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Part 1 of 2: Just How Complex is Innocent Spouse Relief? (Demeter v. Comm’r)

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

Demeter v. Comm’r, T.C. Memo. 2014-238, 2014 WL 6645592 (2014)

(a) Facts: A husband and wife were  married. During the marriage, the husband started a business, Sunshine Framing and Finishing (“Sunshine”). The wife was added as a vice president in 2008. She ran errands for the company and helped with its bookkeeping, but did not receive a salary. Sunshine’s bank account was used for personal expenses as well as business expenses; the parties had no individual bank accounts.

The husband retained an attorney to file the parties’ joint tax returns for 2004, 2005, and 2006, which were filed late in 2008. The wife never met the attorney, and signed the returns without reading them.

The returns reported tax due, which the husband did not pay. The wife was not aware that tax was due until the IRS began collection proceedings. She confronted the husband about the tax debts, and he promised to pay them. The parties eventually filed bankruptcy.

Shortly before the end of the bankruptcy case, the parties were divorced in Florida. The divorce decree incorporated a separation agreement, in which the husband agreed to pay all outstanding tax debt.

The husband failed to comply with the agreement, and was held in contempt by a Florida court. As part of the contempt proceedings, he signed an Affidavit For IRS Innocent Spouse Determination, reaffirming that he was responsible for all back taxes.

After the divorce, the wife had no assets and was living on public assistance.

The wife filed a request for innocent spouse relief. The IRS denied that request, and the wife appealed to the Tax Court. The IRS then changed its position and agreed that the wife was entitled to relief. The husband intervened to oppose relief. The court requested briefs, but the husband failed to file one. The court decided to address the merits nevertheless.

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

(c) Answer to Issue: Yes.

(d) Summary of Rationale: The wife met the threshold conditions for relief. But she had reason to know that the husband would not pay the taxes at issue, because she should have read the returns before she signed them, so she was outside of the “safe harbor” provisions under which relief is normally granted.

The result therefore turned upon the discretionary factors. Factors weighing in favor of granting relief were the wife’s clear economic hardship, the fact that she received no benefits of nonpayment of taxes beyond normal support, her future compliance with tax laws, the fact that the parties were divorced, and the fact that the husband promised, in both the agreement and the affidavit, to pay all back taxes. The husband argued that he signed the agreement under duress, but the court disregarded this defense, on the ground that he had voluntarily signed the original agreement.

Factors weighing against granting relief were that the wife should have known that the husband could not pay the taxes, as he had been turned down for loans smaller than the amount of tax liability.

Because a preponderance of the factors favored the wife, the court held that innocent spouse relief should be granted.

Tune in to next week’s post for a more in-depth analysis of this case. 


Part 1 | Part 2