John Maluda v. Commissioner of Internal Revenue

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 10-1753
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JOHN MALUDA,
Appellant
v.
COMMISSIONER OF INTERNAL REVENUE
_______________________
Appeal from the United States Tax Court
Washington, D.C.
Tax Court No. 26429-07
(U.S. Tax Court Judge: Honorable Maurice B. Foley)
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Submitted Pursuant to Third Circuit LAR 34.1(a)
May 26, 2011
Before: McKEE, Chief Judge, SCIRICA and RENDELL, Circuit Judges.
(Filed: June 23, 2011)
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OPINION OF THE COURT
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SCIRICA, Circuit Judge.
John Maluda requested Innocent Spouse Relief from joint and several liability for
underreported income on joint tax returns he filed with his wife, Cathy, between 1998
and 2002. The Commissioner of Internal Revenue denied John’s request, and the Tax
Court upheld the IRS’s decision. On appeal, John contends he was entitled to Innocent

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Spouse Relief based on nominal ownership and misallocation of underreported income.
We will affirm.
I.
On June 11, 1994, John and Cathy Maluda married. During the taxable years
1998-2002, John ran a tool dealership as a Schedule C sole proprietorship while Cathy
was an unemployed homemaker. During this period, the Maludas filed joint income tax
returns, but failed to pay taxes on John’s self-employment income. On June 26, 2006, the
Maludas separated, and Cathy filed for divorce on December 22, 2006.
The Maludas filed untimely joint income tax returns for the years 1999-2002 on
December 29, 2004, and an untimely joint return for 1998 on February 12, 2007, to
reflect their income, almost all of which came from John’s business. On May 4, 2007,
John filed with the IRS a Request for Innocent Spouse Relief, IRS form 8857, seeking
relief from liability for unpaid taxes during the years 1998-2002. This form stated John
was not responsible for the Maludas’ underpayment of taxes because Cathy had led him
to believe she prepared and filed their joint tax returns in these years when, in fact, she
had diverted these funds to her own use. In support of his request, John produced a
counterfeit passbook in the Maludas’ name reflecting false deposit and withdrawal
information from the joint bank account the Maludas held at the Valley National Bank.
John contends Cathy fabricated this passbook to convince him she had paid their taxes.
On October 24, 2007, the IRS denied John’s request for Innocent Spouse Relief
“because relief is not allowed on tax you owe on your own income or deductions.” John

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timely filed a petition for review in Tax Court, where the parties submitted the case
without a trial and on the basis of a stipulated record. The court agreed with the IRS that
relief is not typically available for a taxpayer who fails to file taxes on his own income,
but also concluded the IRS failed to consider exceptions to this rule. But the court found
John did not meet these exceptions and upheld the IRS’s order denying his request. John
timely appealed.1
II.
On appeal, John contends the Tax Court erred in finding he was not entitled to
Innocent Spouse Relief under § 6015(f) of the Internal Revenue Code (IRC).2 Spouses
filing joint federal income tax returns are generally jointly and severally liable for the full
amount of tax due on their combined incomes. I.R.C. § 6013(d)(3). However, § 6015
provides several circumstances whereby a requesting taxpayer who files a joint tax return
may qualify for Innocent Spouse Relief and be relieved of joint and several liability for
unpaid sums. Section 6015(f) permits the Secretary of the Treasury to relieve an
individual from joint and several liability if “taking into account all the facts and
circumstances, it is inequitable to hold the individual liable for any unpaid tax . . . .”
Internal Revenue Procedures list seven conditions a requesting taxpayer must satisfy to
1 The Tax Court had jurisdiction under 26 U.S.C. §§ 6015(e)(1)(A) and 7442. We have
jurisdiction under 26 U.S.C. § 7482(a)(1).
2 “Our review of the Tax Court’s legal conclusions is plenary and is based on the clearly
erroneous standard for its findings of fact.” Neonatology Assocs. v. Comm’r, 299 F.3d
221, 227 (3d Cir. 2002) (internal quotation marks omitted). “The Tax Court’s
determination that a spouse is not entitled to innocent spouse relief is a finding of fact

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be eligible for relief under § 6015(f). The only one at issue is condition 7. Condition 7
reads, in relevant part:
The income tax liability from which the requesting spouse seeks relief is
attributable to an item of the individual with whom the requesting spouse filed the
joint return (the “nonrequesting spouse”), unless one of the following exceptions
applies:
. . .
(b) Nominal ownership. If the item is titled in the name of the requesting
spouse, the item is presumptively attributable to the requesting spouse. This
presumption is rebuttable. . . .
(c) Misappropriation of funds. If the requesting spouse did not know, and
had no reason to know, that funds intended for the payment of tax were
misappropriated by the nonrequesting spouse for the nonrequesting
spouse’s benefit, the Service will consider granting equitable relief
although the underpayment may be attributable in part or in full to an item
of the requesting spouse. The Service will consider relief in this case only
to the extent that the funds intended for the payment of tax were taken by
the nonrequesting spouse.
. . .
Rev. Proc. 2003-61, 2003-2 C.B. 296 (emphasis added).
John contends he meets condition 7(b) of section 4.01 because he owned the
understated income only nominally. Condition (7)(b) gives an example illustrating
“nominal ownership,” whereby a spouse will not be held jointly and severally liable for
underpaid taxes: When a husband, unbeknownst to his wife, 1) opens an individual
retirement account (IRA) in his wife’s name by forging her signature, 2) contributes to
the IRA, 3) takes a taxable distribution from the IRA, and finally 4) files a joint tax return
with his wife without reporting the taxable distribution.
that this court reviews for clear error.” Cheshire v. Comm’r, 282 F.3d 326, 332 (5th Cir.
2002).

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John does not resemble the innocent wife of the IRS’s nominal ownership
scenario. The parties stipulated the Maludas’ income came almost exclusively from
John’s business and was held jointly by John and Cathy. While John claims Cathy
“handled all financial matters” for the household, the record does not clearly support that
conclusory assertion. Furthermore, even if Cathy did exercise exclusive control over the
income, John voluntarily acceded to Cathy’s controlling the Maludas’ income. “[I]ncome
earned by one person is taxable as his, if given to another for the donor’s satisfaction.”
Thomas Flexible Coupling Co. v. Comm’r, 158 F.2d 828, 832 (3d Cir. 1947).
Accordingly, John cannot deny ownership of income because his wife controlled the
family finances while he earned the income. The Tax Court did not clearly err in
concluding the record “does not establish . . . that [John Maluda’s] earnings from his sole
proprietorship are not attributable to himself.”
John also contends he meets condition 7(c) of section 4.01 because he alleges
Cathy produced false tax returns and misappropriated funds earmarked for tax payments.
John insists he did not know of Cathy’s misdeeds, nor could he have known. Again, the
record does not clearly support these conclusions. The stipulated facts demonstrate only
that the Maludas’ joint tax returns between 1998 and 2002 were never filed with the IRS,
and the Valley National Bank passbook in the Maludas’ name is a complete fabrication.
John maintains Cathy is responsible for these transgressions. However, the record
identifies no actor responsible for any misrepresentations or misappropriations. The
parties never agreed, nor does the documentary record clearly demonstrate, that Cathy

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bore sole responsibility for underreporting income to the IRS or diverted funds to her
own use.
Even if Cathy did misrepresent the couple’s income, John presents no evidence
she acted without his knowledge. Had the Tax Court conducted a trial, John might have
demonstrated Cathy’s culpability and his own innocence. Because the parties submitted
the case on the basis of a stipulated record, John had no such opportunity. Therefore, the
court did not clearly err in concluding the record “does not establish that Ms. Maluda
misappropriated funds intended for tax payments.”
III.
For the foregoing reasons, we will affirm the Tax Court’s judgment.

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