Nancy B. Doyle v. Commissioner of Internal Revenue

* Honorable Milton I. Shadur, Senior District Judge for the United States District
Court for the Northern District of Illinois, sitting by designation.
NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 03-2907
___________
NANCY B. DOYLE,
Appellant
v.
COMMISSIONER OF INTERNAL REVENUE,
___________
ON APPEAL FROM THE DECISION OF THE
UNITED STATES TAX COURT
(Tax Court No. 01-9137)
Tax Court Judge: Honorable Robert P. Ruwe
___________
Submitted Under Third Circuit LAR 34.1(a)
March 12, 2004
BEFORE: SLOVITER, NYGAARD, Circuit Judges.
and SHADUR,* District Judge.
(Filed: April 20, 2004)
OPINION OF THE COURT
SHADUR, District Judge.
Nancy Doyle (“Nancy”) has appealed a ruling by the United States Tax

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1 All further citations to the Code will take the form “Section--,” eliminating the
need for repeated references to “26 U.S.C.”
2
Court that the Commissioner of Internal Revenue (“Commissioner”) (1) was correct to
deny Nancy relief under 26 U.S.C. §6015(b)(1), part of the Internal Revenue Code
(“Code”),1 from her joint and several tax liability with her husband Richard and (2) did
not abuse his discretion when he denied her relief under Section 6015(f). Because the
Tax Court did not commit clear error in making either determination, we affirm its
decision in both respects.
Nancy and the Commissioner stipulated to a set of facts (App. 21-37)
before the Tax Court. We discuss those facts here only as they are necessary to
understand our ruling.
Nancy and Richard filed joint federal income tax returns for the years 1980
through 1983 that included large deductions for horse breeding and horse racing tax-
sheltered investments (Stip. ¶6). After auditing those returns, the Commissioner issued
notices of deficiency alerting Nancy and Richard that they owed upwards of $100,000 in
additional taxes (Stip.¶¶7-8). That liability was upheld by two Tax Court determinations
that computed the aggregate deficiency (including interest) at well over $300,000 (Stip.
¶¶10-12).
Although the Commissioner has recouped some of the amount due by
levying on Richard's wages and by retaining overpayments and refunds due to Nancy and

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2 Section 6015 has replaced the former Section 6013(e), generally liberalizing
when relief would be available for “innocent spouses.” But where parts of the new
provision are comparable to the old one, caselaw pertaining to Section 6013(e) is helpful
in construing Section 6015 (Cheshire, 282 F.3d at 331 n.9 & 332 n.15). This opinion
follows that interpretive guideline when applicable and appropriate.
3
Richard, neither Nancy nor Richard has ever made a voluntary payment on their liability
(Stip. ¶¶50-53). Nancy submitted a “Request for Innocent Spouse Relief” pursuant to
Section 6015 in October 2000 (Stip. ¶61), but the Tax Court denied Nancy's request and
upheld the Commissioner's right to continue collection activity (App. 18). On Nancy's
appeal, we now review that decision.
We have plenary review over the Tax Court's legal conclusions, and we
review any factual findings not based on the parties' stipulation for clear error
(Neonatology Assocs., P.A. v. Comm'r, 299 F.3d 221, 227 (3d Cir. 2002)). Because the
Tax Court's ultimate determination that Nancy is not entitled to relief under Section 6015
is a finding of fact, it too is reviewed for clear error (Cheshire v. Comm'r, 282 F.3d 326,
332 (5th Cir. 2002)). Moreover, Section 6015 comports with the general rule that
taxpayers bear the burden of demonstrating that a determination by the Commissioner is
incorrect (Neonatology Assocs., 299 F.3d at 228; Purificato v. Comm'r, 9 F.3d 290, 292
(3d Cir. 1993)).2
To begin with, the Tax Court did not commit clear error when it determined
that Nancy had not met her burden of establishing each of the five conjunctive
requirements (A) through (E) of Section 6015(b)(1). Only if a taxpayer can prove all five

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3 Although publication page references to Jonson are not yet available, the
opinion may be retrieved on Westlaw.
4
requirements will she “be relieved of liability.” Here the Tax Court found that Nancy
failed to show (1) that “she did not know, and had no reason to know, that there was such
understatement” (requirement (C)) and (2) that “taking into account all the facts and
circumstances, it is inequitable to hold the other individual [here Nancy] liable for the
deficiency...” (requirement (D)).
As to the first of those failures, courts are divided about the proper standard
to use in erroneous-deduction scenarios to determine whether a taxpayer knew or had
reason to know of an understatement (see Cheshire, 282 F.3d at 333 n.18; Jonson v.
Comm'r, 118 T.C. 106 (2002)).3 As for the Tax Court, it consistently applies a
knowledge-of-the-transaction test to both income-omission and erroneous-deduction
situations (see, e.g., Jonson, citing among other cases Bokum v. Comm'r, 94 T.C. 126,
150-51 (1990), aff'd on another ground, 992 F.2d 1132 (11th Cir. 1993)). Under that
approach a taxpayer does not satisfy Section 6015(b)(1)(C) if she has reason to know
about the underlying transaction that resulted in the understatement at issue (id.). In
contrast, many circuits hold that in the erroneous-deduction context mere awareness of
the underlying transaction that gave rise to an erroneous deduction does not alone cause
the taxpayer to flunk Section 6015(b)(1)(C)(that view was first expounded in Price v.
Comm'r, 887 F.2d 959, 964-65 (9th Cir. 1989)). Those circuits ask whether a reasonably

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4 Nancy testified that she did not know about any investments Richard may have
had during the period in question (App. 40-41, 43-45). But it was the Tax Court's
responsibility and prerogative to assess and weigh conflicting evidence and to make the
factual finding as to whether Nancy knew of the transactions (App. 13; Wilmington Trust
Co. v. Helvering, 316 U.S. 164, 168 (1942)).
5
prudent taxpayer could be expected to know that there was an erroneous deduction at the
time she signed the return (id.). Any “yes” answer to that question triggers a duty of
inquiry, and a taxpayer who then does not inquire further is denied relief under Section
6015(b)(1)(C)(id.). As the ensuing discussion reflects, we need not stake out a position in
that debate.
As for the first of those approaches, the Tax Court found that Nancy knew
of the underlying horse breeding and horse racing investments because she wrote the
checks for the transactions pertaining to them (App. 13, 44-45).4 And as indicated early,
that alone is enough to defeat Nancy under the Tax Court's approach to “knew or had
reason to know.”
As for the second and more lenient test first articulated in Price, we hold
that Nancy did not adequately discharge the duty to inquire further into the possibility of
an erroneous or improper deduction. Though the discussion of that concept is necessarily
more prolonged, our conclusion adverse to Nancy is equally firm.
Various factors consistently play into the threshold determination as to
whether a duty of inquiry arises as envisioned by Price and other cases following the
same line (see, e.g., Bliss v. Comm'r, 59 F.3d 374, 378 (2d Cir. 1995)). Those factors

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5 William Shakespeare, Hamlet act 1, sc. 4, line 90.
6
include such matters as the taxpayer's level of education and involvement in the family's
financial affairs, the size and nature of the deduction (particularly in relation to the
couple's tax liability and gross income), the presence of comparatively large expenditures
or an abrupt lifestyle change, and deception or evasion by the spouse with primary
responsibility for the couple's finances (26 C.F.R. §1.6015-2(C); see also Hayman v.
Comm'r, 992 F.2d 1256, 1261-62 (2d Cir. 1993)).
Several of those ingredients confirm Nancy's clear duty to inquire about the
deductions. For one thing, although she had only a high school education, her writing of
all the household checks and handling of household expenses involved her in an active
role in the family's finances (App. 38, 44-45). More significantly, Nancy certainly should
have been alerted to the prospect that “[s]omething is rotten in the state of Denmark”5
when she signed a tax return that deducted almost 70% of the couple's gross income
(App. 3 n.2)--something that on its face reduced the family's apparent income to a level
totally at odds with the couple's lifestyle. And finally, as the Tax Court noted, there is no
indication that Richard was deceiving Nancy such that her opportunity to learn about the
deductions or their propriety was thwarted (App. 13).
But in the face of those things Nancy simply played ostrich, hiding her head
in the proverbial sand. She admits that she never reviewed or discussed the returns with
Richard or anyone else, nor did she present any evidence to the Tax Court indicating that

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6 Although that Procedure (later superseded by Rev. Proc. 2003-61) actually
addressed equitable factors in terms of Section 6015(f) and not specifically as to Section
6015(b)(1)(D), we see no reason why the considerations would be any different for the
wholly comparable concepts set out in Sections 6015(b)(1)(D) and 6015(f).
7 Again the Tax Court was entitled to discount Nancy's testimony that her
standard of living stayed the same and that she did not “realize in [her] mind any benefit
from the deductions,” in light of the substantial objective evidence to the contrary (App.
46).
7
she attempted to disentangle the tax knot that she had to know about (App. 41-43). That
total lack of inquiry forecloses her ability to satisfy Section 6016(b)(1)(C), even under the
less demanding Price formulation.
That inability alone scotches the availability of relief under Section
6015(b)(1) (Friedman v. Comm'r, 53 F.3d 523, 532 (2d Cir. 1995)). But the Tax Court
had a second string to its bow: It also determined that Nancy could not show it would be
inequitable to hold her liable under all the facts and circumstances, as required by Section
6015(b)(1)(D)(App. 13-16). We agree on that score as well.
That equitable evaluation also implicates a number of possible factors (Rev.
Proc. 2000-14 §4.02 to .03 (found at 2000WL 42026)).6 Here the Tax Court focused
primarily on two of those factors in reaching the conclusion that it would not be
inequitable to hold Nancy liable on her joint return.
First, the Tax Court noted that Nancy received significant benefits over and
above normal support (though some of those benefits were realized several years later)
(App. 15; Hayman, 992 F.2d at 1262; Rev. Proc. 2000-15 §4.03(2)(c)).7 For example, in

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1993 (just as the Commissioner was filing tax liens against them) Nancy and Richard
took two European vacations in the span of a few months (Stip. ¶¶26-28). Additionally,
after the tax years at issue Nancy and Richard frequently transferred substantial moneys
(funds they could have applied towards their tax liability) to their children, but they then
regularly withdrew that money for their own living expenses--including those vacations
(App. 14-18, 21-22, 29-30, 34-35, 50).
Next the Tax Court emphasized that Nancy's continuous attempts to hinder
collection of the taxes at issue also cuts against her argument that relief would be
appropriate based on a good faith effort to comply with federal income tax laws (App. 15-
16; Rev. Proc. 2000-15 §4.03(2)(e)). As Nancy plainly stipulated, while she has not made
any voluntary payments on her tax liabilities, she has liquidated numerous assets, taken
out liens on previously unencumbered property and--as already discussed--“transferred”
to her children large sums of money that she and Richard then recaptured to support their
own lifestyle (Stip. ¶¶13-24, 28-30, 34-35, 50). Given that factual backdrop, the Tax
Court surely committed no error, let alone clear error, when it characterized Nancy's and
Richard's activities as a systematic ploy to hinder collection (App. 16).
Finally, the Tax Court did not err when it concluded that it was not an abuse
of the Commissioner's discretion to deny Nancy equitable relief under Section 6015(f)
(App. 17; Mitchell v. Comm'r, 292 F.3d 800, 807 (D.C. Cir. 2002)). That statute tracks
verbatim the language of Section 6015(b)(1)(D). Because Nancy was ineligible for relief

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under Section 6015(b) precisely because she failed to satisfy Section 6015(b)(1)(D)(even
apart from her shortfall under Section 6015(b)(1)(C), it necessarily follows that the
Commissioner did not abuse his discretion by withholding relief under Section 6015(f).
For all these reasons we AFFIRM the Tax Court's decision in all respects.

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