Beatty v. Commissioner
| Decision Date | 27 June 2007 |
| Docket Number | Dkt. No. 22047-04. |
| Citation | 93 T.C.M. 1422 |
| Parties | Cynthia K. Beatty v. Commissioner. |
| Court | U.S. Tax Court |
Caroline D. Ciraolo, for petitioner.
James H. Harris, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
This case arises from a request for equitable relief (relief) under section 6015(f).1 We must decide whether respondent abused respondent's discretion in denying petitioner relief under section 6015(f) for each of the taxable years 1988 though 1997 and 2000. We hold that respondent abused respondent's discretion in denying petitioner such relief.
All of the facts in this case, which the parties submitted under Rule 122, have been stipulated by the parties and are so found.
Petitioner resided in Ocean City, Maryland (Ocean City), at the time she filed the petition.
In 1978, petitioner married Michael Beatty (Mr. Beatty). She was still married to him when the parties submitted this case under Rule 122.
In 1975, petitioner received an associate degree from Villa Julie College. Mr. Beatty stopped attending school when he was in the ninth grade.
From 1975 until 1980, petitioner worked as a medical secretary for Washington Hospital Center in Washington, D.C.
Around 1977, Mr. Beatty obtained a Small Business Administration loan in order to purchase a delicatessen and bakery business that he incorporated under the name "MKB Donut and Deli, Inc." (MKB). Mr. Beatty failed to pay his withholding tax liabilities with respect to MKB, and respondent filed Federal tax liens with respect to such liabilities. In 1980, MKB filed for bankruptcy, and he eventually lost MKB and all of his savings. Around 1981, a bank foreclosed on a house which Mr. Beatty had purchased in 1976 and in which petitioner and he had been residing since shortly after that purchase.
In 1981, Mr. Beatty began working as a self-employed disc jockey. From 1981 until the summer of 1998, petitioner was a full-time homemaker, although she did help Mr. Beatty in his work as a disc jockey. During that period, Mr. Beatty's earnings as a self-employed disc jockey were the only source of income of petitioner and Mr. Beatty.
Around 1996, petitioner and Mr. Beatty purchased a townhouse in Ocean City. Except for signing certain documents, petitioner was not involved in that purchase.
From May through August 1998, petitioner worked as a bartender, for which she received $4,187. During the summers of 1999, 2000, and 2001, petitioner worked as a hostess at a restaurant, for which she received $4,387, $6,819, and $4,581, respectively. Except for basic cashier duties that petitioner had while working as a bartender and a restaurant hostess, petitioner had no other financial responsibilities in those (or any other) jobs that she has had.
At all relevant times, Mr. Beatty managed the finances of petitioner and himself and made all of their financial decisions, including managing all bank accounts and reviewing all bank statements in his and/or petitioner's name. In addition, at all relevant times, if petitioner needed to purchase groceries or other personal items, Mr. Beatty provided her with the cash or a check to do so.
At certain relevant times, Mr. Beatty was unable to open bank accounts or obtain credit in his name because of his poor credit rating. Instead, Mr. Beatty used petitioner's name to open bank accounts, which he used for both personal and business purposes. Mr. Beatty also obtained credit cards in petitioner's name, which he used for business purposes. In addition, Mr. Beatty used petitioner's name to finance the purchase of at least one vehicle that he used for business purposes.
Petitioner and Mr. Beatty did not timely file Federal income tax returns and State income tax returns for any of their taxable years 1988 through 1999. On a date not disclosed by the record in 1999, Mr. Beatty was indicted by the State of Maryland for willful failure to file a State income tax return (State return) for each of the taxable years 1995, 1996, and 1997. On May 8, 2000, Mr. Beatty pleaded guilty to failing willfully to file a State return with the State of Maryland for each of those taxable years.
On September 8, 2000, as a result of pleading guilty to failing willfully to file a State return with the State of Maryland for each of the taxable years 1995, 1996, and 1997, Mr. Beatty was sentenced to 15 years in prison. That sentence was suspended, and Mr. Beatty was placed on supervised probation for five years. As a condition of his probation, Mr. Beatty was required to file a Federal income tax return (Federal return) and a State return for each of his taxable years 1995 through 1999.
Around September 7, 2000, petitioner and Mr. Beatty filed jointly Form 1040, U.S. Individual Income Tax Return (Form 1040), for each of their taxable years 1998 (1998 joint return) and 1999 (1999 joint return). In their 1998 joint return and their 1999 joint return, petitioner and Mr. Beatty reported tax owed of $46,710 and $31,533, respectively, which they did not pay at the time they filed those returns. The liabilities reported in those returns (unpaid liabilities for 1998 and 1999) are solely attributable to Mr. Beatty.
On September 14, 2000, petitioner filed a petition for bankruptcy (bankruptcy petition) under Chapter 7 of Title 11 of the United States Code (Chapter 7) with the United States Bankruptcy Court for the District of Maryland (Bankruptcy Court). Petitioner filed the bankruptcy petition because of excessive credit card debt that she was unable to pay and that had been generated by Mr. Beatty, who used credit cards in petitioner's name to charge business expenses. On January 23, 2001, the Bankruptcy Court adjudicated petitioner bankrupt under Chapter 7.
In 2001, on a date not disclosed by the record, the Comptroller of Maryland directed Mr. Beatty to file a Federal return and a State return for any taxable year after 1987 for which Mr. Beatty had failed to file such returns.
In November 2001, Mr. Beatty's accountant, Eric Vinson, prepared a Federal return for petitioner and Mr. Beatty with respect to each of their taxable years 1988 through 1997 and 2000, each of which petitioner and Mr. Beatty signed. Those returns, which respondent received on the dates indicated, showed the following tax owed:
Date Received by
Taxable Year Respondent Tax Owed
1988 11/7/01 $12,849
1989 11/7/01 13,644
1990 11/7/01 14,255
1991 11/7/01 14,823
1992 11/7/01 15,088
1993 11/7/01 15,533
1994 11/7/01 15,902
1995 11/7/01 20,726
1996 11/7/01 30,440
1997 11/26/01 41,174
2000 10/18/01 14,399
(For convenience, we shall refer collectively to the Federal returns that petitioner and Mr. Beatty filed jointly for the taxable years 1988 through 1997 and 2000 as the joint returns for the years at issue.)
The liabilities reported in the joint returns for the years at issue (unpaid liabilities for the years at issue) are solely attributable to Mr. Beatty. Petitioner did not review those joint returns before she signed them. At the time petitioner signed the joint returns for the years at issue, she believed that Mr. Beatty would be incarcerated if she did not sign such returns.
Around February 28, 2002, petitioner filed with respondent Form 8857, Request for Innocent Spouse Relief (And Separation of Liability and Equitable Relief), with respect to, inter alia, taxable years 1988 through 1997 and 2000. Petitioner attached a statement to that form, which stated in pertinent part:
Mrs. Beatty is not responsible, and should not be held liable, for the underpayment of tax reflected on the joint returns filed. First, she signed the returns solely because she was instructed to do so by her husband's accountant. She was not advised nor was she aware that she had the option of filing separately. She was not told that by signing the returns, she was jointly and severally liable for any tax reported thereon. She would not have understood the information reported as all items, with the sole exception of her wages, were attributable to her husband and his business, of which she had no knowledge. And, most importantly, she was told that failure to promptly file all prior federal and state tax returns would result in her husband going to jail.
On or about April 25, 2002, at the request of respondent, petitioner submitted to respondent Form 886-A, Innocent Spouse Questionnaire (petitioner's Form 886-A). In petitioner's Form 886-A, petitioner provided the responses indicated to the following questions:
2. If you are requesting relief from tax reported on the original return:
a. Did you review the tax return before signing it? No.
b. At the time you signed the return, were you aware there was a balance due IRS? Please explain in detail. She did not review the returns and, therefore, was not aware that a balance was due. Had she been advised that a balance was due, she would have assumed that she was not liable * * * [because] income tax had been properly withheld from her * * * wages and she believed that this meant that she, individually, would not owe any tax.
c. Describe how, at the time you signed the return, you and your spouse planned to pay the tax due? Mrs. Beatty did not review the returns. She signed the returns solely because she believed that her failure to do so would result in her husband going to prison. She also believed * * * [that] because income tax had been withheld from * * * [her] paychecks, that she * * * would not * * * personally owe any taxes.
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8. During...
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