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Leith v. Commissioner (T.C. Memo. 2020-149)

On November 4, 2020, the Tax Court issued a Memorandum Opinion in the case Leith v. Commissioner (T.C. Memo. 2020-149). The primary issue before the court in Leith was whether the petitioner is entitled to IRC § 6015(f) equitable innocent spouse relief to the extent of the tax items attributable to her ex-husband for the years at issue, even though her ex-husband (the intervenor) opposed the relief.

The petitioner provided her ex-husband with her tax documents but was not otherwise involved in the preparation of the returns. The ex-husband/intervenor did not invite the petitioner to join his meetings with their return preparers. After the returns were prepared, the intervenor provided the petitioner the signature pages only. He did not give the petitioner an opportunity to review the returns before she signed them.

The IRS issued petitioner and intervenor a notice of deficiency for 2010 and 2011. The notice of deficiency determined substantial income items attributable to the intervenor.  The petitioner and the intervenor signed the Form 4549 consenting to assessments based on the adjustments listed thereon for 2010 and 2011. The IRS subsequently assessed the deficiencies and accuracy-related penalties proposed on the Form 4549. On June 11, 2013, the IRS issued petitioner and intervenor a collection due process (CDP) notice for 2010 and 2011.

No Duress Claimed

A joint return signed by an individual under duress is not a valid return as to that individual. Rev. Proc. 2013-34, § 2.03. The petitioner does not contend that she was under duress when she signed the returns for the years at issue. Nor has she renounced those returns. The Tax Court therefore found that the petitioner intended to and did file joint returns with the intervenor. See Ziegler v. Commissioner, T.C. Memo. 2003-282, *8 (assuming that the taxpayer conceded the filing of a joint return or ratified the joint return that the non-requesting spouse filed where she continued to assert her entitlement to IRC § 6015(f) relief).

The Divorce

The petitioner and the intervenor were divorced on April 14, 2015, through the issuance by the circuit court of a final judgment of dissolution of marriage that incorporated a marital settlement agreement. According to the marital settlement agreement, the petitioner and the intervenor agreed that they were each liable for half of their “debt with the Internal Revenue Service in the approximate amount of $36,000.00.” The intervenor also became obligated to pay the petitioner child support of $209 per month. Both parties were represented by counsel in the divorce proceedings, and both parties signed the marital settlement agreement.

The Innocent Spouse Request

A few months after divorcing intervenor, petitioner filed two Forms 8857 (Request for Innocent Spouse Relief), which the IRS received in March 2016. In her first request, the petitioner identified 2010 and 2011 as the tax years for which she was seeking relief. She explained that she was not involved in preparing the joint returns other than providing the intervenor with her tax documents. She further explained that she did not review the returns before they were filed and that she had no knowledge of the erroneous items on them. Petitioner also checked several boxes indicating that intervenor (1) made her afraid to disagree with him, (2) criticized or insulted her or frequently put her down, and (3) caused her to fear for her safety. She recounted finding several knives under her mattress during a tense time in her marriage to intervenor. She also stated that she “was constantly in fear” of intervenor’s “moods”. However, she mistakenly checked the “No” box in response to a question of whether she had been a victim of spousal abuse or domestic violence. After discovering this mistake petitioner filed a second Form 8857 (second request).

The Intervening Ex-Spouse (Slimeball)

In response to the petitioner’s first and second requests, the intervenor filed two Forms 12508 (Questionnaire for Non-Requesting Spouse). On the second of those forms, the intervenor alleged, among other things, that the petitioner had: (1) helped prepare their tax returns, (2) reviewed the returns before filing them, and (3) known how much money was in their bank accounts.

The Denial and Petition

The IRS, in their infinite, collective administrative compassion, denied the request, and the petitioner filed a petition with the Tax Court. Pursuant to IRC § 6015(e)(4) and Tax Court Rule 325, the intervenor subsequently became a party to this case, opposing relief. At trial the IRS actually conceded that the petitioner was entitled to IRC § 6015(f) relief for the years at issue to the extent of the tax items attributable to intervenor.

Jurisdiction

With respect to claims for relief from joint and several liability, the Tax Court has three jurisdictional bases for reviewing a claim: (1) as an affirmative defense in a deficiency redetermination proceeding pursuant to IRC § 6213(a); (2) as a stand-alone petition pursuant to IRC § 6015(e) where the Commissioner has issued a final determination denying the requesting spouse’s claim for relief or the Commissioner has failed to rule on the claim within six months of its filing; and (3) in the context of a petition for review of a lien or levy action pursuant to IRC § 6320(c) or IRC § 6330(d). See IRC § 6015(e), IRC § 6213, IRC § 6214, IRC § 6320(c), and IRC §§ 6330(c)(2)(A)(i), (d); see also Maier v. Commissioner, 119 T.C. 267, 270 (2002), aff’d, 360 F.3d 361 (2d Cir. 2004); see also Baumann v. Commissioner, T.C. Memo. 2005-31.

The Innocent Spouse Framework

Under certain circumstances, a spouse who has made a joint return may seek relief from joint and several liability under procedures set forth in IRC § 6015. IRC § 6015 provides a spouse with three alternatives: (1) full or partial relief under subsection (b), (2) proportionate relief under subsection (c), and (3) if relief is not available under subsection (b) or (c), equitable relief under subsection (f).

In this case the IRS evaluated the petitioner’s entitlement to relief from joint and several liability under each alternative, and we have jurisdiction to do the same. See IRC § 6015(e)(1). In doing so we apply a de novo standard and scope of review. See Porter v. Commissioner, 132 T.C. 203, 210 (2009). The petitioner generally bears the burden of proving that she is entitled to relief under IRC § 6015. See Tax Court Rule 142(a); Porter, 132 T.C. at 210; Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff’d, 101 F. App’x 34 (6th Cir. 2004); Stergios v. Commissioner, T.C. Memo. 2009-15.

Relief under IRC § 6015(b) and IRC § 6015(c)

To qualify for relief pursuant to IRC § 6015(b), the requesting spouse must establish that: (1) a joint return was filed; (2) there was an understatement of tax attributable to erroneous items of the non-requesting spouse; (3) at the time of signing the return, the requesting spouse did not know and had no reason to know of the understatement; (4) taking into account all the facts and circumstances, it is inequitable to hold the requesting spouse liable for the deficiency in tax attributable to the understatement; and (5) the requesting spouse sought relief within two years of the first collection activity relating to the liability. IRC §

6015(b)(1). These conditions are stated in the conjunctive, and the taxpayer must satisfy all five in order to be awarded relief. See Alt, 119 T.C. at 313. Accordingly, the failure of a taxpayer to satisfy any one of the elements precludes relief. Id.; Haltom v. Commissioner, T.C. Memo. 2005-209.

IRC § 6015(c) permits a requesting spouse to seek relief from joint and several liability and elect to allocate a deficiency to a non-requesting spouse if the following conditions are met: (1) a joint return was filed; (2) at the time of the election, the requesting spouse was separated or divorced from the non-requesting spouse or was not a member of the same household as the non-requesting spouse at any time during the 12-month period ending on the date of the request for relief; (3) the requesting spouse sought relief within two years of the first collection activity relating to the liability; and (4) the requesting spouse did not have actual knowledge, at the time of signing the joint return, of the item giving rise to the deficiency. IRC § 6015(c)(3).

Critically, IRC § 6015(b) and IRC § 6015(c) of apply only in the case of “an understatement of tax” or “any deficiency” in tax, and do not apply in the case of underpayments of tax reported on joint tax returns. IRC § 6015(b)(1)(B), (c)(1); Hopkins v. Commissioner, 121 T.C. 73, 88 (2003); see also Block v. Commissioner, 120 T.C. 62, 66 (2003). Because the petitioner seeks relief from an underpayment of tax for 2013, she is not entitled to relief under IRC § 6015(b) or (c) for that year.

Relief under IRC § 6015(f)

The requesting spouse must meet seven threshold requirements to be considered for relief under IRC § 6015(f). Rev. Proc. 2013-34, § 4.01. Those requirements are: (1) the requesting spouse filed a joint return for the taxable year for which relief is sought, (2) relief is not available to the requesting spouse under IRC § 6015(b) or (c), (3) the claim for relief is timely filed, (4) no assets were transferred between the spouses as part of a fraudulent scheme, (5) the non-requesting spouse did not transfer disqualified assets to the requesting spouse, (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return, and (7) absent certain enumerated exceptions, the tax liability from which the requesting spouse seeks relief is attributable to an item of the non-requesting spouse. Rev. Proc. 2013-34, § 4.01.

Streamlined Relief

For the portions of the liabilities for which petitioner is eligible for relief under IRC § 6015(f), Rev. Proc. 2013-34, § 4.02, sets forth circumstances under which the IRS will make a streamlined determination granting equitable relief to the requesting spouse. The requesting spouse is eligible for a streamlined determination by the IRS only in cases in which the requesting spouse establishes that she (1) is no longer married to the non-requesting spouse (marital status requirement), (2) would suffer economic hardship if not granted relief (economic hardship requirement), and (3) did not know or have reason to know that the non-requesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return, or did not know or have reason to know that there was an understatement or deficiency on the joint income tax return (lack of knowledge requirement). Id. The requesting spouse must establish that she satisfies each of the three elements to receive a streamlined determination granting relief. Id.

The Abuse Exception to the Knowledge Requirement

Even if the Tax Court had found that the petitioner had actual or constructive knowledge of the understatements and underpayment, she would still satisfy the lack of knowledge requirement because she was a victim of spousal abuse.

Abuse comes in many forms and can include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate the requesting spouse, or to undermine the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws.” Rev. Proc. 2013-34, § 4.03(2)(c)(iv); see, e.g., Stephenson v. Commissioner, T.C. Memo. 2011-16. The Tax Court takes all facts and circumstances into account in determining the presence of abuse and requires substantiation, or at a minimum, specificity, with regard to allegations of abuse. Rev. Proc. 2013-34, § 4.01; Nihiser v. Commissioner, T.C. Memo. 2008-135. A generalized claim of abuse is insufficient. See Thomassen v. Commissioner, T.C. Memo. 2011-88, aff’d, 564 F. App’x 885 (9th Cir. 2014); Knorr v. Commissioner, T.C. Memo. 2004-212.

(T.C. Memo. 2020-149) Leith v. Commissioner

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