                               T.C. Memo. 2013-292



                         UNITED STATES TAX COURT



                 BRENDA REILLY-CASEY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 6558-11.                           Filed December 30, 2013.



      Richard Ager Uffelman, for petitioner.

      Nhi T. Luu, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      KROUPA, Judge: This case is before the Court in response to a

determination notice under section 6015(e)1 concerning petitioner’s tax liabilities


      1
        All section references are to the Internal Revenue Code, as amended and in
effect at all times relevant, and all Rule references are to the Tax Court Rules of
                                                                        (continued...)
                                        -2-

[*2] for 2006 and 2007 (years at issue). We must decide whether petitioner is

entitled to relief from joint and several liability under section 6015. We hold that

petitioner is not.

                               FINDINGS OF FACT

       Some of the facts have been deemed stipulated pursuant to Rule 91(f) and

are so found. The stipulation of facts and the accompanying exhibits are

incorporated by this reference. Petitioner resided in Oregon when she filed the

petition.

       Petitioner has been a successful realtor since the 1980s. She often ranked in

the top 10% of her company’s annual sales rankings. Dann Casey worked for the

same company, and petitioner and Mr. Casey (collectively, couple) were married

in 1993.

       Petitioner and Mr. Casey each owned various single-family and multiunit

residential properties before, during and after the years at issue. Petitioner owned

at least three properties during the years at issue, including 7534 SW Elmwood

Street in Portland, Oregon (Elmwood property). The couple resided at the

Elmwood property between 1995 and October 2006. The couple then resided at


       1
       (...continued)
Practice and Procedure, unless otherwise indicated.
                                         -3-

[*3] 5043 SE 141st Place in Portland, Oregon (141st Place property) from

November 2006 until 2012. Mr. Casey owned the 141st Place property and paid

the mortgage and all associated expenses. Petitioner consequently leased the

Elmwood property and collected $9,900 in annual rent.

      Mr. Casey purchased four parcels of real property and invested in a limited

liability company during the years at issue. Mr. Casey also owned residential

properties in Arizona and Nevada. Petitioner periodically used and enjoyed these

properties, and she was added to the title of the property in Arizona.

      Petitioner periodically collected rents and facilitated maintenance on Mr.

Casey’s properties. Petitioner lent Mr. Casey $161,250 in 2006 and 2007, $60,000

of which remains outstanding. Petitioner also lent to Mr. Casey’s associate

$80,000 that partially funded another real property purchase with Mr. Casey.

      A return preparer assisted petitioner and Mr. Casey with jointly filing Forms

1040, U.S. Individual Income Tax Return, for the years at issue (joint returns).

Petitioner provided a completed questionnaire and documentation to the return

preparer. Petitioner then followed up by telephone with the return preparer. The

return preparer electronically filed the joint returns. Petitioner knew that the joint

returns had been electronically filed. Petitioner received hard copies of the joint

returns soon after the return preparer filed them.
                                         -4-

[*4] Respondent issued to the couple a deficiency notice for the years at issue.

Respondent determined deficiencies of $184,385 for 2006 and $36,752 for 2007

(collectively, understatements) and accuracy-related penalties. Respondent

determined that the couple had failed to report income, overstated interest and

claimed erroneous deductions from real estate activities (real estate items).

Respondent also determined that the couple had failed to report an Oregon State

income tax refund (Oregon refund) received in 2006 and income from pension or

annuities, qualified dividends, capital gain distributions and Social Security for the

years at issue. The couple did not file a petition with this Court for

redetermination of the determinations in the deficiency notice.

      Petitioner later submitted to respondent Form 8857, Request for Innocent

Spouse Relief, and Form 12150, Questionnaire for Requesting Spouse.

Respondent denied petitioner’s request for relief.2 Petitioner timely filed a petition

with this Court regarding respondent’s denial of relief.

      Petitioner and Mr. Casey dissolved their marriage in 2012. The uncontested

divorce decree did not allocate any payments for outstanding taxes, spousal

support, division of property or repayment of any outstanding loans.


      2
     Petitioner requested relief in July 2010. Respondent denied the request in
December 2010.
                                          -5-

[*5] Petitioner’s net worth exceeds $1 million, and her monthly income exceeds

her monthly expenses. Petitioner did not suffer from poor mental or physical

health during the years at issue or when she requested relief from joint and several

liability.

       Petitioner filed Federal income tax returns for 2009 and 2010 more than

three years late. Petitioner has not filed a Federal income tax return for 2011.

                                       OPINION

       We must decide whether petitioner is entitled to relief from joint and several

liability for the joint tax obligations for the years at issue. Petitioner requests

relief from tax liabilities from the real estate items and unreported income from the

Oregon refund. Petitioner contends she neither knew nor had constructive

knowledge of the understatements because she failed to review the joint returns

and was unaware of Mr. Casey’s finances. Respondent argues that petitioner has

not established that she meets the requirements for relief. We agree with

respondent.

I. Standard of Review and Burden of Proof

       This Court applies a de novo scope and standard of review to a taxpayer’s

request for innocent spouse relief. Porter v. Commissioner, 132 T.C. 203, 210

(2009). The spouse requesting relief generally bears the burden of proof. See
                                         -6-

[*6] Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff’d, 101 Fed.

Appx. 34 (6th Cir. 2004); Young v. Commissioner, T.C. Memo. 2012-255.

Petitioner has not presented credible evidence relevant to the disputed factual

issues to shift the burden to respondent. See sec. 7491(a).

II. Relief From Joint and Several Liability

      We begin with the general principles of joint returns. A married taxpayer

may elect to file a joint Federal income tax return with his or her spouse. Sec.

6013(a). Each spouse filing the return is jointly and severally liable for the entire

tax shown on the return or otherwise determined to be due. Sec. 6013(d)(3);

Cheshire v. Commissioner, 115 T.C. 183, 188 (2000), aff’d, 282 F.3d 326 (5th Cir.

2002). A taxpayer may seek relief from joint and several liability that arises from

a joint return in certain situations and subject to a variety of conditions. See sec.

6015. Petitioner contends she qualifies for innocent spouse relief under

subsection (b) and equitable relief under subsection (f).3

      A. Relief Under Subsection (b)

      The parties dispute whether petitioner is entitled to relief from joint and

several liability for an understatement under subsection (b). The requesting


      3
      The parties stipulated that petitioner is not eligible for relief under sec.
6015(c).
                                         -7-

[*7] spouse must establish that he or she did not know and had no reason to know

of the understatement when signing the return.4 See sec. 6015(b)(1)(C); sec.

1.6015-2(a), Income Tax Regs. A requesting spouse had reason to know of an

understatement if a reasonably prudent taxpayer in his or her circumstances would

have known that the tax liability stated was erroneous or that further investigation

was warranted. Guth v. Commissioner, 897 F.2d 441, 443-445 (9th Cir. 1990),

aff’g T.C. Memo. 1987-522. We consider the nature and relative amount of the

erroneous item, the couple’s financial situation, the requesting spouse’s

educational background and business experience, whether the requesting spouse

participated in the activity that resulted in the erroneous item, whether the

requesting spouse inquired about the item and whether the erroneous item

represented a departure from a recurring pattern reflected in prior years’ returns.

Sec. 1.6015-2(c), Income Tax Regs. This is a factual question that we decide

based on the entire record. Guth v. Commissioner, 897 F.2d at 443-445.

      Petitioner contends she had no reason to know of the understatements

because she did not sign the joint returns. We find this contention unbelievable.

      4
        A requesting spouse must satisfy five requirements under sec. 6015(b).
Respondent concedes that joint returns were filed and petitioner timely sought
relief. See sec. 6015(b)(1)(A), (E). The other two requirements are moot in light
of our holding regarding the lack of knowledge requirement.
                                          -8-

[*8] Her testimony is insufficient to establish that she did not sign the joint

returns. Even if she did not sign the joint returns, the record demonstrates that

petitioner spoke with the return preparer, authorized the return preparer to file the

joint returns, knew the joint returns had been filed and received hard copies of the

joint returns. Petitioner tacitly consented to the joint return filings for the years at

issue. See Reifler v. Commissioner, T.C. Memo. 2013-258, at *15. And there is

no indication that she sought to review the joint returns after each was filed or

objected to either Mr. Casey or the return preparer. Petitioner is charged with

knowledge of the joint returns. See Barranco v. Commissioner, T.C. Memo. 2003-

18.

      Petitioner also knew about the items and surrounding circumstances such

that she should have understood the stated tax liabilities were erroneous or at least

inquired further. Petitioner is an experienced real estate broker who owns multiple

residential properties. Petitioner assisted in managing Mr. Casey’s properties.

Petitioner also knew that Mr. Casey owned and sold residential properties, even

lending money to Mr. Casey and his business partner. Petitioner was aware of the

transactions underlying the real estate items. See, e.g., Bokum v. Commissioner,

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

duty of inquiry and ignored facts that would have led a reasonably prudent
                                          -9-

[*9] taxpayer to inquire further. See Butler v. Commissioner, 114 T.C. 276, 283-

284 (2000); Terzian v. Commissioner, 72 T.C. 1164, 1170 (1979); Thomason v.

Commissioner, T.C. Memo. 1994-418. Further, petitioner failed to show that she

had no reason to know of improper deductions that would give rise to substantial

understatements. See Price v. Commissioner, 887 F.2d 959, 963 (9th Cir. 1989).

      Similarly, petitioner failed to establish that she had no reason to know about

the Oregon refund income. The Oregon refund resulted from a joint State income

tax return the couple filed. Petitioner did not establish that (or even suggest why)

she was ignorant of the couple’s Oregon tax liability for 2005 or that she was

unaware of the Oregon refund.

      Petitioner has not established that she did not know or had no reason to

know of the understatements.5 Petitioner is unable to satisfy this requirement.

Thus, we need not consider the other requirements for relief under subsection (b).

See Alt v. Commissioner, 119 T.C. at 313. Accordingly, petitioner is not entitled

to relief from joint and several liability under subsection (b) for the years at issue.




      5
      Petitioner neither requests nor argues for relief resulting from other items.
We deem that petitioner concedes relief with respect to other items.
                                        - 10 -

[*10] B. Equitable Relief Under Subsection (f)

      We now consider whether petitioner qualifies for relief under subsection (f).

The Commissioner may relieve a requesting spouse of joint liability if it is

inequitable to hold that spouse liable for any deficiency or unpaid tax. Sec.

6015(f); sec. 1.6015-4(a), Income Tax Regs. Equitable relief under subsection (f)

is available only when the spouse does not qualify for relief under subsections (b)

and (c). Fernandez v. Commissioner, 114 T.C. 324, 329-331 (2000). A requesting

spouse must satisfy seven threshold conditions before a request under subsection

(f) will be considered.6 See Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. 397,

399. A requesting spouse that satisfies the threshold conditions must then

demonstrate that equitable relief is appropriate under certain factors. Id. secs. 4.02

and 4.03, 2013 I.R.B. at 400.




      6
       We may consider guidelines the Commissioner prescribed in determining
whether a requesting spouse is afforded equitable relief under subsec. (f). See
Pullins v. Commissioner, 136 T.C. 432, 438-439 (2011). We note that the parties
suggest we apply the proposed guidance in Notice 2012-8, 2012-4 I.R.B. 309. We
have declined to do so because Notice 2012-8, supra, had not become final. See,
e.g., Hudgins v. Commissioner, T.C. Memo. 2012-260, at *15. The Commissioner
has since promulgated final guidelines. See Rev. Proc. 2013-34, 2013-43 I.R.B.
397. We will evaluate petitioner’s request for equitable relief under the guidance
in Rev. Proc. 2013-34, supra.
                                          - 11 -

[*11]           1. Threshold Conditions

        Respondent concedes that petitioner satisfies six of the seven threshold

conditions. The seventh condition is that the income tax must be attributable to an

item of the nonrequesting spouse or an underpayment resulting from the

nonrequesting spouse’s income, unless an enumerated exception applies. See id.

sec. 4.01(7). Respondent concedes that petitioner satisfies the seventh threshold

condition with respect to at least a portion of each understatement.7 Thus,

petitioner meets the threshold requirements (with respect to portions of the

understatements), and we consider petitioner’s request for equitable relief.

                2. Facts and Circumstances Test

        We now consider the seven factors to determine whether equitable relief is

appropriate.8




        7
       Respondent concedes that portions of each understatement should be
allocated to Mr. Casey. See sec. 1.6015-3(d)(2)(iii) and (iv), Income Tax Regs.
We do not determine the appropriate amounts to allocate based on our holding.
        8
        A requesting spouse who satisfies three conditions is entitled to equitable
relief under the Commissioner’s streamlined procedure. See Rev. Proc. 2013-34,
sec. 4.02, 2013-43 I.R.B. at 400. The three conditions are the couple’s marital
status, potential economic hardship absent relief and whether the requesting
spouse knew or had reason to know of the understatement. Petitioner did not meet
the economic hardship or knowledge conditions.
                                        - 12 -

[*12] The first factor is the couple’s marital status. See Rev. Proc. 2013-34, sec.

4.03(2)(a). The couple’s marriage was dissolved by divorce decree in April 2012.

This factor weighs in favor of granting equitable relief.

      The second factor is whether petitioner would suffer economic hardship if

relief is not granted. See id. sec. 4.03(2)(b), 2013-43 I.R.B. at 401. Economic

hardship exists if satisfying the tax liability in whole or part would cause the

requesting spouse to be unable to pay reasonable basic living expenses. Id.

Petitioner’s monthly income covers her monthly expenses. Further, petitioner has

more than $1 million in equity in her real property interests. Satisfying the tax

liabilities would not cause petitioner to be unable to pay reasonable basic living

expenses. Accordingly, this factor is neutral.

      The third factor is whether petitioner knew or had reason to know of an

understatement. See id. sec. 4.03(2)(c)(i)(A), (iii), 2013-43 I.R.B. at 401-402. As

previously discussed, we find that petitioner did have reason to know of the

understatements. In addition, petitioner does not contend she suffered physical or

mental abuse. And we find that Mr. Casey did not restrict petitioner’s access to

financial information. See id. sec. 4.03(2)(c)(i)(A). This factor weighs against

granting equitable relief.
                                        - 13 -

[*13] The fourth factor is whether either spouse is obligated by divorce decree or

other binding agreement to pay the outstanding Federal income tax liability. See

id. sec. 4.03(2)(d), 2013-43 I.R.B. at 402. This factor is neutral as the divorce

decree does not address the tax liability.

      The fifth factor is whether the requesting spouse significantly benefited

from an understatement. See id. sec. 4.03(2)(e). Petitioner benefited financially

by leasing the Elmwood property while the couple resided at the 141st Place

property. Petitioner also used and enjoyed the Nevada and Arizona properties.

This factor weighs slightly against relief.

      The sixth factor is whether the requesting spouse has made a good-faith

effort to comply with the income tax laws in later years. See id. sec. 4.03(2)(f).

Petitioner filed returns for 2009 and 2010 three years late and has not filed a return

for 2011. This factor weighs against relief.

      The seventh and final factor is whether the requesting spouse was in poor

mental or physical health. See id. sec. 4.03(2)(g), 2013-43 I.R.B. at 403.

Petitioner was not in poor mental or physical health when the joint returns were

filed or when she requested relief. This factor is neutral.

      In toto, we find that petitioner has not established that equitable relief is

appropriate. The facts and circumstances indicate that petitioner had sufficient
                                        - 14 -

[*14] knowledge to detect the understatements and that she benefited from the

understatements. Further, she has not complied with the income tax laws in the

years following the understatements. And she has not demonstrated that she

would be unable to pay reasonable living expenses. We conclude that petitioner

does not qualify for equitable relief for either understatement.

      In reaching these holdings, we have considered all of the parties’ arguments,

and, to the extent not addressed, we conclude that they are moot, irrelevant or

without merit.

      To reflect the foregoing,


                                                           Decision will be entered

                                                     for respondent.
