Schorse v. Comm’r, T.C. Memo. 2018176, 2018 WL 5270556 (2018)
(a) Facts: Husband was a computer programmer and wife was a physician. During the marriage, the wife earned 80% to 90% of the parties’ income.
For tax years 2002, 2003, and 2004, the wife provided her tax information to the husband, and his business accountant prepared joint tax returns. The wife’s tax information claimed that her practice suffered losses each year. The husband asked the wife and her accountant about the losses, and he was told that the wife did not have a sufficient basis in the medical practice to deduct the losses.
Nevertheless, the husband told his accountant to prepare returns that claimed loss deductions. Predictably, the IRS disallowed the deductions and assessed deficiencies. The couple paid these deficiencies for several years, paying off their tax debt for 2002.
The parties separated in 2012 and divorced in 2014. The divorce decree assigned all outstanding tax liabilities to the wife.
The husband filed a petition for innocent spouse relief from the 2003 and 2004 liabilities. The IRS denied the petition, and the husband sought review in the Tax Court.
(b) Issue: Was the husband entitled to innocent spouse relief?
(c) Answer to Issue: No.
(d) Summary of Rationale: To obtain mandatory innocent spouse relief, the claiming spouse must prove that he or she had no reason to know of a tax understatement. The husband here had reason to know, because the wife and her accountant told him, that the losses of the wife’s practice were not tax deductible.
The IRS agreed that the husband had not met the threshold conditions for innocent spouse relief. The husband had reason to know of the tax understatement, so the safe harbor conditions were not met. The result therefore turned upon the discretionary relief factors.
Factors favoring relief were (1) the husband had been divorced from the wife; (2) the divorce decree assigned all outstanding tax liabilities to the wife; and (3) the husband was current on taxes from later years. Factors opposing relief were (1) the husband had reason to know of the tax understatement; (2) the parties had a high standard of living; and (3) the husband therefore benefitted from the tax underpayment.
“Although many of the factors for equitable relief either favor petitioner or are neutral, petitioner’s actual knowledge of the losses deducted on the joint returns, his involvement in preparing those returns, and the significant benefit he received from the understatements weigh too heavily against him to allow relief.” 2018 WL 5270556, at *22-23.
1. If your wife’s accountant tells you that the wife’s business losses cannot be deducted on your tax return, you should probably consider taking the accountant’s advice.
2. It is hard to get innocent spouse relief when the tax problem is a deduction you instructed your accountant to take against the direct contrary advice of both your wife and her accountant.