Benson v. Comm’r, T.C. Memo. 2018157, 2018 WL 4520083 (2018), aff’d, 774 F. App’x 339 (8th Cir. 2019)
(a) Facts: Wife owned a corporation that maintained and collected revenue from St. Louis parking meters. She fraudulently overbilled the city, was convicted, and went to prison. While she was in prison, the husband filed to divorce her.
On their 2011 joint tax return, the husband and the wife correctly reported their incomes. But they did not pay the entire $69,513 tax liability.
The husband petitioned for innocent spouse relief. The IRS denied the petition, and the husband appealed to the Tax Court.
(b) Issue: Was the husband entitled to innocent spouse relief?
(c) Answer to Issue: No.
(d) Summary of Rationale: Mandatory innocent spouse relief is available only for tax understatements. Here, the problem was not understatement but, rather, lack of payment.
The IRS agreed that the threshold conditions were met. The husband had an annual income of $140,000, which was sufficient to make payments on the tax liability, so he would not suffer hardship by paying the taxes, and the safe harbor conditions were not met.
The result therefore depended upon the discretionary relief factors. Only one factor favored relief –the parties were separated when the husband requested relief. By contrast, three factors opposed relief: (1) the husband benefitted from the unpaid tax liability because his financial status was intertwined with the wife’s; and (2) the husband was aware that the wife could not pay the taxes (because her conviction resulted in a total loss of income); and (3) the husband had not timely paid his 2013 and 2014 taxes. Because the balance of factors was negative, the court refused to grant the husband innocent spouse relief.
In an unpublished opinion, the Eighth Circuit summarily affirmed the Tax Court’s decision.
Observation: The husband did not know of the wife’s fraud, but he appears to have shared in spending the proceeds. Also, he could repay the debt of $69,513 (presumably plus interest) from his annual income of $140,000. Finally, it never helps when a claimant seeking innocent spouse relief has failed to pay taxes on time in later years.