Rogers v. Comm’r, 908 F.3d 1094 (7th Cir. 2018)
(a) Facts: Husband and wife filed a joint tax return for 2004. The IRS assessed a deficiency, and the parties sought review in the Tax Court. The Tax Court held for the IRS.
Three years later, the wife filed a petition for innocent spouse relief. The IRS rejected that petition. The wife sought review in the Tax Court, which agreed with the IRS. The wife appealed to the Seventh Circuit.
(b) Issue: Was the wife entitled to innocent spouse relief?
(c) Answer to Issue: No.
(d) Summary of Rationale: “[I]f a decision of a court in any prior proceeding for the same taxable year has become final, such decision shall be conclusive except with respect to the qualification of the individual for [innocent spouse] relief which was not an issue in such proceeding. The exception contained in the preceding sentence shall not apply if the court determines that the individual participated meaningfully in such prior proceeding.” I.R.C. ‘ 6015(g)(2).
The above language is full of confusing double negatives, but the bottom-line rule is that when married taxpayers contest a deficiency, and both spouses “participated meaningfully” in the proceeding, the proceeding bars a later petition for innocent spouse relief. It is expected that any claim for innocent spouse relief would have been asserted in the initial proceeding.
The Tax Court held that the wife participated meaningfully in the proceedings to question the deficiency and therefore could not file an independent petition for relief. In particular, the wife had an MBA and a law degree and substantial knowledge of tax law, yet she claimed complete ignorance of tax matters. The wife also had counsel in the previous tax proceedings. The Tax Court found her testimony not credible, and the Seventh Circuit agreed.
The wife argued that the result should be different because the IRS failed to inform her of her right to innocent spouse relief. “[The wife] has identified no authority that a disclosure shortcoming precluded the Service from taking the position that she was not entitled to innocent spouse relief.” 908 F.3d at 1097.
Lesson: When contesting a deficiency in the Tax Court, it is prudent to seek innocent spouse relief at that time. A later petition for such relief will not be available if the petitioning spouse “participated meaningfully” in contesting the deficiency.
There will obviously be cases in which the spouse seeking relief did not participate at all in questioning the deficiency. But the prudent step, in doubtful cases, is to seek innocent spouse relief at the earliest opportunity.
Observation: It is difficult for a person with a law degree and an MBA to obtain innocent spouse relief.