McDonald v. Comm'r, T.C. Summary Opinion 2016-79
| Decision Date | 01 December 2016 |
| Docket Number | Docket No. 3266-15S.,T.C. Summary Opinion 2016-79 |
| Parties | DWIGHT MCDONALD AND DONNA MCDONALD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
Dwight McDonald and Donna McDonald, pro sese.
Erika B. Cormier and R. Jeffrey Knight, for respondent.
LAUBER, Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.1 Pursu-ant 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.
With respect to petitioners' Federal income tax for 2009-2011, the Internal Revenue Service (IRS or respondent) determined deficiencies and an accuracy-related penalty as follows:
| Year |
| Deficiency |
| Penalty |
| sec. 6662(a) |
| 2009 |
| $3,407 |
| -0- |
| 2010 |
| 4,971 |
| -0- |
| 2011 |
| 10,258 |
| 2,052 |
Petitioners have conceded the deficiencies and penalty in full. The sole issue remaining for decision is whether petitioner Donna McDonald is entitled under section 6015(c) to relief from joint and several liability as to portions of the liabilities shown above. Petitioner Dwight McDonald opposes her request for relief, but we agree with respondent that she is entitled to it.
The parties filed a stipulation of facts with accompanying exhibits that is incorporated by this reference. At the time their petition was filed, petitioners were divorced and resided in separate locations in Rhode Island.
During 2009-2011 petitioner Dwight McDonald worked full time as a senior IT specialist at IBM Corp. He also engaged in a rental real estate activity through Gulf Coast South Holdings, LLC (Gulf Coast). Through Gulf Coast he held for rental 10 residential real estate properties in Florida and Alabama (one property was sold in 2010). Mr. McDonald actively participated in this rental real estate activity, but he relied for day-to-day management on property management companies in Florida and Alabama, respectively.
During 2009-2011 petitioner Donna McDonald owned and operated a travel agency business, Travel Plus, LLC. In 2009 she attended nursing school part time. She graduated in 2010 and worked as a part-time nurse in 2010 and 2011. She had no knowledge of Federal tax law and relied entirely on Mr. McDonald and their certified public accountant (C.P.A.) to prepare their returns.
Petitioners jointly owned some of the rental real estate properties, and Mrs. McDonald's name appeared on the mortgages for those properties. However, she did not directly participate in Mr. McDonald's real estate business. She knew that Mr. McDonald devoted substantial time to the recordkeeping and financial aspects of this business, and she occasionally answered the telephone when the management companies called seeking his guidance on various points.
Throughout their marriage Mr. McDonald was primarily responsible for the couple's finances. Mrs. McDonald testified that Mr. McDonald maintained a locked room in their house where he stored IBM-related documents and financial records relating to his real estate business. Mrs. McDonald credibly testified that she did not have access to this storage room or to the financial records stored in it.
Petitioners separated in 2011 and finalized their divorce in May 2012. In the marital settlement agreement the parties acknowledged that Mr. McDonald "owns a business known as Gulf Coast," and he was awarded sole ownership of the Florida and Alabama rental properties. Mrs. McDonald explicitly waived any interest she might be thought to have in Gulf Coast.
Petitioners filed delinquent joint income tax returns for 2009-2011, which were prepared by Otrando, Porcaro & Associates, a Rhode Island accounting firm. The first of these returns was filed on June 13, 2011. Mrs. McDonald went to the firm's office to sign the completed returns. She credibly testified that their C.P.A. did not review the returns with her or provide a detailed explanation of the various line entries appearing on the returns. However, the C.P.A. had advised petitioners some years earlier (apparently in 2009) that one or both of them qualified as real estate professionals by virtue of the substantial time and effort devoted to the rental real estate activity.
Included in petitioners' return for each year was a Schedule E, Supplemental Income and Loss, reporting income and expenses of Mr. McDonald's real estate business. On these Schedules E petitioners reported, from the Florida and Alabama properties, rental real estate losses of $119,246, $78,002, and $58,550 for 2009, 2010, and 2011, respectively.
The IRS selected petitioners' 2009-2011 returns for examination and made the following adjustments.
• The IRS allowed petitioners to deduct $25,000 of Schedule E losses for each year on the ground that Mr. McDonald "actively participated" in the rental real estate business. See sec. 469(i). The IRS disallowed all loss deductions in excess of $25,000 as nondeductible passive losses, determining that Mr. McDonald was not a real estate professional, i.e., that he did not "materially participate" in a "real property trade or business." See sec. 469(c)(7).
• The IRS determined that petitioners had received taxable refunds of State income tax of $3,309, $3,364, and $3,337 for 2009, 2010, and 2011, respectively.
• The IRS determined that for 2010 Mrs. McDonald had unreported wage income of $9,599, as reported to the IRS on two Forms W-2, Wage and Tax Statement.
• As a corollary of disallowing the Schedule E loss deductions for 2009, the IRS determined that petitioners were not entitled to deductions for net operating loss (NOL) carryforwards attributable to the Schedule E business of $5,146 and $13,086 for 2010 and 2011, respectively.
On November 4, 2014, the IRS sent petitioners a timely notice of deficiency determining deficiencies in tax and an accuracy-related penalty in the amounts shown above. See supra p. 2. Petitioners timely petitioned this Court for redetermination, assigning error principally to the IRS' determination that they did not qualify as real estate professionals under section 469(c)(7)(B). After the petition was filed, Mrs. McDonald submitted Form 8857, Request for Innocent Spouse Relief, requesting relief from joint and several liability, which Mr. McDonald has opposed.
Married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). After making this election, each spouse is jointly and severally liable for the entire tax due for that year. Sec. 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000). In certain circumstances, a spouse who has filed a joint return may seek relief from joint and several liability under procedures set forth in section 6015. Unless otherwise provided in section 6015, the taxpayer bears the burden of proving his or her entitlement to such relief. Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff'd, 101 F. App'x 34 (6th Cir. 2004). The scope and standard of review that we apply in such cases are de novo. Porter v. Commissioner, 132 T.C. 203, 210 (2009).
Section 6015 affords relief from joint and several liability on three possible grounds. See sec. 6015(b), (c), (f). Mrs. McDonald seeks relief only under section 6015(c). It provides for allocation of the tax liability between the spouses as if they had filed separate returns reporting their respective items of income and deduction. "For purposes of section 6015(c), unlike for purposes of section 6015(b) and (f), equitable considerations * * * are of no import." Cheshire v. Commissioner, 115 T.C. 183, 194 (2000), aff'd, 282 F.3d 326 (5th Cir. 2002). If relief is available under section 6015(c), subsection (d) specifies the method for allocating the tax liability.
A requesting spouse may elect to have section 6015(c) apply if three conditions are met. The requesting spouse must: (1) have joined in the filing of a joint return for the year at issue; (2) be divorced or legally separated from the nonrequesting spouse at the time relief is sought; and (3) seek relief no later than two years after the date on which the IRS first commences collection activity for the year at issue. See sec. 6015(c)(1), (3). The parties agree that Mrs. McDonald meets these three threshold requirements.
Notwithstanding satisfaction of these threshold tests, an election to have section 6015(c) apply is invalid "[i]f 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 a portion thereof) which is not allocable to such individual under subsection (d)." Sec. 6015(c)(3)(C); see Charlton v. Commissioner, 114 T.C. 333, 341 (2000); Martin v. Commissioner, T.C. Memo. 2000-346. The regulations explain this rule as follows:
If * * * the Secretary demonstrates that * * * the requesting spouse had actual knowledge of an erroneous item that is allocable to the nonrequesting spouse, the election to allocate the deficiency attributable to that item is invalid, and the requesting spouse remains liable for the portion of the deficiency attributable to that item. * * *
Sec. 1.6015-3(c)(2)(i), Income Tax Regs. This "actual knowledge" exception does not apply if the requesting spouse "establishes that * * * [she] signed the return under duress." Sec. 6015(c)(3)(C) (last sentence). Mrs. McDonald does not contend that she signed the 2009-2011 joint returns under duress.
In deciding whether Mrs. McDonald made a valid election to have section 6015(c) apply, we are thus required to determine whether, at the time she signed the returns, she had "actual knowledge * * * of any item giving rise to a deficiency" that was allocable to Mr. McDonald. Sec. 6015(c)(3)(C). By requiring that the Secretary demonstrate actual knowledge of an erroneous item, the statute puts the burden of proof on ...
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