ndividuals who file a joint tax return accept joint and several liability for any underpayments. IRC section 6015(a) provides an innocent spouse protection from an assessed deficiency due to an understatement of taxes because his or her spouse incorrectly reported items. A person who is no longer married to, is legally separated from, or lives apart from the spouse with whom he or she filed a joint return can choose a separate liability election under IRC section 6015(a)(2).
Lois Ordlock and her husband resided in California, a community property state. After they paid the initial reported tax liabilities for the years 1982–1984, the IRS assessed additional liabilities because Mr. Ordlock had understated various items. The couple used both community funds and Mrs. Ordlock’s separate funds to pay these additional taxes. After the IRS granted innocent spouse relief, Mrs. Ordlock requested a refund of the total amount paid using her separate funds and half of the amount paid using community funds.
The IRS refunded the payments made using Mrs. Ordlock’s separate funds, but refused to refund any payments made from community funds. She petitioned the Tax Court.
Result . For the IRS. The dispute centered on two phrases in IRC section 6015 relating to community property law in California. IRC section 6015(a) allows the innocent spouse relief from joint and several liability, stating that any determination of such relief shall be made “without regard to community property laws.” IRC section 6015(g)(1) goes on to say “notwithstanding any other law or rule of law a credit or refund shall be allowed or made to the extent attributable to the application of this section.”
Mrs. Ordlock had relied on this language when she requested a refund of her share of payments made from community funds. She asked the court to reallocate the 1982, 1983 and 1984 tax liability payments even though they actually were made during the period from 1984 through 2002. Despite the continued existence of the marital community, she contended that based on the source of these payments, IRC section 6015 required the court to reallocate them.
Judge Goeke noted that this position implied that IRC section 6015 was a “statutory exception to the well-established law that state law defines ownership interest in property for purposes of federal tax.” The judge wondered whether Congress clearly and unequivocally intended to supplant community property law regarding the type of payments in this case. He determined that a “clear and unequivocal” intent was not apparent in the tax law.
The “any determination” phrase in 6015(a) referred to a taxpayer’s eligibility for joint and several tax liability relief. The judge concluded that the phrase “not-withstanding any other law or rule of law” in IRC section 6015(g) did not mean Congress intended taxpayers to ignore community property laws in innocent spouse situations. Thus, the court limited Mrs. Ordlock’s refund to the payments she had made using her separate funds.
When a case involves unusual, important or novel issues, more than one of the 19 Tax Court judges hears or reviews it. Eighteen of the 19 judges either heard or reviewed this case. The majority of them (10, including Judge Goeke) agreed that Mrs. Ordlock did not merit a refund of the community funds. But eight judges either wrote an opinion dissenting with Judge Goeke or agreed with the dissents. The necessity for a full court review, and the lack of consensus, makes an appeal to the circuit court likely.
For the time being, it is difficult to advise clients of a strategy to protect themselves from this type of situation. For the years in question, Mrs. Ordlock apparently had no reason to suspect she needed to make payments out of separate funds. If she had taken steps to protect herself, she might not have been granted innocent spouse relief. Tax professionals must continue advising clients to protect themselves by keeping adequate records.
Lois E. Ordlock v. Commissioner, 126 TC no. 4.
Prepared by Sharon Burnett, CPA, PhD, associate professor of accounting and Darlene Pulliam, CPA, PhD, professor of accounting, both of the College of Business, West Texas A&M University, Canyon.