Opinion
10417-18
01-07-2022
BRADLEY M. BLAPPERT & CATHERINE M. BLAPPERT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch, Judge.
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit with this order to petitioners and the Commissioner a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch, at the New Orleans, Louisiana remote session, containing his oral findings of fact and opinion rendered at the remote trial session at which the case was heard.
In accordance with the oral findings of fact and opinion, an appropriate decision will be entered.
Bench Opinion by Judge Ronald L. Buch
December 9, 2021
Bradley M. Blappert & Catherine M. Blappert v.
Commissioner
Docket No. 10417-18
THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or the Treasury regulations in effect during the year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.In this case we are asked to decide whether Catherine Blappert is entitled to innocent spouse relief for 2015. The Commissioner issued a notice of deficiency to the Blapperts determining that they had underreported income attributable to Bradley Blappert's medical practice. The parties resolved the deficiency issues, but while this case has been pending, the Blapperts divorced, and Ms. Blappert sought innocent spouse relief. The Commissioner would grant Ms. Blappert's request for relief, but Dr. Blappert objects. We find that Ms. Blappert qualifies for relief under section 6015(b).
Background
Catherine Blappert met Bradley Blappert, a physician, when she was working as a medical sales representative. The Blapperts married in 2005 and had four children during their marriage. In early 2013, Dr. Blappert opened a medical practice, Peak Medical Partners LLC (Peak Medical).
Throughout 2015, the Blapperts were married, and each of them earned income. Dr. Blappert was the primary income earner, and he had income from multiple sources. His medical practice received payments from insurance companies, which was the principal source of income. The practice also received patient copayments by credit card, which were processed using Square, a payment processing service. Dr. Blappert also received nonemployee compensation for providing contract medical services in settings outside his own practice. Ms. Blappert worked part-time as a sales representative for Peak Medical and a surgical center in the same building as Peak Medical for part of 2015. For her work with Peak Medical, she earned wages of $36,479.
Peak Medical employed professionals to handle its bookkeeping and finances. From the outset, Peak Medical employed an office manager to help with finances.
The office manager handled both insurance payments and credit card payments. Dr. Blappert also hired a certified public accountant (CPA) for both the medical practice and the preparation of the Blapperts' personal tax return. Ms. Blappert delivered documents to the CPA if Dr. Blappert requested, but she was not otherwise involved with Peak Medical's bookkeeping, finances, or taxes. She did not participate in Dr. Blappert's meetings with the office manager or the CPA.
The Blapperts' have conflicting views of Ms. Blappert's role in Peak Medical's finances. Ms. Blappert characterized herself as having no meaningful role in the finances of Peak Medical, whereas Dr. Blappert characterized Ms. Blappert as "a partner" in the business, as having transacted with and accessed Peak Medical's bank accounts, and as having received a significant portion of Peak Medical's earnings as her wages.
Dr. Blappert's testimony in this regard was not credible. There is no evidence that Ms. Blappert was a partner in the business. Although Peak Medical has the word "partners" in its name, the Blapperts' tax return identifies Peak Medical as a sole proprietorship and Dr. Blappert as the proprietor. Likewise, there is no evidence of Ms. Blappert accessing Peak Medical's accounts while the business was in operation. The only record of
Ms. Blappert transacting on behalf of Peak Medical is three withdrawals that she made from Peak Medical's bank accounts after it had wound down its operations. Lastly, at trial, Dr. Blappert characterized Ms. Blappert's approximately $36,000 of wages as a sales representative for Peak Medical as constituting a substantial portion of the business's profit. But the Schedule C, Profit or Loss from Business, shows gross receipts of nearly $650,000, and a net profit of approximately $276,000, after deducting for wages and other expenses. In sum, the documentary record conflicts with Dr. Blappert's testimony; there is no evidence of Ms. Blappert having any role in Peak Medical's finances.
Ms. Blappert's main role in 2015 was in the home. Because Dr. Blappert worked long hours, Ms. Blappert managed the household and served as the primary caregiver for the children, one of whom had special needs. The Blapperts maintained a household account that Ms. Blappert used to pay household expenses. She also made expenditures related to the children, including their Catholic school tuition.
Dr. Blappert began winding down his medical practice the fall of 2015. Peak Medical ceased operations in December 2015, and Dr. Blappert started a new job with Prime Healthcare in January 2016. In December 2016, Ms. Blappert made a total of three withdrawals from Peak Medical's two accounts, which were separate from the Blapperts' household account. She believed that she and Dr. Blappert were closing out the Peak Medical accounts because the business was no longer in operation.
The Blapperts filed a joint tax return for 2015. When Ms. Blappert signed the return, she believed that she and Dr. Blappert reported all of their income, and nothing gave her reason to believe otherwise. She knew Dr. Blappert had income from Peak Medical and contracts for his medical services, but she did not know the amounts. Ms. Blappert signed the return after reviewing the first page. She did not scrutinize the entire return because she did not know about the finances of Peak Medical and because the Blapperts had hired a CPA to prepare the return.
The Blapperts led a lifestyle in 2015 that was commensurate with their reported income. Their largest expenditure was for their children's Catholic school tuition.
According to information reported to the Commissioner by third parties, the Blapperts underreported Peak Medical's income by $108,318. The Commissioner mailed the Blapperts a notice of deficiency determining an income tax deficiency of $41,204. The Commissioner also determined a substantial understatement penalty under section 6662 and an addition to tax under section 6651(a)(1). The Blapperts resided in Louisiana when they timely filed a petition for redetermination.
After filing the petition, the Blapperts separated. They began living apart in January 2019. In June 2020, they divorced. While this deficiency case has been pending, Ms. Blappert submitted to the Commissioner a Form 8857, Request for Innocent Spouse Relief.
On her Form 8857, Ms. Blappert indicated that Dr. Blappert abused her. About halfway through the Blapperts' marriage, Ms. Blappert began feeling threatened by Dr. Blappert. She perceived him to be demanding and controlling. Ms. Blappert alleged physical abuse, and a temporary restraining order was issued to Dr. Blappert. There is no evidence that Dr. Blappert was convicted of any abuse.
The Blapperts and the Commissioner resolved the amount of the deficiency. They filed a Stipulation of Settled Issues in which the Blapperts stipulated to the income adjustments in the notice of deficiency and the Commissioner conceded the penalty and addition to tax. In addition, the Commissioner administratively determined that Ms. Blappert is entitled to relief from joint and several liability under section 6015(b) for 2015. But Dr. Blappert opposes the Commissioner's determination to grant Ms. Blappert relief.
Discussion
The only issue remaining for decision is whether Ms. Blappert is entitled to relief from joint and several liability under section 6015(b) for 2015. At trial, the parties agreed that the only element underlying relief that remains in dispute was whether Ms. Blappert knew or had reason to know of the understatement of Peak Medical's income. We treat all other elements as conceded. I. General Rules
Generally, married taxpayers may elect to file a joint Federal income tax return. Sec. 6013(a). Upon electing to file jointly, each spouse is jointly and severally liable for the entire tax due for that year. Sec. 6013(d)(3). In certain circumstances, however, a spouse who filed a joint return may seek relief from joint and several liability under the procedures in section 6015.
Section 6015(a) allows a spouse to seek relief from joint and several liability. Except as otherwise provided in section 6015, the taxpayer bears the burden of proving that he or she is entitled to 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 our review in cases involving relief from joint and several income tax liability are de novo. Porter v. Commissioner, 132 T.C. 203, 210 (2009).
II. Section 6015(b) Relief
Under section 6015(b), a taxpayer requesting relief from joint and several liability must meet five conditions: (1) a joint return was filed for the taxable year; (2) there was an understatement of tax attributable to an erroneous item of the non-requesting spouse; (3) at the time of signing the return, the requesting spouse did not know and did not have reason to know of the understatement; (4) taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for the deficiency in tax attributable to the understatement; and (5) the requesting spouse sought relief within two years of the first collection activity relating to the liability. The requesting spouse must satisfy all five requirements to qualify for relief. Sec. 6015(b)(1); Alt v. Commissioner, 119 T.C. at 313.
Only the knowledge element is in dispute. The Blapperts filed a joint return for 2015. The understated income was attributable to Dr. Blappert's medical practice. No one disputes that, if she is found not to have the requisite knowledge, it would be inequitable to hold Ms. Blappert liable for the deficiency. And the Commissioner has not commenced collection activity for the deficiency, so Ms. Blappert's request was timely.
Ms. Blappert did not have actual knowledge of the omitted income. Actual knowledge requires knowledge of the receipt of the income; knowledge of the source alone is not sufficient. Sec. 1.6015-3(c)(2)(i)(A) and (iii), Income Tax Regs. It also requires knowledge of the amount received. See sec. 1.6015-3(c)(2)(ii) and (c)(4) (example 4), Income Tax Regs. Ms. Blappert believed that Dr. Blappert properly reported his income. She did not participate in bookkeeping for Peak Medical. Peak Medical's office manager handled insurance payments and co-payments processed through Square. Moreover, Peak Medical maintained a separate business account that Ms. Blappert did not access while Peak Medical was in operation. Ms. Blappert did not actually know about the source, receipt, or amount of the omitted income.
Ms. Blappert also did not have reason to know about the omitted income. She would have reason to know of the understatement if a reasonable person in similar circumstances would have known of the understatement. Sec. 1.6015-2(c), Income Tax Regs.; Cheshire v. Commissioner, 115 T.C. 183, 192-93 (2000), aff'd, 282 F.3d 326, 332-34 (5th Cir. 2002). We consider all the facts and circumstances, including: the nature of the erroneous item and its amount relative to other items; the requesting spouse's education and business experience; the extent that the requesting spouse participated in the activity producing the erroneous item; whether the erroneous item departed from a pattern reflected in prior returns; and whether the requesting spouse failed to ask about erroneous or omitted items that a reasonable person would question. Sec. 1.6015-2(c), Income Tax Regs.
Considering these factors, Ms. Blappert did not have reason to know about the omitted income. Although the omitted income of $108,318 was significant, Ms. Blappert did not have information that would call into question the accuracy of the $650,000 of income actually reported. Ms. Blappert worked as a medical sales representative and had no meaningful financial expertise or education. She did not participate in bookkeeping or accounting for Dr. Blappert's business. And the Blapperts led a lifestyle consistent with the income they reported. Their lifestyle did not indicate a source income beyond what was reported on their return. A reasonable person in Ms. Blappert's circumstances would not have known of the understatement.
Conclusion
Ms. Blappert satisfies the conditions for innocent spouse relief under section 6015(b). She is not jointly and severally liable for the 2015 deficiency. An appropriate decision will be entered.
(Whereupon, at 9:15 a.m., the above-entitled matter was concluded.)