Third-Party Evidence and Credibility are Key in Obtaining Innocent Spouse Relief (Sapp v. Comm'r)

Sapp v. Comm’r, T.C. Memo. 2015-143, 2015 WL 4639260 (2015)

(a) Facts: The IRS assessed deficiencies on a husband and wife’s joint income tax returns for 2004, 2006, and 2008. The parties appealed to the Tax Court, and the wife sought both mandatory and discretionary innocent spouse relief. The IRS conceded that relief was appropriate, but the husband argued otherwise.

The tax at issue arose from the husband’s plumbing business, for which the wife served as bookkeeper. There was a history of domestic abuse in the marriage going back to 2002. The parties had been separated multiple times, and the wife spent time living in a domestic violence shelter.

At the time of the Tax Court hearing the parties were separated but not yet divorced. The wife had little income and was receiving food stamps.

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

(c) Answer to Issue: Yes.

(d) Summary of Rationale: Because the wife served as bookkeeper for the business, she knew of the tax matters at issue, and she was not eligible for mandatory innocent spouse relief.

For discretionary innocent spouse relief, there is an exception to the knowledge requirement in cases of abuse. The court summarily held that abuse was present, so the threshold conditions were met.

Without addressing the “safe harbor” conditions, the court moved directly to the discretionary factors. Two factors were favorable: the parties were separated and the wife would suffer financial hardship from paying the taxes. A third factor, the wife’s knowledge of the tax problem, was superficially negative, but is treated as favorable when abuse is present. Because all of the relevant factors were favorable, the court granted innocent spouse relief.

Comments:

Sapp is another case that speaks directly to the reasons why the IRS is now considering abuse as a factor in innocent spouse cases.

The court was rather demure in setting forth the details of the evidence. “Although we are reluctant to include details of the abuse to which Ms. Sapp testified, we find that there is a history of domestic abuse in their relationship dating back at least to the birth of their first son in 2002.” 2015 WL 4639260, at *1.

But abuse is a newly important factor in innocent spouse cases, and the requirements for proving abuse are an issue upon which hard law is needed. Some of the cases discussed in this outline suggest that the federal courts are seeing a wave of weak claims of abuse. An important tool in dealing with this wave is factual specificity in cases finding abuse, so that the practicing bar will know what a strong case of abuse looks like. The court’s reluctance to provide factual details does not help the federal courts work through the necessary process of defining abuse.

The fact that the wife spent time in a domestic violence shelter was a solid piece of third-party evidence in favor of abuse.

One suspects, however, that the primary factor driving the Tax Court’s conclusion was simply its belief that the wife was credible. The only real piece of third-party evidence referred to is the wife’s time in the domestic violence shelter. Sapp is therefore some evidence that a claim of abuse can be based primarily upon the abused spouse’s testimony—if the Tax Court finds that testimony credible.