Owen E. Smith, Petitioner

T .C . Memo . 2009-23 7

UNITED STATES TAX COUR T

OWEN E . SMITH, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, .(cid:127)Responden t Docket No . 16708=07, .

.Filed October 1 9, 2009 .

Owen E . Smith,'pro se .

Dennis . R . Onnen ,'for respondent .

MEMORANDUM FINDINGS OF FACT AND OPINIO N

HAINES , Judge :

This case arises under section 60151 from petitioner ' s request for relief from ' joint and several liabilit y 1Unless'otherwise indicated, all section references are to the Internal Revenue Code, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure . Amounts are rounded to the nearest dollar .

SERVE OCt 1 9 2009 A e for unpaid Federal income tax liabilities for 2001, 2002, 2003 , and 2004 (years at issue) . Respondent determined petitioner was not entitled to relief . The issue for decision is whether petitioner is entitled to relief from joint and several liability pursuant to section 6015(b) or, in the alternative, under section 6015(f) . As explained herein, we find petitioner is not entitled to relief under either subsection (b) or subsection (f) .

FINDINGS OF FAC T

Some of the facts have been stipulated and are so found .

The stipulation of facts, together with the attached exhibits, is incorporated herein by this reference . At the time he filed his petition, petitioner resided in Missouri .

Personal Backgroun d Petitioner graduated from Central High School in Kansa s City, Missouri, and did not pursue further education . He served a 5-year apprenticeship as a plumber and later became a pipe fitter for General Motors . In 1977 he took an-income tax preparation course from H & R Block and prepared tax returns for them for 2 years . In 1996 petitioner began working for the Internal Revenue Service (IRS) as a GS-3 tax examiner . In 1999 petitioner became an IRS customer service representative and assisted taxpayers who had questions regarding their tax accounts . For the past 3 years petitioner served as a full-time union representative within the IRS .

-3- 1 Petitioner married T. ressie M .Lyman-Smith (Ms . Lyman) i n 1999 . Before and during her marriage to petitioner, Ms . Lyman owned and operated a restaurant known as Steak'M Take'M, wit h which petitioner had no-involvement . However , petitione r prepared the couple's joint income tax returns, including th e Schedules C, Profit or-Loss From Business, for Ms . Lyman's restaurant operations for each of the years at issue usin g figures Ms . Lyman gave him . The to sses reported on Schedules C for 2001, 2002, and 2003 were $35,5 93, $32,662, $23,570 , respectively , and the couple reported a $7,214 profit on Schedule C for 2004 .

Before the years at issue , petlitioner opened bank accounts at a local credit union in which he' deposited his individual earnings .

In 2000 or 2001 petitioner gave Ms . Lyman signature authority for his accounts , and Ms .

; Lyman placed her separate restaurant deposits for 2001 and 20,02 therei -n . On June 3, 2003, Ms . Lyman opened separate accounts yet continued to place the bulk of her business deposits into the couple's joint . accounts . Z Notice of Deficiency and Procedural Backgroun d On April 24, 2007, respondent 'issued a notice of deficiency to petitioner and Ms . Lyman . In the notice of deficiency respondent reconstructed Schedule C gross receipts using the ban k 2During 2003 and 2004 Ms . Lyman deposited 88 percent of her business deposits into the joint accounts and the other 12 percent in her separate accounts .

individual liable for the deficiency in tax fo r ,'-such taxable year attributable to such understatement ; an d (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 * * * The five requirements of section 6015(b)(1) are stated in the conjunctive . Furthermore, except as provided by section 6015, the requesting spouse bears the burden of proving that he satisfies each of these five requirements . See Rule 142(a), ; Jonson v . Commissioner , 118 T .C . 106, 113 (2002), affd . 353 F .3d 1181 (10th Cir . 2003) . If the .requesting spousefails to meet any one of the five requirements, he fails to qualify for relief .

Alt v . Commissioner , 119 T .C . 306, 313 (2002), affd . 101 Fed .

Appx . 34 (6th Cir . 2004) .

Respondent does not dispute that petitioner satisfies three elements of section 6015(b)(1) ; namely, those regarding th e ` y a filing of a joint return, the attribution of an understatement o f tax to an erroneous item of the nonrequesting spouse, and ; timely election under, section 6015 (b)r (1),(A) (cid:127) (B) , and . (E) , respectively .

Thus, we consider only whether petitioner satisfies the remaining , two elements of section 6015(b)'(1) .

A .

Section 6015(b) (1) (C ) The first element, section 6015(b)(1)(C), requires that i n signing the return, the individual seeking relief did not know and had no reason to know of the understatement .3 A requesting spouse has knowledge or reason to now of an understatement if h e actually knew of the understatement or if a reasonable person i n similar circumstances, at the time'he signed the return, could be expected to know that the return contained an understatement .

.Sec . 1 .6015-2(c), Income Tax Regs .

Petitioner has shown that he did not know and had no reason to know of the understatement attributable to Steak'M Take' M because he had no control over the restaurant's finances o r knowledge of its operations . Consequently, we must .decide whether, on the dates he signed the returns, petitioner ha d reason to know that the returns understated the tax liabilitie s for those years .

A requesting spouse is considered to have reason to know in this context if "a reasonably prudent taxpayer in his or her position, at the time he or she signed the return, could be expected to know that the return contained an understatement o r that further investigation was warranted ."

Butler v .

Commissioner , supra at 283 ; see also Park v . Commissioner , 25 F .3d 1289, 1293 (5th Cir . 1994), affg . T .C . Memo . 1993-252 .

Hence, the spouse seeking relief may have a duty of inquiry wit h 3"The requirement in section 6015(b)(1)(C) * * * is virtually identical to the same requirement of former section 6013(e)(1)(C) ; therefore, cases interpreting former section 6013(e) remain instructive to our analysis ." Commissioner , T .C . Memo . 2004-35 .

Doyel v .

regard to the return .

Butler v . Commissioner , 114 T .C . at 283- 284 .

This duty of inquiry is a subjective test, and its focus is on the individual seeking innocent spouse relief .

Id . at 284 .

It recognizes that the suspicions of a spouse who is a lawyer or accountant should be triggered more easily than those of someone without such training . Compare Ohrman v . Commissioner , T .C .

Memo . 2003-301 (requesting spouse was a lending officer at two large banks who controlled the family finances), affd . 157 Fed .

Appx . 997 (9th Cir . 2005), with Pietromonaco v . Commissioner , 3 F .3d 1342, 1345-1347 (9th Cir . 1993) (requesting spouse was stay- at-home mom with a high school education), revg, . T .C . Memo . 1991- 472 . In applying the foregoing "reason to know" standard, the following factors are considered relevant .

1 .

Education Leve l We note that petitioner's education ended with high school, and he never pursued college or coursework in accounting, finance, or mathematics . However, petitioner has some understanding of the income tax system, as evidenced by his enrollment in a tax preparation course and his preparation of returns for H & R Block for 2 years . . Furthermore, petitioner has been an employee of the IRS since 1996 and presumably has had additional exposure to the tax system .

2 .

Involvement in Financial Affair s Petitioner credibly demonstrated that his involvement in th e family' s financial affairs was negligible .

Ms . Lyman was give n the primary responsibility of managing all living expenses, while petitioner simply direct-deposited1his check and made occasional purchases with his debit card . However, petitioner was th e primary account holder on the accounts to which Ms . Lyma n deposited the bulk of her business proceeds for the years at issue . Accordingly, petitioner had full access to the monthly financial statements and could review the proceeds of Ms . Lyman's business transactions .

3 .

Large or Lavish Expense s The record shows that petitioner made mostly minor purchase s during the years at issue . The exdeption is petitioner' s purchase in 2000 of a used Ford SUV . . However, petitioner credibly testified that this vehicle was purchased primarily with insurance proceeds that he received from an auto accident claim settlement . The record is devoid of any additional information regarding potential large or lavish expenses petitioner mad e during the years in question .

4 .

Nonrequesting Spouse's Evasion or Deceit The last factor is whether Ms . Lyman was evasive'or deceitful regarding the couple's .fi~nances . As noted, petitioner was the primary account holder on most of the accounts in which Ms . Lyman made business deposits for the years at issue . The record shows that 100 percent of her business deposits in 2001 and 2002 and 88 percent of her business deposits in 2003 and 2004 .

were made to the accounts in petitioner's name, with only marginal amounts being deposited into Ms . Lyman's separate accounts . Consequently, petitioner had access to the accounts and oversight of'the couple's finances . Further, petitioner presents no evidence to show that the deficiency was the result of concealment or deceit on the part of Ms . Lyman .

5 .

Duty of Inquir y Taking all factors into consideration, we must decide whether a reasonably prudent taxpayer in petitioner's position would have had reason to know or a duty to inquire whether income was omitted from his joint returns . A spouse may have a duty to inquire if he or she knows enough facts so as to be placed on notice of the possibility of a substantial understatement of tax .

Guth v . Commissioner , 897 F .2d .441, 444-445 (9th Cir . 1990), affg . T .C . Memo . .1987-522 . A joint tax return reporting a large deduction that significantly reduces a couple's tax liability generally puts the taxpayer who joins in filing the return on notice that the return may contain an understatement . See Levin v . Commissioner , T .C . Memo . 1987-67 . Consequently, the requesting spouse is deemed to have constructive knowledge of the understatement if she fails to inquire . See Von Kalinowski v .

-11- .

Commissioner , T .C . Memo . 2001-21 (requesting spouse found to possess constructive knowledge of understatement where income of $370,263 was offset by losses of $ 228',133) . ' Petitioner and Ms . Lyman's tax returns reported large deductions that significantly reduc ed their joint tax liabilities .

during the years at issue . Because petitioner prepared an d signed those returns, he would have) noticed the net losses and resulting deductions repeatedly claimed .for Ms . Lyman's business .

Presumably, such large losses, caused by understated gross receipts, over a period of years would cause him to question how he and Ms . Lyman were able to maintain their standard of living .

Consequently, petitioner could be expected to know that th e returns contained understatements,,thus raising his duty to inquire . See Levin v . Commissioner , supra .

Petitioner prepared the Schedules C of the returns-for th e years at issue by entering the numbers provided by Ms . Lyman .

However, a taxpayer who files a joint return with his spouse ma y not turn a blind eye to the return and thereby avoid the duty to inquire ."

Id . ; see also McCoy v . Commissioner , 57 T .C . 732, 734 (1972) . Moreover, ataxpayer who prepares a ,return is no t relieved of the duty to prepare an,accurate return if th e taxpayer relies on summarized information provided by the taxpayer's spouse when information upon'which the summary. is .based is available to the taxpayer .

Charlton v . Commissioner , 114 T .C . 333, 340 (2000) .

Petitioner's testimony indicates that he simply relied on the numbers Ms . Lyman provided and failed to investigate or inquire as to their origin or accuracy . As a result of his failure to fulfill his duty to inquire, petitioner is deemed to have constructive knowledge of the understatements on the returns . A reasonably prudent person with experience filing a return would have questioned repeated deductions and net losses of such magnitude in the absence of a diminished standard of living . See, e .g ., Mora v . Commissioner , 117 T .C . 279, 289 (2001) . Furthermore, had petitioner investigated the bank statements for the accounts to which his name was affixed, he would have noticed that his account balances did not correspond to the sizable'losses he claimed on his return for each of th e years at issue .

We conclude that petitioner, under the facts,and circumstances of this case, had a duty to inquire regarding the gross receipts omitted from his returns . Because he failed to satisfy his duty of inquiry, we find that he had reason to know of the understatements of tax under section 6015(b)(1)(C) . See Id . ; Charlton v . Commissioner , supra ; Hayman v . Commissioner , T .C . Memo . 1992-228, affd . 992 F .2d 1256, 1262 (2d Cir . 1993) .

B .

Section 6015(b) (1) (D ) The second of the two remaining elements .takes into accoun t all the facts and circumstances in'deciding whether it is inequitable to hold the relief- seeking spouse liable for a deficiency .

Sec . 6015 ( b)(1)(D) .4 The two material factors most often cited and considered are whether there has been a significant benefit to the spouse claiming relief and whether the failure to report the correct tax liability on the joint return results from concealment, overreaching, or any other wrongdoing on the part of the other spouse .

Alt v . Commissioner , 119 T .C .

at 314 ; Jonson v . Commissioner , 1181 T .C . at 119 .

There is no allegation of concealment, overreaching, or any other wrongdoing on the part of Ms .! Lyman . However, there i s evidence that petitioner benefited substantially from the omissions of income on the ret.urns .i The overstated losses generated by Ms . Lyman's activities; . completely offse t petitioner's income in 2001 and 2002 and most of his income i n E r 2003 . Consequently, petitioner and Ms . Lyman receive d significant tax refunds during those years .

We conclude , by a preponderance of the evidence , that i t would not be inequitable to hold petitioner liable for th e 4Because this requirement is almost identical to the requirement of former sec . 6013(e)(1)(D), cases interpreting that section remain instructive to our analysis . Commissioner , 114 T .C . 276, 283 .(2000) .

Butler v .

deficiencies for the years at issue . Thus, we sustain respondent's determination denying petitioner relief from joint and several liability under section 6015(b)(1) .

II .

Relief From Joint and Several Liability Under Section 6015(f ) Relief may be granted from joint and several liability under 6015(f) 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)" . This Court has jurisdiction to determine whether a taxpayer is entitled to equitable relief under section 6015(f) . Sec . 6015(e)(1)(A) ; see also Farmer v . Commissioner , T .C . Memo . 2007-74 . Our determination is made in a trial de novo .

Porter v . Commissioner , 130 T .C . 115, 117 (2008) .

The Commissioner prescribed procedures in Rev . Proc . 2003- 61, 2003-2 C .B . 296, that IRS personnel must use to determine whether a requesting spouse qualifies for relief under section 6015(f) . Rev . Proc . 2003-61, sec . 4 .01, 2003-2 C .B . at 297, lists threshold conditions which must be satisfied before the Commissioner will consider a request for relief under section 6015(f) . Respondent concedes that petitioner meets each of the threshold conditions .

Rev . Proc . 2003-61, sec . 4 .03, 2003-2 C .B . at 298, provides that once the threshold conditions have been satisfied, equitable relief may be granted under section 6015(f) if, taking into account all facts and circumstances, it is inequitable'to hold the requesting spouse liable . Rev Proc . 2003-61, sec . 4. .03, lists several factors that the Commissioner, and ultimately thi s Court, may consider in determining whether to grant equitabl e relief under section 6015(f) . No single factor is determinative, all factors are to be considered and weighed appropriately, an d the listing of factors is not intended to be exhaustive . See Washington v . Commissioner , 120 T .C . 137, 148 (2003) ; Jonson v .

Commissioner , supra at 125 . Our analysis of the relevant facts and circumstances is set forth below .

A .

Marital Status Petitioner and Ms . Lyman wer e married when petitioner sough t relief . This factor is neutral .'

B .

Economic Hardship This factor favors relief if payment of the owed taxes would cause the requesting spouse to suffer economic hardship . Rev .

Proc . 2003-61, sec . 4 .03(2)(a)(ii),f 2003-2'C .B . at 298 . The Commissioner considers the taxpayer to suffer economic hardship if payment of the tax would prevent the taxpayer from meeting reasonable basic living expenses . Sec . 301 .6343-1(b)(4)(i) , 'In analyzing such factors as the taxpayer's marital status, whether the taxpayer would suffer hardship, and whether the taxpayer has complied with income tax laws in subsequent years, our inquiry is directed to the taxpayer's status at the time of trial .

Proced . & Admin . Regs . ; Rev . Proc . 2003-61, sec . 4 .02(1) ( 4 .03(2)(a)(ii), 2003-2 C .B . at 298 . As the record does not indicate that petitioner would experience economic hardship from paying the tax, this factor favors respondent .

Petitioner argues that, because he is an IRS employee, he .

could lose his employment under the Internal Revenue .Service Restructuring and Reform Act of 1998 (RRA 1998), Pub . . L . 105-206, sec . 1203(b)(9), 112 Stat . 721 . This section authorizes the Commissioner to terminate the employment of an IRS employee if there is a final administrative or judicial determination that the employee has committed, in the performance of his official duties, an act or omission described in RRA 1998 section 1203(b), among which is a "willful understatement .of Federal tax liability, unless such understatement is due to reasonable cause and not to willful neglect" .

Id . sec . 1203(b)(9) . This Court has no occasion to decide whether petitioner willfully understated his tax liabilities . within the meaning of RRA 1998 section 1203(b)(9), and he has not called to our attention any final administrative or judicial determination that he has committed such an act . Consequently, we consider his reliance, on RRA 1998 section 1203 misplaced .

C .

Knowledge or Reason To Kno w With regard to an income tax liability resulting from a deficiency, we are less likely to grant relief under section 6015(f) if the requesting spouse knew or had reason to know o f the item giving rise to the deficiency .

We have already attributed to :petitioner constructiv e knowledge of the understated grossireceipts giving rise to th e tax deficiencies . See supra p . 12 Thus, this factor favor s respondent .

D .

Nonrequesting Spouse's Legal Obligation To Pa y We conclude that this factor does not apply because petitioner and Ms . Lyman are not divorced . See Ferrarese v .

Commissioner , T .C . Memo . 2002-249 ; see also Washington v .

Commissioner , supra at 148-149 .

E .

Significant Benefit Receipt by the requesting spouse either directly o r indirectly, of a significant benefit in excess of normal support from the unpaid liability or the item giving rise to the deficiency weighs against relief . Lack of a significant benefit beyond normal support weighs in favor of relief . Normal suppor t is measured by the circumstances o the particular parties .

Estate of Krock v . Commissioner , 93 T .C . 672, 678-679 (1989) .

As discussed previously , we conclude that petitione r significantly benefited, beyond the receipt of normal support, from the omission of income and that this factor favors respondent . See supra p . 13 .

F .

Compliance With Income Tax Law s Respondent concedes that petitioner has complied with income tax laws in all subsequent years . Even for the years at issue, petitioner promptly filed returns . This factor favors petitioner .

G .

Conclusio n The only factor favoring relief is that petitioner has complied with all tax laws . This factor is strongly outweighed by petitioner's failure to show economic hardship, his inability to demonstrate that he had no reason to known of items giving rise to the deficiencies, and his failure to show he did not receive a significant economic benefit .

On the basis of the above, we find that petitioner has failed to carry his burden of proving that he is entitled to relief from joint and several liability under section 6015(f) .

In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude that they are moot, irrelevant, or without merit .

To reflect the foregoing, Decision will b e entered for respondent .