The Tax Court disagreed with the IRS and awarded a taxpayer innocent spouse relief even though the underpayment at issue was attributable to his income.
Facts: Joseph Boyle, a self-employed salesman in the business of selling printing cartridges, relied on his wife, Patricia Boyle, to handle his business's bookkeeping and manage their finances. Although the couple maintained a joint checking account, Patricia Boyle wrote all of the checks for their business and personal expenses. She also was responsible for having the couple's joint federal income tax returns prepared and filed.
Patricia Boyle gathered the information for the couple's joint return for 2003 and presented a return to her husband for his signature, telling him she would mail it. (She had no income in 2003; all income for the year was attributable to Joseph Boyle.) However, although Joseph Boyle signed the return, it was never filed.
In 2006, after Patricia Boyle's death in 2005, Joseph Boyle discovered that the 2003 return was never mailed. He promptly had a joint return prepared and filed it, reporting, but not paying, tax due. The first notice that Boyle received from the IRS (or that was sent to either taxpayer, according to an IRS transcript) concerning any problem for the 2003 tax year was an assessment sent to him a month after the filing date of the return he filed, for the tax underpayment, as well as additions to tax under Secs. 6651(a)(1) and (2) for late filing and late payment, respectively, plus interest.
Boyle sought innocent spouse relief from the interest and penalties for 2003 but not the underpayment of tax.
Issues: The IRS issued Rev. Proc. 2013-34 to provide guidance when determining if equitable innocent spouse relief under Sec. 6015(f) should be granted. Section 4.01 of the revenue procedure lists seven threshold conditions that must be satisfied before the IRS will consider a request. The IRS argued that Boyle failed to satisfy the seventh threshold condition, that the underpayment at issue must have been attributable to the nonrequesting spouse's income (the "attribution condition"). Therefore, it denied his request for equitable relief. Boyle petitioned the Tax Court to review the IRS's determination.
Holding: Boyle argued that relief was appropriate under Sec. 6015(f) because he did not know that his wife had failed to file the return and pay the tax for that year and, once he learned after her death of her failure to do so, he filed a return for 2003. The Tax Court found that the evidence indicated Patricia Boyle deceived her husband about filing the returns and paying the tax, which the court deemed sufficiently analogous to Rev. Proc. 2013-34's exception from the attribution condition for an erroneous item on a return due to fraud of the nonrequesting spouse for it to apply in this case. Moreover, as the court noted it had previously held in other cases, it was not bound by the guidelines of Rev. Proc. 2013-34.
Having thus held that Boyle was not barred by the attribution condition from seeking relief, the court considered the seven equitable factors in Section 4.03 of Rev. Proc. 2013-34: marital status, economic hardship if relief is not granted, knowledge or reason to know that the tax liability would not be paid, legal obligation to pay the outstanding tax liability, receipt of a significant benefit from the unpaid income tax liability, compliance with income tax laws, and mental and physical health. The court found the majority of factors neutral but found that two factors justified the relief sought: Boyle had no knowledge or reason to know that the tax liability was unpaid, and neither spouse received a significant benefit from the unpaid income tax liability.
Accordingly, the Tax Court held that it would be inequitable to hold Boyle liable for the additions to tax and interest.
- Boyle, T.C. Memo. 2016-87
—By Maria M. Pirrone, CPA, LL.M., assistant professor of accounting and taxation, St. John's University, Queens, N.Y.