Decisions of the Tax Court in cases filed under the Small Case procedures of Section 7463 are nonappealable and may not be cited as precedent but can be instructive of what the court thinks is non- controversial and settled law and how the court manges pro se taxpayers playing out divorce related matters in yet another forum.
In Milhouse, TC Summary Opinion 2011-12, Judge Laro is emphatic in holding that Congress intended that “actual knowledge” would be the disqualifying factor for relief from joint and several liability under the Section 6015(c) procedures to limit liability for divorced or legally separate taxpayers . “Actual knowledge” is not the same as “actual knowledge or reason to know,” the disqualifying factor under the Section 6015(b) escape hatch from joint and several liability. The service had argued that actual knowledge should be inferred to the petitioner spouse in this case, because she had online access to the joint account into which the former husband’s unreported retirement benefit and interest income were deposited. No evidence was presented at trial to corroborate the intervening former husband’s testimony, which that court found to be incredible, that the petitioner was provided statements regarding the unreported income. The court found the petitioner spouse’s testimony to be more credible and decided that all of the deficiency was attributable to items of the former husband. The found the following to be convincing:
- The spouses were married in February of 2006 and divorced in October 2007.
- The parties were no longer married when petitioner filed her election to proportionately limit her liability under Section 6015(c).
- Petitioner came to the marriage with 3 children.
- Only one joint return was filed, that being for 2006.
- Petitioner testified that she’d kept her finances separate and apart from her husband because she’d perceived in him a pattern of financial mismanagement.
- Petitioner deposited her wages and child support payments into a separate account in her own name.
- Although petitioner transferred separate funds to the joint account to cover household expenses, and had access to the account on-line, she never actually logged into the on-line site to access the account.
- In her Form 8857, former spouse had stated she reported all of her income and was under the impression that her former husband had given to her all information that needed to be reported in the return.
- Oddly, the record did not contain a copy of the joint return but the court found that petitioner’s credible testimony satisfied her burden of proving that none of the deficiency is attributable to items allocable to her and that she’d received no tax benefit from any items in the joint return. Thus, the court allocated all of the items giving rise to the deficiency to the former husband
Other portions of the decision reveal instructive aspects of innocent spouse disputes:
- Neither spouse filed a Tax Court petition in response to the Notice of Deficiency for the year 2006 and failing to seek redetermination of the deficiency notice is not a bar to relief after collection efforts commence.
- The former wife was sent Form 8857, Request for Innocent Spouse Relief, by IRS (collection efforts were not mentioned in the decision and timeliness of the appeal was not in issue).
- The former husband intervened by filing Form 12509, Statement of Disagreement, with IRS stating that his former wife knew about the retirement income because she had access to the joint account and he gave her the year-end statements.
- The matter was referred to Appeals which issued a notice of determination denying petitioner’s request for innocent spouse relief finding that she knew or had reason to know of the items giving rise to the deficiency and had not demonstrated that it would be unfair to hold her liable for the deficiency.
- Former wife timely petitioned the court to review the appeals determination.
- Former husband then timely filed a notice of intervention.
- Both spouses appeared pro se before the court.
This case illustrates how innocent spouse cases unfold and the dynamic of divorce disagreements spilling over into the tax arena. Judge Lara, apart from correctly ruling on the law, seems to have ably managed and resolved this mini War of the Roses.