Articles Posted in Innocent Spouse

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Hammernik v. Comm’r, T.C. Memo. 2014-170, 2014 WL 4119398 (2014)

(a) Facts: A husband and wife were divorced in Wisconsin. In 2003, before the divorce, the husband’s business encountered hard times, and he withdrew $104,909 from his personal retirement account to pay living expenses.

The parties filed a joint income tax return for 2003. They reported the withdrawn retirement funds as income, and returned tax due of $15,058, but failed to pay this amount.

The divorce decree left the parties equally responsible for paying all federal tax debts.

The husband paid more than half of the tax debt, and sought innocent spouse relief from the remainder. The IRS granted only partial relief, and no relief from the tax on the retirement withdrawal. The husband appealed to the Tax Court.

(b) Issue: Was the husband entitled to innocent spouse relief from the tax on the retirement withdrawal?

(c) Answer to Issue: No.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Varela v. Comm’r, T.C. Memo. 2014-222, 2014 WL 53656631 (2014)

(a) Facts: A husband and wife filed joint tax returns for 2007 and 2008. The IRS assessed deficiencies. The wife petitioned the Tax Court for innocent spouse relief, and the husband intervened, asking the court to deny the request. The court asked for briefs, and the husband failed to file one, but the court addressed the issues nevertheless.

The parties kept separate bank accounts during the years in question. The husband owned a business, JL Unique Homes, Inc. (“JL Unique”). The wife was initially a director but never did work for the company. She did, however, assist its office manager in organizing the company’s paperwork.

The tax issue arose when the husband used certain business funds for personal purposes. The wife did not know of this use initially. The parties separated in 2009, and the wife did learn of the use during divorce proceedings.

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

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The IRS agreed that the wife was entitled to innocent spouse relief, so the only party objecting was the husband. The husband argued that the tax problem was partly attributable to the wife’s conduct, and that the wife should have known that the tax had not been paid.

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By: Dana M. Horlick, Attorney, Woodruff Family Law Group

 

Obergefell v. Hodges, 135 S. Ct. 2584 (2015)

(a) Two years ago, it appeared that the United States would be divided for some years between states that recognize same-sex marriage, and states that do not recognize same- sex marriage.

(b) After Windsor, most federal courts held that state provisions refusing to recognize same-sex marriages are unconstitutional. See, g., Bostic v. Schaefer, 760 F.3d 352 (4th Cir. 2014).

(c) This issue reached the S. Supreme Court in Obergefell. The Court held that as a matter of federal constitutional law, states are not permitted to allow only opposite-sex couples to marry. If a state recognizes opposite-sex marriages, it must also recognize same-sex marriages.

(d) The choice-of-law question has therefore fizzled into irrelevance. All states must permit same-sex couples to marry, and all same-sex couples who do marry are entitled to file a joint federal income tax return.

A less well settled topic is that of innocent spouse relief.

Deihl v. Comm’r, 603 F. App’x 527 (9th Cir. 2015) (unpublished)

(a) Facts: A wife sought innocent spouse relief from tax due on returns she filed jointly with her late husband. She claimed that she was entitled to relief because, among other things, she was abused during the marriage.

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This article is part 4 of a series of articles regarding Innocent Spouse.  This final blog on the basics of the current Innocent Spouse tax law will do two things:  1) summarize changes discussed in the first three articles; 2) give some practical guidance to attorneys, CPAs, and clients in North Carolina.

Summary of Major Changes

(1) Rev. Proc. 2013-34 was discussed in detail in Part 3 of 4 Parts.  The new framework for handling innocent spouse cases 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 (domestic violence) 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 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.

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Part 3 of a 4-Part Series on Innocent Spouse Basics

(a) The Former Requirements: Rev. Proc. 2003-61, 2003‑32 I.R.B. 296, 2003 WL 21708514 (Aug. 11, 2003)

(b) The New Requirements: Rev. Proc. 2013-34, 2013‑43 I.R.B. 397, 2013 WL 5179241 (Oct. 21, 2013)

(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 applies—presumably cases decided after October 21, 2013.

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This article is part 2 of a 4 part series on Innocent Spouse basics.  Be sure to read all four parts.  Also, check this blog regularly for new information on innocent spouse law, as I will write about it frequently.  I’ll keep you posted of new cases and developments from the IRS.

So, if you are in Asheboro or Reidsville, or wherever, this four part article should answer your questions about innocent spouse tax law and how it might affect your North Carolina divorce.

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I have always said:  “the Internal Revenue Service is the third party to the North Carolina Divorce”.  It is, therefore, incumbent upon parties to a divorce, their counsel, and their CPAs in North Carolina to understand the Innocent Spouse rules of the Internal Revenue Code, particularly if there are tax issues outstanding.  Further, understanding innocent spouse can many times help with an otherwise devastating tax situation.

This article will be in four parts, so be sure to read all four parts.  Also, check this blog regularly for updates on innocent spouse law as I will write about it frequently.  I’ll keep you advised of new cases and new rulings from the IRS.

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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.

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In North Carolina, as well as nationwide, family law and divorce cases are filled with bad tax returns.  Let’s face it, generally one spouse handles the finances and the other spouse doesn’t.  Enjoy Santa as the Tax Court finds this husband innocent.

Santa v. Comm’r, T.C. Memo. 2013178, 2013 WL 3984636 (2013)

(a) Facts: The wife suffered from various addictions and often hid financial matters from the husband.  She obtained a credit card without the husband’s knowledge, and forged his name on a certificate of title on her vehicle so that she could sell it for cash.  In 2002, she withdrew $95,392 from her retirement account without telling the husband.  For portions of that year, the parties lived separately.

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