The widow of Joe Alioto, who served as the mayor of San Francisco from 1968 to 1976, was granted relief under section 6015(f) from paying nearly $2 million in taxes for tax years 1995 and 1996. The Tax Court had dismissed the case in September 1996 due to lack of jurisdiction. However, that decision was vacated after the Tax Relief and Health Care Act of 2006 gave the Tax Court jurisdiction over stand-alone nondeficiency cases where the liability arose or remained unpaid on or after Dec. 20, 2006.
Joe and Kathleen Alioto married in 1978 and settled in California. In addition to serving as mayor, Joe Alioto also practiced law. He handled all of the family finances, and although the couple had a loving and supportive marriage, Joe Alioto never discussed business matters with his wife. Joe Alioto had been previously married and divorced and had legally indemnified his ex-wife, Angelina Alioto, against any tax liabilities for the years 1976 and 1977, a fact Kathleen Alioto did not learn until after her husband’s death in 1998. She was also reportedly stunned when she learned that her late husband’s creditors had filed claims in excess of $74 million against his estate. The IRS was among those creditors, claiming that the couple’s 1995 and 1996 joint tax liabilities had not been satisfied. Nor had she known of her late husband’s tax liabilities stemming from 19 years earlier with his first wife.
At approximately the same time that the couple’s 1995 return was filed, Joe Alioto earned a fee of more than $2 million for legal services. Kathleen Alioto later testified that she knew about this income. She didn’t know until after her husband’s death, however, that the IRS had seized these community-property funds and applied them against Joe Alioto’s 1976 and 1977 tax liabilities with Angelina Alioto— despite his request to apply them against his and Kathleen Alioto’s 1995 and 1996 tax liabilities. In 1999, she filed for innocent spouse relief. Although relief was granted for other years, it was denied for 1995 and 1996.
When Joe Alioto died, his and Kathleen’s children were 18 and 16 years old. Kathleen’s health insurance lapsed, and she sought employment to pay her medical bills. In 2003, even though her residence was classified as community property, the probate court ordered it sold and the proceeds distributed to creditors of her late husband’s estate, including the IRS. At the time of trial, she was 64 and had approximately $7,000 in savings. She worked at a local college and would not become eligible for pension benefits for several more years.
In rehearing her case, the Tax Court granted relief under the safe harbor provisions of Revenue Procedure 2000-15 (since superseded by Rev. Proc. 2003- 61), which required the requesting spouse no longer be married to the nonrequesting spouse, that she have no knowledge or reason to know that the tax would not be paid, and that she would otherwise suffer economic hardship. The court found Kathleen’s testimony that she did not know about the 1995 and 1996 underpayments to be credible. Further, given the circumstances, such as her age, employment status and number of dependents, she would be unable to pay reasonable basic living expenses if required to pay the outstanding tax liabilities, the court said. Finding the conditions satisfied, the court concluded that the IRS abused its discretion when it denied her relief.
Alioto v. Commissioner, TC Memo 2008-185
By Laura Lee Mannino, CPA, LL.M., associate professor of accounting and taxation, St. John’s University, Jamaica, N.Y.