Billings v. Commissioner of Internal Revenue, 127 T.C. No. 2 (U.S.T.C. 7/25/2006), No. 6148-03.

CourtUnited States Tax Court
Writing for the CourtHolmes
Citation127 T.C. No. 2
Docket NumberNo. 6148-03.
Decision Date25 July 2006

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127 T.C. No. 2
No. 6148-03.
United States Tax Court.
Filed July 25, 2006.

P's wife did not report embezzlement income on their joint 1999 return. After she was caught, P and she filed an amended tax return that reported the embezzlement income. P then applied for relief from joint and several liability under IRC sec. 6015(f). The Commissioner issued a notice of determination denying his request, and P filed a petition under sec. 6015(e) to review the Commissioner's determination. P and R stipulated that no relief is available under IRC sec. 6015(b) and (c). Held: Upon reconsideration, we no longer adhere to our prior holding that sec. 6015(e) gives us jurisdiction over such nondeficiency stand-alone petitions. Ewing v. Commissioner, 118 T.C. 494 (2002), revd. 439 F.3d 1009 (9th Cir. 2006), no longer followed.

Patrick Wiesner, for petitioner.

Vicki L. Miller, for respondent.

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HOLMES, Judge:

In 1999, Rosalee Billings began embezzling money from her employer. She kept her husband in the dark about her embezzlement and didn't report the ill-gotten income on their joint return. After she was caught in 2000, she confessed her theft to him, and together they signed an amended joint return that reported the stolen income and showed a hefty increase in the tax owed. He asked the Commissioner to be relieved of joint liability for the increased tax, but his request was refused because he knew about the embezzled income when he signed the amended return, and also knew that the increased tax shown on that amended return was not going to be paid.

Billings began his case in our Court by filing a "nondeficiency stand-alone" petition—"nondeficiency" because the IRS accepted his amended return as filed and asserted no deficiency against him, and "stand-alone" because his claim for innocent spouse relief was made under section 6015 and not as part of a deficiency action or in response to an IRS decision to begin collecting his tax debt through liens or levies. The particular part of section 6015 under which he seeks relief is section 6015(f).1 This subsection is the only one available to spouses against whom the IRS has not asserted a deficiency. In

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Ewing v. Commissioner, 118 T.C. 494 (2002) (Ewing I),2 we held that the Tax Court had jurisdiction over nondeficiency stand-alone petitions like Billings's. The Ninth Circuit has now reversed us, Commissioner v. Ewing, 439 F.3d 1009 (9th Cir. 2006), revg. Ewing I, 118 T.C. 494, vacating 122 T.C. 32 (2004); the Eighth Circuit has adopted the Ninth Circuit's position, Bartman v. Commissioner, 446 F.3d 785, 787 (8th Cir. 2006), affg. in part, vacating in part T.C. Memo. 2004-93; and the Second Circuit has questioned our decision, see Maier v. Commissioner, 360 F.3d 361, 363 n.1 (2d Cir. 2004), affg. 119 T.C. 267 (2002). Billings's case is one of the large number of nondeficiency stand-alone cases that began accumulating on our docket while Ewing I was on appeal. We now revisit the question of whether we have jurisdiction to review the Commissioner's decisions to deny relief under section 6015(f) when there is no deficiency but tax went unpaid.


David Billings was well into a 30-year career at General Motors when he married Rosalee in 1996. Rosalee herself was a payroll clerk at South Kansas City Electric Company. The Billingses kept two checking accounts, and while both were

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jointly held, David and Rosalee each kept almost exclusive control over one of them. In 1999, Rosalee began to transfer money from the Electric Company's payroll account into the checking account that she controlled and into which she had her own pay directly deposited.

Rosalee kept her embezzlement secret from her husband and she did not report on their 1999 return the nearly $40,000 that she had stolen. The Electric Company discovered the embezzlement in December 2000, fired her, and then notified the authorities. She told her husband what she had done and hired a lawyer, Patrick Wiesner. (Wiesner also represented David in this case and before the IRS.)

In his capacity as Rosalee's lawyer, Wiesner advised her to report the embezzlement income to the IRS on an amended return. He told her that if she did, a sentencing judge would probably be more lenient and might even depart from the U.S. Sentencing Guidelines. But section 1.6013-1(a)(1) of the income tax regulations created a problem. It prohibits spouses who have already filed a joint return for a particular year from filing amended returns changing their status to married-filing-separately once the deadline to file returns has passed. The due date for the Billingses' 1999 tax year—April 15, 2000—was long past, and so Wiesner told David (whether in Wiesner's capacity as Rosalee's lawyer or as David's is unclear) that David also had to

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sign the amended return, or risk having his wife face a longer sentence in a more unpleasant facility. On March 19, 2001, David signed the amended return.

That return included as taxable income the nearly $40,000 that Rosalee had embezzled in 1999. It also showed an increase in tax of over $16,000. When David signed the amended return, he knew that neither he nor his wife expected to be able to pay the increased tax. Wiesner, however, suggested that David himself might avoid liability for the extra tax by filing for innocent spouse relief under section 6015. He even filled out the required IRS form and had David sign it together with the amended return. The Billingses sent that form to the IRS, but it was never processed.

As the Billingses feared, Rosalee's embezzlement led to a criminal charge—one count of wire fraud. Less than a month later, in November 2001, she pleaded guilty. Her sentence apparently reflected a downward departure for acceptance of responsibility, though the probation officer who wrote the sentencing report did not mention that the Billingses had filed an amended return.3

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In 2002, the Billingses filed for bankruptcy and received a discharge, which of course did not affect Rosalee's obligation to repay the money she'd embezzled or her own liability for the unpaid 1999 taxes. 11 U.S.C. secs. 523(a)(1), 507(a)(8) (2000). David retired from GM in 2003 and began collecting a pension, though he continues to work two other jobs. He and his wife have filed timely tax returns for later years as they came due.

As the IRS had not processed David's original request for relief, he filed another one. In November 2002, the IRS denied his request for relief based on "all the facts and circumstances," but particularly because:

you failed to establish that it was reasonable for you to believe the tax liability was paid or was going to be paid at the time you signed the amended return.

David appealed, and the IRS issued its final determination, again denying him relief because he did not believe when he signed the amended return that the tax would be paid.

The Commissioner argues:

Instead of filing an amended return, [Rosalee] could have contacted respondent and informed him of the unreported embezzlement income. Once informed, respondent could have proceeded with examination procedures and [Rosalee] could have agreed to respondent's determination of additional tax.

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Resp. Br. at 30. This would have led to the determination of a deficiency and presumably allowed David to file a petition seeking relief under a different part of section 6015. See, e.g., Haltom v. Commissioner, T.C. Memo. 2005-209.

Even under section 6015(f), Billings's position is not a weak one. In Rosenthal v. Commissioner, T.C. Memo. 2004-89, the petitioner was a widow who also had no knowledge of omitted income (in her case, an unreported IRA distribution to her late husband) when she signed the original return, but did know about it when she signed the amended return that corrected that omission. We found that the Commissioner had abused his discretion by not giving her innocent spouse relief:

It is unpersuasive to argue, as does respondent, that petitioner's voluntary filing of an amended 1996 return and her attendant payment of the delinquent taxes attributable to the omission of income from the original 1996 return militate against equitable relief simply because she had to have known of the omission before she filed the amended return and made the payment.


Before this case was tried, Billings and the Commissioner fully stipulated the facts under Rule 122. Billings was a resident of Kansas when he filed his petition, which means an appeal lies to the Tenth Circuit unless the parties stipulate differently.

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A married couple can choose to file their Federal tax return jointly, but if they do, both are then responsible for the return's accuracy and both are jointly and severally liable for the entire tax due. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000). This can lead to harsh results, especially when one spouse hides information from the other, so Congress enacted section 6015, which directs the Commissioner to relieve qualifying "innocent spouses" from that liability. Sec. 6015(a). An innocent spouse may seek either (1) relief from liability under section 6015(b) if he can show that he was justifiably ignorant of unreported income or inflated deductions, or (2) have his tax liability allocated between himself and an estranged or former spouse under section 6015(c). Billings, however, looks to section 6015(f) for relief. Subsection (f) relief is available only to a spouse who is ineligible for relief under subsections (b) and (c) and who shows that "taking into account all the facts and circumstances, it is inequitable to hold [him] liable for any unpaid tax or any deficiency (or any portion of either)."

Billings and the Commissioner stipulated that he did not qualify for relief under either section 6015(b) or (c) because no...

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