In Leonard W. Harbin v. Commissioner, 137 T.C. No. 7 (Filed 9/26/11), the petitioner Leonard Harbin and his wife, who intervened in the case, were married in the 1990s and divorced in 2004. The wife was a heavy gambler. In their joint tax returns for 1999 and 2000 prepared by petitioner both gambling winnings and loses were reported. The petitioner used records provided by his wife in reporting her gambling activities. IRS examined the 1999 and 2000 returns in 2001. The wife dealt with the revenue agent, was uncooperative and provided to IRS different documents than those given to the petitioner when the returns were prepared. IRS issued its Notice of Deficiency in 2004 while the spouses were in the midst of their divorce process. The lawyer who represented both spouses in the divorce proceeding also filed a petition with the U.S. Tax Court on behalf of both spouse despite obvious conflicts of interest. The petition did not seek relief under Section 6015 and eventually the spouses agreed to a stipulated decision that they owed tax and accuracy related penalties for both 1999 and 2000. The attorney representing both of them did not explain the risks of joint representation or request them to waive the conflict of interest. The court’s decision became final on June 19, 2005.
The petitioner’s return for 2004 reported an overpayment which the IRS applied to the 1999 liability. Petitioner, then 70 years old, filed Form 8857, submitted Form 12510, and followed all of the IRS formalities in pursuing his request for relief from joint and several liability which IRS ultimately denied. In its Final Notice of Determination, IRS denied relief under Section 6015(b) but did not respond to petitioner’s concurrent requests for relief under Sections 6015(c) and (f). Showing great Chutzpah or stupidity the same attorney who’d represented both spouses before filed a petition in Tax Court to contest the denial of relief under Section 6015(b). Thereafter, petitioner hired other counsel and the court granted a motion for leave to amend the petition to include a request for relief under Sections 6015(c) and (f). IRS did not oppose the motion for leave to amend but later IRS filed a motion for summary judgment claiming for the first time that petitioner is barred by the doctrine of res judicata under Section 6015(g)(2) because he “participated meaningfully” in the prior deficiency case.
RES JUDICATA FOR PURPOSES OF INNOCENT SPOUSE CLAIMS
Section 6015 (g) (2) provides:
Res judicata: In the case of any election under subsection (b) or (c) or of any request for equitable relief under subsection (f), if a decision of a court in any prior proceeding for the same taxable year has become final, such decision shall be conclusive except with respect to the qualification of the individual for relief which was not an issue in such proceeding. The exception contained in the preceding sentence shall not apply if the court determines that the individual participated meaningfully in such prior proceeding.
Res judicata is a common-law legal doctrine that prevents litigants from re-litigating matters that were or could have been raised in earlier litigation. In other words, you get one bite at the apple. Section 6015 (g) (2) is a special statutory res judicata rule that applies to innocent spouse claims. The Court states: “…A taxpayer that participated meaningfully in a prior proceeding is barred from requesting relief under section 6015 for the same taxable year after the decision of the Court has become final.”
Relief from joint and several liability was not an issue in the first tax court case, the Court found. Thus, the issue remaining was did petitioner meaningfully participate in the earlier proceedings? Meaningful participation involves “exercising exclusive control over the handling of the prior proceeding, having a high level of participation…and having the opportunity to raise a claim for relief from joint and several liability.”
The court denied the IRS motion for summary judgment, holding that petitioner was not barred by res judicata from requesting innocent spouse relief and that petitioner qualified for such relief under section 6015 (b). The court based its decision on the following findings:
- Petitioner’s spouse controlled the handling of the prior Tax Court proceedings
- She was the one with personal knowledge of the gambling losses at issue and that knowledge was critical to contesting the IRS disallowance.
- She maintained and provided all of the documentation provided to IRS which differed from that given to petitioner when he’d prepared their joint returns.
- Petitioner was not active in the deficiency case being over 60 years old at the time.
- His participation was through the joint-representation attorney solely.
- Petitioner’s ability to raise a claim of innocent spouse relief in the earlier case was “obscured and obstructed” by the lawyer representing both spouses concurrently while also representing both in their divorce.
- The joint representation by counsel presented “an actual conflict of interest,” because “Petitioner had a viable claim for relief from joint and several liability under Section 6015(b).”
- The conflicted lawyer never obtained an informed consent waiving the conflict as required under the Court’s Rules (Rule 24(g)). Proceeding to represent both spouses despite the conflict “materially limited counsel’s ability to represent petitioner’s interest in bringing a claim for relief from joint and several liability.” “Petitioner was not informed of his opportunity to and consequently did not raise a claim for relief from joint and several liability in the prior deficiency case.”
The court further found that:
- As stipulated by the parties, petitioner meets the requirements of Section 6015(b) (1) (A) (joint return filed), (B) (understatement due to return items of one spouse), and (E) (timely election of innocent spouse relief) regarding the disallowed gambling losses.
- As to section 6015(b) (2) (C), petitioner did not know or have reason to know that there was an understatement due to the wife’s gambling loses as the time the returns were signed finding compelling that she had provided to him records different from those given to IRS upon audit.
LESSONS TO TAKE FROM THIS CASE
For divorce lawyers: Don’t represent both spouses in the divorce; and, certainly don’t even consider representing one of them no less both, in tax litigation, unless qualified in tax matters.
- Don’t sign a joint return unless you are comfortable that it is correct as to all material matters.
- Don’t be a passive participant in the tax return preparation and audit process. Ask your spouse what is going on and what is being done to protect each spouse.
- Ask your spouse if you should seek independent tax counsel when a significant tax liability looms on the horizon. If he or she says no, ask why and seek your own counsel to determine whether that answer best serves and protects your interests.
- Always seek independent tax counsel when tax issues arise during a divorce proceeding. Do not rely on the forensic accountant for tax advice about whether to file a joint return. To answer that question may involve imparting incriminating information to the accountant that will not be protected by privilege.
© 2011 by Robert S. Steinberg, Esquire
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