In Cotroneo v. Commissioner the Commissioner of Internal Revenue determined that Cotroneo and her husband had a tax deficiency of $15,288 and a penalty of $3,058.
The U.S. Tax Court heard the case, in which the issue at question was whether Cotroneo failed to report $122,500 of taxable IRA distributions, nearly $7,000 of taxable Social Security income, and $144 of income from a partnership. The Court also decided on whether or not she was liable for the $3,058 penalty and if she was entitled to relief pursuant to section 6015 of the Internal Revenue Code.
Background of Cotroneo v. Commissioner
Cotroneo married her husband in 1988, and they were still married at the time of this hearing. For around 22 years of their marriage, Cotroneo was a homemaker. Her husband was the primary earner for the couple and made the major financial decisions for the household, such as decisions regarding investments and high-dollar purchases.
In 2010, Cotroneo’s husband was indicted for bribery and tax evasion, which included an allegation that he did not report over $1.5 million in income over a two-year period. He accepted a plea agreement and was required to file amended tax returns for 2005 through 2007. As part of the plea deal, Cotroneo’s husband also had to pay additional tax owed after filing amended returns and forfeit all property purchased with bribed funds. Cotroneo knew about the conditions of her husband’s plea agreement.
In February 2011, a house was purchased in Chester, New Jersey, in Cotroneo’s name only. The house was bought for $950,000 in cash, some of which came from the sale of a home owned by Cotroneo and her husband, but the bulk of the funds were provided by her husband. About one week prior to the purchase of this home, Cotroneo’s husband had withdrawn over $300,000 from an IRA.
Money Cotroneo Received from her Husband Considered Income
Cotroneo began working as a cashier in September 2012 and made a little over $2,000 for the year. She and her husband also received around $8,000 in Social Security benefits that year. However, Cotroneo also received deposits from her husband into her personal checking account that totaled $98,556. These funds likely came from her husband’s IRA, from which he withdrew $122,500 in 2012.
When filing taxes for 2012, neither Cotroneo nor her husband provided their accountant with details regarding these withdrawals. They reported an income of $34,633 for that year. Cotroneo signed the tax return without reviewing it or asking any questions about it.
In January 2014, Cotroneo’s husband was ordered to pay over $12 million to the United States, $9 million of which was related to the funds he received from his bribery scheme. He was incarcerated for his crimes beginning in February 2014 and was released in March 2017.
The IRS notified Cotroneo in September 2014 that there was a deficiency based on the failure to report $122,500 of taxable retirement income, $144 in partnership income, and $6,987 of taxable Social Security benefits. Cotroneo requested redetermination and sought relief under section 6015.
U.S. Tax Court’s Ruling on Entitlement to Relief Under Section 6015
Married spouses who choose to file joint federal taxes must compute their aggregate income, and they are each responsible for ensuring the return is accurate. Both spouses are also fully responsible for any tax owed. However, relief may be available to a spouse who filed jointly if they meet the eligibility criteria in section 6015 (b), (c), or (f).
Section 6015(b)
Requirements for relief include that the understatement of tax was caused by the other spouse’s error, that the spouse requesting relief did not know of the understatement, and it is inequitable to hold the requesting spouse liable.
The Court in this case determined that Cotroneo had reason to know and should have inquired about the substantial omissions from the return. Additionally, she had a heightened duty to inquire because of her husband’s past criminal history of tax evasion and bribery.
Section 6015(c)
A spouse may request relief under this section if they are no longer married to the non-requesting spouse or legally separated at the time of the request, or if they have not lived together at any time in the previous 12 months. However, taxpayers are ineligible if assets were transfered between spouses as part of a fraudulent scheme. The Court determined that Cotroneo and her husband did transfer assets fraudulently.
Section 6015(f)
A taxpayer may be relieved of liability for a tax deficiency if it is inequitable to hold them liable and relief is not available under the other sections. Cotroneo was not eligible for relief due to the fraudulent scheme to defraud creditors that she engaged in with her husband.