On February 22, 2021, the Tax Court issued a Memorandum Opinion in the case of Rogers v. Commissioner (T.C. Memo. 2021-20). The primary issue presented in Rogers v. Commissioner was whether the petitioner was eligible for innocent spouse relief under IRC § 6015(b), (c), or (f).
The Wisconsin Tent & Pony Show in Rogers v. Commissioner
The petitioner and her erstwhile husband owned the top tent rental company in Madison, Wisconsin. The petitioner also solely owned to other businesses, one which rented jumping castles in the other which offered pony rides. As a high school graduate and having some banking experience (perhaps as a janitor, the opinion is not clear), the petitioner was the “brains” of the operation and was primarily responsible for maintaining the tent company’s books and records, hiring a payroll company, tracking billing, making loan payments, and making credit card payments. The petitioner also had signature authority on the bank accounts, prepared and signed sales tax returns, and worked with an accountant to prepare the tent company’s returns. The petitioner’s husband, the intervener in the present case, was the muscle.
In 2010 and 2011, the petitioner and her ex-intervener-spouse (by all accounts, a giant bag of douche) untimely filed joint returns, on which the IRS determined deficiencies based upon disallowed deductions associated with the tent company claimed on Schedule E. In 2014, the tent empire crumbled, and the petitioner and her husband divorced, with the husband being awarded the tent company.
Innocent Spouse Relief Sought
In 2015, the petitioner filed a Form 8857 (Request for Innocent Spouse Relief) from the petitioner, stating that she was not involved in handling household finances, was not involved in preparing the joint tax returns, and had no knowledge that anything was incorrect or missing when the returns were filed. The petitioner asserted that she was a victim of spousal abuse; however she noted that the police were never called, her husband was never arrested or charged, and she never sought help from a local domestic violence program. The IRS denied the petitioner’s request, the Tax Court found that the trial record did not support the petitioner’s and the petitioner timely submitted Form 12509 (Statement of Disagreement). In 2017, the petitioner’s ex-husband intervened and submitted a protest of the petitioner’s appeal, in which she objected to the requested relief.
Lies. All Lies.
The Tax Court found that the record did not support the petitioner’s claims that she was not involved in handling the household expenses or in preparing her and intervenor’s joint tax returns for the years at issue. It also found a lack of support in the record for the petitioner’s claim of spousal abuse. The Court did, however, accept as true that the petitioner did not receive a level of significant benefit that would undermine her claim for relief under IRC § 6015(f).
Innocent Spouse Relief, a Review
Generally, married taxpayers may elect to file joint Federal income tax returns. IRC § 6013. IRC § 6013(d)(3) provides that, if a joint return is filed, each spouse is jointly and severally liable for the entire tax due for that year. A requesting spouse may be relieved from joint and several liability under IRC § 6015 if certain conditions are met. IRC § 6015 provides a requesting spouse with three alternatives for relief from joint and several liability:
- full or partial relief under IRC § 6015(b);
- proportionate relief under IRC § 6015(c); or
- if relief is not available under IRC § 6015(b) or IRC § 6015(c), equitable relief under IRC § 6015(f).
Except as otherwise provided in IRC § 6015, petitioner, as the taxpayer requesting relief, bears the burden of proof. See Rule 142(a); Alt v. Commissioner, 119 T.C. 306, 311 (2002), aff’d, 101 F. App’x 34 (6th Cir. 2004).
Innocent Spouse Relief under IRC § 6015(b)
IRC § 6015(b)(1) provides that a requesting spouse shall be relieved of joint and several liability for a particular year if each of the following requirements is met:
- a joint return was filed for the year in issue;
- the return contains an understatement attributable to an erroneous item of the nonrequesting spouse;
- the requesting spouse establishes that, in signing the return, he or she did not know and had no reason to know of the understatement;
- it is inequitable to hold the requesting spouse liable for the deficiency attributable to the understatement; and
- the requesting spouse’s claim for relief is timely. Failure to meet one of these requirements precludes relief under IRC § 6015(b). Alt, 119 T.C. at 313.
The Tax Court found that the petitioner failed to satisfy the actual knowledge requirement.
Actual Knowledge Includes “Reason to Know”
The Tax Court applies a reasonably prudent person standard to evaluate the requesting spouse’s knowledge in cases involving both erroneous deductions and unreported income. See Hopkins v. Commissioner, 121 T.C. 73, 77-78 (2003) (involving improper deductions); Butler v. Commissioner, 114 T.C. 276, 283-284 (2000) (involving unreported income), abrogated by Porter v. Commissioner, 132 T.C. 203 (2009). A spouse knew or had reason to know of an understatement if a reasonably prudent person in her position would have known that the return contained an understatement when she signed it. Resser v. Commissioner, 74 F.3d 1528, 1535-36 (7th Cir. 1996); Hopkins v. Commissioner, 121 T.C. at 77. The reasonably prudent person standard also imposes a duty of inquiry on the requesting spouse. Resser, 74 F.3d at 1541; Hopkins, 121 T.C. at 77-80; Butler, 114 T.C. at 283-284.
For understatements resulting from improper deductions, the requesting spouse had reason to know if she had sufficient knowledge of the facts underlying the deductions such that a reasonably prudent person in her position would have seriously questioned whether the deductions were erroneous. Resser, 74 F.3d at 1536 (quoting Stevens v. Commissioner, 872 F.2d 1499, 1505 (11th Cir. 1989), aff’g T.C. Memo. 1988-63). In applying the reasonably prudent person standard, we consider four factors:
- the spouse’s level of education;
- her involvement in the financial and business activities of the family;
- the presence of unusual or lavish expenses beyond the family’s norm; and
- the nonrequesting spouse’s evasiveness or deceitfulness about the family’s finances. Resser, 74 F.3d at 1536.
No single factor is controlling. Rogers v. Commissioner, T.C. Memo. 2018-53, at *103.
The Petitioner’s Claims of Ignorance
The petitioner claimed to be an unsophisticated taxpayer who “cannot be said to have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of [the tent empire] resulted in tax deficiencies for the years” at issue. Further, she claims that she merely provided some “bookkeeping work” to the tent empire.
The Tax Court called bullshit. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (finding that the Tax Court is not required to accept uncorroborated or self-serving testimony as reliable and true); see also Hopkins, 121 T.C. at 78, n.11 (noting that an “individual cannot rely solely on ignorance of the attendant tax or legal consequences of an item giving rise to a deficiency to satisfy his or her burden under IRC § 6015(b)(1)(C)”).
It’s at this point that the Tax Court reminds the petitioner that she was a high school graduate with a “little bit of banking education,” which, in in the land of the cheese curd, practically makes her certified actuary.
Innocent Spouse Relief under IRC § 6015(c) and (d)
IRC § 6015(c) permits an individual who filed a joint return to elect to limit his or her liability to the portion of the deficiency that is allocable to him or her under IRC § 6015(d). IRC § 6015(c)(1). Under IRC § 6015(d), a portion of the deficiency is allocable to the electing spouse if the erroneously reported items giving rise to that portion of the deficiency are allocable to the electing spouse. IRC § 6015(d)(1). An item is allocated to the individuals filing the joint return “in the same manner as it would have been allocated if the individuals had filed separate returns for the taxable year.” IRC § 6015(d)(3)(A); see Treas. Reg. § 1.6015-3(d)(2)(iv) (explaining that, in the event that both spouses owned an interest in a business, “an erroneous deduction item is generally allocated between the spouses in proportion to each spouse’s ownership interest in the business”). The election to limit liability under IRC § 6015(c) is effective only if the requesting spouse made a joint return for the taxable year at issue. IRC § 6015(c)(1). To be eligible to make an election under IRC § 6015(c), the requesting spouse must have either:
- been legally separated or divorced from the nonrequesting spouse at the time of the election, IRC §6015(c)(3)(A)(i)(I); or
- not been a member of the same household as the nonrequesting spouse at any time during the 12-month period ending on the date of the election, IRC § 6015(c)(3)(A)(i)(II).
The request for relief under IRC § 6015(c) must be made no later than two years after the IRS began collection actions against the requesting spouse. IRC § 6015(c)(3)(B).
Actual Knowledge Bars IRC § 6015(c) Relief
If the IRS demonstrates by a preponderance of the evidence that the requesting spouse had actual knowledge, when signing the return, of erroneous items that are allocable to the nonrequesting spouse and give rise to the deficiency (or portion thereof), then the requesting spouse is generally not entitled to relief under IRC § 6015(c) with respect to that deficiency (or portion thereof). IRC § 6015(c)(3)(C). The knowledge standard for purposes of IRC § 6015(c)(3)(C) is “an actual and clear awareness (as opposed to reason to know) of the existence of an item which gives rise to the deficiency (or portion thereof).” Armour v. Commissioner, T.C. Memo. 2016-129, at *10-*11 (quoting Cheshire v. Commissioner, 115 T.C. 183, 195 (2000), aff’d, 282 F.3d 326 (5th Cir. 2002)). Put differently, the “actual knowledge” standard subsumes the “reason to know” standard. Wiksell v. Commissioner, T.C. Memo. 1999-32, slip op. at 10, supplementing T.C. Memo. 1998-3, aff’d, 215 F.3d 1335 (9th Cir. 2000).
In cases involving erroneous deductions, a spouse is deemed to have actual knowledge of an item giving rise to a deficiency if she has actual knowledge of the factual circumstances that made the deductions unallowable. Phemister v. Commissioner, T.C. Memo. 2009-201, *40 (citing King v. Commissioner, 116 T.C. 198, 204 (2001)); see Treas. Reg. § 1.6015-3(c)(2)(iv) (noting that joint ownership of property is a factor supporting a finding that the requesting spouse had actual knowledge of an erroneous item). Actual knowledge of the tax laws or legal consequences of the operative facts is not required. Hopkins, 121 T.C. at 86 (citing King, 116 T.C. at 204).
Innocent Spouse Relief under IRC § 6015(f)
IRC § 6015(f) provides an alternative means for innocent spouse relief for a requesting spouse who does not otherwise qualify for relief under IRC § 6015(b) or (c). IRC §6015(f)(1)(B). IRC §6015(f) provides relief from joint and several liability if it is inequitable to hold the requesting spouse liable for any unpaid tax or any deficiency (or any portion thereof) after taking into account all the facts and circumstances of the case. IRC § 6015(f)(1)(A). Except as otherwise provided in IRC § 6015, the taxpayer bears the burden of proving that she is entitled to IRC § 6015(f) relief. Rule 142(a). Rev. Proc. 2013-34, sets forth a three-step procedure for evaluating requests for innocent spouse relief. The first step is that the requesting spouse satisfy a list of seven threshold requirements, which are:
- the parties filed a joint return;
- relief is not otherwise available under IRC § 6015,
- the claim for relief is timely;
- no assets were transferred between the spouses as part of a fraudulent scheme;
- the nonrequesting spouse did not transfer disqualified assets to the requesting spouse;
- the requesting spouse did not knowingly participate in the filing of a fraudulent return; and
- absent certain exceptions, the income tax liability is attributable (in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse’s income. Rev. Proc. 2013-34, § 4.01.
The Tax Court next looks to whether the taxpayer is entitled to streamlined relief, and if not, then the Tax Court looks to a nonexclusive list of factors that the IRS will consider in determining whether it would be inequitable to hold the spouse jointly and severally liable.
When the seven threshold conditions have been met, Rev. Proc. 2013-34, § 4.02, allows a requesting spouse to qualify for a streamlined determination of relief under IRC § 6015(f) if all of the following conditions are met:
- the requesting spouse is no longer married to the nonrequesting spouse;
- the requesting spouse will suffer economic hardship if relief is not granted; and
- the requesting spouse did not know or have reason to know that there was an understatement or deficiency on the joint income tax return.
Negation of Actual or Constructive Knowledge Based on Abuse
Actual or constructive knowledge may be negated if the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information such that the nonrequesting spouse’s actions prevented the requesting spouse from questioning or challenging the treatment of any items on the joint return. Id. sec. 4.02(3)(a). “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.” Id. sec. 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, see Rev. Proc. 2013-34, § 4.01, and requires substantiation or, at a minimum, specificity with regard to allegations of abuse. See 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.
Equitable Factors under IRC § 6015(f)
If the requesting spouse is no longer married to the nonrequesting spouse, this factor will weigh in favor of granting relief. Rev. Proc. 2013-34, § 4.03(2)(a). Economic hardship exists if satisfaction of the tax liability, in whole or in part, would result in the requesting spouse’s being unable to meet his or her reasonable basic living expenses. Rev. Proc. 2013-34, § 4.03(2)(b). If denying relief from joint and several liability will not cause the requesting spouse to suffer economic hardship, this factor will be neutral. In an understatement case, if the requesting spouse knew or had reason to know of the item giving rise to the understatement as of the date the joint return was filed, this factor will weigh against relief. Rev. Proc. 2013-34, § 4.03(2)(c)(i)(A).
The Tax Court considers the facts and circumstances when determining whether the requesting spouse had reason to know of an understatement. Rev. Proc. 2013-34, § 4.03(2)(c)(iii). The legal obligation factor favors relief where the nonrequesting spouse has the sole obligation to pay an outstanding Federal tax liability under a binding divorce decree or other legally binding agreement. Rev. Proc. 2013-34, § 4.03(2)(d). This factor is neutral where both spouses have such an obligation, or the divorce decree or agreement is silent as to any such obligation. Id.
Under the significant benefit factor, the Tax Court considers whether the requesting spouse received a significant benefit, beyond normal support, from the understatement. Rev. Proc. 2013-34, § 4.03(2)(e). “Normal support is measured by the circumstances of the particular parties.” Porter v. Commissioner, 132 T.C. at 212. Benefits in excess of normal support carry less weight, however, where the nonrequesting spouse controlled the household or business finances, making this factor neutral. Rev. Proc. 2013-34, § 4.03(2)(e). This factor will weigh in favor of granting relief if:
- the nonrequesting spouse significantly benefited from the unpaid tax and the requesting spouse had little or no benefit; or
- the nonrequesting spouse enjoyed the benefit to the requesting spouse’s detriment. Id.
Additionally, the Court has considered the lack of significant benefit to the requesting spouse as a factor favoring relief under section IRC § 6015(f). Wang v. Commissioner, T.C. Memo. 2014-206, at *40.
Under the compliance factor, the Tax Court considers whether the requesting spouse made a good-faith effort to comply with the tax laws for the taxable years following the year for which relief is requested. Rev. Proc. 2013-34, § 4.03(2)(f). This factor will weigh in favor of relief if the requesting spouse is in full compliance for the tax years after being divorced from the nonrequesting spouse. Rev. Proc. 2013-34, § 4.03(2)(f)(i). This factor will weigh against relief if the requesting spouse is not in full compliance with tax laws for the tax years after being divorced from the nonrequesting spouse. Id. This factor will be neutral if the requesting spouse made a good-faith effort to comply with the tax laws for the tax years after being divorced from the nonrequesting spouse but was unable to fully comply. Id.
The Court considers the requesting spouse’s compliance status at the time of trial. Smith v. Commissioner, T.C. Memo. 2009-237, slip op. at 15 n.5. Finally, the health factor may weigh in favor of relief if the requesting spouse was in poor mental or physical health when the tax returns were filed, when the request for relief was made, or at the time of trial. Rev. Proc. 2013-34, § 4.03(2)(g); see also Pullins, 136 T.C. at 454. If the requesting spouse was in neither poor physical nor poor mental health, this factor is neutral. Rev. Proc. 2013-34, § 4.03(2)(g).
Based on the totality of the circumstances, the Tax Court held that the wife’s petition was just another circus act. The Tax Court was not persuaded that she was entitled to equitable innocent spouse relief under IRC § 6015(f).
(T.C. Memo. 2021-20) Rogers v. Commissioner
Footnote re: Tent & Pony Show
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