Innocent spouse cases and dependency exemption cases can seem like divorce court once-removed. Most tax practitioners decide not to be family lawyers because they have personalities that are dry as toast and want to avoid the emotional rollercoaster of domestic disputes. Nonetheless, taxes provide the opportunity for plenty of ongoing domestic disputes as the case of Leith v. Commissioner, TC Memo 2020-149 demonstrates. For an excellent write up of the case you should also read Bryan Camp’s post on this case as part of his Lessons from the Tax Court.
Judge Vasquez
Before I get to the case, I want to pause for a commercial interlude. The Leith case is decided by Judge Vasquez. This month the ABA Tax Section has published a biography of Judge Vasquez, From the Texas Cotton Fields to the United States Tax Court: The Life Journey of Juan F. Vasquez. This is the first biography of a Tax Court judge and a remarkable story about his path to the court. Judge Vasquez was originally appointed by President Clinton and became a senior judge in 2018 – the status all Tax Court judges must take when they reach the age of 70. The path of each judge to the Tax Court differs but few follow a path remotely like the one taken by Judge Vasquez.
Intervention
When a taxpayer seeks innocent spouse relief, they usually begin by filing a Form 8857 with the IRS asking the IRS to abate all or part of a joint tax liability assessed against them. The IRS has centralized consideration of innocent spouse requests in the Cincinnati Service Center, which is actually located in Covington, Kentucky. At this location a group of IRS employees spend all day, every day reading the sad stories of individuals who have signed on for something they wish they had not. When a taxpayer submits a request for innocent spouse relief, thereby becoming the requesting spouse (RS) in innocent spouse parlance, the IRS provides the non-requesting spouse (NRS) with notification of the request giving the NRS the opportunity to comment on whether the IRS should grant the request. We have written about intervention before here, here and here.
Fears of Innocent Spouse Applicants
One problem with giving the NRS the notice of the innocent spouse request stems from the fact that some persons requesting relief have fled from the NRS as victims of domestic violence. These victims often do not want the NRS to know that they have requested relief, because it could enrage their spouse or former spouse and lead to additional violence. They also worry that making the request could alert the NRS to their whereabouts. While the IRS does not provide the NRS with the Form 8857, the NRS can obtain the form and other data through FOIA. The IRS would seek to protect the address and other identifying information in the case of an innocent spouse request involving domestic violence, but the RS would rightfully be nervous about relying on the IRS to carefully redact everything that might serve to identify where they lived.
I have had victims of domestic violence come to my clinic seeking assistance who backed away once they learned that the NRS could have access to the information submitted even if it was limited access. In those cases there are strategies to pursue to protect the RS and still provide some relief. The safest strategy for obtaining relief in that situation is probably an offer in compromise. For one spouse to compromise a joint debt does not allow the other spouse to comment or see the file. Some clients have even been concerned about that level of information sharing with the IRS and prefer to just wait out the statute or at most seek currently not collectible status.
Finding an Ally in IRS
In this case Ms. Leith finds the IRS in agreement with her application for innocent spouse relief. In a case in which the NRS has intervened, a petitioner cannot simply sign a decision document with the IRS agreeing to the result. So, the case goes to trial even though the taxpayer and the IRS agree as to the result. This procedure gives the NRS the opportunity to keep the RS from leaving the NRS as the only liable spouse.
I certainly do not know the whole back story, but the timing of the tax problem lines up with the economic problems the country faced following the Great Recession. My clinic still serves several clients who trace their tax problems back to that recession. At the time the recession began petitioner worked at home taking care of the children while NRS had a job outside of the home which he lost in 2009. Petitioner took a job as a waitress while NRS formed a partnership with two others to clean out foreclosed homes. Petitioner had no connection to the business.
The couple’s financial difficulties continued into 2010 and 2011. She tried to find a position in the mortgage industry where she had worked before becoming a mother but was unsuccessful and ended up working more shifts as a waitress. NRS withdrew money from a retirement account. Early withdrawals were so common following the Great Recession that the students in my clinic at the time became experts in IRC 72(t), seeking to find ways to fit the client into an exception to the imposition of the 10% excise tax. When I turned 59 and ½ they threw me a 72(t) party complete with cake and decorations. That’s how focused we were on that life milestone because of the number of clients we had draining their retirement accounts. It was good to see that Congress had learned from that experience and provided some relief for this problem in the CARES Act.
The returns were audited resulting in additional tax. They also filed their 2013 with a balance due and no remittance. In Tax Court both were pro se; however, by virtue of having the IRS in agreement with her, petitioner in certain respects did have representation. For example, when the NRS sought to introduce documents not properly exchanged prior to trial, the IRS attorney objected to the violation of the Court’s order and succeeded in keeping the documents out of the record. Having persuaded the IRS, the petitioner also had an advantage in persuading the Court regarding her credibility in a case that became somewhat of a he said/she said. Much of the opinion describes her credibility and the NRS failure to bring forth credible evidence. Nowhere does credibility become more important than in her allegations of abuse.
The administrative record in the case at bar provides a detailed account of intervenor’s psychological abuse and physical intimidation of petitioner. In her second request petitioner stated unequivocally that she had been a victim of spousal abuse or domestic violence. She attached to the second request a letter containing detailed descriptions of intervenor’s abusive behavior. Such behavior included: (1) locking petitioner out of the house when she was pregnant because he was angry that petitioner had left the house to run an errand and (2) screaming at petitioner and kicking household objects. Petitioner also discovered three large kitchen knives underneath her mattress, causing her to fear for her and her daughters’ safety.
The trial record reinforces the abuse allegations petitioner made during the administrative process. At trial petitioner credibly testified that intervenor was controlling and prone to outbursts.
Spouses who can prove abuse stand a very high chance of success in an innocent spouse case because such abuse pervades all of the factors in Rev. Proc. 2013-34 published by the IRS to set out the criteria for determining innocent spouse status under IRC 6015(f). Although not required to do so, the Court here faithfully followed the factors set out in the Rev. Proc. The Court goes so far in following the Rev. Proc. as to base its determination on the streamlined factors in the Rev. Proc.:
We find that petitioner is entitled to streamlined relief from joint and several liability pursuant to section 6015(f) for the years at issue to the extent of the tax items attributable to intervenor.
Nothing in the statute or regulations mentions regular or streamlined paths to innocent spouse relief. It is interesting that the opinion reviews her qualifications for a streamlined path to victory.
Also interesting in this case is the determination of abuse. The IRS, unlike many state laws concerning abuse, creates a recognition of abuse that does not require physical abuse. This case involves non-physical abuse. The IRS and the Tax Court deserve kudos for recognizing that many forms of abuse do not involve mere physical actions. The abuse discussion in the opinion is not unique in Tax Court jurisprudence but does a good job of highlighting that the path to proving abuse need not go through the hospital emergency room.
Conclusion
This is not a precedential opinion. Perhaps there is little new here but the opinion reinforces the importance of the non-binding Rev. Proc.; displays the benefits of having the IRS on your side in court; and provides a good example of abuse in a situation in which the petitioner did not suffer physical abuse.