Donna M. Sutherland v. Comm’r, No. 3634-18, T.C. Memo 2021-110 | September 16, 2021 | Lauber | Dkt. No. 3634-18
Short Summary: This is an innocent spouse case in which the taxpayer, Ms. Sutherland, sought relief from joint and several liability under the equitable relief provision of 26 U.S.C. 6015(f). The Court ultimately found that the taxpayer was not entitled to the relief requested.
- Did the taxpayer qualify for relief from joint and several liability for the unpaid employment taxes that accrued from taxpayer’s husband’s business?
Facts and Primary Holdings:
- The taxpayer was married to her husband Scott in 1990. She has a high school education and completed a few college courses. She gave birth to the couple’s only child in 1991, and after her child was born, she worked primarily at home or in Scott’s business.
- Scott was a sole proprietor, running Sutherland Installation & Service (SIS), a business that installed and maintained draft beer systems at restaurants, sports complexes, and other large venues.
- Although the taxpayer was not formally employed by SIS, she assisted the business in various ways at various times. She had substantial bookkeeping responsibilities for the business, including reviewing receipts, billing customers, and depositing customers’ checks into the business bank account. She wrote checks for business expenses, including payroll checks, on the SIS bank account.
- Although the taxpayer’s responsibilities were reduced beginning in October, 2004 – when she and two friends bough a sports bar, she continued her bookkeeping responsibilities with Scott’s business.
- In December, 2005, the IRS audited the Sutherlands’ 2003 and 2004 joint federal income tax returns. After reviewing their returns, the revenue agent (RA) began investigating Scott’s business. During the examination the RA discovered that SIS had not filed employment tax returns for 2003 or 2004. Upon further examination by an employment tax specialist, it was discovered that Scott had withheld payroll taxes form his employees’ paychecks but had not paid those taxes over to the IRS.
- In June, 2008, the employment tax issue was referred to the IRS Criminal Investigation Division. Special Agent (SA) Jeremy Costa, the agent who oversaw the criminal investigation, determined that withheld taxes had been deposited into SIS’ business bank account, and that Donna and Scott had used this money for various personal expenditures, including vacations, mortgage payments, and private school tuition for their
- SA Costa referred the case to the Department of Justice in April 2010, recommending that Scott and Donna both be prosecuted. His recommendation that Donna be prosecuted was based chiefly on her payroll responsibilities for SIS.
- In September 2010 Scott was indicted for willfully failing to deposit his employees’ payroll taxes. He pleaded guilty, and as part of his plea agreement he was required to submit delinquent income tax returns for several years, including 2005 and 2006.
- The 2005 and 2006 joint returns showed tax liabilities of $19,204 and $21,354, respectively, which remain unpaid. Donna signed those returns in the courthouse cafeteria less than an hour before Scott’s sentencing on June 29, 2011. She testified as to her belief that signing the returns might help Scott avoid prison time. She did not review the returns with any care before signing them.
- The District Court entered judgment on July 11, 2011, sentencing Scott to six months of home confinement plus probation. Scott was also ordered to pay restitution of $254,351, the amount of the Government’s estimated tax loss from the failure to deposit payroll taxes. Scott’s defense attorney had previously informed Donna that the payroll taxes “would need to be paid back to the Government.” At the time she signed the 2005 and 2006 income tax returns, she understood that the payroll taxes would be paid back “through his restitution.”
- Scott was ordered to pay the restitution in monthly installments. As of September 2016, the restitution had not been fully paid. His monthly restitution payment at that time was $1,250. At trial Donna testified as to her belief that the payment of restitution was Scott’s responsibility because “it was his business.” She also testified as to her belief that their 2005 and 2006 joint income tax liabilities, though unrelated to the criminal case, would be defrayed out of the restitution.
- On September 1, 2016, Donna filed a Form 8857, Request for Innocent Spouse Relief. In her request, she stated that she had signed the 2005 and 2006 returns during a “confusing and emotional” period, that the returns had been prepared by her husband’s accountant with no input from her, and that she simply signed the returns as instructed. She went on to assert that she “had no personal knowledge of [their] circumstances” and that she “at all times was a homemaker. Despite this, Donna failed to mark the box in the Form 8857 to indicate that she had mental or physical health problems at that time or when she signed the returns.
Key Points of Law:
- 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).
- But in certain circumstances a spouse who has filed a joint return may seek relief from joint and several liability under 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. Since the taxpayer conceded that she was not entitled to relief under 6015(b) or (c), she sought relief under 6015(f).
- A taxpayer bears the burden of proving entitlement to relief under 6015(f). See Rule 142(a).
- Section 6015(f) provides that “equitable relief” may be afforded to a taxpayer 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); see 1.6015-4 (a), Income Tax Regs.
- The Commissioner has specified the procedures governing equitable relief in Rev. Proc. 2013-34.
- The revenue procedure sets forth seven threshold conditions that a requesting spouse must satisfy to be eligible for equitable relief. A requesting spouse who satisfies these conditions may qualify for a “streamlined determination of equitable relief” if (among other things) she is “no longer married to the nonrequesting spouse.” However, the taxpayer here was ineligible for a “streamlined determination” because she was and remains married to Scott.
- A requesting spouse who does not qualify for a “streamlined determination” may nevertheless be granted equitable relief under Rev. Proc. 2013-34 , sec. 4.03. That section lists seven factors for consideration in determining whether relief should be granted. These factors “are designed as guides and not intended to comprise an exclusive list. Other factors relevant to a specific claim for relief may also be taken into account in making the determination.”
- The listed factors are as follows:
(1) marital status;
(2) economic hardship;
(3) significant benefit;
(4) subsequent compliance with Federal tax laws;
(5) legal obligation to pay the outstanding tax liability;
(6) knowledge or reason to know that the tax liability would not be paid, and
(7) mental or physical health.
- No one factor or a majority of factors necessarily determines the outcome. The degree of importance of each factor varies depending on the requesting spouse’s facts and circumstances.
- Based on the evidence, the Court found that 6 of the 7 factors were neutral. The Court honed in on factor (6). Relief is favored if the requesting spouse “reasonably expected the nonrequesting spouse to pay the tax liability reported on the return.” Proc. 2013-34, sec. 4.03(2)(c)(ii). By contract, this factor weighs against relief if, “based on the facts and circumstances of the case, it was not reasonable for the requesting spouse to believe that the nonrequesting spouse would or could pay the tax liability.” Id.
- The critical question, according to the Court, was whether, at the time the returns were filed, Donna knew that Scott “would not or could not pay the tax liability at that time or within a reasonable period of time after the filing the returns. The court found that Donna knew that the 2005 and 2006 income tax liabilities were not paid in June 2011, when the returns were filed. Rather, she testified at trial that she thought these liabilities would be defrayed, at some point in the future, out of the restitution. And she stated her belief that the payment of restitution was Scott’s responsibility because it resulted from “his business.”
- For a variety of reasons, the Court found this testimony implausible. Scott’s criminal case involved nonpayment of employment tax. He was charged, not with evading income tax, but with failing to remit his employees’ payroll taxes. The Court concluded that Donna understood this distinction, having been responsible for signing payroll checks. Indeed, she admitted on brief that “the criminal matter had nothing to do with income taxes.” The possibility of Scott’s imprisonment was a “financial difficulty” of which Donna was aware when she signed the returns. For these reasons, the Court found that Donna knew or should have known, when signing the returns, that Scott “would not or could not pay the tax liability at that time or within a reasonable period of time after the filing of the returns.”
- The Court rejected an argument that focused on a provision in the revenue procedure that “a reasonable expectation of payment will be presumed if the spouses submitted a request for an installment agreement,” finding that no such installment agreement had been requested or received.
- The Court went on to point to two additional factors outside those identified in the revenue procedure weighed against equitable relief:
- First, when signing the returns the taxpayer knew that she would receive a sizable inheritance from her mother’s estate. When she submitted her Form 8857 in 2016, she had more than $400,000 in bank accounts. She could have easily used a portion of this money to pay off the 2005 and 2006 joint liability, which totaled about $40,000.
- Second, the Court found the taxpayer to be less than truthful in her trial testimony. She represented on the Form 8857 that “my husband kept the finances to himself,” that she “had no personal knowledge of our circumstances,” and that she “at all times was a homemaker.” The Court found that these statements were untrue or misleading at best. Donna was intimately involved in Scott’s business, particularly in its financial aspects. She discharged most bookkeeping responsibilities for SIS, reviewing receipts, billing customers, and depositing customers’ checks into the business bank account. She wrote checks for business expenses, including payroll checks. Given her responsibilities in Scott’s business, not to mention the time she devoted to her sports bar during 2004-2009, her statement that she “at all times was a homemaker” was found to lack the “ring of truth.”
Insight: Innocent spouse claims are inherently fact-intensive matters. The taxpayer in this case simply failed to build a strong case for any such relief. The Court notes on multiple occasions where certain helpful testimony that might have been proffered was, in fact not. The rules and corresponding factors used to analyze innocent spouse claims are well laid, and taxpayers would be well-served to seek out competent counsel familiar with these factors prior to making such claims. While professionals cannot manufacture facts, they can certainly highlight facts that would be relevant based on the applicable law.
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