Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1992 in
After concessions, the issues to be decided
Some of the facts have been stipulated for trial pursuant to Rule 91. The parties' stipulations are incorporated into this opinion by reference and, accordingly, are found as facts in the instant case. When they filed their petition, petitioners resided in Longwood, Florida.
Petitioners were married at the time they filed their petition, are currently married, and have always had a "smooth" marital relationship. Petitioner Michael B. Butler (petitioner's husband) has always applied all of his income toward the benefit of his family. Throughout their 35-year marriage, petitioner's husband has never concealed any assets from petitioner and has always told her about his financial endeavors.
Petitioner's husband operates a lucrative surgical practice in three Florida locations: Orlando, Apopka, and Altamonte Springs. Petitioner's family lived quite comfortably, with a very high standard of living, during 1992. They paid $19,963 in home mortgage interest during 1992, making their monthly mortgage payment more than $1,600. Their average
Petitioner's husband works at his surgical practice on an average of more than 70 hours per week. During 1992, petitioner worked with her husband as a medical transcriber, earning $11,700 in wages. Petitioner graduated from St. Louis University in 1960 with a degree in medical records administration. Because she had more free time, petitioner maintained the family's checking account and handled the bills for all of the household expenses. She usually retrieved the mail because she arrived home earlier than her husband.
Petitioner oversees the operation of JCB Construction, Inc. (JCB), an S corporation of which she has been the sole owner since its creation in 1987. As secretary-treasurer of JCB, petitioner maintains its books and records, keeps track of income and expenditures, handles payroll and personnel responsibilities, writes checks for materials and supplies, and collects information for the preparation of JCB's tax returns. JCB filed Forms 1120S with the Internal Revenue Service (IRS) from 1988 through 1996, and FICA and FUTA returns since at least 1989. The gains or losses of JCB were reported on petitioners' Federal income tax returns for the year at issue and in prior years.
B.G. Enterprises, Inc. (BGE), was an S corporation owned by petitioner's husband and Thomas George. BGE was engaged in the foliage nursery business in Apopka, Florida, on land owned jointly by petitioners. In 1990, BGE rented the Apopka property from petitioners and operated the nursery, as Sweetwater Greenery, from that time until some time in 1992. Petitioner's husband and Thomas George were each 50-percent shareholders of BGE. Petitioner never favored petitioner's husband's involvement with the nursery, and their discussions on the subject were usually contentious.
The exact amount of the distributions from BGE to petitioner's husband during 1992 is unknown, and petitioner has provided insufficient evidence to fully account for the settlement proceeds. The record contains no documents illustrating where the distribution of money from BGE to petitioner's husband was deposited during 1991 or 1992. Petitioner failed to explain the use of the following funds: $40,000 paid to petitioner's husband on January 14, 1992, from the escrow account holding the settlement proceeds; another $23,654 disbursed from the escrow account to petitioner's husband on March 31, 1992; and $5,238.47 which remained in the escrow account as of March 24, 1998. Petitioner offered only eight monthly bank statements from petitioner and her husband's personal joint bank account for 1992. Petitioner failed to offer statements or canceled checks from any of petitioner's and her husband's other bank accounts. Petitioners held a bank account throughout 1992 at Southern Bank of Florida. Petitioners did not produce bank statements relating to that account from the periods March 12 to April 12, 1992, from May 12 to July 12, 1992, from August 12 to September 12, 1992, and from December 12 to December 31, 1992. Petitioners failed to offer any bank statements or other financial records from petitioner's husband's surgical practice.
In the notice of deficiency sent to petitioners in the instant case, respondent determined that petitioners failed to include flowthrough income from BGE in the amounts of $79,380 and $18 on their 1992 joint Federal income tax return. Petitioners concede that the flowthrough from BGE for petitioner's husband's share of the net settlement proceeds ($79,380) received by BGE during 1992 was not reported on petitioners' 1992 Federal income tax return.
Petitioners filed their petition in the instant case in response to a notice of deficiency. In the petition, petitioner claimed that she was entitled to innocent spouse relief pursuant to section 6013(e). After the trial and briefing of the instant case, Congress enacted section 6015 as part of the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201(a), 112 Stat. 685, 734, and simultaneously repealed section 6013(e). The effective date of
Petitioners' Claim for Innocent Spouse Relief Pursuant to Section 6015(b)(1)
Generally, spouses filing a joint tax return are each fully responsible for the accuracy of their return and for the full tax liability. See sec. 6013(d)(3). The innocent spouse provisions of section 6015 provide exceptions to the general rule in certain circumstances. Section 6015 provides, in pertinent part, as follows:
SEC. 6015. RELIEF FROM JOINT AND SEVERAL LIABILITY ON JOINT RETURN.
(a) IN GENERAL. — Notwithstanding section 6013(d)(3) —
(b) PROCEDURES FOR RELIEF FROM LIABILITY APPLICABLE TO ALL JOINT FILERS. —
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 (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.
Former section 6013(e) is, for the most part, the same as new section 6015(b), but there are important differences. For example, new section 6015(b)(2) explicitly provides for proportionate relief, although former section 6013(e) did not have an explicit provision for such relief. Additionally, unlike former section 6013(e), which encompassed only substantial understatements attributable to grossly erroneous items, new section 6015(b) encompasses any understatement. Despite the differences between the former provision and the new one, cases interpreting old section 6013(e) remain instructive as to our analysis of whether a taxpayer "knew or had reason to know" of an understatement pursuant to new section 6015(b).
Of the several elements necessary for innocent spouse relief listed in new section 6015(b)(1), the parties in the instant case have presented only the issue of whether petitioner had reason to know of the understatement on petitioners' 1992 tax return. Cases arising pursuant to former section 6013(e) provide that the spouse seeking relief has reason to know of an understatement 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 or that further investigation was warranted. See Kistner v. Commissioner, 18 F.3d 1521, 1524 (11th Cir. 1994),
As to the first factor, level of education, petitioner earned a college degree in medical records administration from St. Louis University. She also owned and operated her own construction business (JCB) that was, like the corporation in which her husband was a shareholder (BGE), an S corporation. Petitioner was primarily responsible for JCB's day-to-day affairs. She collected the information with which to file tax returns for JCB and signed those tax returns. Consequently, we believe that she must have been familiar with the manner in which income of an S corporation flows through to the individual shareholders for Federal tax purposes. Although petitioner testified that she had nothing to do with petitioner's husband's nursery business during its existence, she admitted that she was the secretary-treasurer of Sweetwater Greenery, Inc. (the bankrupt predecessor company of BGE and the initial S corporation operating the foliage nursery). By 1992, petitioner had considerable experience in business and financial matters. At a minimum, given her experience in the family's financial affairs, her knowledge of the settlement between BGE and Dupont, and her apparent experience and knowledge of the tax implications of doing business as an S corporation, petitioner should have inquired into whether the flowthrough of income from the Dupont settlement with BGE was properly accounted for on petitioners' return. Accordingly, petitioner's education and experience weigh heavily against allowing innocent spouse relief to petitioner.
As to the second factor, involvement in the family's finances, petitioner had full responsibility for maintaining
Although respondent requested petitioners to provide the bank statements from all of their bank accounts for 1992, petitioner produced only 8 of the 12 1992 bank statements from their joint personal account, and they produced no statements from any of the other accounts they held. The failure to introduce such evidence leads us to conclude that it would not have been helpful in proving petitioner's innocent spouse claim. The evidence pertaining to petitioner's involvement in her family's finances weighs heavily against petitioner.
As to the third factor, unusual or lavish expenditures, although the record demonstrates that petitioner enjoyed a high standard of living during 1992 and maintained accounts at various upscale department stores where she made significant purchases, there is no evidence in the record indicating whether such expenditures were out of the ordinary when compared to petitioners' spending habits in prior years. Accordingly, the evidence pertaining to unusual and lavish expenditures neither supports nor weakens petitioner's claim for innocent spouse relief.
As to the fourth factor, whether petitioner's husband was evasive about his finances, he never attempted to hide any of his income or assets from petitioner. In his own words, he "always told her about everything he was involved in." All of his income was applied toward the benefit of the family. Consideration of this factor weighs against innocent spouse relief.
In sum, consideration of the foregoing factors leads us to believe that petitioner should have known of the understatement on petitioners' 1992 tax return. At a minimum, petitioner's knowledge of the settlement and the tax consequences of S corporations placed on her the duty to inquire about the amount of the settlement and the flowthrough of petitioner's husband's share of BGE's income as it might affect petitioners' 1992 tax return. Consequently, we hold that petitioner is not entitled to innocent spouse relief pursuant to section 6015(b)(1).
Petitioner's Motion To Reopen the Record To Introduce Evidence of Her Ability To Qualify for Proportionate Relief Pursuant to Section 6015(b)(2)
Petitioner requests that we reopen the record in the instant case to submit evidence as to petitioner's qualification for relief pursuant to new section 6015(b)(2). Reopening
The Tax Court's Authority To Review the Commissioner's Discretion as Exercised Pursuant to Section 6015(f)
Petitioner asked respondent to consider equitable relief pursuant to section 6015(f), which request respondent denied. Respondent contends that the Tax Court has no authority to review the Commissioner's denial of petitioner's request for equitable relief pursuant to section 6015(f). We disagree with respondent.
As a part of our traditional authority in deficiency proceedings, we have jurisdiction in the instant case to review respondent's denial of equitable relief. Petitioner raised her claim for innocent spouse relief in a petition for redetermination filed pursuant to section 6213(a). In a proceeding to redetermine asserted deficiencies, we may take into account all facts and circumstances that bear upon the deficiency as they affect petitioner, including petitioner's affirmative defense that she is entitled to innocent spouse treatment. See secs. 6212-6214; Estate of Mueller v. Commissioner, 101 T.C. 551, 556 (1993); Woods v. Commissioner, 92 T.C. 776, 784 (1989). In the context of a deficiency proceeding, a claim for
In Naftel v. Commissioner, 85 T.C. 527, 533 (1985), we held that where a taxpayer files a petition for a redetermination of a deficiency, we take jurisdiction over the entire tax liability, not just the items determined to be erroneous in the notice of deficiency. Consequently, where a taxpayer raises an affirmative defense to a deficiency determination, we need no additional basis for our authority to render an opinion on such issues because the affirmative defense is part of the deficiency proceeding over which we have jurisdiction. See Rule 39. Accordingly, in the instant case, our authority to review petitioner's affirmative defense that she is entitled to innocent spouse treatment is governed by our general jurisdiction to consider any issue which affects the deficiency before us. See sec. 6213. Petitioner's innocent spouse claim is one such issue.
Respondent argues that section 6015(e) precludes judicial review of claims made pursuant to subsection (f) and limits judicial review only to claims made pursuant to subsections (b) and (c). Respondent contends, inter alia, that the references in section 6015(e)(3) and (4) to subsections (b) and (c), coupled with silence with regard to subsection (f), evidence an intent of Congress to segregate proceedings involving subsection (f) from proceedings involving subsections (b) and (c). Respondent contends that the foregoing statutory scheme, as well as the express language of the statute, evidence a congressional intent to preclude judicial review of determinations made by the Commissioner pursuant to section 6015(f). Alternatively, respondent argues that the
This Court has stated that there exists a strong presumption that the actions of an administrative agency are subject to judicial review. See, e.g., Mailman v. Commissioner, 91 T.C. 1079, 1082 (1988); Estate of Gardner v. Commissioner, 82 T.C. 989, 994 (1984). Agency action is exempt from judicial review only: (1) Where the governing statutes expressly preclude such review, or (2) where the action is "committed to agency discretion" by law. 5 U.S.C. sec. 701(a) (1984); Estate of Gardner v. Commissioner, supra at 995.
As to respondent's argument that section 6015 precludes judicial review, we disagree. Section 6015(e), in relevant part, provides:
We find nothing in section 6015(e) that precludes our review of respondent's denial of equitable relief to petitioner. Indeed, section 6015(e) states that, where a taxpayer elects to have
Moreover, the legislative history supports our interpretation that section 6015 does not limit our authority to review the Commissioner's determinations pursuant to section 6015(f). The House report states: "The bill specifically provides that the Tax Court has jurisdiction to review any denial (or failure to rule) by the Secretary regarding an application for innocent spouse relief." H. Rept. 105-364 (Part I), at 61 (1997) (emphasis added). The Senate report provides:
The Tax Court has jurisdiction of disputes arising from the separate liability election. For example, a spouse who makes the separate liability election may petition the Tax Court to determine the limits on liability applicable under this provision. [S. Rept. 105-174, at 56 (1998).]
The conference report states that it follows the "House bill and the Senate amendment in establishing jurisdiction in the Tax Court over disputes arising in this area." H. Conf. Rept. 105-599, at 251 (1998). In short, there is no language in either the statute or the legislative history that precludes our review of the Commissioner's denial of equitable relief pursuant to section 6015(f) where the taxpayer has made the requisite election for relief pursuant to section 6015(b) or (c). But see In re Mira, 245 Bankr. 788 (Bankr. M.D. Pa. 1999).
We also disagree with respondent's argument that the Commissioner's authority to grant equitable relief pursuant to section 6015(f) is "committed to agency discretion by law." The "committed to agency discretion" exception to the general rule of judicial review is a very narrow one. Estate of Gardner v. Commissioner, supra at 995 (citing Citizens To Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971)). The exception applies only in those rare instances in which a statute is drawn in terms so broad that there is no law to apply. See id. Whether there is law to apply turns on pragmatic considerations as to whether an agency determination is the proper subject of judicial review. See id. In Mailman v. Commissioner, supra at 1082-1083, we stated:
None of the foregoing circumstances, where action is committed solely to agency discretion, are present in the instant case. Our review does not involve political, economic, military, or other managerial choices not susceptible to judicial review.
Respondent argues that there is no ascertainable standard upon which to review respondent's discretionary denial of relief pursuant to section 6015(f). We disagree. The language of section 6015(f)(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)", does not differ significantly from the language of section 6015(b)(1)(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". Indeed, the language of section 6015(f)(1) does not differ significantly from the language of former section 6013(e)(1)(D), "taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement".
We have consistently applied a "facts and circumstances" analysis in considering the application of former section 6013(e)(1)(D). See Terzian v. Commissioner, 72 T.C. 1164, 1170 (1979); French v. Commissioner, T.C. Memo. 1996-38; Bouskos v. Commissioner, T.C. Memo. 1987-574. In Kistner v. Commissioner, T.C. Memo. 1995-66, on remand from the Court of Appeals for the Eleventh Circuit, we discussed the particular standards to be applied when deciding the appropriate relief pursuant to section 6013(e)(1)(D). Accordingly, we are well equipped to decide whether it was an abuse of discretion for respondent to deny relief to petitioner under
On the basis of the foregoing, we conclude that we have the authority to review respondent's denial of petitioner's claim for equitable relief pursuant to section 6015(f). We discuss below whether it was an abuse of discretion for respondent to deny petitioner's equitable relief claim.
Whether Respondent Appropriately Denied Petitioner Equitable Spouse Relief Pursuant to Section 6015(f)
On February 4, 1999, petitioner submitted a Form 8857, Request for Innocent Spouse Relief, to the IRS. The Form 8857 was forwarded to the IRS Appeals Office, and the claim was assigned to an Appeals officer who, after meeting with petitioner, made petitioner a settlement offer that petitioner rejected. In a September 22, 1999, letter, the Appeals officer informed petitioner that he had determined that petitioner is not entitled to relief pursuant to either subsection (b)(1) or (f) of section 6015.
Section 6015(f) provides as follows:
SEC. 6015(f). EQUITABLE RELIEF. — Under procedures prescribed by the Secretary, if —
In deciding above whether petitioner qualified for relief pursuant to section 6015(b)(1), we have held that petitioner had reason to know of the understatement of tax on petitioners' 1992 return. The parties stipulated that petitioner's husband always kept petitioner informed about everything in which he was involved. Indeed, we have found that petitioner was fully engaged in the family's finances. Moreover, the record does not demonstrate that there would be any economic hardship to petitioner if relief were not granted. Petitioner remains married to her husband and is living with
To reflect the foregoing,
An appropriate order will be issued, and decision will be entered for respondent.