Actions (and Inactions) Matter with Innocent Spouse Relief—Jones v. Commissioner

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Zachary J. Montgomery

Zachary J. Montgomery

Attorney

469.998.8484
zmontgomery@freemanlaw.com

Zachary J. Montgomery is a dual-credentialed attorney and CPA. He practices in the area of federal and state tax litigation, white-collar defense, business and tax planning, and litigation. Mr. Montgomery has experience representing both businesses and individuals in federal tax controversies, including appeals, examinations, penalty abatement and collection matters. He has also represented taxpayers—from small organizations to Fortune 500 companies—with Texas franchise tax refund claims, audits, penalty abatement, and corporate structuring.

Mr. Montgomery is a graduate of the University of Virginia School of Law where he focused his studies on corporate and tax law and served on the editorial board of the Virginia Tax Review. Prior to joining the firm, he gained experience with PricewaterhouseCoopers, LLP, and a regional firm, focusing on federal and state tax controversies. His previous experience also includes Ernst & Young, Deloitte & Touche, and a judicial student clerkship with the First Court of Appeals of Texas.

Mr. Montgomery is a graduate of Texas A&M University, where he graduated Summa Cum Laude and received his B.B.A. with a double major in Accounting and Business Honors and his M.S. in Management Information Systems. While attending Texas A&M, he developed his business acumen, working as an enterprise risk consultant and financial analyst.

Actions (and Inactions) Matter with Innocent Spouse Relief—Jones v. Commissioner

A taxpayer may request innocent spouse relief from the Internal Revenue Service (“IRS”) in the form of equitable relief—I.R.C. § 6015(f). Among its threshold conditions, Section 6015(f) generally requires an evaluation of multiple facts and circumstances: whether the requesting spouse is separated or divorced from the nonrequesting spouse; whether the requesting spouse would suffer economic hardship if relief from liability is not granted; whether the nonrequesting spouse abused the requesting spouse; whether the requesting spouse did not know and had no reason to know of the items giving rise to the deficiency; and whether the requesting spouse knew or had reason to know that the nonrequesting spouse would not pay the liability. Generally, these factors will be favorable, unfavorable, or neutral with respect to a taxpayer’s claim for relief. In a recent federal decision, the Ninth Circuit Court of Appeals affirmed the U.S. Tax Court’s holding, ultimately denying the taxpayer’s request for innocent spouse relief. The grounds were largely related to (1) the taxpayer implicitly allowing her ex-husband to prepare joint tax returns (that she did not review or sign), and (2) the record showing that the taxpayer knew or had reason to know that her ex-husband could not pay the deficiency balances.

Innocent Spouse Relief, Generally

The main objective of innocent spouse relief is for one spouse to gain relief from joint and several liability for the couple’s federal tax liabilities. Married couples who file joint tax returns (i.e., elect “married filing jointly”) agree to joint and several liability when they file their taxes. I.R.C. Section 6013(d) states: “if a joint return is made, the tax shall be computed on the aggregate income and the liability with respect to the tax shall be joint and several.” Consequently, each spouse is jointly, individually, and legally responsible for the couple’s collective tax liabilities.

Section 6015 of the Internal Revenue Code (“Relief from joint and several liability on joint return”) is the basis for a taxpayer’s relief from joint and several liability. The general requirements for obtaining innocent are outlined below:

Further, if a requesting spouse who files a joint return for which a liability remains unpaid does not qualify for full relief under Treas. Reg. § 1.6015-2 or § 1.6015-3, he or she may request equitable relief under Section 6015(f) or Treas. Reg. § 1.6015-4(a). The Internal Revenue Service has the discretion to grant equitable relief from joint and several liability to a requesting spouse when, considering all of the facts and circumstances, it would be inequitable to hold the requesting spouse jointly and severally liable.[2]

Jones v. Commissioner of Internal Revenue[3]

Lindsey Jones (“Ms. Jones”) married Noah Pike (“Mr. Pike”) on October 13, 2002. During their marriage, Ms. Jones completely relied on Mr. Pike to handle all family financial matters, and Ms. Jones was never involved in the preparation of filing of tax returns. On August 15, 2008, Ms. Jones and Mr. Pike separated, and money was apparently tight. Ms. Jones and Mr. Pike executed a marital settlement agreement (“MSA”) on February 2, 2011; Ms. Jones initiated divorce proceedings on March 16, 2011; and the Superior Court of California in Orange County issued a decree of dissolution on May 6, 2011, effective September 27, 2011.[4]

During their marriage, neither Ms. Jones nor Mr. Pike filed federal tax returns for tax years 2009 and 2010. The IRS received joint federal income tax returns for tax years 2009 and 2010 on October 25, 2012, and November 23, 2012, respectively. At least for tax year 2010, Mr. Pike signed Ms. Jones’ name on the tax return without her having reviewed it. On August 4, 2014, Ms. Jones submitted to the IRS Form 8857, Request for Innocent Spouse Relief, for tax years 2009 and 2010. The IRS Office of Appeals denied Ms. Jones’ request on September 23, 2015. Ms. Jones timely filed a petition with the U.S. Tax Court, and the Tax Court upheld the IRS’s determination to deny innocent spouse relief. Ms. Jones then appealed the Tax Court’s decision to the Ninth Circuit Court of Appeals. The Ninth Circuit affirmed, holding, in part:[5]

The tax court correctly articulated the governing legal standard, and it found that Jones tacitly consented to filing the 2010 joint tax return because she had provided her then-husband with her W-2s and other tax information; she failed to file a separate income tax return; and she later allowed her spouse in a subsequent marriage to sign her name to their joint tax returns. Although the last of those facts does not seem to us to be especially probative, and although Jones had remarried by the time her ex-husband signed her name on the 2010 return, those considerations are insufficient to establish that the tax court clearly erred. The 2010 joint tax return is therefore valid. . . .

[T]he tax court’s finding that Jones had reason to know that her ex-husband could not pay the 2009 and 2010 tax liability is supported by the record. Jones knew that she and her ex-husband needed to use proceeds from selling their home to satisfy their 2008 tax liability, and she acknowledged at trial that money was tight at the time of their separation. The tax court reasoned that Jones could not “turn a blind eye to the couple’s tax filings,” and that given the circumstances she should have “taken some steps to assure herself … that the tax liabilities for the years at issue would be paid.” That was not error. And although spousal abuse that prevents the claimant from being able to question tax payments “for fear of the nonrequesting spouse’s retaliation” would weigh in favor of relief, the tax court did not clearly err in finding that Jones had not shown abuse of the type or degree that would be recognized by the tax law. Rev. Proc. 2013–34 § 4.03(2)(c)(i)(A).[6]

Conclusion

Notably, the Ninth Circuit’s decision highlights the action and inaction of the taxpayer in its analysis of whether the Tax Court erred in denying equitable relief. While Ms. Jones did not review the 2010 income tax return or sign it, implicitly allowing Mr. Pike to be her proxy, Ms. Jones also did not attempt to file a separate 2010 income tax return. Moreover, in the court’s view, the record demonstrated that Mr. Pike could not pay the deficiency balances, and Ms. Jones knew this. These two factors, along with others (such as the lack of abuse involved) provided the court comfort with the Tax Court’s denial of relief. Innocent spouse relief cases almost always involve a weighing of various factors, facts, and circumstances. Taxpayers should be weary of the facts of their case—both their actions and inactions—when pursuing relief from joint and several liability.

 

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[1] Treas. Reg. § 1.6015-2(a).

[2] Treas. Reg. § 1.6015-4(a).

[3] Jones v. Comm’r of Internal Revenue, No. 20-70013, 2022 WL 327473, at *1 (9th Cir. Feb. 3, 2022).

[4] Jones v. Comm’r of Internal Revenue, T.C. Memo. 2019-139, 2019 WL 5212450, at *1-2, aff’d, No. 20-70013, 2022 WL 327473 (9th Cir. Feb. 3, 2022).

[5] Id. at *3-4.

[6] Jones v. Comm’r of Internal Revenue, No. 20-70013, 2022 WL 327473, at *1-2 (9th Cir. Feb. 3, 2022).