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Robinson v. Commissioner (T.C. Memo. 2020-134)

On September 23, 2020, the Tax Court issued a Memorandum Opinion in the case of Robinson v. Commissioner (T.C. Memo. 2020-134). The primary issue before the court in Robinson was whether the petitioner was entitled to equitable relief from joint and several liability (innocent spouse relief) associated with a joint return from 2010.

Initial Thoughts

The small country town of Palatka, Florida is located along the St. Johns river one-hour due south of Jacksonville. For two years, I had the great pleasure to work with an assistant who lived in Palatka and made the commute to downtown Jacksonville every day. As such, I know that the town produces some very fine people. Apparently, however, it also produces assholes.  Mr. Shelly Robinson was just such an asshole.

Background

Petitioner, Beverly Robinson, had a high school education, which in Palatka is a mighty impressive thing indeed. Shelly wasn’t cut out for book learnin’, but he did earn his GED. Why he did, however, remains somewhat of a mystery as it appears from the case that he had two life ambitions: (1) become the lawn mower of the local Walmart; and (2) not pay his taxes. Shelly had it all, a lovely wife, the Wal-Mart contract, and even a chippie on the side.  But as it goes, pigs get fat, and hogs get slaughterd – and Ol’ Shelly was a fattened hog by the time the IRS threw down the gauntlet on his joint 2010 returns.

The petitioner worked at a wood products company from 1998 to 2007, and subsequent to marrying Shelly in late 1998 (until 2009), she also worked part-time for his sole proprietorship which consisted of Shelly, a riding lawnmower, a large red Igloo cooler, and a two-can beer helmet.  (Shelly reasoned that, although drinking while mowing the Walmart’s common areas could be considered by some sissies as “dangerous,” the helmet was a protective measure and, therefore, canceled out the Steel Reserve tallboys that he zoomed around affixed to his head like alcoholic aluminum antler buds.) Importantly, whether because he was actually working during the day or he simply couldn’t get his shit together, it was Beverly and not Shelly who registered the business’ fictitious name with the Florida Secretary of State. Thus, the fictitious name was technically registered under Beverly’s name.

There was trouble brewing in Palatka (paradise to some, though mostly mosquitos and swamp lilies) in 2009 and 2010.  In a footnote, Judge Copeland notes that Shelly was engaged in extramarital affair with an “associate,” which affair led to the birth of a child.  The final straw, it seems, was the Lord and Savior Jesus Christ. As the opinion notes, the petitioner vividly remembered Shelly moving out because they had a “very bad” fight after a church revival held a few days before Valentine’s Day in 2010.

Author’s Note: It should be known that Palatka has a rich history of revivals. On Easter weekend in 1937, Billy Graham preached his first sermon in Palatka, Florida. For those of you yankees or city folk, who might be unacquainted with a Southern church revival, there is much singing, raising hands the Lord, energetic if not frenetic preaching, and if you’re lucky, they may even pass around a rattlesnake or two.

Subsequent to the revival-related fight, Shelly shacked up in a motel, incurring roughly $800 per month in hotel costs in 2010. (If you do the math, that averages out to approximately $27 a day, which means that Shelly was staying at one of the high-end motels in Palatka.) Shelly and Beverly were separated from February 2010 until July 2013. The straw that ultimately broke the camel’s back was that in June 2013 Shelly (one has to assume that he was fairly inebriated at the time, though judge Copeland does not adequately elaborate) “forced his way back into the marital home.” Not only did he force himself in, once there he settled into his old La-Z-Boy and refused to leave. Beverly attempted to have him evicted by the Palatka Police Department, but Jimmy Earl (the Palatka Police Department) told Beverly that because they were still married, Shelly was entitled to remain at the home.

Beverly, apparently not the quickest runner in the pack, did not file for dissolution of marriage until October 2013. In March 2014, Shelly and Beverly entered into a marital settlement agreement, which specified the division of assets and liabilities. Shelly received $206,000 of total assets including trucks and equipment used to provide lawn care services and $214,000 of liabilities, which included a tax liability that arose from the joint 2010 return as well as a failure to pay penalty and interest.  Stated differently, Shelly agreed in the marital settlement agreement to pay the couple’s income tax liability for 2010. Whether or not Shelly ever intended to pay the tax liability, especially after his accountant explained to him slowly and in small words that the debt was joint and several, the fact remains that Shelly failed to pay the tax liability – because, asshole.

The Audit

Although Shelly and Beverly timely filed their joint return in 2010, reporting $163,000 of AGI and (after credits) $43,000 in tax, such tax was not paid with the 2010 return.  The income earned in 2010 was attributable solely to Shelly’s mowing services. By 2010, Beverly was not involved in the company anymore.  Unfortunately, Beverly did not understand that even though she and Shelly were still married, she could have filed a separate return. It is unclear if the tax return preparer, Uncle Terry, knew that she could either…

Shelly and Beverly entered into an installment agreement through which they agreed to pay $1,000 a month, but, because Shelly is a bum, they defaulted on their installment agreement within a year.  In 2012, Beverly had gotten a new job at a paper mill, and her income was included on the couple’s joint tax return. Although they were entitled to a refund for overpayment in 2012, the IRS applied the refund to the outstanding tax liability. In 2013, Beverly finally filed using a “single” filing status. Once again, Beverly reported an overpayment, and once again the IRS applied the overpayment against the 2010 joint and several outstanding tax liability.

The Petitioner’s Request for Innocent Spouse Relief

In April 2015, the petitioner sent the IRS a Form 8857 seeking relief pursuant to IRC § 6015(f) (equitable innocent spouse relief).  In the application for innocent spouse relief, Beverly stated that she had been living apart from Shelly since 2013; she had not been abused; when she signed the return, she did not know that tax was owed for 2010, because she did not know how to read the return; she did not handle money for the household; although she had a joint accounts with Shelly, because he was a prize asshole, Beverly was not allowed to obtain money from “what [Shelly] said was ‘his’ account, because [Beverly] was not contributing any money to the checking account;” and Beverly was not involved in preparing the tax return nor did she understand the return – instead she signed the return simply because she thought she was under the obligation to do so. Finally, Beverly indicated that it would be unfair to hold her liable for the 2010 income tax liability because Shelly had agreed to assume the liability under the marital settlement agreement, he had a “lucritive [sic]” business, and she didn’t make enough money “to even pay [her] monthly bills.” As it is wont to do, just under one year after the innocent spouse relief application was received by the IRS, the IRS summarily denied Beverly’s request for relief under IRC § 6015(f).

Author’s Note: Under the FAQs for innocent spouse relief listed on the IRS website, Question 8 addresses how long the process should take, and it states that the IRS may take “up to six months before determination is made” and communicated to the taxpayer. Apparently, Felicia, the rubber stamper grade-three-clerk, whose only job is to stamp any document put in front of her (mechanically and without discretion, which would just gum up the process), was on sabbatical or had broken her leg whilst trying to chew bubble gum on her morning jog.

Analysis of Equitable Innocent Spouse Relief

In general, married taxpayers may elect to file a joint Federal income tax return. IRC § 6013(a). Consistent with such election, each spouse is jointly and severally liable for the entire tax due for that year. IRC § 6013(d)(3); see also Treas. Reg. § 1.6013-4(b). Subject to several conditions, an individual who has made a joint return with his or her spouse may seek relief from joint and several liability arising from that joint return. IRC § 6015 provides relief from joint liability for spouses who meet the conditions of IRC § 6015(b) and for divorced and separated persons under IRC § 6015(c); and it provides relief in IRC § 6015(f) when relief provided in IRC § 6015(b) and IRC § 6015(c) is unavailable. If the disputed tax liability involves nonpayment of tax shown on a joint return, the only relief available is under IRC § 6015(f), which is the case here. See Washington v. Commissioner, 120 T.C. 137, 146-147 (2003).

When taxpayers request relief under IRC § 6015(f), equitable relief from joint and several liability is appropriate if “taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either).” IRC § 6015(f)(1). Beverly bears the burden of establishing that she is entitled to relief. See Rule 142(a). The IRS issued Rev. Proc. 2013-34, which prescribes guidelines to determine whether a taxpayer qualifies for equitable relief from joint and several liability. The court examines these guidelines in the context of the facts and circumstances of the present case before it to determine whether equitable relief is appropriate under IRC § 6015(f). However, the court is not bound by the guidelines set forth in the Revenue Procedure. Pullins v. Commissioner, 136 T.C. 432, 438-439 (2011); see also Johnson v. Commissioner, T.C. Memo. 2014-240, *10.

The Seven Threshold Factors for Equitable Innocent Spouse Relief

The requesting spouse must meet seven threshold conditions to be considered for relief under IRC § 6015(f). The conditions are as follows: (1) the requesting spouse filed a joint return for the 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 nonrequesting 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) the income tax liability from which the requesting spouse seeks relief must be attributable either in full or in part to “an underpayment resulting from the non-requesting spouse’s income.” See Rev. Proc. 2013-34, § 4.01(1)-(7).

IRS Stuck on the Attribution Requirement

The IRS concedes that Beverly satisfies the first six conditions. As to the seventh condition, the IRS asserts that the underpayment resulting in the tax liability was attributable to Beverly rather than to Shelly. The IRS relies on the fact that the business was registered in Beverly’s name. However, the Tax Court dismisses this without much fanfare.

The Tax Court observed that all the 2010 tax filings listed Shelly as the recipient of the income associated with Robinson Lawn Care for tax year 2010 (and subsequent tax years). The Schedules C attached to the 2010 return and subsequent returns included in the record listed Shelly as the sole proprietor of Robinson Lawn Care. Shelly was issued all the Forms 1099-MISC for the income associated with Robinson Lawn Care for tax year 2010 (and years thereafter) from third-party payors. This is notable because before 2010, when Beverly was involved in the business, nearly all Robinson Lawn Care customers issued Forms 1099-MISC in her name including their largest customer, Wal-Mart. The absence of any Forms W-2 and/or Forms 1099-MISC by third-party payors to Beverly for 2010 provides substantial support for Beverly’s position that she was unemployed in 2010. Further, the revival-related-donnybrook occurred in 2010 which is truly when Shelly and Beverly separated.

Ultimately, despite the IRS’s arguments to the contrary, the Tax Court found that although Beverly was the registered owner of the fictitious name, this was not “pertinent” to the analysis. The court found that Beverly had registered the name out of convenience and not because she was the true owner of the company (or its fictitious name).

Equitable Facts and Circumstances Test

If, as in the present case, a spouse meets the threshold conditions but fails to qualify for relief under the guidelines for a streamlined determination (which requires all of the following conditions to be met: (1) the requesting spouse is no longer married to the nonrequesting spouse; (2) the requesting spouse will suffer economic hardship if relief is not granted; and (3) the requesting spouse did not know or have reason to know that the nonrequesting spouse would not or could not pay the underpayment of tax reported on the joint income tax return), the Tax Court applies a seven part equitable facts and circumstances test to determine whether it would be inequitable to hold the requesting spouse liable for the underpayment. Rev. Proc. 2013-14, § 4.03(2) provides a list of the nonexclusive factors: (1) marital status; (2) economic hardship if relief is not granted; (3) in the case of an underpayment, knowledge or reason to know the tax liability would not or could not be paid; (4) legal obligation to pay the outstanding tax liability; (5) significant benefit derived from the unpaid tax liability; (6) compliance with income tax laws; and (7) mental or physical health. No one factor is determinative, and the degree of the importance of each factor varies depending on the facts and circumstances of the case. Rev. Proc. 2013-14, § 4.03(2); Pullins, 136 T.C. at 448; Molinet v. Commissioner, T.C. Memo. 2014-109, *10.

The Tax Court then goes through an analysis of Beverly’s marital status, whether she had knowledge or reason to know of the underpayment, whether she had the legal obligation for the liability, whether she derived significant benefit from the underpayment, whether she had complied with federal tax laws, and whether she had been abused.

Although generally a taxpayer who signs a return is charged with constructive knowledge of its contents, such knowledge is negated where the nonrequesting spouse restricted the requesting spouse’s access to financial information such that the requesting spouse was unable to question the payment of tax reported as due on the return. See, e.g., Neitzer v. Commissioner, T.C. Memo. 2018-156, *17-*19.  Thus, although Beverly had constructive knowledge over the contents of the return, because Shelly was in complete control of the lawnmower and the company’s books in 2010, and because he refused to allow her to obtain money from their joint account (see, asshole, supra), such restrictions negated Beverly’s constructive knowledge.

Even if Beverly is charged with constructive knowledge of the 2010 tax liability, she had no reason to know that Shelly would not or could not pay it. Washington v. Commissioner, 120 T.C. at 150-151; Neitzer, at *19-*20. Petitioner is a high school graduate with no financial expertise, and she was no longer involved in the business in 2010. Id. Accordingly, Beverly’s separation from Shelly and lack of involvement with the lawnmower (or the books) show that even with constructive knowledge of the unpaid tax liability, Beverly did not know or have reason to know that the tax would not be paid.

With respect to the legal obligation element, the Tax Court looks to whether either of the spouses has an obligation arising from a divorce decree or other legally binding contract or agreement. If the non-requesting spouse has the sole legal obligation for the liability, this weighs in favor of the requesting spouse.  Rev. Proc. 2013-34, § 4.03(2). The Tax Court looked to whether Beverly knew or had reason to know that Shelly would not pay liability when she signed the settlement agreement in March 2014. This factor presents the most trouble for the Tax Court, as Shelly had not paid the 2010 liability for almost 3 years at the time the divorce decree was signed. Further she was aware that Shelly had bad credit. Thus, even though Shelly had the legal obligation to pay the entire 2010 tax liability, this factor is neutral because Beverly had reason to know that Shelly might not pay the liability that he had assumed.

If the requesting spouse significantly benefited from the nonpayment of taxes in excess of the normal support provided by the non-requesting spouse, this factor weighs against the requesting spouse. Evidence that the requesting spouse enjoyed a lavish lifestyle weighs against relief as well. On the flipside, the lack of significant benefit to the requesting spouse is treated as a factor favoring innocent spouse relief. See, e.g., Boyle v. Commissioner, T.C. Memo. 2016-87, at *16; Wang v. Commissioner, T.C. Memo. 2014-206, at *40. In the present case, only Shelly significantly benefited from the nonpayment of tax.

With respect to the “compliance with federal tax laws” element, If the requesting spouse complied with the Federal income tax laws for taxable years after being divorced from the nonrequesting spouse, this factor weighs in favor of relief. Rev. Proc. 2013-34, § 4.03(2)(f)(i). In the present case, Beverly failed to comply with her filing requirements in the three years subsequent to the period for which she sought innocent spouse relief. See Canty v. Commissioner, T.C. Memo. 2016-169, *7, *19 (weighing the compliance factor against relief when taxpayer was not compliant with one of the three years following the year at issue by filing a return late and untimely paying the tax due). Accordingly, this factor weighs against granting relief.

Finally, the Tax Court considered whether Beverly was a victim of abuse by Shelly. If the taxpayer does not prove abuse, this factor is neutral. See, e.g., Sleeth v. Commissioner, T.C. Memo. 2019-138, at *10. The Court does not treat such serious allegations lightly, but neither will we accept a taxpayer’s uncorroborated or nonspecific abuse claims at face value. See, e.g., Pullins, 136 T.C. at 454; Johnson,  T.C. Memo. 2014-240 at *13-*14. Claims of abuse require corroborating evidence or specificity in allegations. See, e.g., Deihl v. Commissioner, T.C. Memo. 2012-176, *12-*13, aff’d, 603 F. App’x 527 (9th Cir. 2015). Because Beverly did not allege that she had been abused, this factor was neutral.

Conclusion

On the basis of the foregoing facts and circumstances, the Tax Court held that the equities weigh in Beverly’s favor. The factors that weigh in favor of relief are marital status, knowledge, and lack of significant benefit. The factor that weighs against relief is compliance with Federal income tax laws. The remaining factors are neutral.

The court is quick to point out, however, that the decision of whether relief is appropriate is not based on “a simple tally of those factors.” See, e.g., Hudgins v. Commissioner, T.C. Memo. 2012-260, *39-*40. Instead the weight given to each factor is based on the requesting spouse’s facts and circumstances. As a result, when the Tax Court weighed Beverly’s facts and circumstances, it held that she was entitled to relief from joint and several liability under IRC § 6015(f) for tax year 2010.

(T.C. Memo. 2020-134) Robinson v. Commissioner

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