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.
Please note that the parties were in a state of separation for some of 2002. The parties filed a joint tax return for 2002. The wife did not tell the preparer about the $95,392 withdrawal, or about some of her 2002 wage income. The IRS discovered the unreported income and assessed a deficiency.
The husband filed for innocent spouse relief. The IRS denied the request, and the husband appealed to the Tax Court. While the case was pending, he separated from the wife, and they eventually divorced. He did not notify the Tax Court of his change of address, the notice of trial was sent to the former marital home, and the husband never received it. As a result, he did not appear for trial, and the court denied his request for relief.
The IRS sent the parties a notice of tax lien to enforce the unpaid 2002 taxes. The husband filed a second request for innocent spouse relief. The IRS again denied the request, and the husband again appealed to the Tax Court.
(b) Issue: Is the husband entitled to innocent spouse relief?
(c) Answer to Issue: Yes.
(d) Summary of Rationale: Under § 6015(c), innocent spouse relief is available if the parties are divorced or legally separated or physically separated for 12 months, and a tax understatement is attributable to the other spouse’s income, unless the IRS proves that the spouse requesting relief knew of the understatement.
The IRS argued that the prior decision denying innocent spouse relief was binding under principles of res judicata. But the parties had not yet been divorced or legally separated or physically separated for 12 months. Thus, section 6015(c) relief was not available in the prior appeal, and the prior denial of relief was not res judicata.
The IRS claimed that the $95,392 was deposited into a joint bank account, but it presented no supporting evidence. The court accepted the husband’s testimony that the money was placed into an account known only to the wife. Because the requirements of § 6015(c) were met, the husband was entitled to relief.
Obvious Lesson: When an appeal to the Tax Court is pending, notify the court of any change in address! Notice is especially important when your address of record is the former marital home with a spouse who has a very long history of dishonest behavior.
The husband was fortunate that § 6015(c) relief was not available in the first proceeding. If it had been available, the husband would have had a substantial res judicata problem.