Innocent spouse is entitled to refund

The Tax Court recently found that a taxpayer who petitioned for relief under Sec. 6015(f) was not precluded from receiving a refund of money levied from a joint bank account. The court ruled that relevant Massachusetts law gave the innocent spouse a 50% ownership interest in the account. Thus, under Sec. 6015(g), she could receive a refund of 50% of the money removed from the account if she was entitled to relief under Sec. 6015(f), the court held.

Amid a contentious divorce, Ann Marie Minihan and John Minihan Jr. sold their Massachusetts home in 2008 and deposited the proceeds into a joint bank account, which they mutually agreed was intended to fund their children’s education. The divorce was not finalized until January 2011.

Though Mrs. Minihan had signed the couple’s joint tax returns each year, she was not involved in the family finances. When the Minihans’ financial situation deteriorated in 2007, Mrs. Minihan became aware that Mr. Minihan had not remitted payments for income taxes due for 2002 through 2006. Mrs. Minihan filed for divorce in 2007 and, in 2008, requested innocent spouse relief from joint and several liability for tax years 2001 through 2006.

The IRS pursued collection activities. In March 2010, the IRS received levy payments from the joint bank account of almost $84,000, which fully satisfied the tax liabilities for the years in question.

In February 2011, the IRS moved for summary judgment with regard to Mrs. Minihan’s petition for innocent spouse relief under Sec. 6015(f). The IRS argued that, since the entire liability had been paid, collection activity would cease, and the only relief Mrs. Minihan might thereafter seek would be a refund. The IRS contended, however, that Mrs. Minihan was not entitled to a refund under Sec. 6015(g) because the liability had not been paid with her separate funds but with joint funds. The Tax Court proceeded with a partial trial on the IRS’ motion. Before the Tax Court, counsel for Mrs. Minihan contended that the IRS had levied on property that Mr. Minihan could not acquire unilaterally and that a share of the money levied constituted separate payments by Mrs. Minihan. The Tax Court agreed, finding that Mrs. Minihan owned 50% of the funds in the joint account and would be entitled to a refund of 50% of the funds seized from the account if she was granted relief under Sec. 6015(f).

The Tax Court cited Massachusetts law, which asserts that nondebtor co-depositors have the right to intervene and assert their ownership rights against creditors who attach a joint bank account. Having found that Mrs. Minihan owned of 50% of the joint bank account from which funds were attached to satisfy Mr. Minihan’s tax liabilities, Mrs. Minihan’s 50% interest survived the IRS seizure.

By Alice A. Upshaw, CPA, MPA, CMA, instructor of accounting, and Darlene Pulliam, CPA, Ph.D., Regents Professor and McCray Professor of Business, both of the College of Business, West Texas A&M University, Canyon, Texas.

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