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Acc 352 RP 5
Fall, 2016
In January, 1984 Hammed and Su-Li Spartan (husband and wife) welcomed their newborn daughter,
Janet, into their household. Not long after Janet came home from the hospital a number of health
problems developed. The health problems became more and more challenging and Janet has never led a
“normal” life. Today Janet functions at the effective age of three. Janet has never been able to feed,
bathe or dress herself and her health problems are never going to end. Shortly after Janet’s birth, Su-Li
ended her promising career in public accounting to devote herself to fulltime care for Janet. Su-Li has
not worked outside the home since shortly after Janet’s birth.
In 2002, as Janet’s eighteenth birthday loomed on the horizon Su-Li completed a series of courses on
home health care and obtained certification to perform home health care functions. A few days after
Janet’s eighteenth birthday Hammed and Su-Li were court appointed as guardians for the now (by age)
adult Janet.
Su-Li (on behalf of Janet) applied for Medicare treatment funding (administered by the state) and was
approved to treat Janet in their home. In cases such as Janet’s the typical treatment for “adults” with
Janet’s medical issues is to become resident in a facility that treats individuals with similar medical
issues. Su-Li completes regular annual training and obtains an annual update to her home health
training.
The state monitors Janet’s care (provided by Su-Li) and then submits the claims for payment to
Medicare for funding. Su-Li received $48,000 from Medicare for treatment provided to Janet in 2014.
Su-Li excluded the $48,000 from income on her tax return citing §131(a) of the Internal Revenue Code as
justification.
The IRS selected Hammed and Su-Li’s tax return for examination (audit) and included the $48,000 as
income. The IRS has assessed interest and penalties for failure to include the $48,000 in income.
Hammed and Su-Li have refused to pay and challenge the IRS’ position in court. What will be the result
of their challenge?
Remember: Students must cite a code section along with a federal tax case, IRS or Treasury
publication or other Primary authority. Textbooks are not primary authority. The format is: Facts,
Issue, Answer, Rationale, Authority. One page only. Use the template found on Bb under Documents
tab. Spelling and grammar are very important. Remember to BOTH submit your assignment using the
Bb link for turnitin AND deliver a hard copy to class.
Facts: The Keating family is composed of Bart, Arlene and their four adult children. Bart and Arlene are
married and file a joint tax return. Arlene has regularly been embezzling from her job. Arlene also
prepared the couple’s tax returns, which are signed by both Arlene and Bart. Arlene spends all of the
embezzled funds to provide an extravagant lifestyle for her adult children, while Arlene and Bart live a
more modest lifestyle in line with their reported income. Bart believes that the lifestyle of the children is
derived from prosperity. Arlene’s embezzlement is discovered and she is prosecuted and jailed. Bart and
Arlene divorce. The IRS files a deficiency against Bart for taxes levied against the embezzlement funds
not reported on returns filed during their marriage.
Issue: Is Bart liable for the taxes? Answer: No, Bart is not liable.
Rationale: While according to IRC Sec. 6013(d)(3) married persons become jointly liable for all taxes due,
IRC Sec. 6015 was enacted for situations like Bart’s. According IRC Sec. 6015 an innocent spouse must
not have knowledge of the understatement. In the case above, Bart had no awareness of Arlene’s
embezzlement. In the case of Kathryn Cheshire vs. Commissioner, a spouse is eligible for innocent
spouse relief if a joint return is filed, there is a gross understatement related to the other spouse, and if
the spouse had no knowledge. Furthermore, the burden of proof is on the IRS to provide that the spouse
had knowledge, as is seen in Evelyn M. Martin vs. Commissioner.
Authority:
IRC Sec. 6013(d)(3)
IRC Sec. 6015
Kathryn Cheshire, 115 T.C. 183 (2000)
Evelyn M. Martin, 80 TCM 670, TC Memo. 2000-347
…
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