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Facing the Music: Innocent Spouse Relief

Henry v. Comm’r, T.C. Memo. 201924, 2019 WL 1385242 (2019) 


(a) Facts: Husband and wife married in 1997 and divorced in 2013.  While the divorce case was pending, the parties filed a joint income tax return for tax year 2012.  The return did not report $14,650 in income earned by the husband from his second job as a church musician. 


The IRS assessed a deficiency, which neither party contested.  The IRS then seized funds from the wife’s 2014 tax return to satisfy the deficiency.  The wife moved for innocent spouse relief.  The IRS granted relief but denied the wife a refund.  The wife sought review in the Tax Court. 


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


(c) Answer to Issue: Yes. 


(d) Summary of Rationale: The court construed the wife’s request for a refund as a request for discretionary innocent spouse relief.  The IRS conceded that the wife was entitled to such relief, but the husband intervened and opposed relief. 


The husband did not contest that the threshold conditions were met.  Because the wife had reason to know of the tax understatement and there was no evidence of abuse, the safe harbor conditions were not met. 


The result therefore turned upon the discretionary relief factors. 


Factors favoring relief were (1) the parties had been divorced; (2) the wife’s only monthly income was $500 in alimony and $999 on Social Security disability, so she faced economic hardship; (3) the wife did not benefit from the unreported income, which husband spent for his own purposes; (4) the wife had complied with tax law in future years; and (5) the wife’s health was poor.  Only one factor opposed relief –the wife argued in the divorce case only two weeks after the filing of the return that the husband had omitted his church income from a financial statement and that she knew he had had church income the year before, which suggested that she had reason to know of the omitted church income.  Because the strong preponderance of the factors was favorable, the court granted discretionary spouse relief.