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Know Your Finances! Hardships and Settlements: Heedram v. Comm’r (2018)

Heedram v. Comm’r, T.C. Memo. 2018‑25, 2018 WL 1193421 (2018)

 

(a) Facts: A husband and wife married in 2011 and divorced in 2015.  During the marriage, the wife earned most of the parties’ income and handled the parties’ finances.  She had unpaid federal taxes from before the marriage.  The parties had difficulty meeting the mortgage payments on their home, and the husband knew this.

The parties filed a joint tax return in 2014, reporting $147 in tax attributable to the husband, and $1,059 in tax attributable to the wife.  The parties’ divorce decree ordered the wife to pay the outstanding tax debt.

 

The husband filed a request for innocent spouse relief.  The IRS denied the request, and the husband sought relief in the Tax Court.

 

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

 

(c) Answer to Issue: Yes

 

(d) Summary of Rationale: The husband did not meet the threshold conditions with regard to the $147 in tax attributable to his income, so he was not entitled to relief from that amount.

 

The husband did meet the threshold conditions with regard to the $1,059 in tax on the wife’s income.  The safe harbor conditions were not met, as the husband did not claim he would suffer economic hardship if ordered to pay the tax.

 

The result, therefore, turned on the discretionary relief factors.  The IRS argued that the marital status factor disfavored relief because the parties were still married when the petition for relief was filed.  The court disagreed, finding that the factor favored relief because the parties were divorced at the time of trial.  They continued to reside together for a period of time after their divorce, but only because of financial issues.

 

The economic hardship factor did not favor relief.  “We believe petitioner’s testimony that he does not have much left at the end of each month after paying his living expenses and sending money to his mother to support her and his two children. Nonetheless, we cannot conclude on the basis of this testimony alone that he will suffer economic hardship. We treat this factor as neutral.”  2018 WL 1193421, at *10-11.

 

The IRS argued that the husband should have known that the wife could not pay the tax.  Both spouses testified that the husband was not financially sophisticated, and the wife told him that she would set up a payment plan, as she had done for prior tax years.  The court held that the husband reasonably believed the wife’s statement.

 

The IRS argued that the allocation of the tax debt to the wife in the divorce decree did not favor relief because the husband knew that the wife could not pay the debt.  But the court held again that the husband reasonably believed that the wife would set up a payment plan.

 

The IRS argued that the husband was not in compliance with tax law because he had not paid tax on certain income reported to the IRS on Form 1099-MISC by R.J. Carroll Company.  Both the husband and the wife denied working for this company in 2014, claiming that the husband was terminated in 2013.  The IRS presented no evidence on this point beyond the Form 1099-MISC.  The court held that the IRS had not sufficiently proven tax noncompliance, finding that a reasonable dispute existed over the income at issue.

 

Because none of the factors opposed relief, the court granted discretionary innocent spouse relief.

 

Observation: The husband did not argue economic hardship directly, and the court’s conclusion that the safe harbor factors were not met was rather reluctant.  “We conclude that petitioner fails to qualify [under the safe harbor factors].  Petitioner has not indicated that he will suffer economic hardship if relief is not granted, although taking into account his credible testimony we do not think he has significant means to pay the tax liability at issue.”  Id. at *8-9.

 

It appears from this language that the court might have been receptive to a more direct claim of economic hardship.