenbrun assure petitioner that he would pág the tax liability on the 1997 income tax return The 1997 joint Federäl income tax return ·(1997 joint return) reflected ä $7,181 income tax liebility and wage -withholding of $3,945. Petitioner was aware thät there was an unpaid b lance on the 1997 joint return. Petitioder ultimately |agreed to execute the 1997 joint return with Mr. Schoenbrun on thë basis of his representation that he would pay the unpaid tex balance. At the time of signing t ae 1997 joint return petitioner was aware that Mr. Schoenbrun had a history of financial problems; "although she understood that he was paying the household exgenses and his incode tax liabiitties, ,älbeit antimely. Mr. Sáhoenbrun knew he could not päy the liability; and unbeknownst-to petitioner, he lied to her at the time she signed the 1997 joint return:

Additionally, and at the time petitioner signed the 1997 joint return', Mr. Schoenbrun did not disclose to her, that he hEd unpaid II tax liabilities for his individual 1993, 1994, 1995, and 1996 Federal income tax returns.

Respondent assessed. the unpaid 1997 tax liability, but petitioner did not see any of the notificatioñs of the assessment or collection because Mr. Schoenbrun kept that information from her.

For the taxable years 1998, 1999, sand 2001 petitioner did not execute a joint income tax returntwith Mr. Schoenbrun.

For |!

the 2000 and 2002 tax years, petitioner did execute joint income tax returns with Mr. Schoenbrun.

For 1998 and 1999 petitioner attempted to file Federal income tax returns with single filing status.

Because she was married to Mr. Schoenbrun during those years, petitioner was technically notsentitled to single filing status.⁵ Petitioner timely filed her 2007 Federal income tax return seeking a refund, and on April 15, 2008, respondent credited $9,211.69 and $357.86 of that refund to outstanding 1997 and 2000 joint tax liabilities, respectively.

On April 28, 2008, respondent notified petitioner of the offsets, and on May 12, 2009 (within 2 years from the notification), petitioner filed a Form 8857, Request for Innocent Spousè Relief.

The facts petitioner relied upon in her request for relief are, in all 3The distinction between filing as an "unmarried individual" rather than "separately" is that for purposes of filing status, a married person must file either jointly or married filing separately. Petitioner incorrectly attempted to file as an unmarried individual.

pertinent respectis, the same ad those in the record. After considering petitioner's request, respondent nótified her that her claim for relief was denied. Subsequently, petitioner filed a petition seeking this Court' s review of resýondent' s determination.

Discussion Petitioner seeks review of respondent ' s ' denial' of relief I from joint liability for 199-i.

The matter arose when respondent offset part of petitioner's 2007 tax refund against the unpaid 1997 joint tax liability which as solely attributable tò pe t it ioner ' s Mr . Schoenbrun' s income . Respondent agrees that petitioner meets the threshold test for consideration of section 6015 (f) relief . However, rëspondent contends thät petitioner is not entitled to relief because she failed to show that she met two principal criteria for relief.⁴ Those criteria invol&e whether petitioner knew or had enson to know that Mr. Schoenbrun would not pay the tax liability and whether she meets thd financial hardship test.

4Respondent allso argued that petitioner had not been in compliance with her tax filing obligations because she attempted to file income tax returns as an unmarried individual during 1998 and 1999 when she das technically not entitled to do so because she was married ati argument if we considered that aspect, petitioner's action would not rise to the level of being detrimentäi It to her request for relief. should also be noted that resporident conceded that all other criteria used to determine whether petitioner is entitled to relief are favorable to her.

to be superficial and not worthy of consideration.

the end of each year.

We find respondent's Even A married taxpayer who elects to llfile a joint Federal income tax return is generally jointly and severally liable for the entire tax due for that year.

Sec. 6013(a), (d) (3); Butler v.

Commissioner, 114 T.C. 276, 282 (2000)).3 Under section 6015, however, a spouse who filed a joint income tax return may seek relief from joint and several liability. Relief may bè sought pursuant to different circumstances provided for in section 6015(a), (b), and (c).

If a taxpayeridoes not qualify for relief under either section 6015(b) or (c), equitable relief may be sought under section 6015(f).

The Sedretary has discretion to grant equitable relief to a spouse who filed a joint income tax return for which a reported liability»rëmains unpaid or to one who has a deficiency (or any portion of either).

Sec. 6015(f); sec. 1.6015-4(a), Income Tax Regs, a Petitioner does not qualify for relief under sec. 6015(b) or (c) because the tax liability involved was an underpayment.

Petitioner bears the burden of showing that she is entitled to section 6015 (innocent spouse) relief.

See Rule 142(a); Alt v.

Commissioner, 119 T.C. 306, 311 (2002), affd. 101 Fed. Appx. 34 (6th Cir. 2004).

The scope and standärd of this Court's review in cases involving requests for equit$ble relief from joint and several income tax liability are de novo.

- Porter v.

Commissioner, 132 T.C. 203 (2009).

7 - The procedures under whic the Commissioner determines whether a spouse qualifies for relief are set forth in R'ev. Proc.

2003-61, 2003-2 C.B. 296. Under those procedures a requesting spouse must meet seven threshold requirements to be considered for equitable relief.

Rev. Proc. 2003-61, sed. 4.01, 2003-2 C.B.

at 297. Respondent concedes that petitioner meets all seven of the threshold requirements.

If a requesting spouse satisfies the threshold requirements, the Commissioner then looks to Rev. Proc. 2003-61, sec. 4.02, 2003-2 C.B. at 298, for the criteria or guidelines of circumstances in which relief wili ordinarily abe granted under section 6015(f) with respect to an underpayment of a properly reported liability.

The principal criteria considered are whether a requesting spouse is no longer marri'ed*to or legally separated from the nonrequesting spouse on the date of the , request for relief; had no knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability; and will suffer economic hardship.

'Id..

.Even though a requesting spouse fails to qÒalify for relief under Rev. Proc. 2003261, sec.

4.02, the Commissioner may still grant relief under Rev. Proc.

2003-61, sec. 4.03, 2003-2 C.B.lat 298.

The two prinäipal criteria in dispute are whether petitioner knew or had reason to know that anc. Schoenbrun would not pay their 1997 tax liability and whether she will suffer financial hardship if relief is not granted.

As to whether petitioner knew or had reason to know that Mr. Schoendrun would not pay the income tax liability, the relevant knowledge is knowing when the income tax return was signed that the itax would not be paid.

Rev. Proc. 2003-61, sec. 4.02(1) (b).

jThe following factors are used in determining whether the requesting spouse had reason to know:

(1) The requesting spouse's level of education, (2) any deceit or evasiveness of the nonrequedting spouse, (3) the requesting spouse's degree of involve eut in the activity generating the income tax liability, 4) the requesting spouse's involvement in business and household financial matters, (5) the requesting spouse's business or finandial expertise, and, (6) any lavish or unusual expenditures compar d with past spending levels.

See Rev. Proc. 2003-61, sec. 4.03(2) (a) (iii) (C).

A taxpayer who signs a return is generally charged with constructive knowledge of its contents.

• Hayman v. Commissioner, 992 F.2d 1256, 1262 (2d Cir. 1993), affg. T.C. Memo. 1992-228.

Petitioner was college educated; ihowever, her degree was in social welfare rather than business or accounting.

She was not working and had no income during 1997 land was not involved in Mr.

Schoenbrun's work or finances.

She w(s aware that he was having some financial difficulties, but he was paying the household and living expenses, albeit untimely. More specifically, Mr.

Schoenbrun intentionally kept informadion about his tax debts from petitioner and intentionally deceived her inta believing that he would päy the 1997 tak liäbility if she would sigñ the 1997 joint return.

Petitioner did not have ány lavish or unusual exþënditurés and wäs a student with student loans and was receiving finäncial assistance during the 1997 tax ear. Petitioner was àWare that the 1997 joint return had an unpaid balance due to the Góvernment but believëd that Mr.. Schoenbrun would pay that belance in the same manner as het had been paying the couple's other living expenses.

Under these-circumstances, petitioner did not know and had no reason to knowl when the inco e täx return was filed that the tax liability would not be paid.

Economic hardship may exist if collection of the tax liability.will cause the taxpaygr to be unable- to pay reasonable basic living expenses. Rev. Proc. 2003-61, sec. 4.02(1) (C).

The Commissioner uses the factors provided in section 301.6343-1(b) (4), Proced. & Admin. Regs.

The 'pertinent factórs to be considered here are:

(1) Petitioner's age, employment status and history, ability to earn, and number of ciegendents; (2) the amount reasonäbly necessary for food, glothing, housing (including utilities, homeowner å insurance, homeowner's ässociation dues, and the like) Medical expenses (including health insurance), transportation, and current tax päyments - 10 (including Federal, State, and lòcal); (?)

the cost of liting in the geographic area in which petitiòñet resides; and, (4) any other factor that petitioner claims bears an economic hardship.

See sec. - 301.6343-1(b) (4) (ii) , Proced.1|-& Admin. Negs.

At the time of trial petitiòner häd thfee de9eudents, two preschool children and her mother.

Heg boyfriend (the father of her children) alsò lived in her home and shared some of the living expenses.. Respondent, following standard guidelines for basic living expenses, determined that petitioner's necessary monthly living expenses should be $4,877.

As one of the criteria for denying relief, respondent relied on the fact that petitioner's mortgage, interest, utilities, and property taxes exceeded the "necessary" amount and, additionally, that her boyfriend shared some of thë household living costs.

Petitioner contends that respondent' s reliance on the $4, 877 figure is misplaced because respondent||used figutes for a family - of four, whereas petitioner's householÓ comprises five.

Respondent's reliance on monthly living eipense calculations for a family of four does appear to be misylaáed in the light of the fact that respondent acknowledges thatilpetitioner's boyfriend contributed to the household, costs. Nexty petitioner points out that her salary from the unified schoo district has decreased precipitously since respondent reviewed and denied her request and that announced cutbacks will cause further reductions in her 11.- salary.

Under these circumstänees, we find respondent's determination that this factor Weighs against relief to be of little import and that petitiorier's financìäl circumstances should not have been resulted in danial of relief .

In summary, all critería a e favorable to her entitiement to equitable relief from joint liäbility. With respect to her financial circumstances, they do not indicate a standard of living that is much if in any amount in excess of the minimal standards by which respondent measures this criterion.

This is especially ,so where, as here, respondent used the wrong standard by not including the fifth person in the analysis. Although respondent determined that petitiioner knew or had reason to know that Mr. Schoenbrun could not pay, petitioner provided ample evidence at trial showing that dhe did not know and that the information was intentionally k pt from her.

We hold that petitioner is therefore entitled to equitable relief from the 1997 joint tax liability under section 6015 (f) .

To reflect the foregoing, Decision will be" entered - for petitioner.