                                  T.C. Memo. 2019-136



                            UNITED STATES TAX COURT



           HABIBE KRUJA, Petitioner, AND ERMIR KRUJA, Intervenor v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 23859-17.                             Filed October 15, 2019.



      Habibe Kruja, pro se.

      Ermir Kruja, pro se.

      Derek S. Pratt, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      BUCH, Judge: The sole issue before the Court is whether Ms. Kruja is

entitled to innocent spouse relief under section 6015.1 The Commissioner initially


      1
          Unless otherwise indicated, all section references are to the Internal
                                                                           (continued...)
                                        -2-

[*2] denied Ms. Kruja’s request for relief relating to deficiencies from 2010 and

2011 taxable years but now concedes that she is entitled to relief. However, Mr.

Kruja opposes relief. Ms. Kruja is entitled to relief under section 6015(c) for

deficiencies and accuracy-related penalties allocable to Mr. Kruja.

                               FINDINGS OF FACT

      Ms. Habibe Kruja was married to Mr. Ermir Kruja in 2010 and 2011, the

years at issue. Ms. Kruja holds a master’s in business administration degree, and

in 2010 and 2011 she worked as a finance manager at Cushman & Wakefield. In

2010 and 2011 Mr. Kruja owned and operated his business, Bobbie’s Cafe. The

Krujas maintained a joint bank account during the years at issue. Ms. Kruja also

maintained her own personal bank account, and Mr. Kruja maintained several

business and personal accounts.

      The Krujas filed joint Forms 1040, U.S. Individual Income Tax Return, for

2010 and 2011. They received State refunds but did not report these refunds as

income on their Federal income tax returns. In addition they reported

unreimbursed employee business expenses on their Schedules A, Itemized


      1
       (...continued)
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All monetary amounts are rounded to the
nearest dollar.
                                         -3-

[*3] Deductions. As required on the Schedules A, they attached Forms 2106,

Employee Business Expenses, for Mr. Kruja’s business and Forms 2106-EZ,

Unreimbursed Employee Business Expenses, for Ms. Kruja to the returns. For

2011 they filed an amended return and attached Schedule C, Profit or Loss From

Business, reporting gross receipts and deducting expenses related to Bobbie’s

Cafe.

        Ms. Kruja filed for divorce in June 2013.

        On March 7, 2014, the Commissioner issued the Krujas a notice of

deficiency for their tax years 2010 and 2011. The Commissioner (1) determined

additional income from Bobbie’s Cafe, (2) disallowed or adjusted various

Schedule C deductions attributable to Bobbie’s Cafe, (3) determined income from

State tax refunds, and (4) disallowed all Schedule A unreimbursed employee

business expense deductions. Because the Krujas benefit more from the standard

deduction than the adjusted itemized deductions, the Commissioner allowed the

standard deduction in lieu of itemized deductions. The Commissioner also

determined accuracy-related penalties under section 6662(a).

        To determine the unreported income from Bobbie’s Cafe on their returns,

the Commissioner used the bank deposits analysis method. The Krujas’ joint bank
                                         -4-

[*4] account and Mr. Kruja’s various bank accounts showed deposits for State tax

refunds as well as income from Bobbie’s Cafe that had not been reported.

      The Krujas petitioned the Tax Court to redetermine the deficiency in docket

No. 13368-14, and the case settled without a trial. As a result of this initial

proceeding the parties agreed on deficiencies for 2010 and 2011 of $37,380 and

$146,957, respectively, and penalties under section 6662(a) of $3,738 and

$14,696, respectively. Counsel purporting to represent the Krujas in the

deficiency proceeding signed the decision on behalf of both Mr. and Ms. Kruja.

      In May 2014 Ms. Kruja filed Form 8857, Request for Innocent Spouse

Relief, for 2010, 2011, and 2012. On this request Ms. Kruja claimed the

deficiencies were “due to the errors/ommissions [sic] from her ex-husband”, she

“had no involvement with her ex-husband’s business” or “with the record keeping

of her ex-husband’s business”, and she did not benefit “in any way from the

income that had not been claimed on the 2010, 2011 or 2012 tax returns.” She

further stated on the Form 8857:

      Habibe prepared and filed the 2010 tax return with her husband.
      Habibe had not been involved in any way with her husband’s 2010
      business return.

      Habibe prepare[d] and filed jointly the 2011 tax return with her
      husband. Habibe received information from her husband’s
      accountant, who had prepared the information for the schedule C.
                                       -5-

[*5] In an explanation of household finances on Form 8857, Ms. Kruja asserted:

      Habibe and her husband had a joint account, however Habibe did not
      deposit money into the joint account or take disbursements from the
      joint account. Habibe had her own account and it was her belief that
      the joint account had no activity since her husband also kept his own
      account(s).

      The Krujas’ divorce became final on April 16, 2015. On May 20, 2015, the

Commissioner granted Ms. Kruja innocent spouse relief for 2012 under section

6015(b).

      On July 15, 2015, the Commissioner received a second Form 8857 from Ms.

Kruja concerning 2010 and 2011. On her request, Ms. Kruja asserted the

following claims:

      The tax liability that resulted from the audit of 2010 and 2011
      occurred due to errors/ommisions [sic] from my ex-husband. I had no
      involvement with his business, which is the cause of the additional
      tax obligation. I did not have involvement in the record keeping of
      the business either. I did not benefit in anyway [sic] from the income
      from 2010 and 2011. I had the courage to open a separate bank
      account but he was very angry with that decision and he would not
      give me any of his income and made me pay all of the bills and
      childcare expense from my account.

      In addition to all this, somehow Ermir managed to manipulate the
      system to ensure that I was not involved in the audit process. I had
      transferred my power of attorney to Allan Iadema in March, 2014 yet
      his attorney JG tax Group still represented me in court without my
      knowledge. I only learned this from countless hours of telephone
      calls to various departments in the IRS. He would not share any
                                        -6-

[*6] information with me even after asking for status updates. Neither
     would his attorney, even though they represented me in court.

      On August 12, 2015, the IRS received a Form 12508, Questionnaire for

Non-Requesting Spouse, from Mr. Kruja explaining why he did not believe Ms.

Kruja should be granted innocent spouse relief. On the questionnaire Mr. Kruja

claimed that Ms. Kruja prepared their tax returns, worked as a cashier, filed bills

and invoices, and organized paperwork on behalf of his business, Bobbie’s Cafe.

      The Commissioner considered Ms. Kruja’s appeal and issued a letter on

August 24, 2017, denying Ms. Kruja innocent spouse relief for 2010 and 2011

under section 6015(b), (c), and (f). In the letter the Commissioner determined that

the Tax Court had already “issued a final decision” and that Ms. Kruja

“meaningfully participated in that proceeding.”

      While residing in Arizona, Ms. Kruja filed a timely petition based on the

determination.2 She claimed the following:

      I did not participate in the court proceeding as I was not made aware
      of it whatsoever. The full burden is on me when most of the tax debt
      is related to the business that was fully owned by Ermir Kruja--my ex
      spouse. I had zero interest, was not a shareholder or a partner.




      2
       We acknowledge that Arizona is a community property State, but that fact
does not change our analysis. See sec. 6015(a) (flush language).
                                       -7-

[*7] Mr. Kruja intervened3 to contend that Ms. Kruja was not entitled to relief

because she did their taxes, knew about all of the bank accounts and their income

and expenses, and had received a large settlement from the business proceeds in

the divorce.

      Since the filing of that petition, the Commissioner has changed some of his

positions. He now contends that Ms. Kruja is not precluded from raising a claim

for innocent spouse relief for 2010 and 2011. The Commissioner claims that the

adjustments attributable to Bobbie’s Cafe should be allocated to Mr. Kruja. The

Commissioner also claims that unreported State tax refunds and disallowed

unreimbursed employee business expenses attributable to Ms. Kruja’s job should

be allocated to her.




      3
       If a spouse petitions the Court for section 6015 relief, the nonrequesting
spouse has a right to intervene in the case under section 6015(e)(4) and Rule 325.
By doing so, the intervenor becomes a party. Sec. 6015(e)(4).
                                         -8-

[*8] This case was tried in January 2019.4 Both Mr. and Ms. Kruja testified, and

they disagreed as to the extent of her involvement with Bobbie’s Cafe and her

method for preparing their joint returns. This disagreement was also evident from

their statements in the administrative record.

                                      OPINION

      Married taxpayers may generally elect to file a joint Federal income tax

return.5 If they do so, each spouse is jointly and severally liable for the entire tax




      4
       We held trial in this case before the enactment of section 6015(e)(7), which
provides:

            (7) Standard and scope of review.--Any review of a
      determination made under this section shall be reviewed de novo by
      the Tax Court and shall be based upon--
                   (A) the administrative record established at the time of
            the determination, and
                   (B) any additional newly discovered or previously
            unavailable evidence.

This provision is effective for “petitions or requests filed or pending on or after the
date of the enactment of this Act.” Taxpayer First Act, Pub. L. No. 116-25, sec.
1203(b), 133 Stat. at 988 (2019). Because the trial evidence was merely
cumulative of what was already included in the administrative record, section
6015(e)(7) does not affect the outcome of this case. As a result, we have not
addressed the effect of section 6015(e)(7).
      5
          Sec. 6013(a).
                                           -9-

[*9] liability for that year.6 In certain circumstances, a spouse who previously

filed a joint return may seek relief from joint and several liability under procedures

set forth in section 6015.7

       Section 6015(a) allows a spouse to seek relief from joint and several

liability under subsection (b) and, if eligible, to elect to allocate the liability

according to provisions set forth in subsection (c). If a taxpayer does not qualify

for relief under either subsection (b) or (c), the taxpayer may be eligible for

equitable relief under subsection (f). The Secretary has discretion to grant

equitable relief to a spouse who filed a joint return with an unpaid tax liability or a

deficiency.8 Except as otherwise provided in section 6015, the taxpayer bears the

burden of proving that he or she is entitled to section 6015 relief.9

       In the determination, the Commissioner asserted that the Tax Court had

already issued a final decision in a deficiency proceeding in which Ms. Kruja

could have raised innocent spouse relief and that she had meaningfully

participated in that proceeding. However, the Commissioner now agrees with Ms.


       6
           Sec. 6013(d)(3).
       7
           Sec. 6015(a).
       8
           Sec. 6015(f).
       9
           Rule 142(a).
                                         - 10 -

[*10] Kruja that she is not precluded from raising a claim for relief and that the

doctrine of res judicata does not apply here. Res judicata generally prevents

parties from relitigating the same cause of action and “applies to a claim if it was,

or could have been, litigated as part of the cause of action in a prior case.”10

Under section 6015(g)(2), “to escape the effect of res judicata from prior litigation,

the requesting spouse must show (1) that his innocent spouse claim ‘was not an

issue’ in the prior proceeding and (2) that he did not ‘participate[] meaningfully’

in the prior proceeding.”11 The Commissioner bears the burden of proving that res

judicata precluded Ms. Kruja’s section 6015(c) claim.12 Because Ms. Kruja did

not meaningfully participate in the case in docket No. 13368-14, she is not

precluded from raising her claim.

      Ms. Kruja elected relief under section 6015(c) twice--once before the

Krujas’ divorce was finalized and once after. Under section 6015(c), a divorced or

separated spouse may elect to limit liability for a deficiency on a joint return. The

election may be filed at any time after the deficiency is asserted but not later than



      10
       Morse v. Commissioner, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673,
676-677 (2003), aff’d, 419 F.3d 829 (8th Cir. 2005).
      11
           Koprowski v. Commissioner, 138 T.C. 54, 65 (2012).
      12
           See Rules 39, 142(a); Calcutt v. Commissioner, 91 T.C. 14, 20-21 (1988).
                                         - 11 -

[*11] two years after the Secretary begins collection activities.13 Here, no

collection activities have commenced, so the two-year period has not started to

run.

       To be eligible for relief under section 6015(c) the electing individual must:

(1) no longer be married to or be legally separated from, the individual with whom

the joint return was filed or (2) not have been a member of the same household

with the individual with whom the joint return was filed during the 12-month

period before the election was filed.14 The regulations permit a second election

when a change in the taxpayer’s marital status opens the door to relief for which

the taxpayer was previously ineligible.15 Ms. Kruja did not qualify for relief under

section 6015(c) at the time of her first request because she was still married and

had been physically separated for less than 12 months at the time of election. Ms.

Kruja’s second claim for innocent spouse relief satisfied the timing requirements

for purposes of her eligibility for relief under section 6015(c) because she was

divorced when she made the second election.




       13
            Sec. 6015(c)(3)(B).
       14
            Sec. 6015(c)(3)(A)(i).
       15
            Sec. 1.6015-1(h)(5), Income Tax Regs.
                                         - 12 -

[*12] Section 6015(c) limits the requesting spouse’s liability for a deficiency to

the portion of the deficiency properly allocable to that spouse under

subsection (d). In general, any item giving rise to a deficiency on a joint return is

allocated to the individuals filing the return in the same manner as it would have

been if the individuals had filed separate returns.16 Under section 6015(c)(2), the

electing spouse generally has the burden of proving how much of any deficiency is

allocable to him or her.

      However, section 6015(d) provides an exception that allows an item that

would ordinarily be allocable to one individual under the general rule to be

allocable to the other individual filing the joint return to the extent that the other

individual received a tax benefit from the item.17 Ms. Kruja claims that she did not

receive any tax benefits from the unreported income, and neither Mr. Kruja nor the

Commissioner disputes this claim.

      As for allocation of erroneous items between the former spouses, section

1.6015-3(d)(2)(iii), Income Tax Regs., provides that “[e]rroneous items of income

are allocated to the spouse who was the source of the income”, and section 1.6015-

3(d)(2)(iv), Income Tax Regs., provides that “[e]rroneous deductions related to a


      16
           Sec. 6015(d)(3)(A).
      17
           Sec. 6015(d)(3)(B).
                                        - 13 -

[*13] business or investment are allocated to the spouse who owned the business

or investment.” It is undisputed that Bobbie’s Cafe was Mr. Kruja’s business. As

a result all adjustments attributable to Bobbie’s Cafe are allocable to Mr. Kruja.

This includes all adjustments to Schedule C items, the unreported income from

Bobbie’s Cafe, and Mr. Kruja’s portion of the disallowed employee business

expense deductions. Likewise, disallowed unreimbursed employee business

expense deductions attributable to Mr. and Ms. Kruja are separately allocable to

each of them.

      If the Commissioner shows that when signing the return the electing spouse

had actual knowledge of any item giving rise to a deficiency (or portion thereof)

which is not allocable to the electing spouse, the election usually does not apply to

that deficiency (or portion).18 The Commissioner must demonstrate actual

knowledge by a preponderance of the evidence.19 The actual knowledge standard

is narrower than the “reason to know” standard applied under section 6015(b)

and (f).20 Proving actual knowledge requires the Commissioner to show that the



      18
           Sec. 6015(c)(3)(C).
      19
           Culver v. Commissioner, 116 T.C. 189, 196 (2001).
      20
       McDaniel v. Commissioner, T.C. Memo. 2009-137, 97 T.C.M. (CCH)
1786, 1789 (2009).
                                        - 14 -

[*14] individual making the election had “actual knowledge of the factual

circumstances which made the item unallowable as a deduction.”21 Proving actual

knowledge of the tax laws or the legal consequences is not required.22

      Our Court has not answered and we leave open the question of whether the

burden of proof shifts to the intervenor when the Commissioner concedes that a

taxpayer is entitled to relief and an intervenor opposes relief.23 Because we would

decide this case the same way regardless of which party bears the burden, we do

not need to decide who bears the burden.

      The Commissioner agrees with Ms. Kruja that she did not have actual

knowledge of the items giving rise to the deficiencies attributable to Mr. Kruja’s

business when she signed the returns. Mr. Kruja disagrees. Nevertheless, the

evidence in the administrative record does not establish that Ms. Kruja had actual

knowledge of the items attributable to Bobbie’s Cafe giving rise to the

deficiencies.

      We do not agree with the Commissioner that the full portions of the

deficiencies attributable to the State tax refunds are allocable to Ms. Kruja. In the


      21
           King v. Commissioner, 116 T.C. 198, 204 (2001).
      22
           King v. Commissioner, 116 T.C. at 204.
      23
           See Hollimon v. Commissioner, T.C. Memo. 2015-157, at *7.
                                         - 15 -

[*15] absence of clear and convincing evidence supporting a different allocation,

an erroneous item of income is generally allocated 50% to each spouse.24 Mr. and

Ms. Kruja owned the State tax refunds jointly and there is no evidence in the

administrative record, or adduced at trial, to support an allocation other than 50%

to each spouse. Accordingly, the State tax refunds are properly allocated 50%

each to Mr. and Ms. Kruja.

      The Commissioner contends that Ms. Kruja had actual knowledge of the

unreported State tax refunds. Although the Krujas’ bank account statements

indicate receipt of State tax refunds from Arizona, the record is insufficient to

establish that Ms. Kruja had actual knowledge of the unreported State tax refunds.

      Ms. Kruja generally requested relief under section 6015 but did not provide

arguments regarding relief under section 6015(b) or equitable relief under section

6015(f). As a result, Ms. Kruja is not alternatively eligible for relief for the State

tax refunds or the employee business expenses under subsections (b) and (f).

      We must also address Mr. and Ms. Kruja’s liabilities for accuracy-related

penalties that have previously been established with respect to the 2010 and 2011

deficiencies. When a section 6662 accuracy-related penalty is included among the

items to be allocated under section 6015(c), section 1.6015-3(d)(4)(iv)(B), Income

      24
           Sec. 1.6015-3(d)(2)(iii), Income Tax Regs.
                                        - 16 -

[*16] Tax Regs., provides that the penalty is “allocated to the spouse whose item

generated the penalty.” Following that regulation, the penalties must be allocated

to Mr. Kruja for all items except Ms. Kruja’s half of the State tax refunds and her

employee business expenses.

Conclusion

      On the basis of the record before us, we hold that Ms. Kruja is entitled to

relief under section 6015(c) for all items giving rise to the 2010 and 2011

deficiencies that are attributable to Mr. Kruja’s business, the portions of the

deficiencies attributable to Mr. Kruja’s half of the State tax refunds, and the

accompanying accuracy-related penalties.

      To reflect the foregoing,


                                                 An appropriate decision will be

                                        entered under Rule 155.
