The Taxpayer Who Cried Wolf (Hardin v. Comm’r)

Hardin v. Comm’r, T.C. Memo. 2016-141, 2016 WL 4006806 (2016)

Facts: Husband and wife were married in During the marriage, the husband was partner in a law firm, and he also ran a sports management business. The wife was owner and president of a financial planning company. The husband was not involved with the operation of the wife’s business.

For 2009 and 2010, the parties filed joint tax returns.

Husband and wife were divorced in Missouri in 2011. Their divorce decree incorporated the settlement agreement, which gave each party all of the assets and liabilities of their respective businesses, and required each party to hold the other harmless from all business debts. There is no suggestion that the wife claimed any form of abuse in the divorce case.

The IRS examined the 2009 and 2010 returns, and found deficiencies. Some of these deficiencies arose from the husband’s law firm, and some arose from the wife’s financial planning business. Each party filed a petition for innocent spouse relief. The IRS agreed that each party was entitled to relief from liability for tax problems attributable to the other’s business.

The wife then filed an additional petition for innocent spouse relief from taxes attributable to her own business. In this petition, she argued for the first time that she was abused by the husband.

Issue: Is the wife entitled to innocent spouse relief from taxes arising from operation of her own business?

Answer to Issue: No

Summary of Rationale: The only issue before the court was discretionary innocent spouse relief under 6015(f). The seventh threshold condition normally requires proof that the tax liability is attributable at least in part to property or income of the nonrequesting spouse. The taxes at issue were on the wife’s business, so the seventh condition was facially not met.

But there is an exception to the seventh requirement for cases in which the requesting spouse was subject to physical abuse. The wife argued that this exception applied. The court doubted the credibility of her testimony, finding it to be “evasive, vague, conclusory, and/or inconsistent with certain other evidence in the record.” 2016 WL 4006806, at *9.

In addition, the evidence showed that the wife ran her financial planning company without any involvement by the husband. The wife had declined opportunities to review both the 2009 and 2010 returns. The 2010 return was prepared after the parties separated, suggesting that the husband’s opportunity to abuse the wife was limited.

Because the wife had not proven abuse, the seventh threshold requirement was not met, and the wife’s request for innocent spouse relief from her own taxes was denied.

The court found that the wife’s position was groundless, and that it was taken primarily to delay the proceedings. It chose not to sanction the wife, but warned the wife and her counsel that they might be sanctioned in the future if their behavior continued.

Observations:

It is good that the IRS is now considering physical abuse when it makes innocent spouse In some cases, e.g., Hiramanek, the evidence of abuse has been strong and compelling.

But a tool which can be used for good can also be used for evil. Given the powerful effect which spousal abuse now has upon innocent spouse determinations, and given the large amounts of tax liability involved in many Tax Court cases, it is foreseeable that some claims of spousal abuse will be factually weak, and that others may not even be raised in good faith. Hardin is a good example of these types of claims.

These false allegations of abuse are troubling not only because of their effect on tax litigation, but also because of the potential effect on the reputation of the accused spouse. When claims of abuse are made in bad faith, the Tax Court needs to take action. The wife in Hardin was fortunate that the court declined to order sanctions.

Claims of abuse are especially questionable when they are made for the first time in Tax Court, and were not made in prior family law proceedings between the parties. There is no suggestion that the wife in Hardin claimed any form of abuse in the divorce case, or sought any form of protective order. When the parties were divorced before the tax case arose, and spousal abuse was not raised as an issue, it should take strong facts to convince the Tax Court to find abuse.