Innocent Spousal Relief Take 3: A Single Mistake Can Cost Thousands (Hammernik v. Comm'r)

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 They reported the withdrawn retirement funds as income, and returned tax due of $15,058, but failed to pay this amount.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.

(d) Summary of Rationale: One of the threshold requirements for relief is that the tax at issue must be based upon the other spouse’s income. The tax at issue here was based upon the husband’s income, so he failed to meet a threshold requirement for relief.

There is an exception to this threshold condition that applies when funds intended to the payment of the tax were misappropriated by the other spouse, without the actual or constructive knowledge of the spouse requesting relief. The husband alleged that he had set aside funds to pay the tax, and the wife had misappropriated those funds. But the husband failed to corroborate his claim that he had actually set aside the funds aside.

Also, the husband alleged that the wife had withdrawn part of the funds that he had set aside; that he had taken the remaining funds; that he put them back when the wife objected; and then she then took the remainder of the funds. This sequence of events showed that the husband knew that the wife was taking funds intended to pay the tax debt. She therefore did not take funds without the husband’s knowledge, and the husband was not entitled to innocent spouse relief.

Observations:

If the wife truly took the funds set aside for paying the tax in the manner that the husband claimed, one is led to wonder why the husband did not raise this issue in the divorce.

To the extent that the IRS collected the full tax due from the husband, the husband would of course have the right to collect half of the amount paid from the wife under the divorce decree. But the wife may not have had the funds to pay a judgment.

In re Mikels, 524 B.R. 805 (S.D. Ind. 2015)

(a) Facts: A husband and wife filed joint income tax returns for 2003-2005, 2007, and 2010. They were divorced in 2011. The decree ordered the wife to pay the first $93,174 of outstanding tax liability, and remaining liability was to be divided evenly.

The husband then filed a Chapter 13 bankruptcy petition. He also filed a proper Form 8857 seeking innocent spouse relief. The IRS filed a Notice of Claim in the bankruptcy proceeding. The husband objected to the claim, on the basis that he was entitled to innocent spouse relief.

(b) Issue: Did the bankruptcy court have jurisdiction over the question of innocent spouse relief?

(c) Answer to Issue: No.

(d) Summary of Rationale: Section 6015(e) gives the Tax Court jurisdiction over innocent spouse “Although the statute does not address whether the Tax Court’s jurisdiction is exclusive, courts interpreting the statute have concluded that it is.” 524 B.R. at 807.

Obvious Lesson: To obtain innocent spouse relief, file Form 8857 with the IRS. If the IRS refuses relief, appeal to the Tax Court. Don’t file bankruptcy and expect the Bankruptcy Court to rule on this issue.