The 11th Circuit upheld the decision of the Tax Court in Sleeth v. Commissioner, — F.3d — 2021 WL 1049815 (11th Cir. 2021), holding that Ms. Sleeth was not an innocent spouse. The Sleeth case continues the run of unsuccessful taxpayer appeals of innocent spouse cases following the major structural changes to the law in 1998. Another taxpayer is trying to break the string by appealing the Tax Court decision in Jones v. Commissioner, TC Memo 2019-139 to the 9th Circuit. I will discuss both cases below.
read more...Sleeth
The Sleeth case is the second case the Tax Clinic at the Legal Services Center of Harvard Law School appealed to a circuit court. If you are interested in the oral argument, you can listen to it here. Madeleine DeMeules argued on behalf of the clinic and did an excellent job but faced significant headwind from the court because of the burden that an appellant must meet to overcome a trial court decision.
In both cases argued by the tax clinic the Tax Court found multiple positive factors and only one negative factor applying the tests of Rev. Proc. 2013-34. Yet, despite the multitude of factors favoring relief in each case the Tax Court found that the knowledge factor was negative for the taxpayer and denied relief. The pattern developing in these cases suggests that the Tax Court views the knowledge factor as a super factor, despite changes in IRS guidance no longer describing it as such. In this post, Carl Smith discussed Seventh Circuit’s decision in the Jacobsen case, the first of the two cases the tax clinic took to a circuit court, and cites to all of the unsuccessful appeals of innocent spouse cases.
In Sleeth the court knocked down each of the three arguments for petitioner. The appeal challenged the decision of the Tax Court regarding the knowledge element, the economic hardship element and the overall application of the factors. Ms. Sleeth signed three joint returns at once, two of which were delinquent, showing liabilities totaling a few hundred thousand dollars. She did not work, and her then-husband was a doctor who worked as a contractor rather than an employee. In prior years he had also run significant liabilities which he had always paid off in relatively short order. They had not filed delinquent returns before, so both the number of returns with an unpaid liability and the total amount of the liability exceeded prior circumstances. She testified she expected he would pay off these liabilities, and he might have but he lost his job and ultimately paid in enough money to almost fully pay one of the years, but which still left a hefty balance. The 11th Circuit found the Tax Court’s determination that she should have known he would not pay off the liabilities reasonable under the circumstances.
The size of the liability significantly exceeded her assets and her income was essentially non-existent. The Tax Court found the economic hardship factor neutral, and the clinic argued on appeal it should be a positive factor for her, since devoting her assets to a partial payment of the liability would have left her homeless and penniless. The 11th Circuit found that she might have had some assets other than her modest townhome, with which she could have paid a relatively small fraction of the outstanding liability. The court also foundthat she did not show she could not pay something toward the liability. The Tax Court record regarding her assets and ability to pay was not as robust as it might have been.
Taking all factors into consideration and having agreed with the Tax Court on the two contested factors, the 11th Circuit did not find it unreasonable to deny Ms. Sleeth innocent spouse relief, even through the court had found three positive factors for relief and only one negative factor. The case shows the importance of creating a strong record in the Tax Court and of prevailing at the Tax Court. Overturning a primarily factual decision will never be easy.
Jones
Despite the difficulty in obtaining a reversal on an innocent spouse decision, Ms. Jones seeks to do exactly that in the 9th Circuit. The Jones case involves not only a determination of her status as an innocent spouse but also the issue of whether she filed a joint return. The tax clinic recently filed an amicus brief in the case on the issue of tacit consent. We have not written much on tacit consent, but it is a regular feature in innocent spouse cases where one spouse, almost always the same spouse arguing for innocent spouse status, asserts that they did not agree to sign the joint return. In many cases the spouse’s actual signature is not on the return, because the return was filed electronically or because the other spouse signed for both. The Tax Court has created a body of case law deciding when the non-signing spouse intended the joint filing of a return and refers to the taxpayer’s consent in these situations as tacit consent.
Some of the factors the court relies upon in deciding whether a non-signing spouse intended to create a joint return are (1) whether the non-signing spouse objected to the filing of a joint return; (2) whether prior filing history of the couple during the marriage suggests an intent; (3) whether the non-signing spouse filed a separate return if that spouse had a filing requirement; (4) whether general reliance on one spouse for financial matters existed and (5) whether the couple had specific rules between themselves governing signing for one another. While the issue of abuse and duress goes beyond tacit consent, it can play a role here. If one spouse physically or emotionally intimidates or abuses the other, it could invalidate even an actual signature or could influence a court’s decision on the granting of tacit consent.
Taxpayer’s contesting a joint return liability should always look first to determine if they have an argument that no joint return exists. Knocking out the existence of the joint return provides a surefire way of avoiding any liability stemming from the spouse’s income or other tax issues (note however that this does not hold true in a community property state, where the innocent spouse will still be required to include their share). Taxpayers can easily argue that they did not sign a joint return but face a much more difficult argument regarding their intent. Bob Nadler wrote a post on the joint return issue several years ago in which he touched on tacit consent but the case did not focus on this issue. Bob wrote the book on innocent spouse issues. Christine Speidel and Audrey Patten are in the process of updating the book and the third edition should go to press later this year.
Ms. Jones argues she did not intend to file a joint return and that if she did file a joint return, she should receive innocent spouse relief. She is being represented by Lavar Taylor, a frequent guest blogger. The case is still in the briefing stage and will not get argued until later this year. Perhaps Ms. Jones can break the string of taxpayer defeats in appellate courts on the innocent spouse issue or avoid the innocent spouse issue altogether with a victory on tacit consent. For those interested in innocent spouse issues, the case is worth following.
US Tax Court has jurisdiction over an innocent spouse case even when no joint return was filed, and apparently even when no return at all was filed. The facts determining whether Ms. Jones is an innocent spouse have to depend on matters other than whether a joint return was filed.
Keith – Your discussion of the Jones case reminded me that when I was a law clerk for Judge Bruce Forrester at the Tax Court of the United States [as it was then called] in the pre-innocent spouse legislation days, Judge Forrester had two cases involving wives seeking relief from joint and several liability. The taxpayers lost in both cases, despite having sympathetic stories to tell. [I think the taxpayer kin one case was Marie Dolan; I don’t remember the other.] In one of the cases, the husband had left the taxpayer and moved to Mexico. She acknowledged signing the return when H told her to do so, because she was afraid of him and did whatever he told her. But because there was no evidence to indicate she had an objection to signing the return, the judge felt he couldn’t find that the taxpayer was coerced to sign against her will.
I don’t remember much about the other case, I think one issue was whether the taxpayer’s signature had been forged by her husband. There may also have been an issue as to whether her pattern of signing returns in prior years [or allowing him to sign for her] established implied consent.
I thought both cases were unfair to the innocent spouses – in all other respects I think they would have satisfied the criteria of the legislation that was subsequently enacted. It’s disappointing to me to see the IRS and/or the courts interpreting the innocent spouse provisions – clearly intended as relief provisions – strictly in ways detrimental to spouses in situations where the outcome seems unfair in light of the purposes of the provisions.
Ron Wiener
Those of us who don’t practice in a community property state tend to forget that community income is taxed one-half to each spouse. A successful challenge to the “joint return” due to signing issues may actually make it harder for the challenging spouse to obtain any sort of relief. The innocent spouse rules of § 6015 are more taxpayer friendly than the community property relief provisions of § 66.