Even Though Entire Understatement Attributable to Requesting Spouse's Income, Tax Court Grants Partial Equitable Innocent Spouse Relief

The IRS had denied §6015(f) innocent spouse relief to Joseph Boyle in the case of Boyle v. Commissioner, TC Memo 2016-87 since the interest and penalties from which he sought relief were directly related to income from his sole proprietorship.  But the Tax Court did not agree given the facts of the case.

IRC §6015(f) provides:

(f) Equitable relief

Under procedures prescribed by the Secretary, if—

(1) taking into account all the facts and circumstances, it is inequitable to hold the individual liable for any unpaid tax or any deficiency (or any portion of either); and

(2) relief is not available to such individual under subsection (b) or (c),

the Secretary may relieve such individual of such liability.

The IRS issued Revenue Procedure 2013-34 to provide guidance to be used in determining if equitable relief is to be granted to a spouse requesting the relief under IRC §6015(f). 

As the Tax Court notes “Rev. Proc. 2013-34, sec. 4.01, 2013-43 I.R.B. at 399, lists seven threshold conditions that must be satisfied before the Commissioner will consider a request for section 6015(f) relief.”  The taxpayer in this case failed to meet one of those seven conditions:

Respondent argues that petitioner fails to satisfy the seventh threshold condition in Rev. Proc. 2013-34, sec. 4.01—namely, that the underpayment at issue must have been attributable to the nonrequesting spouse’s income—and is therefore ineligible for equitable relief. This “attribution condition” was also the basis on which the Appeals Office denied any relief. It is true that all of the 2003 underpayment is attributable to petitioner’s income. See supra note 3.

In the situation in question the taxpayer’s spouse had taken care of the couple’s finances and had the tax return prepared.  She presented the return to Joseph for signature and then would take care of filing the return.  This was the process that the taxpayer had followed for years without incident.

However, in 2003, while Joseph was presented with a return for signature, his spouse (whom it appears was suffering from cancer that eventually took her life) failed to actually file the return or pay the tax, all of which related to Joseph’s business.  In 2004 she again presented the return to Joseph for signature.  This time the return was filed, but it turned out that the estimated tax payments shown on the return had not been paid.

Joseph’s spouse died in 2005, and shortly thereafter he received a notice from the IRS that told him the tax for 2004 had not been paid.  Upon further investigation Joseph discovered that not only had the tax never been paid for 2003, but the return had never been filed.  At that point he had the 2003 return filed, filing the return before the IRS contacted him regarding the missing return.

Joseph did not dispute that the tax on 2003 was his and that he owed it.  Be he sought innocent spouse relief for the penalties and interest, arguing he had reasonably believed the tax had been paid.  The Tax Court found that to be a significant distinction and, pointing out that the Tax Court was not bound by Revenue Procedure 2013-34 noted:

However, petitioner is not seeking relief from the underpayment; he is seeking relief from the additions to tax and interest triggered by Mrs. Boyle’s failure to timely file and pay after deceiving petitioner in that regard. In these circumstances, treating the attribution condition as an absolute bar to relief runs counter to our mandate under section 6015(e)(1)(A) “to determine the appropriate relief available” to petitioner.

Rather the Court moved on to look at the factors noted in Revenue Procedure 2013-34, proceeding as if the threshold conditions had been met by looking at the equitable factors listed in the ruling. 

The Court found the majority of factors to be neutral in determining if relief should be granted, but found that the two that did justified relief from the penalties and partial relief from the interest on the unpaid tax:

All of the Rev. Proc. 2013-34, sec. 4.03 equitable factors are neutral here except petitioner’s lack of a significant benefit and knowledge or reason to know of the understatement. And the latter factor weighs very heavily in petitioner’s favor. Petitioner is not seeking relief from the income tax itself, which is attributable entirely to his income. He seeks relief from the failure to file and pay additions to tax. Petitioner did not know and had no reason to know the facts that gave rise to those liabilities; to the contrary, he was misled by his spouse’s actions and therefore reasonably believed that his return had been filed and his tax paid. We accordingly conclude that it would be inequitable to hold him liable for the unpaid section 6651(a)(1) and (2) additions to tax for 2003.

Petitioner also seeks relief from interest. We find it appropriate to relieve petitioner of the interest that accrued during the period in which he reasonably believed the 2003 tax had been paid. That period would run from the due date of the tax until petitioner knew the liability existed and its amount. He learned the amount of the outstanding 2003 tax liability of $1,861 no later than the date on which he signed the 2003 return that he filed; namely, September 14, 2006. Thus, we conclude that it would be inequitable to hold him liable for interest from the due date of the 2003 return through September 14, 2006.