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Lack of Knowledge and Access is a Recipe for Innocent Spouse Relief (Varela v. Comm’r)

By: Dana M. Horlick, Attorney, Woodruff Family Law Group

Varela v. Comm’r, T.C. Memo. 2014-222, 2014 WL 53656631 (2014)

(a) Facts: A husband and wife filed joint tax returns for 2007 and 2008. The IRS assessed deficiencies. The wife petitioned the Tax Court for innocent spouse relief, and the husband intervened, asking the court to deny the request. The court asked for briefs, and the husband failed to file one, but the court addressed the issues nevertheless.

The parties kept separate bank accounts during the years in question. The husband owned a business, JL Unique Homes, Inc. (“JL Unique”). The wife was initially a director but never did work for the company. She did, however, assist its office manager in organizing the company’s paperwork.

The tax issue arose when the husband used certain business funds for personal purposes. The wife did not know of this use initially. The parties separated in 2009, and the wife did learn of the use during divorce proceedings.

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

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The IRS agreed that the wife was entitled to innocent spouse relief, so the only party objecting was the husband. The husband argued that the tax problem was partly attributable to the wife’s conduct, and that the wife should have known that the tax had not been paid.

The wife did not work for JL Unique and had no access to its bank accounts. “[E]ven though petitioner is listed as an incorporator and a director of JL Unique, she credibly testified that she never performed any services in that capacity. The company never issued formal stock certificates or other records that reflect its ownership, and petitioner never received a formal dividend from the company.”  2014 WL 53656631, at *4.  “We see no basis to conclude that petitioner was either formally or informally a shareholder of JL Unique, and, thus, the erroneous omission of constructive dividends from petitioner and intervenor’s 2007 and 2008 joint returns was not the omission of items attributable to her.” Id.

“Petitioner did not have access to either intervenor’s or JL Unique’s bank accounts and thus did not know that intervenor was withdrawing money from the company’s accounts in 2007 and 2008 or that he was doing so without JL Unique’s formally declaring a dividend.” The wife knew that money was coming from JL Unique, “but nothing in the record indicates that she was aware that the funds were withdrawn inappropriately or that intervenor failed to report them on their return. ” Id. at *5. Her lack of knowledge was especially justifiable because the husband “concealed the fact that the withdrawn funds were inappropriately taken from JL,” id., and because the wife received no benefit from the withdrawn funds beyond ordinary support. The wife is therefore entitled to innocent spouse relief.

Tactical Litigation Suggestion: If you are litigating in the Tax Court, and the court asks for briefs, it might be a good idea to file one.