                               T.C. Memo. 2015-198



                         UNITED STATES TAX COURT



                   MARK A. WILLIAMS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 12777-13.                          Filed October 7, 2015.



      Gregory M. McCauley, for petitioner.

      Harry J. Negro and John A. Darazsdi, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: Petitioner seeks review of the determination by the Inter-

nal Revenue Service (IRS or respondent) that he is not eligible for relief from joint

and several liability for tax years 2000 through 2003. The sole question presented
                                         -2-

[*2] is whether he is eligible for such relief under section 6015(f).1 We hold that

he is not so entitled.

                               FINDINGS OF FACT

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

facts and the attached exhibits are incorporated by this reference. Mark A. Wil-

liams (petitioner) and Kathleen Williams were married in 1987. They are still

married and have been living together continuously since then. They resided in

Pennsylvania when petitioner filed his petition.

Background

      Petitioner graduated from high school and attended two years of community

college. He has held a variety of managerial jobs during his career. During 2000

he worked as a building manager for an architectural firm and for HUSA Cigna

Corporation. During 2001-2002 he worked for Basement Doctor Waterproofing

Company (Basement Doctor) and later as a project manager for Belfour Telecom.

He was unemployed during 2003.

      1
        Unless otherwise indicated, all section references are to the Internal Reve-
nue Code in effect at all relevant times; all Rule references are to the Tax Court
Rules of Practice and Procedure; and all dollar amounts are rounded to the nearest
dollar. Petitioner initially sought relief from joint and several liability under sec-
tions 6015(b), (c), and (f). At trial his attorney stated that petitioner seeks relief
only under subsection (f). We treat this as a concession that he is not entitled to
relief under subsection (b) or (c).
                                          -3-

[*3] Mrs. Williams has a high school education. From 1987 until October 2004

she worked as a receptionist and secretary for Bernard Bagdis, an attorney. Her

duties included typing letters, filing, and paying office bills.

      Throughout their marriage Mrs. Williams has been primarily responsible for

the family’s finances. Petitioner knew where the couple banked and how many

accounts they had, but he rarely wrote checks on those accounts. For major ex-

penditures, such as home improvements, petitioner and Mrs. Williams would

consult to determine how much they could afford; petitioner would then decide

what to buy.

       Petitioner and Mrs. Williams filed joint Federal income tax returns for 1987

through 1995. On these returns they reported in full the salary income that each of

them earned. Petitioner prepared these returns himself and, in some years, his

father reviewed them for accuracy. By 1995 petitioner had gained experience in

preparing tax returns.

      Mr. Bagdis during this period was promoting a variety of tax-evasion

schemes that ultimately led to his imprisonment for tax crimes. In 1995 or 1996

he offered one of these schemes to Mrs. Williams. He told her that she could

bring home more income from her secretarial job if she were paid through

Administar Corporation, a Delaware C corporation that he owned. Under this
                                        -4-

[*4] scheme Mr. Bagdis proposed to deposit sums equal to her pretax salary in an

Administar checking account over which Mrs. Williams would have control. She

could then write checks on this account to pay her family’s living expenses

without reporting any of her salary income on her tax returns.

      Mrs. Williams asked petitioner several times whether he thought she should

participate in the Administar scheme. Petitioner initially said no, and Mrs. Wil-

liams did not participate in this scheme in 1995 or 1996. Rather, she continued to

receive, and she and petitioner continued to report for Federal income tax pur-

poses, her usual salary from Mr. Bagdis.

      In 1997 Mrs. Williams again broached with petitioner the possibility of par-

ticipating in the Administar scheme. This time petitioner agreed to speak with

Mr. Bagdis about it. Petitioner did not ask Mr. Bagdis to explain how this plan

would work. He simply asked Mr. Bagdis whether the scheme was “legal,” and

Mr. Bagdis said “yes.” Petitioner then agreed to Mrs. Williams’ participation;

before doing so, he did not seek outside advice concerning the scheme’s

legitimacy.

      Sometime during 1997 Mr. Bagdis ceased issuing salary checks to Mrs.

Williams and instead deposited in an Administar checking account sums equal to

her pretax salary. Mrs. Williams wrote checks on this account to pay the living
                                        -5-

[*5] expenses that she and petitioner incurred. Mrs. Williams continued to receive

her compensation from Mr. Bagdis in this way through October 2004. Mrs.

Williams signed every check written on the Administar account through 2003.

      During 2001 petitioner earned $21,800 as compensation from Basement

Doctor. Mr. Bagdis was a principal shareholder of Basement Doctor. Petitioner’s

earnings from Basement Doctor were deposited into the same Administar account

over which Mrs. Williams exercised control.

      For 1996-1999 petitioner and Mrs. Williams filed Federal income tax re-

turns as married filing separately. (The record does not clearly establish who pre-

pared the 1996-1999 returns but the Court infers that someone in Mr. Bagdis’ law

office prepared them.) For 2000-2003 petitioner and Mrs. Williams resumed the

filing of joint Federal income tax returns. Someone at Mr. Bagdis’ office prepared

the 2000-2003 joint returns using information that petitioner and Mrs. Williams

supplied.

      The information petitioner supplied for 2000-2003 included Forms W-2,

Wage and Tax Statement, reporting his wages from sources other than Basement

Doctor. Petitioner reviewed the returns that Mr. Bagdis’ office prepared. He and

Mrs. Williams signed these returns, and she took them to her office to be filed.

These returns reported none of Mrs. Williams’ secretarial income and none of
                                         -6-

[*6] petitioner’s Basement Doctor income that Mr. Bagdis had deposited in the

Administar account that Mrs. Williams controlled.

      As a result of her involvement in Mr. Bagdis’ schemes, Mrs. Williams faced

criminal charges. She ultimately pleaded guilty to one count of filing a false

Federal income tax return for 2001 in violation of section 7206(1). In her guilty

plea she stipulated that she had also willfully filed false returns for 2000, 2002,

and 2003.

      Following conclusion of the criminal proceeding, the IRS examined the

joint returns that petitioner and Mrs. Williams filed for 2000-2003. In April 2006

petitioner and Mrs. Williams signed Form 4549, Income Tax Examination

Changes, agreeing to deficiencies and civil fraud penalties relating to their wages

that had been diverted to Administar during this period. The deficiencies and

fraud penalties to which petitioner and Mrs. Williams agreed are as follows:

                                                  Penalty
                   Year         Deficiency       sec. 6663
                  2000            $10,008          $7,506
                  2001             10,946           8,208
                  2002              7,863           5,897
                  2003              4,724           3,543
                                        -7-

[*7] Petitioner testified that he did not have assistance of counsel when he signed

the Form 4549. He testified that he signed this Form after Mrs. Williams told him

that she “would go to jail” if he did not sign it. In April 2008 the IRS assessed the

deficiencies and penalties set forth above.

      Petitioner knew that Mrs. Williams earned a salary working for Mr. Bagdis

during 2000-2003 and knew that her salary was not reported on their joint returns

for those years. Petitioner knew that he earned compensation working for Base-

ment Doctor during 2001 and knew that this compensation was not reported on

their 2001 joint return. Petitioner knew that all of this money was being paid to

Administar and that Mrs. Williams was writing checks on an Administar bank ac-

count to defray their joint household and living expenses. Petitioner does not

currently have any health problems and did not have any such problems at the time

he signed the 2000-2003 joint returns. He has never been a victim of spousal

abuse or domestic violence.

      In December 2010 petitioner filed a request for relief from joint and several

liability under section 6015(b), (c), and (f) for tax years 2000-2003. On March 11,

2013, respondent mailed him a Final Appeals Determination denying this request

for relief. On June 6, 2013, petitioner timely sought review in this Court pursuant

to section 6015(e)(1).
                                          -8-

[*8]                                  OPINION

I.     Burden of Proof

       Except as otherwise provided in section 6015, the taxpayer bears the burden

of proving that he or she is entitled to relief from joint and several liability. Rule

142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff’d, 101 F. App’x 34

(6th Cir. 2004). Both the scope and standard of our review in cases requesting

relief from joint and several liability are de novo. Porter v. Commissioner, 132

T.C. 203, 210 (2009).

II.    Relief Under Section 6015(f)

       Married taxpayers may elect to file a joint Federal income tax return. Sec.

6013(a). After making this election, each spouse is jointly and severally liable for

the entire tax due for that year. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C.

276, 282 (2000). In certain circumstances, however, a spouse who has filed a joint

return may seek relief from joint and several liability under procedures set forth in

section 6015.

       Section 6015(b) specifies procedures for relief from liability for all joint

filers, and subsection (c) specifies procedures to limit liability for taxpayers who

are no longer married or are living separately. Petitioner concedes that he is not

entitled to relief under subsection (b) or (c).
                                         -9-

[*9] Section 6015(f) provides that “equitable relief” may be afforded to a tax-

payer if “relief is not available to such individual under subsection (b) or (c).”

“Under procedures prescribed by the Secretary” such relief may be available 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).”

Sec. 6015(f)(1); sec. 1.6015-4(a), Income Tax Regs. The Commissioner has

specified the procedures governing equitable relief in Revenue Procedure 2013-

34, section 4.01, 2013-43 I.R.B. 397, 399-400.2

      Revenue Procedure 2013-34, supra, sets forth seven threshold conditions

that a requesting spouse must satisfy to be eligible for equitable relief. A re-

questing spouse who satisfies these conditions may qualify for a “streamlined

determination of equitable relief” if (among other things) he or she is “no longer




      2
        Revenue Procedure 2013-34, 2013-43 I.R.B. 397, which modified and
superseded Revenue Procedure 2003-61, 2003-2 C.B. 296, applies to requests for
relief from joint and several liability that were filed on or after September 16,
2013, or that (like petitioner’s request) were pending in Federal court on that date.
Although we are not bound by the guidelines set forth in Revenue Procedure
2013-34, supra, we consult those guidelines in determining whether a taxpayer is
entitled to equitable relief. See Pullins v. Commissioner, 136 T.C. 432, 438-439
(2011); Sriram v. Commissioner, T.C. Memo. 2012-91, 103 T.C.M. (CCH) 1482,
1484-1485.
                                        - 10 -

[*10] married to the nonrequesting spouse.” Id., sec. 4.02. We assume without

deciding that petitioner meets these seven threshold conditions.3 However, he was

ineligible for a “streamlined determination” because he was and remains married

to Mrs. Williams.

      A requesting spouse who meets the threshold conditions but does not quali-

fy for a “streamlined determination” may nevertheless be granted equitable relief

under Revenue Procedure 2013-34, section 4.03. That section sets out a

nonexclusive list of factors relevant in assessing a taxpayer’s entitlement to such

relief. Neither any single factor nor a majority of factors controls this

determination; the degree of importance of each factor varies depending on the

requesting spouse’s facts and circumstances. See id. sec. 4.03(2). Relief may be

denied even where a majority of factors favors relief and vice versa. See id. sec.

3.05, 2013-43 I.R.B. at 398. The Court may choose to assign varying weight to

the listed factors, or to include other factors, depending on the circumstances of

the case. See Hall v. Commissioner, T.C. Memo. 2014-171, at *38.




      3
        The seventh condition considers the extent to which the liability is attri-
butable to an item of the nonrequesting spouse. Rev. Proc. 2013-34, sec. 4.01(7),
2013-43 I.R.B. at 399. That condition is met here only in part, because a portion
of the deficiency for 2001 is attributable to petitioner’s unreported income from
Basement Doctor.
                                        - 11 -

[*11] Revenue Procedure 2013-34, section 4.03, directs our attention to the fol-

lowing factors: (1) marital status, (2) economic hardship, (3) legal obligation to

pay the Federal tax liability, (4) mental or physical health, (5) subsequent compli-

ance with Federal tax laws, (6) significant benefit, and (7) knowledge or reason to

know about the deficiency or unpaid tax liability. We find that the first four of

these factors are neutral. Petitioner is still married to Mrs. Williams; he has not

shown that he would suffer economic hardship if relief is denied; there was no

legal obligation (such as a divorce decree) that made either spouse specifically

responsible for Federal income taxes; and petitioner had no medical or physical

health problems during the relevant years.

      The fifth factor is also neutral. As far as the record shows, petitioner ap-

pears to have complied with his Federal tax obligations after the IRS discovered

the Administar scheme in 2004. Where the requesting spouse remains married to

and files joint tax returns with the nonrequesting spouse, “this factor will be neu-

tral if the joint returns are compliant with the tax laws.” Hall, at *41; Rev. Proc.

2013-34, sec. 4.03(2)(f)(ii), 2013-43 I.R.B. at 402.

      The sixth factor favors petitioner slightly. While he received benefits from

the understatements of income, these appear to have consisted of the payment of

joint household expenses rather than “the benefits of a lavish lifestyle.” Rev. Proc.
                                       - 12 -

[*12] 2013-34, sec. 4.03(2)(e). There is no evidence that he received “significant

benefit (beyond normal support) from the unpaid income tax liability.” Ibid.; see

Pullins v. Commissioner, 136 T.C. 432, 451 (2011).

      At trial the parties focused chiefly on the last factor enumerated above,

namely, whether petitioner “knew or should have known” about the understate-

ments of income on the 2000-2003 joint returns. Where the understatement arises

from omitted income, we employ a “knowledge of the transaction” test. This test

requires us to determine whether the requesting spouse was aware of the circum-

stances that gave rise to the understatement of income. See Bokum v. Commis-

sioner, 94 T.C. 126, 146 (1990), aff’d, 992 F.2d 1132 (11th Cir. 1993).

      We find that petitioner had actual knowledge of the circumstances that gave

rise to the 2000-2003 understatements of income. He signed the Form 4549

agreeing that he was liable for a fraud penalty for each year. This indicates that he

was aware contemporaneously of the 2000-2003 omissions from income. His only

answer when questioned at trial about why he signed the Form 4549 was that Mrs.

Williams told him she “would go to jail” if he did not sign the Form. For whatever

reason, he signed the Form voluntarily, and he thereby admitted that he knew

about the omissions from income.
                                       - 13 -

[*13] Wholly apart from the Form 4549, other evidence establishes that petitioner

knew or had reason to know about the omitted income. He personally prepared

the couple’s tax returns for 1987-1995 and invariably reported Mrs. Williams’

wages as taxable income. He knew that Mrs. Williams continued to earn after

1995 the same wages she had earned from Mr. Bagdis previously; that her post-

1996 compensation was being diverted into an Administar bank account; and that

Mrs. Williams was writing checks on that account, as on an ordinary bank

account, to defray their living expenses. He knew that the purpose of this

arrangement was to eliminate taxes on her wages as well as to eliminate taxes on

his compensation from Basement Doctor, so that the couple could take home more

money and thus enhance their standard of living. This evidence makes clear that

petitioner was aware of the circumstances that gave rise to the omissions from

their 2000-2003 joint returns of both his and Mrs. Williams’ income.

      Petitioner testified that he thought Administar was paying taxes on the in-

come diverted to it and that this relieved him and his wife of any tax liability. We

found this testimony unpersuasive for several reasons. First, petitioner was not a

credible witness. His testimony on this point was vague and conclusory. It had a

rote quality and appeared to be from a script that he had memorized.
                                         - 14 -

[*14] Second, petitioner plainly had misgivings about the Administar scheme.

For 1995 and 1996 he advised his wife against participating in it. He acquiesced

in her doing so in 1997, but he declined to file a joint tax return with her for that

year or for the next two years. Even though the Administar scheme sounded too

good to be true, he made no meaningful inquiry into its legitimacy before agreeing

to his wife’s participation. And he made no meaningful inquiry before signing up

for this scheme himself in 2001. He took no steps whatever to verify that Admini-

star was actually filing tax returns and paying tax on the diverted income, as he

claimed to believe. He thus evidenced willful blindness to the truth.

      Revenue Procedure 2013-34, section 4.03(2), notes that the seven factors

discussed above are “not intended to comprise an exclusive list” and that “[o]ther

factors relevant to a specific claim for relief may also be taken into account.” See

Hall, at *38 (noting that we consider the listed guideline factors “as well as any

other relevant factors”).4 We conclude that an additional factor weighs against

equitable relief here. The evidence established that Mrs. Williams did not sign up


      4
        See, e.g., Torrisi v. Commissioner, T.C. Memo. 2011-235, 102 T.C.M.
(CCH) 338, 346 (considering as additional factor weighing against relief that the
taxpayer had depleted life insurance proceeds despite outstanding Federal income
tax liability); Haigh v. Commissioner, T.C. Memo. 2009-140, 97 T.C.M. (CCH)
1794, 1804 (considering as additional factor that nonrequesting spouse had posted
a bond that was used to satisfy the deficiency determined by the Commissioner).
                                        - 15 -

[*15] for the Administar scheme until petitioner gave his approval and that she

would not have participated in this scheme but for the fact that petitioner had

given his approval. Petitioner, therefore, not only had actual knowledge of the

omissions from income; he was also a contributing cause of those omissions by

condoning Mrs. Williams’ participation in Mr. Bagdis’ scheme.

      In sum, we find that petitioner had actual knowledge of the improper omis-

sions of income from the 2000-2003 joint returns and that he was a significant

contributing cause of those omissions. Weighing all the factors that we believe

are relevant to petitioner’s claim for relief, we conclude that he has failed to carry

his burden of proving that he is entitled to equitable relief under section 6015(f).

      To reflect the foregoing,


                                                  Decision will be entered for

                                           respondent.
