RICK E. JACOBSEN, Plaintiff-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Defendant-Appellee.
No. 18-3371
United States Court of Appeals For the Seventh Circuit
Argued September 13, 2019 — Decided February 13, 2020
Before BAUER, ROVNER, and SYKES, Circuit Judges.
Appeal from the United States Tax Court. No. 25348-15 — Elizabeth Crewson Paris, Judge.
OPINION
I.
The stipulated facts as found by the Tax Court provide a backdrop for Jacobsen‘s claim on appeal. While Jacobsen and Lemmens were married, Lemmens, an accountant, handled all of their finances. During the relevant time period (2009-2011), Lemmens worked for a blood bank, where her duties included processing accounts payable and issuing checks to vendors. Jacobsen, who holds an associate‘s degree, worked as a machine operator at a factory. In addition to working at the factory, which he did in twelve-hour shifts fourteen days per month, Jacobsen inspected properties for financial institutions and insurance companies.
Jacobsen deposited wages from his work as a machine operator into a personal account at Evergreen Credit Union in Wisconsin. The remainder of the couple‘s income, from both Lemmens’ job and Jacobsen‘s home inspections, was deposited into a joint account at Community First Credit Union.
That joint account was also used by Lemmens for deposits that she had actually embezzled from the blood bank. Throughout the tax years at issue here, Lemmens was embez-zling from the blood bank by drafting checks to herself or adding sizable amounts to her own paychecks and classifying the excess as reimbursements.
Lemmens was eventually arrested in June 2011 for embezzling over $450,000 from her employer. The Tax Court credited Jacobsen‘s testimony that he neither knew of, nor had reason to know of Lemmens’ scheme at the time of her arrest.
First, as discussed above, Jacobsen was for the most part completely uninvolved with the couple‘s finances. Specifically, he never reviewed bank or credit card statements, nor did he look over their personal or business finances, which Lemmens managed. Nor would have reviewing their finances necessarily have alerted him to Lemmens’ embezzlement given her practice of depositing the embezzled funds via check into the couple‘s joint account. These checks would have been difficult to distinguish from the checks for the home inspection business, which were also made out to Lemmens and tended to be for similar amounts.
Lemmens was convicted in 2011 and sentenced in January 2012. Although the two remained married throughout the criminal trial and into her term of imprisonment, they ultimately became estranged sometime in 2013 and divorced in May 2015. Their divorce decree specified that Jacobsen and Lemmens would each pay half of the 2010 and 2011 tax liabilities. Jacobsen, however, maintains that he believed he was only agreeing to pay half of the liabilities remaining after excluding the embezzlement income.
The disputed tax liabilities arose from the audit of the couple‘s jointly submitted tax returns for 2009, 2010, and 2011. After Lemmens was convicted, an IRS agent analyzed bank deposits and interviewed both Lemmens (from jail) and Jacobsen. In early 2013, the IRS prepared Form 4549 Tax Examination Changes proposing adjustments to the tax returns from all three years, most of which arose from income adjustments attributable to Lemmens’ embezzlement.1 As relevant here, for 2010 the IRS proposed total net adjustments of $298,710.14, of which $261,959.14 was attributable to omitted embezzlement income. That proposed adjustment resulted in a deficiency of $103,247 and an accuracy-related penalty under
In January 2014, Jacobsen filed a Form 8857 with the IRS, requesting innocent spouse relief under § 1615 for 2009, 2010, and 2011. Although the IRS made a preliminary determination granting Jacobsen full relief, it reconsidered its decision after Lemmens filed a statement of disagreement. Ultimately in July 2015, the IRS office of appeals denied all relief under
In October that same year, Jacobsen, who was by then divorced from Lemmens, filed a timely petition under
The Tax Court then considered Jacobsen‘s eligibility for relief under
The Tax Court granted Jacobsen
The Tax Court also considered the factors set forth in
The assessment for 2011, however, was different. Lemmens was arrested that same year, so by the time the 2011 returns were filed in April 2012, she had been convicted of embezzlement and was incarcerated. The Tax Court thus denied relief under
With the exception of knowledge of the understatement, which bars relief under
With the exception of the third factor, whether Jacobsen knew or had reason to know of the understatement, the Tax Court concluded that each of the foregoing factors favored Jacobsen or were “neutral.” The Tax Court nonetheless concluded that Jacobsen‘s actual knowledge in 2011 of Lemmens’ embezzlement and the accompanying tax understatement weighed “too heavily” against him to allow equitable relief under
II
The Internal Revenue Code specifies that a husband and wife who file a joint tax return are jointly and severally liable for the taxes on their combined incomes.
Section 6013(e) was designed to protect innocent taxpayers after the IRS began assessing underpayments and associated penalties from the spouses of embezzlers, even when the spouse was unaware of the embezzling or associated tax liability. It allowed relief where the underpayment was due to fraud by the taxpayer‘s spouse, the taxpayer did not and had no reason to know of the underpayment, and it would be inequitable to hold the taxpayer liable for the underpayment in light of the facts and circumstances. In 1984, Congress amended that section and slightly broadened the available relief. See Pub. L. No. 98-369, § 424(a), 98 Stat. 494, 801 (1984). Still not content with the availability of relief, Congress later repealed § 6013(e) entirely and enacted § 6015 in the Internal Revenue Service Restructuring and Reform Act of 1998 to make “innocent spouse status easier to obtain.” H.R. Conf. Rep. No. 105-599, at 249-51 (1998), reprinted in 1998 U.S.C.C.A.N. 288.
Section 6015, as relevant here, provides three separate avenues for relief in subsections (b), (c), and (f). Conceding his ineligibility for relief under
The parties’ differing views on the standard of review hinge in part on the Taxpayer First Act, legislation that was passed shortly after the parties filed their briefs. See Pub. L. No. 116-25, 133 Stat. 981 (July 1, 2019). As relevant here, § 1203 of the Taxpayer First Act added a new paragraph at the end of
Jacobsen, however, insists that the Taxpayer First Act confirms his position that we review decisions under
We are unconvinced, however, that the Taxpayer First Act (which settled only the Tax Court‘s standard of review of IRS determinations) sheds any particular light on our standard of review as to relief under
As described above, Revenue Procedure 2013-34 identifies seven possible factors for consideration in assessing whether to grant relief under
Jacobsen acknowledges that with the exception of his knowledge for 2011, the Tax
The longstanding test for “knowledge” of omitted taxable income “is not knowledge of the tax consequences of a transaction but rather knowledge of the transaction itself.” See, e.g., Quinn v. C.I.R., 524 F.2d 617, 626 (7th Cir. 1975). Under this standard, the Tax Court‘s conclusion that Jacobsen, who was aware of Lemmens’ indictment, trial, and subsequent conviction for embezzlement, had actual knowledge of the embezzled income is uncontroversial. In conceding that he had “reason to know” of the embezzled income, Jacobsen admits that after Lemmens’ conviction but before he filed their taxes he should have looked into the 2011 bank statements to ascertain the amounts of embezzled income, looked at the analysis of embezzled income by year from Lemmens’ trial, or sought information from Lemmens to determine how much she embezzled in 2011. But, Jacobsen argues, because he did none of these things, he lacked “actual knowledge” of the 2011 embezzlement income as contemplated by Revenue Procedure 2013-34.
Jacobsen‘s argument boils down to his claim that he cannot be accountable for having actual knowledge because there was no evidence in the Tax Court that he knew the precise amounts embezzled, an argument he supports with reference to slight differences in the totals calculated by the restitution order in Lemmens’ criminal trial, the joint stipulation in their divorce decree, and the IRS agent‘s audit calculations.
Jacobsen‘s argument, however, is based on the faulty premise that he is not responsible for demonstrating that he lacked knowledge of the embezzled income. First, relying on
Instead of doing this, Jacobsen simply notes that the Tax Court made no explicit finding that he knew the particular amount of embezzlement income in 2011. Jacobsen faults the Tax Court‘s actual knowledge finding because there “was nothing in the record” demonstrating that he read any documentation from Lemmens’ trial that would establish the precise
The Tax Court reached that conclusion after considering all the facts and circumstances as anticipated in Sec. 1.6015-3(c)(2)(iv), Income Tax Regs. The Tax Court noted that by the time he filed the return in April, Jacobsen was aware of Lemmens’ arrest in June of 2011, her conviction in November 2011 of embezzling $485,681, and her January 2012 sentence to incarceration and restitution. Jacobsen cites no authority, nor are we aware of any, suggesting that a finding of actual knowledge would be precluded by the fact that a petitioning spouse may not, as a result of his own lack of investigation, be aware of the precise amount of embezzlement, particularly when he has not offered any explanation as to why he failed to access that information. See Porter v. C.I.R., 132 T.C. 203, 212 (2009) (
Jacobsen‘s argument that the Tax Court improperly assigned too much weight to that knowledge is more persuasive. Jacobsen claims that because, with the exception of knowledge, the factors relevant to relief under
As discussed above, the Tax Court considered each of the seven factors identified for consideration in Internal Revenue Procedure 2013-34 § 4.03(2)(a)-(g) and determined that only the third factor, whether the requesting spouse knew or had reason to know of the understatement, weighed against Jacobsen‘s request for equitable relief.
Notably, the court fully considered those factors favoring relief. It noted Jacobsen‘s failure to benefit significantly from the embezzled income as well as his subsequent compliance with tax laws. And the court took note of the fact that Jacobsen is a veteran suffering from PTSD who experienced a mental breakdown in response to Lemmens’ crime and has since moved three times and held four different jobs.
Because each of the factors for consideration was either neutral or favored relief, Jacobsen claims the Tax Court must have weighed knowledge more heavily than the other factors, in contravention of Rev. Proc. 2013-34 § 4.03(2)(c)(i)(A). Nothing in the Tax Court‘s opinion, however, suggests that it believed knowledge of the embezzled
Jacobsen also suggests it was inappropriate for the Tax Court to factor his “participation in preparing the 2011 return” into its assessment, characterizing it as “another way for the court to extra-count” Jacobsen‘s knowledge of the embezzlement. In assessing the role of Jacobsen‘s knowledge in his entitlement to equitable relief, the court noted that in addition to Jacobsen‘s actual knowledge on account of Lemmens’ criminal conviction and sentence, in 2011 Jacobsen himself provided the tax information to the paid preparer, whereas in previous years Lemmens had always prepared and submitted the tax information. Far from demonstrating that the Tax Court erred, the court‘s consideration of his role in preparing the 2011 return demonstrates its commitment to heed the Revenue Procedure‘s directive that the seven listed factors merely provide “guides” as opposed to an “exclusive list” and that “[o]ther factors relevant to a specific claim for relief may also be taken into account.” Rev. Proc. 2013-34 § 4.03(2).
It is clear from its opinion that the Tax Court considered the factors relevant to Jacobsen‘s specific claim for relief. The court considered Jacobsen‘s individual circumstances as it analyzed each of the listed factors. Jacobsen does not argue, nor could he, that the Tax Court misapprehended the facts or otherwise overlooked information relevant to Jacobsen‘s claim.
We are sympathetic to Jacobsen‘s situation, and recognize that the Tax Court could have easily decided on this record that Jacobsen was entitled to equitable relief under
III.
Jacobsen‘s case is a close one, and we are ultimately persuaded by our deferential standard of review. Because nothing in the record leads us to believe the Tax Court clearly erred or abused its discretion, we AFFIRM its denial of equitable relief.