                               T.C. Memo. 2015-180



                         UNITED STATES TAX COURT



          WILLIE C. SCOTT AND SANDRA N. SCOTT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 1753-14L.                          Filed September 14, 2015.



      Michelle T. White, for petitioners.

      Adam J. Smith and Lauren B. Epstein, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      GOEKE, Judge: Petitioners seek review of respondent’s determinations to

collect via levy income tax liabilities and additions to tax arising in 2008 and 2009

and to deny Mrs. Scott relief from joint and several liability. The specific issues

presented are:
                                           -2-

[*2] (1) whether the settlement officer abused her discretion by determining that

petitioners were not eligible for currently not collectible status but instead

qualified for an installment agreement with a $960 monthly payment. We hold

that the settlement officer did not; and

      (2) whether Mrs. Scott is entitled to relief from joint and several liability for

taxable years 2008 and 2009 under section 6015(b).1 We hold that she is to the

extent that the tax deficiencies were not attributable to items reported on her

Schedules C, Profit or Loss From Business, and on her Schedules A, Itemized

Deductions.

                                FINDINGS OF FACT

      Petitioners, a married couple, resided together in Florida when the petition

was filed.

      Mr. Scott has been in charge of household finances in recent years,

including taxable years 2008 and 2009. Mr. Scott prepared the joint Federal

income tax returns for 2008 and 2009 and submitted them electronically. Mrs.

Scott played no role in the returns’ preparation except providing Mr. Scott

information regarding her two businesses. She holds a bachelor of science degree

      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                          -3-

[*3] in accounting from Northern Illinois University and handled the sales and

expense data for the two businesses she managed, Mary Kay cosmetics and Direct

Sales Waiora, for which she had two separate Schedules C for each year. She was

not involved in her husband’s business activities.

      On their 2008 joint return petitioners claimed a $43,433 refund, which

respondent issued on November 9, 2009. On their 2009 return petitioners claimed

a $3,650 refund, which respondent issued on November 1, 2010. On May 29,

2012, respondent mailed petitioners a notice of deficiency for taxable years 2008

and 2009. Respondent determined income tax deficiencies and fraud penalties

under section 6663 for 2008 and 2009. We note, however, that respondent abated

the assessment of the fraud penalties against Mrs. Scott. Petitioners did not file a

petition to contest the 2008 and 2009 determinations in the notice of deficiency,

and those liabilities are not in dispute in the present case; however, Mrs. Scott’s

claim for relief from joint and several liability is properly before us on the basis of

our jurisdiction to review determinations denying such relief under section

6015(e).

       The notice of deficiency indicated several areas where petitioners had

failed to establish that expenses reported on the joint returns for the businesses

each petitioner operated independently were paid or incurred.
                                                   -4-

[*4] The notice of deficiency had the following adjustments to income:

             Adjustments to income                        2008      2009

 Sch C1 - supplies - Mary Kay                            $4,108    $5,755
 Sch C1 - interest - other - Mary Kay                     2,938     3,404
 Sch C1 - car & truck expenses - Mary Kay                (4,469)     2,411
 Sch C4 - taxes & licenses - Gold Importing               4,251          195
 Sch C3 - advertising - Waiora                           246,049     ---
 Sch C2 - travel - Tree/RE/5Linx                           4,025     ---
 Sch C2 - legal & professional - Tree/RE/5Linx             8,077     ---
 Sch C2 - car & truck expenses - Tree/RE/5Linx             2,846     ---
 Sch C3 - gross receipts - Waiora                           (73)     ---
 Sch C2 - gross receipts - Tree/RE/5Linx                   (375)     ---
 Sch C1 - gross receipts - Mary Kay                       10,851    15,656
 Sch C2 - repairs & maintenance - Tree Farm                1,047     ---
 Sch C1 - CGS - purchases - Mary Kay                         171   (1,745)
 SE AGI adjustment                                         (135)     (807)
 Itemized deductions                                      10,492     1,001
 Exemptions                                                3,501    2,920
 Sch C1 - utilities - Mary Kay                             ---           976
 Sch C1 - rent/lease - other business property -           ---      4,428
  Mary Kay
 Sch C1 - office expenses - Mary Kay                       ---      3,154
 Sch C5 - utilities                                        ---      2,011
 Sch C5 - car & truck expenses                             ---      1,869
 Sch C5 - gross receipts or sales - Ardyss                 ---       (138)
 Sch C1 - other expenses - Mary Kay                        ---      4,936
                                                 -5-

 [*5] Sch C5 - supplies - Ardyss International          ---              16,857

 Sch C4 - other expenses - Gold Importing               ---               30,658
 Social Security                                        ---               10,499

       The most significant adjustment was $246,049 regarding Mrs. Scott’s sole

proprietorship Direct Sales Waiora for 2008. For 2008, $255,467 of the $293,304

total positive adjustments to income related to Mrs. Scott’s two businesses. For

2009, $33,220 of the $104,040 in total positive adjustments related to her two

businesses.

       Regarding petitioners’ request for currently not collectible status, the

settlement officer requested that before November 29, 2013, petitioners submit to

her signed copies of their Forms 1040, U.S. Individual Income Tax Return, for tax

years 2011 and 2012 and a completed Form 433-A, Collection Information

Statement for Wage Earners and Self-Employed Individuals, with all applicable

attachments requested on the form. The settlement officer made clear that she

could not consider any collection alternative during the collection due process

(CDP) hearing without the requested information.

       Petitioners failed to submit the information by that deadline. On December

4, 2013, petitioners left a voice mail requesting to reschedule the conference. The

settlement officer complied and rescheduled for December 17, 2013. On
                                         -6-

[*6] December 9, 2013, petitioners faxed the settlement officer each spouse’s

married filing separate individual income tax returns for taxable years 2011 and

2012 and a Form 433-A signed only by Mr. Scott. They provided no other

documents. On December 13, 2013, the settlement officer left a voice mail

requesting supporting documentation for Form 433-A, but petitioners never

submitted any.

      For taxable years 2008 and 2009, Mr. Scott had retirement income and

operated multiple businesses.

      After reviewing the Form 433-A and using the national standards for

allowable living expenses, the settlement officer determined that petitioners were

not eligible for currently not collectible status and instead indicated that they could

pay $960 monthly installments. Respondent therefore issued a determination to

proceed with collection. Petitioners then filed a petition with this Court.

                                      OPINION

I. Jurisdiction

      Petitioners come before us pursuant to section 6330(d) to appeal the

settlement officer’s determination. “[J]urisdiction under section 6330(d)(1)(A) is

established when there is a written notice that embodies a determination to
                                          -7-

[*7] proceed with the collection of the taxes in issue, and a timely filed petition.”

Lunsford v. Commissioner, 117 T.C. 159, 164 (2001).

      Petitioners received a notice of deficiency for the taxable years 2008 and

2009. The notice of deficiency determined that both petitioners were liable for the

deficiencies in income tax and penalties under section 6663. Since petitioners

received the notice of deficiency and did not file a petition contesting it, they

cannot challenge the tax liabilities in this case but may challenge the settlement

officer’s exercise of discretion in determining to proceed with collection.

Subsequently, Mrs. Scott requested relief from joint and several liability and

submitted Form 8857, Request for Innocent Spouse Relief, and respondent

rejected her request in the same notice of determination issued regarding the

collection action. However, respondent stated in that notice that the denial of

relief from joint and several liability was separate from the collection action

determination.

II. CDP Hearings and Standard of Review

      If a taxpayer fails to pay any Federal income tax liability after notice and

demand, section 6331(a) authorizes the IRS to collect the tax by levy on the

taxpayer’s property. Before proceeding with a levy, the Commissioner must issue

a final notice of intent to levy and notify the taxpayer of the right to a hearing.
                                         -8-

[*8] Sec. 6330(a) and (b)(1). During the hearing a taxpayer may raise any relevant

issue, including challenges to the appropriateness of the collection action and

possible collection alternatives. Sec. 6330(c)(2)(A).

      Following the hearing, the Appeals Office must determine whether the

proposed collection action may proceed. For a notice of intent to levy, the

Appeals Office is required to consider: (1) whether the Secretary has met the

requirements of applicable law and administrative procedure; (2) the relevant

issues raised by the taxpayer; and (3) whether the proposed collection action

appropriately balances the need for efficient collection of taxes with the taxpayer’s

concerns that the collection action be no more intrusive than necessary. Sec.

6330(c)(3). The settlement officer considered each of these requirements and

found petitioners’ accounts were currently collectible.

      Where a taxpayer’s underlying tax liability is not in dispute, the Court

reviews the Commissioner’s determination to proceed with collection for abuse of

discretion. See Sego v. Commissioner, 114 T.C. 604, 610 (2000); Goza v.

Commissioner, 114 T.C. 176, 182 (2000).

      To establish abuse of discretion, the taxpayer must prove that the decision

of the Commissioner was arbitrary, capricious, or without sound basis in fact or in

law. Giamelli v. Commissioner, 129 T.C. 107, 111 (2007) (citing Sego v.
                                          -9-

[*9] Commissioner, 114 T.C. at 610, and Woodral v. Commissioner, 112 T.C. 19,

23 (1999)). In reviewing for abuse of discretion, we generally consider only the

arguments, issues, and other matters that were raised at the hearing or otherwise

brought to the attention of the Appeals Office. Id. at 115.

III. Whether the Settlement Officer Abused Her Discretion

      Petitioners argue that the settlement officer abused her discretion by failing

to consider all facts pertaining to petitioners’ ability to pay the monthly

installment. The settlement officer gave petitioners multiple opportunities to

submit the documents she required to assess the situation. Petitioners missed the

first deadline, November 29, 2013. The settlement officer rescheduled the original

hearing to December 17, 2013, with documents due on December 9, 2013. On this

date petitioners submitted via fax the requested Form 433-A and copies of

delinquent returns for tax years 2011 and 2012 but failed to include supporting

documentation to substantiate income and expenses. On December 13, 2013, the

settlement officer called petitioners and left a voice mail requesting the supporting

documents. Petitioners again failed to comply.

      The settlement officer, through her multiple attempts to obtain

documentation, was sufficiently patient. Petitioners argue that they are not

technologically sophisticated, but they sent the requested Form 433-A via fax.
                                        -10-

[*10] They could have also sent the supporting documents using fax or informed

the settlement officer of the circumstances that prevented them from sending the

information. Petitioners never requested additional time to turn in the

supplemental documents after turning in the Form 433-A. A settlement officer can

take into consideration only the information she is provided. See Boyd v.

Commissioner, T.C. Memo. 2013-100 (granting the Commissioner’s motion for

summary judgment in a CDP case because of, among other things, the taxpayers’

failure to timely submit Form 433-A and supporting documents); Winters v.

Commissioner, T.C. Memo. 2012-183 (holding that the settlement officer did not

abuse her discretion by sustaining the proposed collection action when the

taxpayer did not timely submit the requested forms and financial documentation).

       Petitioners were given ample opportunity to supply the necessary

information, but they did not do so. In addition, their trial testimony did not

support their claims of inability to pay and in at least one instance was inconsistent

with information they had previously represented to the settlement officer. We

therefore conclude that respondent did not abuse his discretion in determining to

proceed with collection.
                                          -11-

[*11] IV. Relief From Joint and Several Liability Under Section 6015(b)

      Generally, married taxpayers who file a joint Federal income tax return are

jointly and severally liable for the tax reported or reportable on the return. Sec.

6013(d)(3). Section 6015 allows a spouse to obtain relief from joint and several

liability in certain circumstances. Section 6015(a)(1) provides that a spouse who

has made a joint return may elect to seek relief from joint and several liability

under section 6015(b).

      Section 6015(b) provides that a taxpayer will be relieved of liability for an

understatement of tax if: (1) a joint return was filed for the taxable year in

question; (2) there is an understatement of tax attributable to erroneous items of

the nonrequesting spouse; (3) the taxpayer requesting relief “did not know, and

had no reason to know, that there was such understatement” when he or she signed

the return; (4) taking into account all of the facts and circumstances, it would be

inequitable to hold the taxpayer liable for the deficiency attributable to such

understatement; and (5) the taxpayer elects to have section 6015(b) apply within

two years of the initial collection action.

      The first element has been stipulated. Namely, that a joint return was filed

for taxable years 2008 and 2009. Mr. Scott prepared the returns while Mrs. Scott

provided the sales and expenses from her businesses; and some of the adjustments
                                        -12-

[*12] in the notice of deficiency relate to Mr. Scott’s businesses alone. Section

6015(b)(1)(B) provides that the erroneous item must be “attributable” to Mr. Scott.

Mrs. Scott maintains that because Mr. Scott prepared the entire return and because

he acknowledged making the error that led to the disallowance of the advertising

expense deduction claimed in her Schedule C for 2008, the item should be

considered attributable to Mr. Scott. We address her position by applying the third

element of the statute, “reason to know”, which requires us analyze to whom the

items of disallowed deductions are attributable.

      A. Reason To Know

      The Court of Appeals for the Eleventh Circuit, to which appeal of this case

would ordinarily lie, has held that a spouse has reason to know of a substantial

understatement if a reasonably prudent taxpayer in her position could be expected

to know that the return contained the substantial understatement. See Kistner v.

Commissioner, 18 F.3d 1521 (11th Cir. 1994), rev’g T.C. Memo. 1991-463;

Stevens v. Commissioner, 872 F.2d 1499 (11th Cir. 1989), aff’g T.C. Memo.

1988-63; see also sec. 7482(b)(1)(E). In Butler v. Commissioner, 114 T.C. 276,

284 (2000), we embraced the four-factor inquiry that has generally been used in

deciding the question of whether there is “reason to know” (level of education,

involvement in business and financial affairs, routine versus lavish expenditures,
                                          -13-

[*13] and deceit by the other spouse). Only the first two factors are applicable

here. Therefore, we will consider education and involvement in financial affairs in

determining whether Mrs. Scott had a reason to know when she signed the joint

return that there were understatements.

          1. Education

      Mrs. Scott has a degree in accounting from Northern Illinois University’s

accounting program. From approximately 1977 to 1984 she was in charge of the

couple’s household finances. She also has business experience managing a sales

team for Mary Kay. With her educational background, coupled with her business

experience, she was in the position to recognize misstatements in the returns had

she chosen to review them. This factor weighs against granting her relief.

          2. Involvement in Financial Affairs

      Petitioners do not have joint accounts, and Mrs. Scott did not have access to

her husband’s personal accounts. The household bills, as well as most of the

grocery shopping and other expenses, were paid out of Mr. Scott’s personal

account. Nevertheless, for 2008, $255,467 of the $293,304 total positive

adjustments to income related exclusively to items from her businesses reported on

her Schedules C. For the taxable year 2009, $33,220 of the $104,040 in total

positive adjustments to income related to items from her businesses. Thus, Mrs.
                                        -14-

[*14] Scott had knowledge of the income and expenses that gave rise to portions

of the understatements of tax.

      Petitioners argue that it does not necessarily follow that having knowledge

of the income itself translates to knowledge of the understatements of tax on the

tax returns. However, the more the relief-seeking spouse knows about a

transaction, “the more likely it is that she will know or have reason to know that

the deduction arising from that transaction may not be valid.” Price v.

Commissioner, 887 F.2d 959, 963 (9th Cir. 1989). The duty to inquire may arise

when the relief-seeking spouse has notice that a particular deduction could result

in a substantial understatement of tax. The failure to inquire may result in the

constructive knowledge of the understatement.

      Mrs. Scott has a responsibility to check the amounts reported for her

businesses. She is not relieved of this obligation simply because she is not

involved in other financial aspects of the household. Responsibility comes with

the benefits of filing jointly. Levin v. Commissioner, T.C. Memo. 1987-67

(holding that a requesting spouse has a duty to inquire about large deductions

claimed on her joint return and cannot escape the resulting tax liability by ignoring

the return’s contents).
                                        -15-

[*15] We agree with respondent, who argues that a requesting spouse who does

not review a return is nonetheless deemed to have knowledge of the contents of

the return. To put it another way, “[f]ailure to review a tax return, standing alone,

does not relieve a taxpayer of liability”. Schmidt v. United States, 5 Cl. Ct. 24, 27

(1984).

      Petitioners cite Price v. Commissioner, 887 F.2d 959, and McClelland v.

Commissioner, T.C. Memo. 2005-121, as examples where relief from joint and

several liability has been granted when there is no shared bank account and there

are no unusual or lavish expenses. Reliance on these cases, however, is misplaced

because in each of these cases the requesting spouse’s income was not a cause of

the tax deficiency. Price involved a requesting spouse whose income was not a

point of contention on the tax return. In addition, this spouse had reviewed the tax

return and even mentioned to her husband that the deductions on his part were

excessive. Price v. Commissioner, 887 F.2d at 961.

      Similarly, in McClelland, the requesting spouse had limited involvement

with the business from which the improper interest deductions originated.

Furthermore, it was the husband who provided all of the business’ information to

their accountant, and the requesting spouse was never allowed the opportunity to

review the tax returns. McClelland v. Commissioner, slip op. at 13. Mrs. Scott,
                                         -16-

[*16] however, had a responsibility to review the tax returns, especially items that

concerned her businesses, and a review of her Schedule C items would have put

her on notice of the substantial overstated expense for 2008 and other errors for

2009.

        In conclusion, Mrs. Scott should have had knowledge of income tax owed

related to items of her own businesses. We hold that those items were not

attributable to Mr. Scott. We must also consider, however, whether she had reason

to know about the other adjustments to the returns.

        The record establishes that Mrs. Scott did not know about her husband’s

businesses or about the adjustments made to her husband’s business expense

deductions. Therefore, we find she did not have reason to know of these items of

disallowed expense deductions. Finally, regarding adjustments disallowing

deductions claimed on Schedules A, Itemized Deductions, Mrs. Scott has failed to

show why she would not have known about these items.

        B. Inequity

        We now must take into account all the facts and circumstances in deciding

whether it is inequitable to hold Mrs. Scott liable for the deficiencies. Sec.

6015(b)(1)(D), (f). The material factors most often cited and considered are

whether there has been a significant benefit to the spouse claiming relief and
                                          -17-

[*17] 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. 306, 314 (2002), aff’d, 101 Fed.

Appx. 34 (6th Cir. 2004); Jonson v. Commissioner, 118 T.C. 106, 119 (2002),

aff’d, 353 F.3d 1181 (10th Cir. 2003). Normal support is not considered a

significant benefit.

      Petitioners received combined retirement distributions of $469,000 and

$338,336 for 2008 and 2009, respectively. On their 2008 and 2009 returns

petitioners offset their retirement income with Schedule C losses. As a result,

petitioners received a refund of $43,433 for 2008 and a refund of $3,650 for 2009.

They owe deficiencies of $93,925 and $36,270 for 2008 and 2009, respectively.

      The overstated expenses of Mrs. Scott’s businesses played a major role in

petitioners’ tax liabilities. Denying Mrs. Scott relief regarding these items is not

inequitable and would not cause undue economic hardship. We do find as to the

adjustments to Mr. Scott’s business expense deductions of which she had no

reason to know that holding her liable on these facts would be inequitable. She

had no personal knowledge of or responsibility for these other items, and she did

not enjoy any significant benefit flowing from them. Finally, denying her relief

for disallowed itemized deductions causes no undue hardship and therefore, she is
                                         -18-

[*18] not granted relief because she failed to establish that she had no reason to

know about them.

V. Conclusion

      The collection action is sustained for both years. The settlement officer did

not abuse her discretion after giving petitioners numerous chances to comply with

her requests for supporting documents. In addition, Mrs. Scott is granted relief

from joint and several liability only to the extent that the tax deficiencies for 2008

and 2009 were attributable to Mr. Scott’s Schedule C items.

      In reaching our holding herein, we have considered all arguments the parties

made, and to the extent we did not mention them above, we conclude they are

moot, irrelevant, or without merit.

      To reflect the foregoing,


                                                     Decision will be entered under

                                                Rule 155.
