King v. Comm'r of Internal Revenue

• Decision Date: 10 April 2001
• Docket Number: No. 5989–97.,5989–97.
• Citation: 116 T.C. No. 16,116 T.C. 198
• Parties: Kathy A. KING, Petitioner and Curtis T. Freeman, Intervenor v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

116 T.C. 198

116 T.C. No. 16

Kathy A. KING, Petitioner and Curtis T. Freeman, Intervenor

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 5989–97.

United States Tax Court.

April 10, 2001.

Taxpayer claimed relief from joint tax liability as innocent spouse. Former husband intervened in opposition. The Tax Court, Ruwe, adopted the decision of Couvillion, Special Trial J., which held that taxpayer did not have actual knowledge that former husband lacked profit motive in cattle raising activity.

Decision for Taxpayer.

See also, 2000 WL 1131914.

Kathy A. King, Petitioner, pro se.

Curtis T. Freeman, Intervenor, pro se.

James R. Rich, for respondent.

OPINION

RUWE, J.

P claimed relief from joint liability under sec. 6013(e), I.R.C., which was repealed and replaced by sec. 6015, I.R.C. Intervenor (I) is P's former spouse, who intervened pursuant to sec. 6015(e)(4), I.R.C., in opposition to P's claim for relief. See King v. Commissioner, 115 T.C. 118, 2000 WL 1131914 (2000). P and I filed a joint income tax return for 1993, on which they claimed a loss from a cattle-raising activity conducted by I. The loss was disallowed by R on the ground that the activity was not engaged in for profit under sec. 183(a), I.R.C.

1. Held: P meets all the requirements for relief under sec. 6015(c), I.R.C., unless R demonstrates that P had actual knowledge of the item giving rise to the deficiency at the time she signed the return. See sec. 6015(c)(3)(C), I.R.C. When the item giving rise to the deficiency is a disallowed deduction, such knowledge must include knowledge of the factual circumstances giving rise to the disallowance of the deduction. In this case, the fact giving rise to the disallowance was I's lack of a profit objective. R did not establish that, at the time P signed the return, P had actual knowledge that I, her spouse, did not have a primary purpose or objective of making a profit under sec. 183(a), I.R.C., with respect to the activity that generated the disallowed loss. Accordingly, P is entitled to relief from joint liability.

2. Held, further, since the activity in question was attributable solely to I, and there were no other adjustments in the notice of deficiency, the relief to P extends to the full amount of the deficiency.

This case was assigned to Special Trial Judge D. Irvin Couvillion pursuant to section 7443A(b)(3) ¹ and Rules 180, 181, and 182. The Court agrees with and adopts the opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

COUVILLION, J.

Respondent determined a deficiency of $7,781 in petitioner's Federal income tax for 1993.

The sole issue for decision is whether petitioner is entitled to relief from joint liability under section 6015. The underlying deficiency determined by respondent in the notice of deficiency is not at issue. Curtis T. Freeman (intervenor) is the former spouse of petitioner and filed an intervention in this proceeding pursuant to section 6015(e)(4) objecting to the granting of relief to petitioner under section 6015. See Interim Rule 325; King v. Commissioner, 115 T.C. 118, 2000 WL 1131914 (2000).

At the time the petition was filed, and at the time the notice of intervention was filed, the legal residence of petitioner and intervenor was Hartsville, South Carolina.

Petitioner and intervenor were married during 1982. During 1981, intervenor had purchased approximately 100 acres of land at Hartsville, South Carolina, and had begun a cattle-raising activity that continued for several years, including the 1993 tax year at issue. This activity commenced with one or two cows, then grew to a herd of 25–30 cows with intermittent sales and purchases of cows and calves along the way. It was by no means a profitable activity, although intervenor had the expectation that, over time, the activity would become profitable. Intervenor allowed some of his neighbors to pasture their livestock on the property, and the neighbors, in turn, assisted to some degree in caring for intervenor's livestock when intervenor was frequently away from home in connection with his sole income activity, a used car business. Petitioner frequently visited the farm, with the children, and assisted minimally in its operation. However, petitioner maintained or kept records of sales, purchases, and expenses. She did not maintain a formal set of books but made sure that all records were kept together and submitted to their tax return preparer each year for inclusion on the joint Federal income tax returns she and intervenor filed. Petitioner knew that the cattle-raising activity was not profitable, but she had expectations that, at some point, the activity would become profitable. Petitioner and intervenor separated in May 1993, and, thereafter, petitioner no longer maintained records of the cattle-raising activity as she had done in the past; however, she knew that intervenor continued with the activity. The record does not show in what year petitioner and intervenor commenced reporting the income and expenses from the cattle-raising activity on their Federal income tax returns, although the testimony at trial indicates that the activity was reported on their joint income tax returns for the years 1989 and thereafter. For the year 1993, petitioner and intervenor reported gross income of $802, expenses of $28,199, and a net loss of $27,397 from the cattle-raising activity on Schedule C of their return, Profit or Loss From Business.

Petitioner and intervenor were divorced in May 1995. On December 23, 1996, respondent issued separate notices of deficiency to petitioner and intervenor for the year 1993 and determined in each notice a tax deficiency of $7,781. In these notices of deficiency, respondent disallowed the $27,397 cattle activity loss claimed on Schedule C of the 1993 joint Federal income tax return. The basis for the disallowance was that the cattle activity was not an activity engaged in for profit under section 183. Respondent made no adjustments to the income or expense amounts reported and claimed in connection with the activity. The only other adjustments in the notices of deficiency flowed from the disallowed cattle activity loss.

Petitioner filed a timely petition with this Court. Intervenor did not petition this Court. Respondent, in due course, assessed the deficiency against intervenor, but no portion of that assessment has been paid, nor has intervenor challenged the assessment in any other court.

In this case, petitioner does not challenge the disallowed Schedule C cattle-raising activity loss. Her sole contention is that she is entitled to relief from joint liability under section 6013(e). After the case was tried and taken under advisement, section 6013(e) was repealed and was replaced with section 6015, which retroactively applies to this case. Moreover, the intervention emanates from section 6015(e)(4).² The case was again calendared for trial and heard pursuant to the provisions of section 6015. Intervenor participated in the trial and objected to petitioner's being relieved of liability under section 6015. In a supplemental trial memorandum, respondent asserted that petitioner was not entitled to relief under section 6015(b) or (c).³

In Cheshire v. Commissioner, 115 T.C. 183, 189, 2000 WL 1227132 (2000), the Court succinctly set forth the legislative history of section 6015 as follows:

For many taxpayers, relief under section 6013(e) was difficult to obtain. In order to make innocent spouse relief more accessible, Congress repealed section 6013(e) and enacted a new innocent spouse provision (section 6015) in 1998 as part of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub.L. 105–206, sec. 3201(a), 112 Stat. 734. See H. Conf. Rept. 105–599, at 249 (1998). The newly enacted statute provided three avenues of relief from joint and several liability: (1) Section 6015(b)(1) (which is similar to former section 6013(e)) allows a spouse to escape completely joint and several liability; (2) section 6015(b)(2) and (c) allow a spouse to elect limited liability through relief from a portion of the understatement or deficiency; and (3) section 6015(f) confers upon the Secretary discretion to grant equitable relief in situations where relief is unavailable under section 6015(b) or (c). Section 6015 generally applies to any liability for tax arising after July 22, 1998, and any liability for tax arising on or before July 22, 1998, that remains unpaid as of such date. See H. Conf. Rept. 105–599, supra at 251.

We consider the merits of this case under section 6015(c), which, in pertinent part, provides:

SEC. 6015(c). Procedures To Limit Liability for Taxpayers No Longer Married or Taxpayers Legally Separated or Not Living Together .—

(1) In general.—Except as provided in this subsection, if an individual who has made a joint return for any taxable year elects the application of this subsection, the individual's liability for any deficiency which is assessed with respect to the return shall not exceed the portion of such deficiency properly allocable to the individual under subsection (d).

(2) Burden of proof.—Except as provided in subparagraph (A)(ii) or (C) of paragraph (3), each individual who elects the application of this subsection shall have the burden of proof with respect to establishing the portion of any deficiency allocable to such individual.

(3) Election.—

* * *

(C) Election not valid with respect to certain deficiencies.—If the Secretary demonstrates that an individual making an election under this subsection 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 under subsection (d), such election shall not apply to such deficiency (or portion). * * *

In Martin v. Commissioner, T.C. Memo.2000–346, the Court stated:

section 6015(c) relieves certain joint-filing taxpayers by making...