PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
1Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
T.C. Summary Opinion 2007-29
UNITED STATES TAX COURT
ELSIE R. GARZA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5149-06S. Filed February 27, 2007.
COUVILLION, Special Trial Judge:
This case was heard
pursuant to section 7463 in effect when the petition was filed.1
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
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2Prior to filing the petition in this case, petitioner
participated in a case in which the Court decided that she and
her spouse were liable for deficiencies in taxes for 1999-2001.
See Garza v. Commissioner, T.C. Summary Opinion 2005-95.
Petitioner meaningfully participated in that proceeding and did
not seek relief under sec. 6015 at that time. Accordingly, the
Court granted respondent’s motion for partial summary judgment in
this case since the judicial doctrine of res judicata bars
petitioner from requesting sec. 6015 relief for 1999-2001, the
years at issue in the prior proceeding. Sec. 6015(g)(2); Huynh
v. Commissioner, T.C. Memo. 2006-180 (where a requesting spouse
meaningfully participated in a prior proceeding, did not seek
sec. 6015 relief at that time, and that proceeding’s decision has
become final, the requesting spouse is barred from seeking relief
for the years at issue in the prior proceeding).
Respondent determined deficiencies of $3,525 and $2,842 in
petitioner’s Federal income taxes for taxable years 2002 and
2003, respectively. Petitioner does not challenge these
deficiencies. This case involves petitioner’s election to seek
relief from joint and several liability for Federal income taxes
for 2002 and 2003 under section 6015(b), (c), or (f).2
Respondent determined that petitioner is not entitled to relief
under any of the aforementioned subsections of section 6015. The
sole issue for decision is whether petitioner is entitled to
relief under section 6015(b), (c), or (f) for taxable years 2002
Some of the facts were stipulated. Those facts, with the
annexed exhibits, are so found and are made part hereof.
Petitioner’s legal residence at the time the petition was filed
was Fresno, California.
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3As an agent for AILIC, Mr. Garza sold insurance policies
and earned a commission for each sale. AILIC advanced him
anticipated commissions and paid for certain expenses he
incurred. These amounts were added to Mr. Garza’s outstanding
account balances due to AILIC. During the time he worked for
AILIC, these advances and expenses amounted to almost $90,000.
During the years at issue, all commissions coming to and
creditable to Mr. Garza were applied to his outstanding account
During the years at issue, petitioner was married to Mario
O. Garza (Mr. Garza). Petitioner and Mr. Garza have been married
for nearly 25 years. They physically separated on March 8, 2001,
when they were evicted from their home. Petitioner has resided
with her mother since the eviction. Mr. Garza moved in with his
father sometime in October or November 2001. Although she lived
apart from him, petitioner frequently received mail, including
tax information, addressed to Mr. Garza. Accordingly, Mr. Garza
went to petitioner’s mother’s house nearly daily to pick up his
mail. Petitioner visited Mr. Garza at least two to three times a
week at his father’s house. Thus, petitioner and Mr. Garza
remained married and maintained contact with each other after
their eviction and physical separation.
Petitioner was employed during the years at issue by Aetna
Insurance Co. processing medical claims. Though technically
retired since 1998, Mr. Garza continued to receive nonemployee
compensation from renewed life insurance policies (renewal
income) he had sold while he was employed as an independent
insurance agent by American Income Life Insurance Co. (AILIC).3
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balances owed to AILIC.
On a joint Federal income tax return for 2002, petitioner
and Mr. Garza claimed an overpayment of tax in the amount of
$449. The return did not include insurance renewal payments in
the amount of $14,405 received by Mr. Garza and a $1,688 annuity
distribution petitioner received that year. On August 9, 2004, a
notice of deficiency was issued to petitioner and Mr. Garza in
which respondent determined a deficiency of $3,525 in Federal
income tax for 2002 based on the failure to include these items
of income on their return. Neither petitioner nor Mr. Garza
petitioned this Court in response to the notice of deficiency.
On their joint Federal income tax return for 2003,
petitioner and Mr. Garza reported a tax due of $792. The return
did not include renewal income in the amount of $10,137.19 that
had been received by Mr. Garza. On October 3, 2005, a notice of
deficiency was issued to petitioner and Mr. Garza in which
respondent determined a deficiency of $2,842 based on the omitted
income. Neither petitioner nor Mr. Garza petitioned this Court
in response to the notice of deficiency.
The relationship later soured between petitioner and Mr.
Garza. After a series of altercations, they legally separated
sometime in July 2004. Petitioner obtained a temporary
restraining order against Mr. Garza on July 14, 2004, and filed
for divorce on August 23, 2004. The Superior Court of
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4In the Stipulation of Settled Issues, petitioner conceded
her liability for the tax due on a $1,688 annuity distribution
she received in taxable year 2002.
California, County of Fresno, granted petitioner a protective
order on April 21, 2005. Petitioner was still involved in
divorce proceedings at the time of trial in this case.
Petitioner filed a Form 8857, Request for Innocent Spouse
Relief, on August 24, 2005, claiming that the omitted items of
income for 2002 and 2003 were Mr. Garza’s income and that he
refused to include these items of income on the returns.4 On a
Form 12507, Innocent Spouse Statement, Mr. Garza claimed that
petitioner knew of the omitted items of income for the years at
issue. On February 22, 2006, respondent issued separate Final
Notices for 2002 and 2003 to petitioner determining that she was
not entitled to relief from joint and several liability under
section 6015(b), (c), or (f) because she had actual knowledge and
reason to know of the omitted income that gave rise to the
Petitioner alleges in her petition that she is entitled to
relief from joint and several liability under section 6015
because Mr. Garza concealed from her the insurance renewal income
that gave rise to the tax liabilities. Pursuant to Rule 325 and
King v. Commissioner, 115 T.C. 118 (2000), respondent served Mr.
Garza with notice of this proceeding and his right to intervene.
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He did not file a notice of intervention and did not appear or
participate in the trial of this case.
A taxpayer may petition this Court for review of the
Commissioner’s determination denying relief under section 6015.
Sec. 6015(e)(1)(A). The petition was filed timely in response to
the Final Notices that denied petitioner’s request for section
6015 relief from her income tax liabilities for the years at
issue. Thus, the Court has jurisdiction to review the
Commissioner’s denial of section 6015 relief for 2002 and 2003.
Generally, married taxpayers may elect to file a Federal
income tax return jointly. Sec. 6013(a). Each spouse filing a
joint return is jointly and severally liable for the accuracy of
the return and the entire tax due. Sec. 6013(d)(3). Under
certain circumstances, however, section 6015 provides relief from
joint liability. Section 6015 applies to any liability for tax
arising after July 22, 1998, and to any liability for tax arising
on or before July 22, 1998, remaining unpaid as of such date.
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3201(g), 112 Stat. 740.
In general terms, there are three avenues of relief under
section 6015: Section 6015(b) provides relief with respect to
certain erroneous items on the return, section 6015(c) provides
for a separation of liability for separated taxpayers, and
section 6015(f) more broadly confers on the Secretary discretion
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5Neither respondent nor petitioner disputes that, in this
case, the requirements of subpars. (A), (B), and (E) of sec.
6015(b)(1) have been satisfied. The dispute is solely as to
whether petitioner meets the requirements of subpars. (C) and (D)
of sec. 6015(b)(1).
to grant equitable relief for taxpayers who otherwise do not
qualify for relief under either subsection (b) or (c).
A prerequisite for relief under section 6015(b) or (c) is
the existence of an “understatement of tax” or a tax deficiency.
Sec. 6015(b)(1)(B), (c)(1); Block v. Commissioner, 120 T.C. 62,
65-66 (2003). Except as otherwise provided in section 6015, the
requesting spouse bears the burden of proving that each
requirement of section 6015(b)(1) has been satisfied. Rule
142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), affd. 101
Fed. Appx. 34 (6th Cir. 2004).
Under section 6015(b), the Court may grant a taxpayer full
or apportioned relief from joint and several liability for an
understatement of tax on a joint return if, among other
requirements,5 the taxpayer establishes that she “did not know,
and had no reason to know” that the other spouse understated that
spouse’s tax liability on the return. Sec. 6015(b)(1)(C), (2).
Where a spouse seeking relief has actual knowledge of the
underlying transaction that produced the omitted income, innocent
spouse relief is denied. Cheshire v. Commissioner, 115 T.C. 183,
192-193 (2000), affd. 282 F.3d 326 (5th Cir. 2002). The
requesting spouse has “reason to know” of the understatement of
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tax if she knew every fact necessary to determine the legal
consequences of the income or if such facts are reasonably within
her reach; ignorance of the attendant tax consequences is not a
defense. Mitchell v. Commissioner, 292 F.3d 800, 804-804 (D.C.
Cir. 2002), affg. T.C. Memo. 2000-332; Price v. Commissioner, 887
F.2d 959, 964 (9th Cir. 1989); McCoy v. Commissioner, 57 T.C.
732, 734-735 (1972).
In the instant case, the Court finds that petitioner knew or
had reason to know of the understatements of tax at the time the
returns for 2002 and 2003 were filed. The Court is satisfied
that petitioner was aware that Mr. Garza received renewal income
during the years at issue. Petitioner admitted in her testimony
that she was aware that Mr. Garza received renewal income in 1999
because she discussed with him the receipt of such income when
she received in the mail a Form 1099-MISC, Miscellaneous Income,
from AILIC for that year. Additionally, Mr. Garza’s receipt of
renewal income, as well as the tax consequences arising
therefrom, were the subject of an audit examination conducted by
agents of respondent sometime in 2002 for taxable years 1999-
2001. At trial, when asked whether she participated in the audit
examination, petitioner testified: “Yes, that’s when I got my
education on what was going on.” Moreover, petitioner admitted
on her Form 12510, Questionnaire for Requesting Spouse, that she
questioned Mr. Garza about the renewal income he received during
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the years at issue and was told not to worry about it.
Petitioner’s basis for requesting relief is that, since she was
told not to worry about the income reported on the Forms 1099-
MISC for 2002 and 2003; i.e., the insurance renewal income, she
was not aware and had no reason to know of the understatements of
tax for the years at issue.
Even if a spouse requesting relief under section 6015 does
not have actual knowledge of the item giving rise to an
understatement, that spouse may, nonetheless, have reason to know
of the understatement. A requesting spouse has reason to know of
an understatement if a “reasonably prudent person with knowledge
of the facts possessed by the person claiming * * * [relief]
should have been alerted to the possibility of a substantial
understatement.” Flynn v. Commissioner, 93 T.C. 355, 365 (1989).
A spouse requesting relief under section 6015 has a duty of
inquiry. Butler v. Commissioner, 114 T.C. 276, 284 (2000).
Respondent argues that petitioner had reason to know that
Mr. Garza received renewal income in 2002 and 2003.
Notwithstanding her lack of a business background, the Court is
not convinced that petitioner’s failure to inquire was
reasonable. Mr. Garza’s unreported renewal income was the only
matter discussed during the 2002 audit examination of taxable
years 1999-2001. A reasonably prudent taxpayer should have been
alerted to the possibility that, despite retiring from AILIC in
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1998, Mr. Garza continued to annually receive renewal income when
customers renewed life insurance policies he had sold them. For
these reasons, petitioner is not entitled to relief under section
Section 6015(c) affords proportionate relief to the
requesting spouse through allocation of the tax items to the
responsible party. Generally, this avenue of relief allows a
spouse to elect to be treated as if a separate return had been
filed. Rowe v. Commissioner, T.C. Memo. 2001-325. To be
eligible for relief under section 6015(c), the requesting spouse
must no longer be married to, be legally separated from, or have
lived at least 12 months apart from the individual with whom the
tax return was filed. Sec. 6015(c)(3)(A)(i). Relief under
section 6015(c) is not available, however, to a taxpayer if it is
shown that the taxpayer had actual knowledge when signing the
return of any “item” giving rise to the deficiency. Sec.
As previously discussed, petitioner was in divorce
proceedings and was legally separated from Mr. Garza in July
2004. However, as noted above, petitioner not only had reason to
know of the understatements at the time the returns were signed,
but she also had actual knowledge of the items giving rise to the
deficiencies. Because petitioner had actual knowledge of the
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6Rev. Proc. 2000-15, 2000-1 C.B. 447, was superseded by Rev.
Proc. 2003-61, 2003-2 C.B. 296, and is effective as to requests
for relief filed on or after Nov. 1, 2003, and also is effective
for requests for relief pending on Nov. 1, 2003, as to which no
preliminary determination letter had been issued as of that date.
Petitioner’s application for relief was submitted after Nov. 1,
2003, on Aug. 24, 2005. Accordingly, the guidelines found in
Rev. Proc. 2003-61, supra, are applicable in this case.
renewal income, she is precluded from claiming relief under
Petitioner may be considered for relief under section
6015(f) where there is an unpaid tax or deficiency for which she
is not eligible for relief under section 6015(b) or (c). Sec.
6015(f)(2). Section 6015(f)(1) provides that a taxpayer may be
relieved from joint and several liability if it is determined,
after considering all the facts and circumstances, that it is
inequitable to hold the taxpayer liable for the unpaid tax or
The Commissioner has prescribed guidelines that are
considered in determining whether it is inequitable to hold a
requesting spouse liable for all or part of the liability for any
unpaid tax or deficiency. Rev. Proc. 2003-61, sec. 4.01, 2003-2
C.B. 297, sets forth seven threshold conditions that the
requesting spouse must satisfy before the Commissioner will
consider a request for relief under section 6015(f).6 Respondent
agrees that petitioner has satisfied the threshold conditions.
Where, as here, the requesting spouse satisfies the
threshold conditions, Rev. Proc. 2003-61, sec. 4.03, 2003-2 C.B.
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7Petitioner seeks relief from the understatements of tax
attributable to omitted renewal income from 2002 and 2003.
Because Rev. Proc. 2003-61, sec. 4.02, considers circumstances
where equitable relief may be granted for underpayments of tax,
petitioner does not qualify for relief under sec. 4.02.
at 298, lists factors to be evaluated for requests for relief
under section 6015 for spouses who filed a joint return and do
not qualify for relief under Rev. Proc. 2003-61, sec. 4.02, 2003-
2 C.B. at 298.7 Rev. Proc. 2003-61, sec. 4.03(2)(a), offers a
nonexclusive list of factors to be considered, including: (1)
Marital status; (2) economic hardship; (3) no knowledge or reason
to know of the item giving rise to the deficiency; (4) whether
the nonrequesting spouse had a legal obligation to pay the
liability; (5) whether the requesting spouse benefited
significantly from the item giving rise to the deficiency; and
(6) whether the requesting spouse has made a good faith attempt
to comply with the tax laws in subsequent years. The Court
considers these factors in determining whether equitable relief
under section 6015(f) should be provided to petitioner.
The Court reviews the Commissioner’s denial of section
6015(f) relief under an abuse of discretion standard. Butler v.
Commissioner, supra at 287-292. The Court defers to the
Commissioner’s determination unless it is arbitrary, capricious,
or without sound basis in fact. Jonson v. Commissioner, 118 T.C.
106, 125 (2002), affd. 353 F.3d 1181 (10th Cir. 2003).
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Petitioner bears the burden of proving that there was an abuse of
discretion. Abelein v. Commissioner, T.C. Memo. 2004-274.
In the case of an income tax liability that arises from a
deficiency, as exists in this case, a finding that the requesting
spouse had actual knowledge of the item giving rise to the
deficiency is an extremely strong factor weighing against relief.
Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(B). Thus, petitioner
must establish that she did not know about Mr. Garza’s renewal
income during 2002 and 2003.
As discussed earlier, petitioner had actual knowledge of Mr.
Garza’s renewal income. In the 2002 audit examination, the sole
issue was Mr. Garza’s receipt of renewal income in taxable years
1999-2001. Petitioner was present during the audit examination
and testified that the audit examiner made her aware that Mr.
Garza, even though retired, continued to receive renewal income
from AILIC. Further, petitioner does not dispute that the Forms
1099-MISC for Mr. Garza’s renewal income for the years at issue
were sent directly to her at her mother’s address. Petitioner
testified that Mr. Garza checked the mail at her mother’s address
while petitioner was working and took the Forms 1099-MISC without
her knowledge. On her Form 12510, however, petitioner stated
that she inquired many times about the omitted renewal income and
was told not to worry about it. The Court finds that petitioner
had actual knowledge of the items giving rise to the
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8Rev. Proc. 2003-61, sec. 4.03(2)(a)(iii)(c), provides
factors to consider in determining whether the requesting spouse
had reason to know of the item giving rise to the deficiency.
Because the Court is convinced that petitioner had actual
knowledge of the omitted items of income, consideration of these
factors is superfluous.
deficiencies.8 Petitioner’s actual knowledge is a strong factor
weighing against relief, which can be overcome only if the
factors in favor of equitable relief are particularly compelling.
Petitioner contended at trial that she would experience
economic hardship if she were forced to pay the tax liabilities
for the years at issue. A taxpayer might experience economic
hardship if he or she is unable to pay basic reasonable living
expenses. Sec. 301.6343-1(b)(4)(i), Proced. & Admin. Regs. It
is the taxpayer’s burden to show both that the expenses qualify
and that they are reasonable. Monsour v. Commissioner, T.C.
Memo. 2004-190. Despite her assertion that paying the tax
liabilities would cause her to experience economic hardship,
petitioner provided no evidence at trial that she would be unable
to pay basic living expenses if she were held liable for the
deficiencies. As noted earlier, petitioner was and remains
gainfully employed. The Court fails to see, and petitioner has
not established, that she would suffer economic hardship if her
request for relief were denied. This factor weighs against
granting relief to petitioner.
On the basis of the facts and circumstances in this case,
including the factors set forth in Rev. Proc. 2003-61, supra, the
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Court concludes that there was no abuse of discretion in denying
petitioner’s request for relief under section 6015(b), (c), or
(f) for taxable years 2002 and 2003. To the extent not addressed
herein, other considerations are without merit or unnecessary to
address. The Court, therefore, sustains respondent’s
determination that petitioner is not entitled to relief from
joint liability pursuant to section 6015(b), (c), or (f) for
taxable years 2002 or 2003.
Reviewed and adopted as the report of the Small Tax Case
Decision will be entered