Innocent spouse relief granted despite ex-husband’s objection Bishop, TC Summary Opinion 2008-33
The Tax Court agreed with the IRS and, over the objection of the taxpayer’s ex-husband, held that the taxpayer was entitled to equitable relief under Section 6015(f) from her husband’s tax underpayments.
Facts. The taxpayer married in 1982, and the couple had two children. The husband was previously a revenue agent who conducted income tax audits for the IRS. However, in 1995, he pled guilty to the charge of bribing a public official and was sentenced to 28 months in prison. He was released from prison in 1997 and rejoined his family. Thereafter, he began working as an auditor for a state agency. The taxpayer was employed as a claims processor for a health insurance company. The couple separated in 2003 and were divorced in 2004.
Before and after 2000, the taxpayer and her husband began to live beyond their means, incurring substantial expenses and debts. The husband was domineering; he controlled the couple’s financial matters and prepared their federal income tax returns. During the years at issue (2000-2002), he decreased his tax withholding by increasing his exemptions and advised the taxpayer to do the same. These actions resulted in underpayments of tax for the years 2000-2002 and the failure to pay unpaid tax liabilities after they were assessed.
The taxpayer did not sign the joint federal income tax returns for 2000 and 2001, and her husband did not disclose or discuss the return’s contents. However, she gave her Forms W-2 to the husband for those years, and they were attached to the returns. Not until late 2002 or early 2003 did the taxpayer become aware that the husband had made no payments on the unpaid taxes for 2000 and 2001 ($2,532 and $4,685, respectively).
The taxpayer did sign the couple’s joint federal tax return for 2002. The total underpayment for that year was $6,105. The taxpayer subsequently corrected her withholding and entered into an installment agreement with the IRS to pay the balance of her tax due for 2003. At the time of the trial, she was current in paying her federal income tax.
Some time after the couple divorced, the taxpayer filed a request with the IRS for relief from joint and several liability under Section 6015(f) with respect to her unpaid federal income tax liability. Although the IRS initially determined that the taxpayer was not entitled to relief, on review, it changed its mind and concluded that she was entitled to relief. The ex-husband, however, objected, asserting that the taxpayer should pay her share of the taxes, which meant that the Tax Court had to determine whether the taxpayer was entitled to relief under Section 6015(f) for the relevant years.
Court’s opinion. The court pointed out that because the taxpayer was seeking relief from underpayments of tax, rather than understatements of tax, relief was not available to her under Sections 6015(b) and (c), and her only avenue for relief was Section 6015(f)’s equitable relief. Under section 4.02(1) of Rev. Proc. 2003-61, 2003-2 CB 296, however, Section 6015(f) equitable relief will ordinarily be granted if each of the following elements is satisfied:
(1) On the date of the request for relief, the requesting spouse is no longer married to, or is legally separated from, the nonrequesting spouse, or has not been a member of the same household at any time during the 12-month period ending on the date of the relief request.
(2) On the date the requesting spouse signed the joint return, he or she had no knowledge or reason to know that the nonrequesting spouse would not pay the income tax liability.
(3) The requesting spouse will suffer economic hardship if the Service does not grant relief.
The court said that the taxpayer was divorced from the husband and would suffer economic hardship if relief was not granted. Also, she may not have been aware of the tax liabilities on the 2000 and 2001 returns because she did not sign them or discuss them and did not actually know that there were unpaid taxes until late 2002. The court, however, believed that the taxpayer should have had reason to know that the tax liabilities might exist because of the couple’s mounting debts and severe financial situation. The court pointed out that she knew there were unpaid taxes for 2002 because she signed the return for that year and confronted her husband about the unpaid taxes for all three years. Additionally, the taxpayer knew about the tax liabilities when she joined the husband as a party in a chapter 13 bankruptcy proceeding in February 2003. Therefore, the court concluded that the taxpayer did not satisfy the knowledge element of Rev. Proc. 2003-61, section 4.02, and did not qualify for equitable relief under that section.
Luckily for the taxpayer, this did not end the inquiry. If a spouse fails to qualify for relief under section 4.02 of Rev. Proc. 2003-61, the IRS may still grant relief under section 4.03 of that Procedure. Section 4.03 lists factors that the Service will take into account in determining whether to grant equitable relief under Section 6015(f). No single factor is determinative, all factors are to be considered and weighed appropriately, and the list of factors is not exclusive.
(1) Marital status. The taxpayer and her husband separated in 2003 and divorced in 2004. (Factor weighed in favor of granting relief.)
(2) Economic hardship. The taxpayer’s monthly income barely covered her monthly expenses. She was raising two children and had not received child support from her husband since 2004. In addition, when the husband was in prison, the taxpayer incurred considerable debt in order to support the family, which she was paying off. Therefore, the taxpayer would suffer economic hardship if relief was not granted. (Factor weighed in favor of granting relief.)
(3) Knowledge or reason to know. As mentioned above, the taxpayer had reason to know that her husband was not going to pay the tax liabilities. (Factor weighed against granting relief.)
(4) Nonrequesting spouse’s legal obligation. The divorce decree did not contain a provision as to which spouse had a legal obligation to pay the outstanding tax liabilities. (Factor was neutral.)
(5) Significant benefit. The taxpayer did not receive significant benefit beyond normal support from the unpaid tax liabilities. (Factor was neutral.)
(6) Compliance with income tax laws. Tax compliance is a factor considered only against granting relief. The IRS did not contend that the taxpayer did not make a good faith effort to comply with her federal income tax obligations in years subsequent to 2002. (Factor did not apply.)
(7) Abuse. While the taxpayer was not physically abused by the husband, she suffered mental and emotional abuse at his hands. He yelled and threatened her, he accessed her bank account to pay pornography sites, and he had an affair, which led to the divorce. The taxpayer also feared he would retaliate against their children. (Factor weighed in favor of granting relief.)
The court found three factors in favor of relief, one against, and the rest neutral. Accordingly, it concluded that it would be inequitable to hold the taxpayer liable for the underpayments of tax, and she was entitled to relief under Section 6015(f).