KAREN NELSON MOORE, Circuit Judge.
Petitioner Winnie L. Greer ("Mrs. Greer") appeals a judgment of the U.S. Tax Court finding her ineligible for relief from joint and several liability for federal income tax deficiencies and additions to tax arising from disallowed investment credits claimed on her 1982 tax return and carryback refunds claimed for the previous three years. Mrs. Greer sought relief based on the tax code's innocent-spouse provision, 26 U.S.C. § 6015(b), and equitable-relief provision, § 6015(f). The Tax Court denied innocent-spouse relief because Mrs. Greer failed to discharge her duty to inquire into the benefits reflected in her and her husband's joint tax filings. The Tax Court denied equitable relief largely on the same basis. Because we cannot say that the Tax Court clearly erred or abused its discretion, we
The Tax Court set forth the relevant facts, which the parties do not dispute:
On December 16, 1982, Mr. Greer signed a check for $50,000 payable to Madison and drawn on the joint checking account of petitioner and Mr. Greer to purchase a 5.5-percent limited partnership interest in Madison. This was the only checking account that petitioner and Mr. Greer had at the time. At the time of the Madison investment, petitioner knew Mr. Greer was purchasing an interest in Madison, and they briefly discussed the Madison transaction before the investment.
In March 1983 Madison filed a partnership return for the taxable year ended December 31, 1982, which reported a loss of $704,111 and a tax credit basis of $7 million. Petitioner and Mr. Greer filed joint individual income tax returns for the years 1979, 1980, 1981, and 1982. The Madison-related pass-through losses and investment credits reported on the joint returns for 1979, 1980, 1981, and 1982 were as follows:
Year Loss Investment Credit 1979 -0- $ 177.28 1980 $ 9,808 7,153.00 1981 3,146 4,128.00 1982 38,726 51,131.00
Greer v. Comm'r (Greer II), 97 T.C.M. (CCH) 1075, 2009 WL 211433, at *1-3 (2009).
The Internal Revenue Service ("IRS") began auditing Madison in 1984 and issued a notice of Final Partnership Administrative Adjustment ("FPAA") disallowing the partnership's claimed tax benefits in 1987. Greer v. Comm'r (Greer II), 557 F.3d 688, 689 (6th Cir.2009).
The Tax Court upheld the FPAA for Madison in 2001, and the Second Circuit affirmed in 2002. Madison, 81 T.C.M. (CCH) 1496 (2001), aff'd, 295 F.3d 280 (2d Cir.2002). On September 29, 2003, the IRS issued the Greers a notice of deficiency for $87,627 in tax and $544,125 in interest. The Greers challenged the amount, but both the Tax Court and the Sixth Circuit denied relief. Greer I, 93 T.C.M. (CCH) 1216, aff'd, Greer III, 557 F.3d 688. On September 26, 2005, Mrs. Greer submitted Form 8857, requesting relief from the deficiency as an innocent spouse. On December 22, 2005, the IRS denied her request, finding that she knew of the Madison investment, that the money for the investment was drawn from the Greers' joint bank account, that she signed the Form 1045 requesting refunds, and that she received the benefit of those refunds. An appeals officer then denied her appeal, based on her failure to inquire into the claimed deductions:
Supplemental Appendix ("S.A.") at 185. The appeals officer also determined that it would not be inequitable to hold Mrs. Greer liable, noting that her claim that the debt would wipe out over half of her net worth did not amount to economic hardship. The appeals officer noted that Mrs. Greer had declined a settlement offer of "fifty percent relief of the deficiency." S.A. at 192.
Mrs. Greer then petitioned for review by the Tax Court. The Tax Court held a trial on January 29, 2008. In addition to the
On January 29, 2009, the Tax Court entered judgment for the IRS, finding that Mrs. Greer did not qualify as an innocent spouse because she "should have at least made further inquiry about the extraordinary tax benefits reflected on the joint return for 1982." Greer II, 2009 WL 211433, at *6. The court found that rather than having "no reason to know" of the tax understatement, as required for relief, she "chose not to know." Id. The court next considered several factors in determining whether Mrs. Greer merited equitable relief. It found that she had failed to prove that economic hardship would result from full liability, that she had not shown that she had no reason to know of the understatement, that she had not received any unusual financial benefit from the money withheld, and that she had complied with the tax laws following the years in question. Id. at *7. Placing special emphasis on her failure to establish that she had no reason to know of the deficiency, the court denied relief. Id. Mrs. Greer timely filed this appeal.
A. Standard of Review
The Tax Court's decision that an individual does not qualify for innocent-spouse relief under § 6015(b) is a factual finding reviewed for clear error. Golden v. Comm'r, 548 F.3d 487, 495 (6th Cir. 2008), cert. denied, ___ U.S. ___, 129 S.Ct. 1647, 173 L.Ed.2d 999 (2009). "[F]actual determinations are not clearly erroneous unless we are left with a definite and firm conviction that a mistake has been made." Kearns v. Comm'r, 979 F.2d 1176, 1178 (6th Cir.1992). The Tax Court's decision not to award equitable relief under § 6015(f) is reviewed for abuse of discretion. Cheshire v. Comm'r, 282 F.3d 326, 338 (5th Cir.2002). The Tax Court "abuses its discretion when it relies on clearly erroneous findings of fact, ... improperly applies the law or uses an erroneous legal standard," Tompkin v. Philip Morris USA, Inc., 362 F.3d 882, 891 (6th Cir.2004), or "bases its ruling on ... a clearly erroneous assessment of the evidence," Rentz v. Dynasty Apparel Indus., Inc., 556 F.3d 389, 395 (6th Cir.2009).
B. Section 6015(b): Innocent-Spouse Relief
Pursuant to 26 U.S.C. § 6013(d)(3), taxpayers filing joint returns are jointly and severally liable for any understatement of tax. A taxpayer is excepted from this general rule if he or she can establish status as an "innocent spouse" under § 6015. A taxpayer who is still married, as Mrs. Greer is, bears the burden of establishing each of the following five elements to qualify for the innocent-spouse exception:
26 U.S.C. § 6015(b)(1)
Courts have interpreted the reason-to-know element to encompass two separate types of constructive knowledge. First, a spouse may have reason to know of an understatement reflected on the tax filings. Second, even if a spouse does not have reason to know of an understatement, he or she nonetheless may have reason to know of a possible understatement, giving rise to a duty to inquire into that possibility. Kistner v. Comm'r, 18 F.3d 1521, 1525 (11th Cir.1994); Price v. Comm'r, 887 F.2d 959, 965 (9th Cir.1989). As the Ninth Circuit has explained:
Price, 887 F.2d at 965 (citations omitted). Here, the Tax Court invoked the latter ground, holding that Mrs. Greer knew enough to trigger a duty of inquiry, which she failed to discharge. Greer II, 2009 WL 211433, at *6. We therefore review whether the Tax Court clearly erred in determining that Mrs. Greer had a responsibility to inquire about a possible understatement on the Greers' 1982 tax-year filings.
1. Applicable Legal Test
As an initial matter, this case presents us the opportunity to decide what test should be used in determining whether a taxpayer had a reason to know of an understatement, or to suspect a possible understatement, resulting from disallowed deductions or credits. The Tax Court previously has stated that in all tax-deficiency cases — that is, in both omitted-income and erroneous-deduction cases — it will find that a taxpayer had reason to know of an understatement if he or she had knowledge of the transaction giving rise to the claimed tax benefits. See Bokum v. Comm'r, 94 T.C. 126, 146, 1990 WL 17262 (1990), aff'd on other grounds, 992 F.2d 1132 (11th Cir.1993). We have followed this knowledge-of-the-transaction test in omitted-income cases. See Kosinski v. Comm'r, 541 F.3d 671, 681 (6th Cir.2008) (holding that taxpayer was not entitled to innocent-spouse relief when she knew of and played an active role in fraudulent transactions that allowed couple to under-report income); Richardson, 509 F.3d at 746 (same, when taxpayer knew of trust-scheme transactions that shielded couple's income from taxation); Purcell v. Comm'r, 826 F.2d 470, 473-74 (6th Cir.1987) (denying relief from liability for omitted income when taxpayer knew of transaction giving rise to that income, and denying relief from liability for impermissible deductions when taxpayer could not prove that the deductions that her spouse had taken had no basis in law or fact, as required by an older version of the innocent-spouse provision). We have not applied the knowledge-of-the-transaction test to erroneous-deduction cases.
In Price v. Commissioner, the Ninth Circuit pointed out that the knowledge-of-the-transaction test is appropriate in omitted-income cases, but not in erroneous-deduction cases:
Price, 887 F.2d at 963 n. 9 (citations omitted). The court went on to hold that in erroneous-deduction cases, "[a] spouse has `reason to know' of the substantial understatement if a reasonably prudent taxpayer in her position at the time she signed the return could be expected to know that the return contained the substantial understatement."
All circuits to have ruled on the Price approach have adopted its test for erroneous-deduction cases. See Hayman v. Comm'r, 992 F.2d 1256, 1261 (2d Cir.1993); Reser v. Comm'r, 112 F.3d 1258, 1267 (5th Cir.1997); Resser v. Comm'r, 74 F.3d 1528, 1536 (7th Cir.1996); Erdahl v. Comm'r, 930 F.2d 585, 589 (8th Cir.1991); Kistner v. Comm'r, 18 F.3d 1521, 1527 (11th Cir. 1994). One circuit has declined to decide the issue. See Doyle v. Comm'r, 94 Fed. Appx. 949, 951-52 (3d Cir.2004) (unpublished opinion) (holding that the petitioner could not prevail under either the knowledge-of-the-transaction test or the Price test). In an unpublished order, a panel of this court applied the Price factors in an erroneous-deduction situation, but it did not cite Price. See Streck v. Comm'r, No. 98-1064, 1999 WL 427381, at **2-3 (6th Cir. June 16, 1999) (unpublished order); see also Alt, 101 Fed.Appx. at 41 (citing Streck and applying the factors in an omitted-income case). In the instant case, the Tax Court applied Price, and the Commissioner has briefed the test's four factors.
Based on the persuasive logic of the Ninth Circuit and on our own case law, we now join our sister circuits in formally adopting the Price test for erroneous-deduction cases. The knowledge-of-the-transaction test leaves room for a taxpayer to claim innocent-spouse relief in omitted-income claims, because the understatement arises in such cases from information being left off a return, and the spouse otherwise may not have known or had reason to know that information. In erroneous-deduction cases, the understatement arises from information being included on the return, so a spouse who signs a tax return necessarily learns of the transaction.
The Price test also is consistent with our own binding case law. In Shea v. Commissioner, 780 F.2d 561 (6th Cir.1986), we applied a context-specific test under which
While the Price factors are used to determine whether a spouse had reason to know of an understatement, they may also be employed to determine whether a spouse had a duty of inquiry. Park, 25 F.3d at 1293; Kistner, 18 F.3d at 1525; Erdahl, 930 F.2d at 590-91. In duty-of-inquiry cases, courts have also considered whether the tax returns set forth deductions or credits large enough, relative to the size of the underlying investment or of reported income, to prod a reasonable taxpayer into further investigation. See Reser, 112 F.3d at 1267-68, 1269; Friedman v. Comm'r, 53 F.3d 523, 531 (2d Cir.1995); Park, 25 F.3d at 1298; Price, 887 F.2d at 961.
The Tax Court held that Mrs. Greer had a duty to inquire into the legitimacy of the tax benefits claimed on the basis of the Madison investment:
Greer II, 2009 WL 211433, at *6. We review the Price factors to determine whether the Tax Court clearly erred in holding that a reasonable person with Mrs. Greer's background and in her circumstances would have known to inquire into the stated tax liability.
(1) Education: Mrs. Greer has a master's degree in music education, but she has no specific education in financial affairs. The Tax Court emphasized that she is "an intelligent, well-educated person" and weighed this factor against her. Greer II, 2009 WL 211433, at *6. The cases are clear, however, that it is financial education, not education in general, that matters. See Reser, 112 F.3d at 1268 (noting that taxpayer with law degree had an education that "albeit advanced, provided her with no special knowledge of complex tax issues"); Resser, 74 F.3d at 1537 (holding that education factor favored spouse who had master's degree in medical communications because her training gave her "no special understanding" of finance); Alt, 101 Fed.Appx. at 41 (evaluating taxpayer with master's degree in education and noting that "courts have examined the type of education received, specifically, whether the education provided a special knowledge of complex tax issues" (internal quotation marks omitted)); Korchak, 2006 WL 2506626, at *22 (in granting relief,
(2) Involvement in Family Finances: The Tax Court observed that Mrs. Greer knew of the G & L distributions, signed tax returns and the Form 1045 request for refunds, and shared a joint checking account with Mr. Greer from which the Madison investment was made. Greer II, 2009 WL 211433, at *6. These facts, however, mainly go to Mrs. Greer's awareness of the Madison transaction. The facts relevant to her involvement in family finances are her management of her photography business and her collection of that business's records at tax time. This level of involvement in family finances is comparable to or less than that of taxpayers found to qualify for innocent-spouse relief by other courts, whose cases constitute persuasive precedent. See Reser, 112 F.3d at 1268 (taxpayer worked full time as a lawyer and "was the family's sole source of financial support," but was not significantly involved in finances of husband's professional corporation); Resser, 74 F.3d at 1538 (taxpayer served as family check-writer); Price, 887 F.2d at 965 (taxpayer paid household expenses and mortgage); Sanders, 509 F.2d at 166 (taxpayer balanced husband's checkbooks and typed business letters for him); cf. Stevens v. Comm'r, 872 F.2d 1499, 1501, 1507 (11th Cir.1989) (taxpayer who served as officer and employee of husband's corporations and frequently was present for business discussions was not entitled to relief). That said, we note that Mrs. Greer was probably familiar enough with basic budgeting and accounting to understand representations made on a tax return, even if the ultimate legitimacy of sheltering income was beyond her experience.
(3) Lavish or Unusual Expenses: While observing that the Greers "lived a very comfortable lifestyle during 1982 and for all the years thereafter," the Tax Court found no "extravagant change in petitioner's lifestyle," the relevant consideration. Greer II, 2009 WL 211433, at *6. This finding was correct and is not disputed. See Resser, 74 F.3d at 1540 (citing the relative difference from the family's ordinary standard of living); Kistner, 18 F.3d at 1525 (same); Sanders, 509 F.2d at 168 (same).
(4) Spouse's Evasiveness or Deceit: Mrs. Greer argues that Mr. Greer "took advantage" of her, Pet'r Br. at 43, 55; Reply Br. at 12, but that argument cannot be reconciled with her position that she purposely left him in charge of all financial matters. The Tax Court correctly found that Mr. Greer was neither deceitful nor evasive regarding the family's finances. The Tax Court weighed this factor against Mrs. Greer, which is consistent with the approach of the courts of appeals. See, e.g., Friedman, 53 F.3d at 532 (husband concealed enormous financial losses).
We think the Tax Court's finding that three of the four factors weighed against Mrs. Greer was incorrect. These factors cannot be discussed in an abstract sense or tallied and set against each other as on a ledger. We must ask whether a reasonable person with the background that emerges from our review of the Price factors should have raised a question, upon reviewing the tax filings, about the extent of the benefits claimed therein. See Shea, 780 F.2d at 565 (quoting Restatement
Having reviewed the record, we cannot say that the Tax Court clearly erred in finding that Mrs. Greer should have inquired into the favorable tax benefits thrown off by the Madison investment. First, the low level of taxes owed relative to the income reported on the 1982 return should have given Mrs. Greer pause. The front page of the 1982 return reflects an adjustable gross income, after deducting $38,726 in losses attributable to the Madison investment, of $183,340. S.A. at 38. The second page of the return reflects a total tax liability of $32,742. S.A. at 39. Although the Greers submitted a check for $10,265 to the IRS (the amount due in excess of the tax withheld), the benefits they claimed resulted in an average tax rate of only 17.86% in a year when their income put them in the highest marginal tax bracket, 50% for income over $85,600. See Tax Foundation, U.S. Federal Individual Income Tax Rates History, Income Years 1913-2010, at 8, available at http:// www.taxfoundation.org/publications/show/ 151.html. Second, the Form 1045 that the Greers filed, carrying Madison-based credits back to 1979 through 1981 and claiming refunds of $33,000, should have raised a question in Mrs. Greer's mind. In addition to reducing their tax burden in 1982, the Greers were able to zero out their income tax for two of the three preceding years. These reductions are reflected clearly on the first page of the Form 1045, at Line 21 in side-by-side columns labeled "Before carryback" and "After carryback," just above Mrs. Greer's signature. S.A. at 60. Income tax was reduced from $9,654 to $0 for 1979, from $22,161 to $1,363 for 1980, and from $9,082 to $0 for 1981.
The facts of Korchak are remarkably similar to those of the instant case. Nonetheless, the Tax Court here distinguished Korchak on three bases: (1) Mrs. Korchak did not even know her husband had made the Madison investment; (2) Mrs. Korchak had no practical business experience; and (3) the Madison benefits did not stand out on the Korchaks' tax return because they sat among other losses and credits. We find the first and third distinctions persuasive. It is clear that Mrs. Greer's knowledge of the Madison transaction was not itself enough to put her on notice of a possible understatement; to hold otherwise would be to revert to the knowledge-of-the-transaction test. However, the fact that her husband informed her of the investment, that the amount of the investment was evident from the check drawn on their joint bank account, and that Madison was the lone entry on Schedule E, Part II
The main thrust of Mrs. Greer's argument is that she left financial decisions to Mr. Greer and had no reason to suspect his errors. Several courts, including our own, have held that being a homemaker cannot alone relieve a spouse of joint and several tax liability on a joint return and that one spouse cannot bury his or her head in the sand or turn a blind eye to the other's accounting. Shea, 780 F.2d at 566; Kistner, 18 F.3d at 1525; Stevens, 872 F.2d at 1505-06; Doyle, 94 Fed.Appx. at 952. Here, the Tax Court found that Mrs. Greer did just that, failing to question her husband even when the documents she signed should have pushed her to do so. Were this de novo review, we might view the matter differently. For the reasons we have discussed, however, we cannot say that the Tax Court committed clear error in denying innocent-spouse relief based on the reason-to-know element of 26 U.S.C. § 6015(b)(1).
C. Section 6015(f): Equitable Relief
Mrs. Greer also challenges the Tax Court's denial of discretionary relief under 26 U.S.C. § 6015(f). That section of the tax code provides that if a still-married taxpayer does not meet all the requirements under § 6015(b), the IRS nonetheless has discretion to grant relief from liability if, "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)." 26 U.S.C. § 6015(f). IRS regulations provide that the following nonexclusive list of factors should be considered in determining whether to grant § 6015(f) relief: (1) marital status, (2) economic hardship that would result absent relief, (3) knowledge or reason to know of the item giving rise to the deficiency, (4) any legal obligation of the nonrequesting spouse to pay the income tax liability pursuant to a divorce agreement, (5) whether the requesting spouse significantly benefited from the understatement, (6) the requesting spouse's compliance with income tax laws since the years in question, and (7) other factors, such as spousal abuse and poor mental and physical health. Rev. Proc.2003-61, § 4.03.
Here, the Tax Court found that factors (1), (4), and (7) were inapplicable or neutral. Greer II, 2009 WL 211433, at *7. It also found that Mrs. Greer's failure to establish economic hardship and the fact that she had reason to know of a possible understatement weighed against relief, while the fact that she did not obtain "an unusual financial benefit" from the claimed tax benefits and her consistent compliance with tax laws since 1982 weighed in favor of relief. Id. Noting that the applicable factors split two-to-two, the Tax Court then concluded that its finding that Mrs. Greer had reason to know of a possible understatement "pushes the scale against granting relief under section 6015(f)." Id. Mrs. Greer now argues that the Tax Court abused its discretion with respect to its findings on economic hardship and reason to know. We have already determined that the Tax Court did not err in concluding that Mrs. Greer had reason to suspect a possible understatement of taxes. Therefore, we will not reverse its ruling unless its conclusion as to economic hardship was based on clearly erroneous factual findings or amounted to a clearly erroneous assessment of the evidence. Rentz, 556 F.3d at 395; Tompkin, 362 F.3d at 891.
The Tax Court found that Mrs. Greer "has failed to establish that respondent's determination regarding a lack of economic hardship was incorrect." Greer II, 2009 WL 211433, at *7. The record evidence supports this conclusion. As of June 30, 2007, the total liability, including accruing penalties and interest, was $1,456,420. S.A. at 19 (Stipulation of Facts at 51). The IRS now estimates the liability at over $1.5 million. Resp't Br. at 61. As of September 30, 2007, Mrs. Greer's assets totaled $2,134,256; of that amount, $869,048 was attributable to an inheritance from her parents, $575,332 to her individual retirement account, and $220,000 to her share of the family home. See S.A. at 25, 181. Mrs. Greer estimated the tax liability on her retirement account to be $161,000. Pet'r Br. at 57. Mr. Greer testified at the Tax Court trial that his assets totaled $214,000. Id. at 58. Subtracting Mrs. Greer's expected retirement taxes from her assets, the couple as of late 2007/early 2008 had $2,187,256 to satisfy a tax debt now estimated at over $1.5 million. On this accounting, it would seem that Mrs. Greer could still pay "`reasonable basic living expenses'" after satisfying the liability. Comm'r v. Neal, 557 F.3d 1262, 1278 (11th Cir.2009) (quoting Treas. Reg. § 301.6343-1(b)(4) to define economic hardship).
Mrs. Greer next argues that even if her net worth is large enough to satisfy the outstanding liability, she cannot do so without wiping out her personal retirement account and family inheritance. Pet'r Br. at 58-59. Now 62 years old, she is nearing retirement and had expected to rely on her savings to support her. See id. at 60. The Tax Court has taken such situational factors into account in previous cases. See, e.g., Campbell v. Comm'r, 91 T.C.M. (CCH) 735, 2006 WL 345827, at *9 (2006) (granting equitable relief to a woman "in her sixties with a limited number of working years" who "ha[d] only a small retirement account, her home, and a 1993 Ford explorer"). We are indeed sympathetic to Mrs. Greer's situation, and again might decide her case differently had we the opportunity to rule in the first instance rather than on deferential review. But we cannot say that the prospect of financial ruin is so plain on the record that the Tax Court abused its discretion in denying equitable relief. We therefore must affirm.
This is a close case, and ultimately we are guided by the deferential standard of review applicable to factual findings and discretionary decisions of the Tax Court. As we can find neither clear error nor abuse of discretion in the Tax Court's rulings, we