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Unmasking Today's Divorce Taxation Problems Part 3

3. Requirements for Discretionary Innocent Spouse Relief (a) The Former Requirements: Revenue Procedure 2003-61

(1) Conditions For Eligibility. A spouse is eligible for discretionary relief only if all of the following factors are met: (1) the requesting spouse filed a joint tax return; (2) mandatory innocent spouse relief under § 6015(b) or (c) is not available; (3) the claim for relief is timely filed; (4) the spouses did not transfer assets between themselves in a fraudulent scheme; (5) the spouse not requesting relief did not transfer certain disqualified assets to the requesting spouse (generally any asset transferred for the purposes of avoiding taxes); (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) the tax liability at issue is attributable at least in part to property or income of the nonrequesting spouse.

(2) The "Safe Harbor"/"Streamlined Relief" Provision. A request for discretionary innocent spouse relief under § 6015(f) will ordinarily be granted when the request involves the underpayment of tax and (1) the parties are divorced or legally separated, or were physically separated for 12 months before the filing of the request for relief; (2) if relief is denied, the spouse seeking relief would suffer economic hardship, and (3) the spouse seeking relief had no reason to know that the other spouse would not pay his or her tax liability.

(3) The Discretionary Factors. If the safe harbor provision does not apply, the IRS will consider the following factors: (1) whether the spouse seeking relief is divorced or legally separated from the other spouse; (2) whether the spouse seeking relief will suffer economic hardship if relief is denied; (3) whether the spouse seeking relief had reason to know of the tax problem; (4) whether the other spouse had a duty to pay the taxes at issue under a divorce decree or settlement agreement; (5) whether the spouse seeking relief received significant benefits from the nonpayment of taxes; and (6) whether the spouse seeking relief complied with tax law in future tax years.

(b) The New Requirements: Revenue Procedure 2013-34

(1) This is the new Revenue Procedure setting forth the new IRS framework for considering requests for discretionary innocent spouse relief.

(2) Revenue Procedure 2013-34 supersedes Revenue Procedure 2003-61 in cases in which the former ruling appliesCpresumably cases decided after October 21, 2013.

(3) Conditions For Eligibility. A spouse is eligible for discretionary relief only if all of the following factors are met: (1) the requesting spouse filed a joint tax return; (2) mandatory innocent spouse relief under § 6015(b) or (c) is not available; (3) the claim for relief is timely filed; (4) the spouses did not transfer assets between themselves in a fraudulent scheme; (5) the spouse not requesting relief did not transfer certain disqualified assets to the requesting spouse (generally any asset transferred for the purposes of avoiding taxes); (6) the requesting spouse did not knowingly participate in the filing of a fraudulent joint return; and (7) the tax liability at issue is attributable at least in part to property or income of the nonrequesting spouse.

Comment: The core of these requirements is that innocent spouse relief will be denied if (1) the requesting spouse was engaged in a scheme to avoid taxes or commit fraud, or (2) the tax problem arises from the requesting spouse's own income or property. It is a rare case where these factors disqualify a spouse from receiving relief.

(4) The "Safe Harbor"/"Streamlined Relief" Provision. A request for discretionary innocent spouse relief under § 6015(f) will ordinarily be granted if (1) the parties are divorced or legally separated, or were physically separated for 12 months before the filing of the request for relief; (2) if relief is denied, the spouse seeking relief would suffer economic hardship; and (3) the spouse seeking relief had no reason to know of an understatement or deficiency or had no reason to know that the other spouse was unable to pay tax that was correctly reported.

Factor 3 is deemed satisfied even if the requesting spouse did have reason to know if the requesting spouse was not able to challenge the joint return due to the other spouse's (a) abuse, or (b) restricted disclosure of financial information.

(5) The Discretionary Factors. If the safe harbor provision does not apply, the IRS will consider the following factors: (1) whether the spouse seeking relief is divorced or legally separated from the other spouse; (2) whether the spouse seeking relief will suffer economic hardship if relief is denied; (3) whether the spouse seeking relief had reason to know of the tax problem (unless the requesting spouse was a victim of abuse); (4) whether the other spouse had a duty to pay the taxes at issue under a divorce decree or settlement agreement; (5) whether the spouse seeking relief received significant benefits from the nonpayment of taxes; (6) whether the spouse seeking relief complied with tax law in future tax years; and (7) whether the requesting spouse was in poor physical or mental health.

(c) Summary of Major Changes

(1) The new framework is generally very similar to the old one. The changes are incremental, not revolutionary.

(2) The new procedures are much more sensitive to the real-world effects of spousal abuse and restricted access to financial information than were the previous procedures. One of the major side benefits of the political fight over the statute of limitations was the increased awareness in the tax community of the fact that many innocent spouses are unable to comply with tax law due to various forms of fraud and abuse.

(3) The increased importance of the abuse factor has led to a wave of cases asking the federal courts to define "abuse." The definition of "abuse" is likely to be a heavily contested issue until the case law is more certain.

(4) The safe harbor formerly applied only to tax underpayment cases. It now applies to tax understatement cases as well.

(5) Financial hardship is now measured against the federal poverty guidelines:

This factor [financial hardship] will weigh in favor of relief if the requesting spouse's income is below 250% of the Federal poverty guidelines, unless the requesting spouse has assets out of which the requesting spouse can make payments towards the tax liability and still adequately meet the requesting spouse's reasonable basic living expenses.

If the requesting spouse's income exceeds 250% of the Federal poverty guidelines, this factor will still weigh in favor of relief if the requesting spouse's monthly income exceeds the requesting spouse's reasonable basic monthly living expenses by $300 or less, unless the requesting spouse has assets out of which the requesting spouse can make payments towards the tax liability and still adequately meet the requesting spouse's reasonable basic living expenses.

If the requesting spouse's income exceeds 250% of the Federal poverty guidelines and monthly income exceeds monthly expenses by more than $300, or if the requesting spouse qualifies under either standard but has sufficient assets to make payments towards the tax liability and still adequately meet the requesting spouse's reasonable basic living expenses, the Service will consider all facts and circumstances (including the size of the requesting spouse's household) in determining whether the requesting spouse would suffer economic hardship if relief is not granted. If the requesting spouse is deceased, this factor is neutral.

Rev. Proc. 2013-34, § 4.03(2)(b) (paragraph breaks added).

4. Chandler v. United States, 338 F. Supp. 3d 592 (N.D. Tex. 2018)

(a) Facts: Wife filed a petition for innocent spouse relief. The IRS denied the petition. The wife did not seek review in the Tax Court within the 90-day review period. The wife then filed an action in federal District Court seeking a refund of funds seized by the IRS.

(b) Issue: Did the District Court have subject-matter jurisdiction over the action?

(c) Answer to Issue: No.

(d) Summary of Rationale: The Tax Court has exclusive jurisdiction over innocent spouse issues:

As to the exclusivity of the Tax Court's jurisdiction, "[a]lthough the statute itself does not address whether the Tax Court's jurisdiction is exclusive, courts interpreting the statute have concluded that it is." United States v. Elman, No. 10‑CV‑6369, 2012 WL 6055782, at *3 (N.D. Ill. Dec. 6, 2012); accord Boynton, 2007 WL 737725, at *3‑*4. Courts have also held that "district court[s] [have] jurisdiction to decide an innocent spouse issue only when the taxpayer files a refund suit in the district court while a [Section] 6015 petition is pending with the Tax Court." United States v. LeBeau, No. 10CV817, 2012 WL 835160, at *3 (S.D. Cal. Mar. 12, 2012); see also Andrews v. United States, 69 F.Supp.2d 972, 978 (N.D. Ohio 1999) (holding that district courts lack jurisdiction to reevaluate a tax payer's innocent spouse claim). "In other words, Congress' statutory scheme envisions the Secretary and the Tax Court deciding questions about the exemption in all but the rarest circumstances. Certainly no part of [Section] 6015 confers jurisdiction to the federal district courts 'to determine innocent spouse claims in the first instance.'" Stein, 2015 WL 5943441, at *3 (quoting United States v. Wallace, No. 1:09‑CV‑87, 2010 WL 2302377, at *4 (S.D. Ohio Apr. 28, 2010)).

338 F. Supp. 3d at 602.

Obvious Lesson: If you disagree with the IRS's decision on an innocent spouse issue not involving a request for a refund, seek review in the Tax Court, not in District Court.

Note: But cf. United States v. LeBeau, 335 F. Supp. 3d 1206 (S.D. Cal. 2018) (while District Court had no jurisdiction over innocent spouse issues, District Court had discretion to stay IRS collection action while defendant's petition for innocent spouse relief was pending in the Tax Court).

5. Hockin v. United States, ___ F. Supp. ___, 2019 WL 3845380 (D. Or. 2019)

(a) Facts: Husband and wife married in 1997. The IRS received from the parties' joint tax returns for tax year 2007 and 2008. Tax was due for both years.

The wife made several payments then sought innocent spouse relief, including a refund. The IRS granted relief from 2008 on the ground that the wife's signature on the 2008 return was a forgery. The IRS denied relief for 2007.

The wife filed a suit in the federal District Court seeking a refund of her 2007 payments and discretionary innocent spouse relief. The IRS moved to dismiss for lack of jurisdiction.

(b) Issue: Did the District Court have jurisdiction over the case?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: Federal District Courts have jurisdiction over all actions to collect refunds from the government, including refunds of taxes paid. Thus, when a deficiency is assessed, a taxpayer can either (1) refuse to pay and directly question the deficiency in the Tax Court, or (2) pay the deficiency and seek a refund in District Court.

The District Court clearly had jurisdiction over the wife's request for a refund because her signature was also forged on the 2007 return.

The IRS argued that the District Court lacks jurisdiction over innocent spouse issues. But the District Court lacks jurisdiction only over "stand alone" claims with no refund requested. Those must be made in the Tax Court. But when the taxpayer properly requests a refund in District Court, the District Court may hear a related claim for innocent spouse relief.

Summary: Innocent spouse issues generally go to the Tax Court. But to obtain a refund of amounts already paid, you may file in District Court.

6. Hiramanek v. Comm'r, T.C. Memo. 2016‑92, 2016 WL 2763870 (2016), aff'd, 745 F. App'x 762 (9th Cir. 2018)

(a) Facts: The husband prepared a joint tax return for tax year 2006 and asked the wife to sign it. She refused to sign without reading it, and he permitted her to take a quick glance at the return. She noticed that the return contained a $35,000 casualty loss deduction for a break-in to the couple's car while they were on vacation in Hawaii. Believing the deduction to be overstated, she refused to sign. The husband threatened and physically abused her for several hours, and she finally made a scribble on the signature line. The husband's physical abuse was consistent with other physical abuse that the wife had endured during the marriage.

The next day, the husband presented the wife with a new report with the $35,000 deduction omitted. The wife, fearful of further abuse, signed the return.

Six days later, the wife reported the abuse to the police. Two weeks later, she filed for divorce. But the parties eventually reconciled.

The IRS investigated the parties' tax return. The husband did not permit the wife to participate in the investigation. During negotiations, the wife refused to sign documents that would have given the husband exclusive authority to settle the tax dispute. The husband began yelling, a neighbor called the police, and the husband was arrested. The wife then filed a second divorce complaint, which eventually resulted in entry of a divorce by a California state court.

In 2009, while the investigation was continuing, the wife filed for innocent spouse relief. The IRS eventually assessed a deficiency. Before the IRS ruled on her petition, she filed an action in Tax Court, arguing that the joint tax return was invalid because her consent was procured by duress. The husband intervened in the action.

The wife and the IRS agreed that the joint tax return was invalid for duress, but the husband contested the issue. The Tax Court agreed with the wife and the IRS, as did the Ninth Circuit, and the Supreme Court denied review. Hiramanek v. Comm'r, T.C. Memo. 2011-280, 2011 WL 5921512 (2011), aff'd sub nom. Hiramanek v. Hiramanek, 588 F. App'x 681 (9th Cir. 2014), cert. denied, 136 S. Ct. 167 (2015).

The husband then filed a petition seeking innocent spouse relief from the same tax liability.

(b) Issue: Was the husband entitled to innocent spouse relief?

(c) Answer to Issue: No.

(d) Summary of Rationale (District Court): Innocent spouse relief is available only if the party seeking relief signed a joint tax return. A joint tax return that is filed under duress is invalid and therefore not a proper subject for innocent spouse relief.

The husband argued that the wife did not sign the return under duress. But this was the same argument raised in the case arising from the wife's request for innocent spouse relief. The husband was a party to that case. He litigated his position all the way up to the U.S. Supreme Court, but lost. The decision in that case is binding in the present case under principles of collateral estoppel.

Because the wife signed under duress, "the return [husband] filed for [2006] was not a joint return. He thus has no claim for relief under section 6015; in fact he has no joint and several liability from which to be relieved." 2016 WL 2763870, at *5.

(3) Summary of Rationale (District Court): "The Tax Court properly held that Hiramanek is collaterally estopped by [the prior decision], which held that the return filed by him and his former wife for 2006 was not a joint return because it was signed under duress by his former wife." 745 F. App'x at 763.

Lessons:

  1. A joint tax return signed under duress does not give rise to joint and several liability. The signature of the coerced spouse is invalid, and the coercing spouse is solely liable for taxes due.
  2. As noted in the 2012 version of this outline, Hiramanek is a textbook illustration of why Congress forced the IRS to abandon the former regulatory statute of limitations and to start considering spousal abuse as a factor in making innocent spouse determinations. The wife did not consent in any real way to the filing of the tax return at issue.
  3. If you coerce your spouse into filing a joint tax return, do not expect to be granted innocent spouse relief.
7. Contreras v. Comm'r , T.C. Memo. 2019‑12, 2019 WL 980695 (2019)

(a) Facts: Husband and wife had two children. The husband ran a construction business, while the wife was a homemaker. The parties were divorced in 2011.

The husband brought into the marriage a piece of real property called Lot 13, and during the marriage the parties acquired an adjoining parcel, Lot 12. In 2005, the husband conveyed to the wife half of Lot 13, and he built a home upon it.

During the marriage, the wife was regularly subjected to physical abuse. The police were called to the home repeatedly, and the parties' daughter witnessed the abuse. The abuse was so severe that the wife at times took the children and stayed with her grandmother. In 2010, the wife obtained a temporary restraining order against the husband on the ground of domestic violence.

The final divorce decree included provisions to protect the wife and children from further abuse. It awarded the wife half of Lot 12 and half of Lot 13, securing the entire property division award (including a monetary award to divide other assets) with a lien. The husband failed to pay the award, and in 2012, the husband transferred both Lot 12 and Lot 13 to the wife to satisfy the judgment.

It is difficult to understand why the IRS took the position that the wife's foreclosure on Lots 12 and 13 was fraudulent, when she was clearly responding to the husband's failure to comply with the divorce decree.

The husband had substantial tax liability from 2008, and to satisfy that liability, the IRS sought to foreclose upon Lots 12 and 13. In IRS proceedings arising from the 2008 deficiency, the husband and the wife had the same counsel, paid by the husband, even though they had been divorced for over a year. The IRS declined to respond to the wife's questions and referred her to the husband's counsel.

The wife filed a petition for discretionary innocent spouse relief, claiming expressly that she signed the returns at issue under duress. The IRS denied relief, and the wife sought review in the Tax Court.

(b) Issue: Was the wife entitled to discretionary innocent spouse relief?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The fourth threshold condition for discretionary innocent spouse relief provides that relief is not available if assets were fraudulently transferred between the spouses. The IRS claimed that the transfers of Lots 12 and 13 were fraudulent. To the contrary, the transfers were made, with the guidance of wife's divorce attorney, as payment for obligations placed upon the husband by the divorce decree. The transfers were recorded publicly and were not hidden from the IRS. They were not fraudulent transfers.

The first safe harbor condition, which requires that the parties be divorced, was clearly met. The second condition requires proof of economic hardship. The wife had income of $3,371.66 per month and expenses of $4,600 per month. She relied on child support and government assistance to make ends meet. Her income was below 250% of the federal poverty guidelines and would fall under that amount even if income were imputed to her. The IRS argued that the wife could sell her real property, but that would leave her homeless. The court held that economic hardship was present.

The third safe harbor condition requires proof that the requesting spouse did not have reason to know that the tax would not be paid. The wife did not know the husband's income during the marriage, and she had no involvement with his business, Thus, she had no way to know he would not pay taxes.

The wife did know before signing some of the returns that the husband had not complied with his financial obligations under the divorce decree. Therefore, she had some reason to suspect that he would not pay the overdue taxes either. But the husband's long-term abusive conduct limited the effect of the wife's knowledge. The wife even attempted to ask questions about the overdue taxes, but the IRS only referred her to counsel –who was paid by the husband. The wife "was not a willing participant in filing the joint returns, but rather a victim still being controlled by her ex‑husband's actions." 2019 WL 980695, at *22.

Because all of the safe harbor conditions were met, the court granted discretionary innocent spouse relief.

Observations:

  1. Contreras is another example of the type of case at which the recent innocent spouse reforms were aimed. It is difficult to understand why the IRS took the position that the wife's foreclosure on Lots 12 and 13 was fraudulent when she was clearly responding to the husband's failure to comply with the divorce decree. It is appalling that the IRS apparently suspected some sort of collusive behavior between the husband and wife despite a long history of physical abuse documented by repeated police visits and by the findings in the divorce decree. The IRS's lack of sensitivity to the wife's difficult economic situation is also hard to explain.
  2. The fact that the IRS did not contest Hiramanek is some evidence that the IRS is becoming more sensitive to abuse issues. The fact that the IRS did contest Contreras is strong evidence that more progress is necessary.

Question: Did valid joint returns exist at all in Contreras? The wife would seem to have an argument that she signed the returns under duress. See Hiramanek. But she did not expressly argue that the joint returns were invalid.

8. Abdelhadi v. Comm'r, T.C. Memo. 2018‑183, 2018 WL 5609201 (2018)

(a) Facts: Husband and wife were married in 2014. Before getting married, they were romantically involved with one another and had both a daughter and a son.

The IRS received a joint tax return for tax year 2007, in which the couple clearly was not married. The wife "did not see, review, or sign that return; she has not seen it since and it is not part of the record." 2018 WL 5609201, at *2. (To the extent that the wife's signature appeared on the return, she presumably argued that her signature had been forged.)

The IRS assessed a deficiency on the 2007 return. The wife filed a petition for innocent spouse relief. The IRS denied the claim, and the wife appealed.

(b) Issue: Was the wife entitled to innocent spouse relief?

(c) Answer to Issue: No, but the Tax Court expressly refused to rule upon whether joint and several liability existed to begin with.

(d) Summary of Rationale: The wife argued that she did not file a joint tax return in 2007 because she never signed such a return. Further, the wife was not even permitted by law to file a joint return for 2007 as the parties were not then married.

The IRS did not contest the above facts, but it argued that when considering a petition for innocent spouse relief, the Tax Court lacked jurisdiction to rule upon whether the petitioning spouse was liable for the tax to begin with. The Tax Court agreed. "Because petitioner did not file a joint return, there is no relief we can grant under section 6015." Id. at *2.

Observation: When a spouse does not sign a valid joint tax return to begin with, the spouse should file an action in the Tax Court for relief from joint and several liability on the ground that the return was invalid, not a request for innocent spouse relief. See, e.g., Hiramanek. The wife in Abdelhadi was obviously not subject to liability on a return she did not sign, but she pushed the wrong procedural button.

9. Neitzer v. Comm'r, T.C. Memo. 2018‑156, 2018 WL 4519997 (2018)

(a) Facts: Husband owned and operated two businesses. The wife, who was trained as a nurse, was totally disabled after a series of spine and hip surgeries. Her income came primarily from disability benefits.

The couple separated in 2010. Their 2012 joint tax return was prepared by the husband's business accountant. The wife was notified of the return only two hours before she was expected to sign it. The accountant had been told to disclose nothing to the wife about the husband's personal or business finances. The wife signed the return without reading it.

The return correctly stated the couple's tax liability, but the husband refused to fully pay that liability. The unpaid liability was attributable solely to the husband's income. Morever, the husband changed his mailing address to the IRS to his business, so the IRS's repeat notices of nonpayment went only to the husband and not to the wife.

After a period of nonpayment, the IRS satisfied the tax debt completely by seizing $21,637.93 from the wife's bank account.

The divorce court denied the wife's motion to be reimbursed immediately for the levied funds, but it found the husband in contempt for failing to disclose the unpaid tax debt on a financial disclosure statement. The decree of divorce incorporated a stipulation that awarded the wife $277,000, but it did not expressly require reimbursement for the seized funds.

The wife filed for discretionary innocent spouse relief. The IRS denied relief, and the wife appealed to the Tax Court.

(b) Issue: Was the wife entitled to discretionary innocent spouse relief?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The IRS agreed that the wife had met the threshold conditions.

The wife's income was $1,400 per month, and the tax debt at issue was $21,637.93. But the wife was given a divorce settlement of $277,000. The court held that payment of the debt would not cause economic hardship. Therefore, the safe harbor conditions were not met, and the result turned upon the discretionary relief factors.

The wife signed the tax return at issue, and she was charged with knowledge of its contents. But she had no way to know that the husband would not pay the debt. The husband told her little about his finances, and he even told his accountant to tell her nothing. The wife's lack of knowledge favored relief.

The parties were separated for the tax year in question, so the wife did not benefit from the husband's nonpayment. She had not filed tax returns since the divorce, but her income was so small that she was not required to file. The wife's disabled condition also favored relief.

Because essentially all of the factors were favorable to the wife, the court granted discretionary innocent spouse relief and awarded her a refund of the entire amount seized from her account.

Observation:

It speaks poorly of the IRS that it denied relief in Neitzer. The wife was a classic example of the sort of spouse the drafters of the new innocent spouse procedures had in mind. She was not abused physically, but she was deliberately kept ignorant about financial matters. Not only did the husband tell her nothing and instruct his accountant to tell her nothing, he changed his address so that she would not receive communications from the IRS regarding nonpayment. Finally, the wife was physically disabled and her income was very limited. She received a substantial settlement, but that settlement was effectively her only source of retirement income, and the unpaid taxes were entirely due to the husband's income. The IRS should not have opposed innocent spouse relief.

10. Heydon‑Grauss v. Comm'r, T.C. Memo. 2018‑209, 2018 WL 6720943 (2018)

(a) Facts: Husband and wife filed joint tax returns for tax years 2005 to 2009. They separated on 2010 and were divorced in 2015.

The parties did not enclose full payment with their 2005-2009 tax returns until 2010. The wife was not aware of this fact until 2010. But she was aware that the parties were spending beyond their incomes and living beyond their means. The wife paid nothing on the parties' tax liabilities, and the divorce decree ordered her to reimburse the husband for half of the payments he had made.

The wife filed a petition for discretionary innocent spouse relief. The IRS granted limited relief for certain amounts in some of the years. The wife sought review in the Tax Court.

(b) Issue: Was the wife entitled to more discretionary innocent spouse relief than the IRS gave her?

(c) Answer to Issue: No.

(d) Summary of Rationale: The seventh and final threshold condition for innocent spouse relief provides that the tax must be attributable to the income of the nonrequesting spouse. In other words, discretionary innocent spouse relief is generally not available for tax due on the requesting spouse's own income. But there is an exception if the requesting spouse was subject to abuse.

The wife argued that abuse was present and therefore she should be relieved of liability for tax on her own income. "To satisfy the abuse exception..., the requesting spouse must establish that as a result of abuse she was unable to question the payment of the tax due on a return for fear of retaliation from the nonrequesting spouse." 2018 WL 6720943, at *14.

The court described the wife's claim of abuse as follows:

[P]etitioner did not provide specific testimony supporting a pattern of abuse. Specifically, she testified that there was "abuse in the household. There was alcohol. There were drugs. There were gambling. There were sexual affairs. There was mismanagement of money. Risky investments. Gambling." She also testified that "[t]here was a lot of anger and yelling in the household." She testified that documents from the domestic relations court indicated that intervenor abused the children. Specifically, she testified that intervenor "had supervised visits" of the children and the court documents "reference the alcohol and drug testing".

Id.

Thus, the wife alleged abuse of alcohol and drugs. But the abuse required by the regulations is abuse of the other spouse. "Anger and yelling" likewise fall short of abuse. The husband denied physical abuse of either the wife or the parties' children, and the court found his denial credible.

Because abuse was not proven, and because the tax at issue arose from the wife's own income, the seventh threshold condition was not met, and the wife was not entitled to additional innocent spouse relief.

Observations:

  1. It is good that the IRS has promised to be more sensitive to a situation in which abuse prevents one spouse from discovering or responding to tax-related misconduct of the other spouse. There are cases, e.g., Hiramanek; Contreras, in which real abuse is present, and the new rules greatly improve the fairness of tax law.
  2. But as this outline has noted in prior years, a power that can be used for good can also be misused for more questionable purposes. It is highly foreseeable that some spouses who were not genuinely abused will attempt to use the new rules to obtain innocent spouse relief from taxes that they can and should help to pay. The federal courts are going to have to find a workable definition of genuine abuse.
  3. Heydon‑Grauss is a good example of a spouse attempting to misuse the new rules. The new rules focus upon physical or emotional abuse of the other spouse. The mere fact that both parties misused alcohol or even drugs is not what the new rules mean by abuse. Further, as divorce courts have realized for years, anger and harsh words do not constitute abuse. Abuse generally requires some form of intimidation, and there was no evidence of any intimidation in Heydon-Grauss. The facts before the court did not show the type of abuse at which the new rules are aimed.
11. Ogden v. Comm'r, T.C. Memo. 2019‑88, 2019 WL 3162423 (2019)

(a) Facts: Husband and wife were married in 1991 and divorced in 2011. The wife was granted Social Security disability benefits in 2008. She received $36,083 that year and $10,297 in 2010.

On their 2008 tax return, the parties did not report the wife's benefits. On their 2010 return, the parties reported the benefits but did not pay the tax. Both returns were prepared by the husband.

The IRS assessed a deficiency for 2008. The wife filed a petition for discretionary innocent spouse relief. The IRS granted the petition as to the husband's income but denied the petition as to the wife's income. The wife sought review in the Tax Court.

(b) Issue: Was the wife entitled to discretionary innocent spouse relief from tax on her own income?

(c) Answer to Issue: No.

(d) Summary of Rationale: One of the threshold requirements for discretionary innocent spouse relief is that the tax cannot arise from the requesting spouse's own income. But there is an exception for abuse. The wife argued that she was abused during the marriage. The court noted:

By the time the 2008 return was filed in 2009, petitioner and Mr. Ogden were separated and living apart. There is no documentation provided by petitioner's physicians or mental health care provider, nor a law enforcement entity, attesting to either physical or psychological abuse suffered by petitioner at the hands of Mr. Ogden. No witnesses testified to the alleged abuse suffered by petitioner. Petitioner's own allegations of abuse are vague and generalized.

2019 WL 3162423, at *8-9. Even if the wife's claims of abuse were credible, the wife testified that she was unaware that her Social Security benefits were taxable. Thus, the facts simply did not show that abuse prevented the wife from objecting to the husband's decision on how to treat her benefits for tax purposes.

For 2010, there was no evidence that abuse limited the wife's ability to question the husband's nonpayment of the balance of taxes due.

Because the abuse exception was not proven, the wife was not entitled to innocent spouse relief from tax due on her own income.

Observations:

  1. Again, the wife's evidence of abuse was weak, and the court effectively found that no abuse had occurred.
  2. The developing rule seems to be that the Tax Court is looking for some amount of evidence to corroborate a claim for abuse. Genuine abuse usually results in police or medical reports, testimony of at least some third-party witnesses, or evidence of domestic violence claims in state court, either as a request for a protective order or as an issue in a divorce case. The Tax Court is much more likely to find abuse when at least some amount of corroborative evidence is present.
  3. There is no legal requirement for corroborative evidence. It is possible that an unsupported claim of abuse, made in the requesting spouse's testimony, might be accepted in at least some cases. But the trend is to reject such testimony, especially where it is very general.

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