Today we welcome back guest blogger Robert Nadler. After retiring from the Office of Chief Counsel, IRS Bob has worked continuously for the Legal Aid Society of Middle Tennessee and the Cumberlands. Bob wrote the book “A Practitioner’s Guide to Innocent Spouse Relief: Proven Strategies for Winning Section 6015 Tax Cases” and we are delighted to share his insights on a recent Tax Court decision.
We are still waiting for the newest version of the innocent spouse regulations. As you may recall, the IRS withdrew a portion of the 6015(f) regulation back in 2011. Then it published new guidance in the form of a Revenue Procedure 2013-34 and requested comments. The Rev Proc went beyond the withdrawal of the two year time period for requesting relief under 6015(f) and reopened the equitable factors the IRS will consider. In listing the new factors to be considered, the IRS seemed to downplay spousal abuse based on the role it previously played and many of the comments addressed this point. The case Bob discusses today points to the continued importance of spousal abuse as a factor leading to innocent spouse relief when the factors developed by the IRS might not otherwise lead to that conclusion. Keith
A recent memorandum opinion, Sapp v. Commissioner, T.C. Memo. 2015-143, illustrates the current state of abuse in innocent spouse cases. Three procedural aspects of innocent spouse law are presented in the opinion.read more...
The facts and procedural history are interesting. Ms. Sapp, the requesting spouse and Mr. Sapp, the non requesting spouse, were married in 2000 and had two sons. Mr. Sapp was in the plumbing business and Ms. Sapp handled the financial aspects of the business and kept the business books and records. Beginning as early as 2002, the marriage included many incidents of domestic abuse committed by the nonrequesting spouse. In March 2013, Ms. Sapp left Mr. Sapp and they were separated for over 12 months when the trial took place. At times Ms. Sapp’s lived with her mother for a time and earned about $360 to $400 a week.
The IRS issued a notice of deficiency for the years 2004, 2006, and 2008. The underlying substantive issues were settled, but, at trial on February 25, 2015, Ms. Sapp raised the issue of innocent spouse relief for the first time. The IRS agreed that Ms. Sapp was entitled to relief under section 6015, but Mr. Sapp opposed the request for relief and the matter was tried.
The Nonrequesting Spouse Opposes Relief
The trial of an innocent spouse case is materially altered when the respondent concedes that the requesting spouse is entitled to relief and the nonrequesting spouse opposes relief. In substance, the respondent becomes a bystander. While the burden of proof is on the requesting spouse, when he or she has made a prima facie case, the burden is shifted to the nonrequesting spouse. At this point, the odds heavily favor the requesting spouse. First, the court will notice that the IRS has made a determination that the requesting spouse is entitled to relief. Second, many nonrequesting spouses are not familiar with the elements of an innocent spouse claim and are ill prepared to present evidence. Third, some nonrequesting spouses oppose relief out of bitterness without regard to the merits. Thus, these factors make it difficult for the nonrequesting spouse to oppose relief when the IRS is prepared to grant relief.
How Abuse Affects the Innocent Spouse Determination
In Rev. Proc. 2003-61, abuse was one of eight independent factors considered by the IRS in granting or denying equitable relief. But, when Rev. Proc. 2013-34 was issued, the IRS did not include abuse as an independent factor. This was surprising, because after fifteen years of experience administering section 6015, it was obvious to observers that the IRS had an enlightened understanding of how abuse impacted marriages and how it could limit a spouse’s ability to discuss tax issues. But, a close reading of the new revenue procedure disclosed that abuse was still a part of the determination, though arguably it could have been made clearer.
First, consider the general language of section 4.03(2) in the final guidance:
In determining whether it is inequitable to hold the requesting spouse liable for all or part of the unpaid tax or deficiency… all facts and circumstances of the case are to be taken into account. The factors listed below are designed as guides and not intended to comprise an exclusive list….Other factors relevant to a specific claim for relief are to be taken into account. … Abuse or exercise of financial control by the nonrequesting spouse is a factor that may impact the other factors, as described below.
The revenue procedure also provided that the presence of abuse could override a factor. Section 4.03(2)(c)(iv) . In particular, even if the requesting spouse had knowledge or reason to know of the income item, but he or she did not question the item because of abuse or fear of retaliation, the factor will be considered favoring relief. Section 4.03(2)(a)(i)(A)
Finally, one of the threshold conditions provides an exception for abuse. Section 4.01(7)(d). Threshold number seven provides that “the income tax liability from which the requesting spouse seeks relief is attributable (either in full or in part) to an item of the nonrequesting spouse or an underpayment resulting from the nonrequesting spouse’s income.” But there is an exception which allows the IRS to consider granting relief if the requesting spouse has been a victim of abuse and the abuse has resulted in the requesting spouse being unable to challenge or question the treatment of an item.
In Sapp, the Tax Court held that Ms. Sapp would have failed the seventh threshold issue in that she had knowledge of the items because she handled the finances. But the Court held that the proof of abuse qualified her for the exception and the court granted her relief.
The Tax Court Is Not Bound By the Commissioner’s Guidelines
Although the Tax Court is not a court of equity, section 6015 is an equitable statute. It requires the IRS to make a determination, taking into account all the facts and circumstances, whether it is inequitable to hold the taxpayer liable for the unpaid tax or deficiency. When the taxpayer requests a redetermination by the Tax Court, the court must review the IRS denial of relief. Thus, the court must consider whether the IRS decision denying is justified. Stated differently, was the decision that it was not inequitable to hold the taxpayer liable justified. Of course, in this case, the court was determining whether the IRS determination granting relief should be sustained when the nonrequesting spouse opposed the determination.
The requesting spouse in Sapp presented the most difficult case for a taxpayer to win. She kept the books and records for the nonrequesting spouse’s business and was not entitled to the knowledge factor. And the court properly held that she was not eligible for relief under subsections b and c due to her knowledge. This moved the analysis to subsection f.
Although the Rev. Proc. 2013-34 recognizes that the factors set out therein are not an exclusive list, sometimes examiners are resistant to considering other factors. In Sapp, the court points out that the revenue procedure provides guidelines, but the court is not bound by the guidelines in evaluating the facts and circumstances in a case. See Pullins v. Commissioner, 136 T.C. 432 (2011)
And this, I believe, is the significance of Sapp. Viewed in light of the guidelines, the court found a way to do equity by finding an exception to one of the threshold conditions to equitable relief. It appears that the history of abuse was so compelling that it was clear to everyone involved but the nonrequesting spouse, that equity required that she be relieved of the deficiency.