Welwood v. Comm’r, T.C. Memo. 2019113, 2019 WL 4187568 (2019)
(a) Facts: Husband and wife were married in 1973. They separated in Florida 2003 and signed an agreement dividing their property.
In the agreement, the husband conveyed to the wife a 50% interest in certain real estate partnerships. The partnerships were designed to generate tax savings in early years. A 1986 tax law change limiting the deduction of passive losses against other income made the partnerships much less attractive in their later years.
In 2010, the husband suffered a series of strokes that left him significantly disabled. He lived in series of care facilities until his death in 2017. The parties never divorced.
The parties filed accurate joint tax returns from 2008 until 2015, but they paid only the tax due in 2009; significant amounts remained outstanding for the other years.
In 2015, the parties signed another marital property agreement transferring the real estate partnerships back to the husband.
The IRS initiated collection proceedings on the unpaid taxes, and the wife filed a petition for discretionary innocent spouse relief. The wife claimed abuse, but the IRS did not believe her. “The [wife] claimed abuse, but she also described the [husband] as not having the cognitive ability to peel an orange.” 2019 WL 4187568, at *8. The IRS denied relief, and the wife sought review in the Tax Court.
(b) Issue: Was the wife entitled to discretionary innocent spouse relief?
(c) Answer to Issue: No.
(d) Summary of Rationale: The IRS argued that one of the threshold conditions was not met because the 2015 transfer of the real estate partnerships back to the husband was fraudulent. The court disagreed and found that the threshold requirements were met. “We see no intent to hide the transfers in this case or other indicia of fraud.” Id. at *15.
The first safe harbor condition requires that the parties be divorced or legally separated. The wife argued that the parties had been separated for well over a year, so this requirement was functionally met. The court suggested that the requirement might not be met. “Petitioner’s actions in taking care of her husband (despite alleged abuse over the years), paying household bills, and bearing the financial burdens of his care suggest that she regarded herself as a member of the same household and married to him until he died.” Id. at *16-17. Also, as discussed below, the wife had reason to know that the taxes would not be paid. The safe harbor conditions were therefore not met.
The result therefore turned upon the discretionary relief factors. The court agreed with the IRS that the wife’s assessment of her own financial condition was questionable and that her expenses exceeded her income by less than $300. She was therefore not facing economic hardship.
Further, the wife had reason to know that the husband would not pay the taxes due. The wife argued that this knowledge was irrelevant because she had been abused, but the court found her claim not credible even as to tax years before the husband’s stroke:
[The wife] testified that she was fearful because her husband had guns, but the only incident she specifically described occurred in 2015 or 2016 while he was in a nursing and rehabilitative care facility. During the incident M. Welwood stated that he wanted a gun in order to commit suicide. There is no evidence that he threatened petitioner with a gun or that he had access to a gun at the time.
Id. at *21-22.
Finally, the wife knew that partnerships generated substantial tax liability because she ultimately transferred them away in 2015. She made no attempt to pay any of the tax liability even though assets existed from which the liability could have been paid.
“Although petitioner’s situation is difficult and unfortunate, the circumstances are not compelling and do not justify relief from the joint liabilities.” Id. at *23-24.
1. Welwood is another case where the abuse factor was misused. Given the husband’s medical condition after he had his strokes, and especially the fact that he was in care facilities, it is highly doubtful that he could have abused the wife. Even before the strokes, the fact that the husband owned guns and that the wife was afraid of guns does not show abuse. There was zero evidence that the husband took any concrete action to intimidate the wife.
2. The wife managed the parties’ finances after 2010, so she had every reason to know the parties’ financial condition. She discussed financial matters with advisors and ultimately conveyed away the real estate partnerships that were responsible for most of the taxes. The wife was not the sort of financially unaware spouse who tends to obtain innocent spouse relief.