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Warehouse

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Based on the relevant facts and circumstances Mrs. Jones would not be entitled to full relief from joint and several liability on the issues of the understatement of the gambling gains and gains on the sale of stock and real estate. She would qualify for partial relief under section 6015(f) for the embezzled funds. This omission is attributed solely to her husband; she had no knowledge or reason to know. Furthermore, she received no benefit from the embezzled funds, which were used to support his gambling addiction and offset his losses. However, Mrs. Jones had actual knowledge of the understatements by having signed the purchase agreements for the real estate and stock, the proceeds of which were paid to both Mark and Leslee. She endorsed all checks which were deposited in their joint account and she wrote checks out of this account as well. Although Mark maintained a separate account for his gambling winnings and stock gains, this does not however relieve Leslee from liability. Leslee may not have had actual knowledge of his winnings, but because of her involvement in the activity such as, accompanying Mark to race tracks and to Las Vegas, where it was known he was a big gambler, evidenced by their rooms always being complimentary, as well as any costs associated with their stays, she admitted to watching her husband gamble and when she got bored she would watch shows or go shopping where she would spend thousands of dollars at a time. Under these circumstances, a prudent person would have a duty to inquire as to his gambling activities. Mark may also be able to offset his understated gains by any losses he may be able to prove to reduce the deficiency assessed. The fact that California is a community property state or that the return was prepared by a CPA are not influential factors in looking at the applicable authority.
Section 6013(a) of the Internal Revenue Code provides that married taxpayers may elect to file a joint Federal Income tax return. By making this election, each spouse is considered to be jointly and severally liable for the entire tax due, this is the case even though one of the spouses has neither gross income nor deductions.
In addition, IRC section 6015 provides relief from joint and several liability on a joint return. This section allows an individual three methods of relief where an individual who filed a joint return may elect to seek relief under the procedures prescribed under subsection (b) or to limit an individual’s liability under subsection (c).
According to Reg. 1.6015-1(a), an individual who qualifies and elects under section 6013 to file a joint Federal income tax return may be relieved of joint and several liability under the following provisions: i) Innocent spouse relief under 1.6015-2 (ii) Allocation of deficiency under 1.6015-3 or (iii) Equitable relief under 1.6015-4. The regulation also states that a taxpayer may submit a single claim electing relief under the three relief provisions to be considered by the IRS.
Regulation 1.6015-2(a) provides relief if 1) a joint return has been made for a taxable year; 2) on such return there is an understatement of tax attributable to erroneous items of one individual filing the joint return; 3) the other individual filing the joint return establishes that in signing the return he or she did not know, and had no reason to know, that there was such an understatement; 4) taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for the deficiency attributable to the understatement.
Regulation 1.6015-3(a) provides procedures to limit liability for taxpayers no longer married or taxpayers legally separated or not living together. Individuals eligible to make the election are individuals who are no longer married to, or are legally separated from the individual with whom such individual filed the joint return to which the election relates to or such individual was not a part of the same household during the 12 month period ending on the date such election was filed; no assets were transferred between individuals filing a joint return as part of a fraudulent scheme and the individual making the election did not have actual knowledge, at the time such individual signed the return, of any item giving rise to a deficiency (or portion thereof).
Regulation 1.6015-4(a) provides equitable relief to an individual taking into account all the facts and circumstances if it is inequitable to hold the individual liable for any unpaid tax or any deficiency and relief is not available to such individual under subsection (b) or (c).
Revenue Procedure 2003-61, 2003-2 CB 296 provides guidance for a taxpayer seeking equitable relief from income tax liability under section 6015(f). The threshold requirements are as follows: 1) the requesting spouse filed a joint return for the taxable year for which he or she seeks relief; 2) relief is not available to the requesting spouse under section 6015(b) or (c); 3) the requesting spouse applies for relief no later than two years after the date of the Service's first collection activity after July 22, 1998, with respect to the requesting spouse; 4) no assets were transferred between the spouses as part of a fraudulent scheme by the spouses; 5) the nonrequesting spouse did not transfer disqualified assets to the requesting spouse. If the nonrequesting spouse transferred disqualified assets to the requesting spouse, relief will be available only to the extent that the income tax liability exceeds the value of the disqualified assets; 6) the requesting spouse did not file or fail to file the return with fraudulent intent; 7) the income tax liability from which the requesting spouse seeks relief is attributable to an item of the individual with whom the requesting spouse filed the joint return (the “nonrequesting spouse”), unless one of the following exceptions applies: a) attribution solely due to the operation of community property law; b) nominal ownership; c) misappropriation of funds; and d) abuse not amounting to duress. If a taxpayer meets all the above conditions, the IRS will look to other factors to determine whether to grant equitable relief that may weigh in favor or against taxpayer, but are not limited to these factors: a) no longer married; b) had no knowledge or reason to know of the understatements, the IRS looks to the requesting spouse’s degree of involvement in the activity generating the income tax liability, involvement in business and household financial matters, spouse’s business or financial expertise and any lavish or unusual expenditures compared with past spending levels; c) nonrequesting spouse’s legal obligation; d) significant benefit, beyond normal support; e) compliance with income tax laws; f) abuse and g) mental or physical health.
In Anna Maria Rodriguez., 2006 RIA TC Summary Opinion 2006-10 petitioner was married, involved in the household finances, signed the return that was prepared by a tax preparer, limited involvement in husband’s gambling activities but admitted to having knowledge of a portion of the understated gambling winnings and IRA distributions. Petitioner was denied relief under 6015(b) for having actual knowledge of the understatements, provided partial relief under 6015(c) which limited her liability to the amounts known at the time the return was prepared and denied relief under 6015(f) because she received partial relief under section 6015(c). Leslee, although having limited knowledge of Mark’s gambling activities, had accompanied him to Las Vegas as well as race tracks.
In Victoria Freulich., 2007 RIA TC Summary Opinion 2007-124, petitioner won $5,000 which she failed to report. The winnings were deposited into a joint account, but relief was denied under 6015(b) because the understatement of tax attributable to the erroneous items was of the individual and not of her deceased spouse. In this case the deceased spouse would be entitled to the election. Petitioner further denied relief under 6015(c) due to the fact that the petitioner had knowledge of the item giving rise to the understatement. The court further stated that the knowledge requirement does not require the requesting spouse to possess actual knowledge of the tax consequences, just that the requesting spouse actually knew of the item on the return giving rise to the deficiency. Petitioner was also denied relief under 6015(f) for failing to meet one of the seven conditions of Rev. Proc. 2003-61 requiring that the income tax liability from which the requesting spouse seeks relief is attributable to an item of the “nonrequesting spouse”.
In Baumann, et ux., 2005 RIA TC Memo 2005-31, petitioner was denied by the appeals officer relief under both section 6015(b) and 6015(c) because she knew of the items giving rise to the deficiency; she was however, entitled to partial relief under section 6015(f) to the extent her liability exceeded the amount of her income tax refund. Relief was denied initially by the examining officer because of her actual knowledge of her husband’s gambling activity. On appeal, the appeals officer provided partial relief under 6015(f) by taking into account the factors of Rev. Proc. 2003-61, 2003-2 CB 296 abuse, economic consideration and compliance which weighed in the favor of the petitioner.
In Infelise., 83 AFTR2d 99-2229 (180 F.3d 271), petitioner was denied relief not because of her having actual knowledge of the item giving rise to the deficiency, but evidenced demonstrated that the petitioner knew about the husband’s illegal activities due to her hosting a party for her husband’s associates. Here their gambling operations were discussed, as well as a search that was conducted by government agents of the couple’s residence. The court held that “a reasonable prudent taxpayer under the circumstances of the spouse at the time of signing the return could be expected to know that the liability stated was erroneous and that further investigation was warranted.” Therefore, the spouse had a “duty to inquire” of the items on the tax return regardless of the fact that it was prepared by a tax lawyer.
Finally, in Ingrid Capehart., 2004 RIA TC Memo 2004-268, petitioner’s husband decided to invest in some partnerships. Petitioner initially had doubts of the investment, but nonetheless participated in the investment and signed all the necessary documents. Petitioner was denied relief under section 6015(b) because the requirements of the section are stated in the conjunctive. Therefore, failing to meet any one of them, bars relief. Since petitioner signed and participated in the joint investment, the understatement is attributable to her as well and she knew of the understatement. Petitioner failed to comply with 6015(c) which requires that the deficiency is attributable to the other spouse. The petitioner was further denied relief under section 6015(f) as in Infelise v. Comm., because petitioner didn’t have actual knowledge but did have a duty to inquire of the items giving rise to the deficiency; by having signed and participated in the investment the deficiency is attributable to both petitioner and 7 spouse; petitioner benefited beyond that of normal support due to the deductions that resulted in significant tax refunds and it wouldn’t be inequitable to hold the petitioner liable for the deficiency.

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