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Part 2 of 2: Digging Deeper into Innocent Spouse Relief (Demeter v. Comm’r)

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


  1. If the Tax Court asks for briefs, it is probably a good idea to file

  1. The husband’s attempt to argue duress was Duress occurs when consent is obtained through improper threats. The husband was in contempt of the state court divorce decree for various acts of noncompliance, including nonpayment of the very taxes at issue. The state court had every right to insist that he comply with the settlement agreement, as incorporated into the decree. There were no improper threats.
  1. The court’s statement that the wife “could . . . write checks for personal expenses but needed permission from intervenor to make purchases,” 2014 WL 6645592, at *3, is a little vague. A check written for personal expenses is often a purchase, so this statement was ambiguous. Since the account was in the name of the husband’s business, the author assumes that the wife’s control over the account was limited. But she might have had considerable control if the definition of “personal expenses” was sufficiently broad. This point is not addressed in the opinion.
  1. The court’s finding that the wife had reason to know of the tax problem is troubling.

If the nonrequesting spouse abused the requesting spouse or maintained control over the household finances by restricting the requesting spouse’s access to financial information, and because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return, or to question the payment of the taxes reported as due on the joint return or challenge the nonrequesting spouse’s assurance regarding payment of the taxes, for fear of the nonrequesting spouse’s retaliation, then the abuse or financial control will result in this factor being satisfied even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency or knew or had reason to know that the nonrequesting spouse would not pay the tax liability.

Rev. Proc. 2013-34, § 4.02(3)(a). The wife had access to Sunshine’s bank accounts, so she knew Sunshine’s finances. She “could look at bank statements and write checks for personal expenses but needed permission from intervenor to make purchases.”  Demeter, 2014 WL 6645592, at *3.  It seems clear that the husband effectively “retained control over the household finances.”  Rev. Proc. 2013-34, § 4.02(3)(a).

The court was not very sensitive to the financial control issue. It is true that the wife was not abused, and she did have knowledge of the parties’ financial situation. But it is very questionable whether she had any real ability to act on that knowledge, other than to divorce the husband, which she eventually did. The parties used the husband’s business’s bank account for their personal finances; the wife lacked effective control over the parties’ finances.

One of the key features of the new framework is greater sensitivity to situations in which dependent spouses are practically unable to take action with regard to the tax problem. To its credit, the IRS did not oppose innocent spouse relief in Demeter. The court’s uncompromising attitude toward the wife, on the issue of her knowledge of the parties’ tax problems, suggests that some courts may not be receptive to the new emphasis on the issue of financial control.

Part 1 | Part 2