Separation and Divorce are Important Factors in Innocent Spouse: See How this Wife Won.

Molinet v. Comm’r, T.C. Memo. 2014-109, 2014 WL 2573992 (2014)

(a) Facts: A husband and wife were married.  The wife was from Cuba and was admitted to the United States on a fiancé visa.  The husband controlled the marital finances, with minimal input from the wife.  She had access to the parties’ joint checking account, but rarely used it and did not have a good understanding of the United States banking system.  She paid her expenses with a weekly allowance from the husband.

The parties initially lived in Maryland, but they moved to Florida for the wife’s health.  To finance the trip, the husband withdrew $117,191 from his 401(k) plan.  The wife did not approve of the withdrawal, but felt she had no choice and reluctantly signed documents regarding the withdrawal.

The parties’ 2008 income tax return reported $30, 938 in tax liability, much of it from the 401(k) plan withdrawal.  The wife believed at the time that the husband could pay the amount due, as he had paid all other prior tax liabilities.  Note that this retirement plan may have been a marital asset and possibly could have been “QDROed” (Qualified Domestic Relations Order)  in the divorce.

The parties separated in 2008 and were divorced in 2009.  The Florida divorce decree allocated the 2008 income tax debt to the husband.

The husband did not pay the 2008 tax debt, and the wife petitioned for discretionary innocent spouse relief under § 6015(f).  The IRS denied relief, and the wife appealed to the Tax Court.  The husband intervened, opposing relief.  The IRS admitted at trial that the wife should receive relief, but the husband continued to argue otherwise.

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

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The safe harbor rule does not apply, because the wife had not established that she would suffer economic hardship if forced to share liability for the taxes.  Factors favoring relief included:  (1) the parties were divorced, (2) the wife had little knowledge of marital finances and reasonably believed that the husband could pay the tax due; (3) the divorce decree allocated the tax debt entirely to the husband; (4) the funds withdrawn were used mostly to acquire a new home in Florida, which was awarded to the husband in the divorce case, so the wife did not benefit from nonpayment of taxes; (5) the wife had fully complied with tax law in all future tax years; and (6) the wife suffered from significant health problems.  The court held that economic hardship was neutral, as the wife had monthly income of $3,616 and monthly expenses of roughly $3,100. Because the balance of factors strongly supported relief, innocent spouse relief was granted.

Comments:

1.  When the IRS favors innocent spouse relief, and the only party objecting is the intervening noninnocent spouse, the argument against innocent spouse relief is always especially hard to make.

2.  If innocent spouse relief had been denied, the wife could still have sued the husband under the divorce decree to be reimbursed for any portion of the debt she was forced to pay.  The problem, however, is that the husband may not have had the funds to pay a state court judgment.