The Tax Court held that a taxpayer was entitled to equitable relief under IRC § 6015(f) for her husband’s half of the additional 2002 and 2003 federal income tax liabilities reported on court-ordered amended joint tax returns, since she had no reason to believe her ex-husband would not pay his share of the tax liability. However, the court held equitable relief was not available for her 50% share of the additional tax, since it was not reasonable for her to assume that her ex-husband would also pay her share.
Each spouse is jointly and severally liable for any tax liability reported on a joint return. IRC § 6015(f) allows a spouse to be relieved of this liability if, under the facts and circumstances, it is inequitable to hold that spouse liable. If the spouse satisfies seven threshold conditions listed in section 4.01 of Revenue Procedure 2003-61, 2003-2 CB 296, the IRS will generally grant relief if the spouse (1) is divorced from, separated from or has not been a member of the same household as the former or separated spouse at any time during the 12 months prior to the date of the request, (2) had no knowledge or reason to know that the other spouse would not pay the tax liability when the return was signed, and (3) would suffer economic hardship if no relief is granted. If a taxpayer fails any of the three tests, equitable relief may still be granted under a facts-and-circumstances test by weighing factors that include the requesting spouse’s marital status, economic situation and whether the other spouse is obligated by a court decree to pay the tax liability. The IRS will also consider whether the requesting spouse received a significant benefit from the item causing the deficiency, attempted to comply with tax laws in later years and knew or had reason to know the other spouse would not pay the liability. Two more factors will weigh for relief if present but not against it if absent: if the requesting spouse was in poor mental or physical health when the return was signed or had been abused by the other spouse. The latter factor can mitigate a requesting spouse’s knowledge or reason to know of a tax liability.
Linda Bruen and Michael Bruen were married in 1978; however, after marital problems began in 1999 and 2000, the couple filed for divorce in September 2003 and received a final divorce in February 2004. For tax years 2002 and 2003, Mrs. and Mr. Bruen filed separate tax returns; she paid the balance due on her returns, but he did not. In 2005, the Probate and Family Court of Massachusetts entered an amended judgment related to the divorce that divided the family home and other marital assets between the ex-spouses. Mrs. Bruen paid her ex-husband approximately $375,000 to buy his share of the family home. The court also required the couple to file amended tax returns for 2002 and 2003 using the married filing jointly status and required each spouse to pay 50% of any additional tax liability, interest and penalties. The amended joint returns reduced the Bruens’ overall tax liability; however, a balance due was created from the inclusion of Mr. Bruen’s income. Mrs. Bruen signed the amended return, writing under her signature she did so “under protest.” Both spouses applied for, and were denied, innocent spouse equitable relief. Mrs. Bruen filed a petition with the Tax Court.
The IRS agreed that Mrs. Bruen satisfied the seven threshold conditions of Revenue Procedure 2003-61 but said she was not entitled to any relief. The Service argued that she had knowledge or reason to know that her ex-husband would not pay the additional tax because she had been ordered to pay half of it.
The Tax Court disagreed as to Mr. Bruen’s share of the tax. It noted that what Mrs. Bruen had recently paid him for the home was more than 12 times his share of the tax liability and said there was no reason for her to assume that he would ignore a court order requiring him to pay that share. On the other hand, the court held, it was not reasonable for her to believe that her ex-husband would also pay her share. Thus, she was not eligible for equitable relief from her half of the tax.
The court also determined Mrs. Bruen was not eligible for relief under the facts-and-circumstances factors. The fact that she was divorced from Mr. Bruen at the time of the request, was experiencing financial hardship, received no significant benefit from the unpaid taxes, and had complied with federal tax laws in succeeding years all indicated that relief should be granted. However, factors weighing against relief—that the family court had ordered her to pay half of the additional tax from the amended returns and that she knew her ex-husband would not pay more than his half of the liability when she signed the returns—were more persuasive, according to the court.
Linda A. Bruen and Michael F. Bruen v. Commissioner , TC Memo 2009-249
By Charles J. Reichert, CPA, professor of accounting, University of Wisconsin–Superior.