T.C. Summary Opinion 2018-1
UNITED STATES TAX COURT
COLIN C. BISHOP, Petitioner, AND LISA BISHOP, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22108-16S. Filed January 4, 2018.
Michael S. Sterner, for petitioner.
Jan R. Pierce and Myla Sepulveda (specially recognized), for intervenor.
Jeffrey D. Rice, for respondent.
SUMMARY OPINION
COHEN, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant
to section 7463(b), the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other case. Respondent -2-
determined a $3,545 deficiency in petitioner’s Federal income tax for 2014. The
issue for decision is whether petitioner should be relieved from liability for all or
part of the deficiency that resulted from failure to report on a joint return a
distribution from intervenor’s separately owned retirement account. The
resolution depends on whether petitioner had actual knowledge of the distribution,
or any portion thereof, for purposes of section 6015(c). Unless otherwise
indicated, all section references are to the Internal Revenue Code in effect for
2014.
Background
Some of the facts have been stipulated, and the stipulated facts are
incorporated in our findings by this reference. Respondent and petitioner have
agreed that petitioner is not liable for the deficiency after application of section
6015(c). Intervenor, however, objects to that conclusion.
Petitioner and intervenor were married on October 31, 2007. They were
temporarily separated twice during 2014, finally separated in June 2015, and
divorced in 2016. At the time his petition was filed, petitioner resided in
Washington. At the time her notice of intervention was filed, intervenor resided in
Oregon. -3-
Intervenor inherited a retirement account from her father in 2009. The
account was maintained at Edward D. Jones & Co. (Edward Jones) in intervenor’s
name. Taxable distributions were received before 2014, ranging from $4,000 to
$48,000, and were reported on joint Federal income tax returns filed by petitioner
and intervenor.
During 2014 and until the time of the permanent separation in 2015,
petitioner and intervenor maintained a joint checking account into which their
payroll checks were deposited. They made transfers to and from other accounts,
and family expenses were paid out of the joint account. Petitioner and intervenor
both had access to the funds in the joint account by the use of debit cards.
During 2014 intervenor received a $15,068 distribution from the Edward
Jones retirement account. Edward Jones withheld $2,712 from the distribution
and reported both of those amounts to the Internal Revenue Service (IRS). On
August 1, 2014, $6,000 was deposited into the joint checking account that
petitioner and intervenor maintained. The balance of the distribution was used for
the benefit of intervenor’s daughter.
As they had in prior years, petitioner and intervenor together provided
information to the preparer of a joint tax return for 2014. They did not report the
Edward Jones distribution on that return. -4-
Before the petition was filed, petitioner filed a Form 8857, Request for
Innocent Spouse Relief, with the IRS. Intervenor provided information during the
review process. The IRS determined that petitioner was not entitled to relief under
section 6015(b) because he had constructive knowledge of the distribution but was
entitled to relief under section 6015(c) because of the absence of proof of actual
knowledge.
Neither petitioner nor intervenor disputes the amount of the deficiency.
Petitioner contends that he is entitled to relief from the full amount of the
deficiency and in the alternative that at most he should be liable for the deficiency
relating to the $6,000 deposited into the joint bank account. Intervenor requests
that petitioner be held liable for tax on $7,080, which intervenor infers was the
portion of the distribution plus withheld tax reflected in the $6,000 deposit.
Discussion
Section 6013(d)(3) provides the general rule that if spouses make a joint
return the liability for the tax shall be joint and several. Subject to other
conditions, section 6015(c) allows a divorced or separated spouse to elect to limit
his or her liability for a deficiency assessed with respect to a joint return to the
portion of such deficiency allocable to him or her under subsection (d). Pursuant
to section 6015(d)(3)(A), “any item giving rise to a deficiency on a joint return -5-
shall be allocated to individuals filing the return in the same manner as it would
have been allocated if the individuals had filed separate returns for the taxable
year.” Further, “[e]rroneous items of income are allocated to the spouse who was
the source of the income.” Sec. 1.6015-3(d)(2)(iii), Income Tax Regs.; see also
Agudelo v. Commissioner, T.C. Memo. 2015-124, at *16. Denial of relief
requires evidence that the requesting spouse had “actual knowledge, at the time
such individual signed the return, of any item giving rise to a deficiency (or
portion thereof) which is not allocable to such individual.” Sec. 6015(c)(3)(C);
see also sec. 1.6015-3(c)(2), Income Tax Regs. Section 6015(c) differs from the
relief provisions of subsections (b) and (f), under which relief may be denied if the
party requesting relief had constructive knowledge of the item giving rise to the
deficiency. See Culver v. Commissioner, 116 T.C. 189, 197 (2001); Richard v.
Commissioner, T.C. Memo. 2011-144.
A question exists as to where the burden of proof lies in cases when, as
here, the IRS favors granting relief and the nonrequesting spouse intervenes to
oppose it. The Court has resolved such cases by determining whether actual
knowledge has been established by a preponderance of the evidence as presented
by all parties. See Pounds v. Commissioner, T.C. Memo. 2011-202; Knight v. -6-
Commissioner, T.C. Memo. 2010-242; McDaniel v. Commissioner, T.C. Memo.
2009-137; Stergios v. Commissioner, T.C. Memo. 2009-15.
To determine whether the requesting spouse had actual knowledge, the IRS
considers “all of the facts and circumstances.” Sec. 1.6015-3(c)(2)(iv), Income
Tax Regs. Similarly, the Court looks to the surrounding facts and circumstances
for “an actual and clear awareness (as opposed to reason to know)” of the items
giving rise to the deficiency. See Cheshire v. Commissioner, 115 T.C. 183, 195
(2000), aff’d, 282 F.3d 326 (5th Cir. 2002); Pounds v. Commissioner, T.C. Memo.
2011-202.
In this case, petitioner denies actual knowledge of the distribution although
he admits that he knew about the retirement account and about withdrawals made
in other years for various family expenditures. He argues that intervenor
deliberately deceived him, but he relies on her silence and does not identify any
specific misrepresentations by her. He acknowledges that he was at fault for not
checking the records on the joint bank account maintained by him and intervenor.
Intervenor disputes petitioner’s credibility. She argues that he had actual
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T.C. Summary Opinion 2018-1
UNITED STATES TAX COURT
COLIN C. BISHOP, Petitioner, AND LISA BISHOP, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22108-16S. Filed January 4, 2018.
Michael S. Sterner, for petitioner.
Jan R. Pierce and Myla Sepulveda (specially recognized), for intervenor.
Jeffrey D. Rice, for respondent.
SUMMARY OPINION
COHEN, Judge: This case was heard pursuant to the provisions of section
7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant
to section 7463(b), the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other case. Respondent -2-
determined a $3,545 deficiency in petitioner’s Federal income tax for 2014. The
issue for decision is whether petitioner should be relieved from liability for all or
part of the deficiency that resulted from failure to report on a joint return a
distribution from intervenor’s separately owned retirement account. The
resolution depends on whether petitioner had actual knowledge of the distribution,
or any portion thereof, for purposes of section 6015(c). Unless otherwise
indicated, all section references are to the Internal Revenue Code in effect for
2014.
Background
Some of the facts have been stipulated, and the stipulated facts are
incorporated in our findings by this reference. Respondent and petitioner have
agreed that petitioner is not liable for the deficiency after application of section
6015(c). Intervenor, however, objects to that conclusion.
Petitioner and intervenor were married on October 31, 2007. They were
temporarily separated twice during 2014, finally separated in June 2015, and
divorced in 2016. At the time his petition was filed, petitioner resided in
Washington. At the time her notice of intervention was filed, intervenor resided in
Oregon. -3-
Intervenor inherited a retirement account from her father in 2009. The
account was maintained at Edward D. Jones & Co. (Edward Jones) in intervenor’s
name. Taxable distributions were received before 2014, ranging from $4,000 to
$48,000, and were reported on joint Federal income tax returns filed by petitioner
and intervenor.
During 2014 and until the time of the permanent separation in 2015,
petitioner and intervenor maintained a joint checking account into which their
payroll checks were deposited. They made transfers to and from other accounts,
and family expenses were paid out of the joint account. Petitioner and intervenor
both had access to the funds in the joint account by the use of debit cards.
During 2014 intervenor received a $15,068 distribution from the Edward
Jones retirement account. Edward Jones withheld $2,712 from the distribution
and reported both of those amounts to the Internal Revenue Service (IRS). On
August 1, 2014, $6,000 was deposited into the joint checking account that
petitioner and intervenor maintained. The balance of the distribution was used for
the benefit of intervenor’s daughter.
As they had in prior years, petitioner and intervenor together provided
information to the preparer of a joint tax return for 2014. They did not report the
Edward Jones distribution on that return. -4-
Before the petition was filed, petitioner filed a Form 8857, Request for
Innocent Spouse Relief, with the IRS. Intervenor provided information during the
review process. The IRS determined that petitioner was not entitled to relief under
section 6015(b) because he had constructive knowledge of the distribution but was
entitled to relief under section 6015(c) because of the absence of proof of actual
knowledge.
Neither petitioner nor intervenor disputes the amount of the deficiency.
Petitioner contends that he is entitled to relief from the full amount of the
deficiency and in the alternative that at most he should be liable for the deficiency
relating to the $6,000 deposited into the joint bank account. Intervenor requests
that petitioner be held liable for tax on $7,080, which intervenor infers was the
portion of the distribution plus withheld tax reflected in the $6,000 deposit.
Discussion
Section 6013(d)(3) provides the general rule that if spouses make a joint
return the liability for the tax shall be joint and several. Subject to other
conditions, section 6015(c) allows a divorced or separated spouse to elect to limit
his or her liability for a deficiency assessed with respect to a joint return to the
portion of such deficiency allocable to him or her under subsection (d). Pursuant
to section 6015(d)(3)(A), “any item giving rise to a deficiency on a joint return -5-
shall be allocated to individuals filing the return in the same manner as it would
have been allocated if the individuals had filed separate returns for the taxable
year.” Further, “[e]rroneous items of income are allocated to the spouse who was
the source of the income.” Sec. 1.6015-3(d)(2)(iii), Income Tax Regs.; see also
Agudelo v. Commissioner, T.C. Memo. 2015-124, at *16. Denial of relief
requires evidence that the requesting spouse had “actual knowledge, at the time
such individual signed the return, of any item giving rise to a deficiency (or
portion thereof) which is not allocable to such individual.” Sec. 6015(c)(3)(C);
see also sec. 1.6015-3(c)(2), Income Tax Regs. Section 6015(c) differs from the
relief provisions of subsections (b) and (f), under which relief may be denied if the
party requesting relief had constructive knowledge of the item giving rise to the
deficiency. See Culver v. Commissioner, 116 T.C. 189, 197 (2001); Richard v.
Commissioner, T.C. Memo. 2011-144.
A question exists as to where the burden of proof lies in cases when, as
here, the IRS favors granting relief and the nonrequesting spouse intervenes to
oppose it. The Court has resolved such cases by determining whether actual
knowledge has been established by a preponderance of the evidence as presented
by all parties. See Pounds v. Commissioner, T.C. Memo. 2011-202; Knight v. -6-
Commissioner, T.C. Memo. 2010-242; McDaniel v. Commissioner, T.C. Memo.
2009-137; Stergios v. Commissioner, T.C. Memo. 2009-15.
To determine whether the requesting spouse had actual knowledge, the IRS
considers “all of the facts and circumstances.” Sec. 1.6015-3(c)(2)(iv), Income
Tax Regs. Similarly, the Court looks to the surrounding facts and circumstances
for “an actual and clear awareness (as opposed to reason to know)” of the items
giving rise to the deficiency. See Cheshire v. Commissioner, 115 T.C. 183, 195
(2000), aff’d, 282 F.3d 326 (5th Cir. 2002); Pounds v. Commissioner, T.C. Memo.
2011-202.
In this case, petitioner denies actual knowledge of the distribution although
he admits that he knew about the retirement account and about withdrawals made
in other years for various family expenditures. He argues that intervenor
deliberately deceived him, but he relies on her silence and does not identify any
specific misrepresentations by her. He acknowledges that he was at fault for not
checking the records on the joint bank account maintained by him and intervenor.
Intervenor disputes petitioner’s credibility. She argues that he had actual
knowledge of the 2014 distribution because it was deposited in their joint bank
account about seven months before the return was prepared and petitioner
continued to write checks from the account and use debit cards accessing funds in -7-
the account. Intervenor does not claim that she specifically told petitioner about
the distribution when it was received or at the time that the return was prepared or
point to any evidence that petitioner had “an actual and clear awareness (as
opposed to reason to know)” of the items giving rise to the deficiency. Intervenor
testified that they both forgot about the distribution at the time the return was
prepared.
The history of withdrawals from the retirement account used by the parties
over a period of years and the transactions by petitioner with reference to the joint
bank account support a conclusion that petitioner should have known about the
distribution. The amount was very large in relation to the average balances and
other transactions in the account. There is no evidence, however, that petitioner
saw the bank records before the joint return for 2014 was filed. His denials are not
incredible, implausible or contradicted by direct evidence. See Culver v.
Commissioner, 116 T.C. 189; Richard v. Commissioner, T.C. Memo. 2011-144.
Regardless of the strong indications of constructive knowledge, the evidence falls
short of establishing actual knowledge of any specific amount of the distribution
in 2014. -8-
While the parties make other arguments about “equitable” factors, the
absence of proof of actual knowledge is determinative in this case. Therefore,
Decision will be entered
for petitioner.