INNOCENT SPOUSE CASE OF THE MONTH – AUGUST 2012 -CATHERINE MARIE NUMEZ f/k/a CATHERINE MARIE URIARTE, AND ROBERT URIARTE, INTERVENOR, V. COMM’R T.C. MEMO 2012-1212 (APRILS 25, 2012)

This decision once again illustrates the problems and procedural machinations that arise from a spouse’s right to intervene in Tax Court proceedings when the other spouse requests relief from joint and several liabilities under any of three escape hatches afforded by IRC Section 6015.  It also illustrates the truth in the sports announcer’s frequent cry, “It’s ain’t over until the fat lady sings.”

FACTS

The parties were married in 1985, separated in August 2002 and divorced on May 1, 2003.  During the marriage they had owned and operated a copier service.  Catherine’s involvement in the business was with the administrative side, specifically:

  • Entering data in QuickBooks
  • Organizing and filing receipts and invoices
  • Answering phones
  • Writing up service calls
  • Paying bills
  • Writing and signing many checks as an officer and authorized check signer.
  • Drawing a salary beginning in 2002.

She was listed as a co-owner on business licenses.  As check signer, she paid some of her personal expenses from the business.  Robert who opposed her innocent spouse request took care of the operational side of the business making sales and taking service calls.

Katherine and Robert filed joint returns for the years 1999, 2002 and 2002, the year of their separation. When she’d signed each return, Katherine knew that Robert had made no estimated tax payments and in each case the tax due on the return was not paid with its filing.  They’d filed for bankruptcy in 2002 but did not make the required payments and were not discharged.

The marital settlement agreement did not address the unpaid joint tax liabilities. Katherine assigned her interest in the business to Robert.

PROCEDURAL EVENTS

With regard to IRS efforts to collect the tax and Katherine’s innocent spouse claim the following occurred:

  • IRS attempted to collect the tax liabilities from Katherine in 2008.
  • Katherine timely requested innocent spouse relief under Section 6015(f) (equitable relief) in two Form 8857 filings.
  • Robert filed Form 12508, Questionnaire for Non-Requesting Spouse and objected to her relief.
  • IRS proposed to deny Katherine’s request for innocent spouse relief
  • Katherine filed Form 12509 Statement of Disagreement, appealing IRS proposed denial and Katherine’s case was sent to Appeals.
  • IRS sent two letters to Robert at the address on his previously filed Form 12508, informing him of Katherine’s appeal, both of which were returned as undeliverable.  Appeals then sent duplicate letters to Robert’s prior home address.  All prior IRS correspondence with Robert had been addressed to a PO Box.  IRS received no response from Robert.
  • IRS found Katherine was fully entitled to innocent spouse relief under Section 6015(f) for the years at issue and mailed to her Form 870-IS, Waiver of Collection Restrictions in Innocent Spouse Cases. The cover letter enclosed with Form 870-IS stated that IRS’ decision was contingent upon any response received from Robert and that IRS would contact Katherine if the determination was revised for that reason.
  • Katherine signed and returned the Form 870-IS on November 17, 2009 and the IRS Appeals team manager signed the form on December 17, 2009

One would think Katherine was in the clear.   Not so fast!  Appeals subsequently reversed its decision and denied Katherine full innocent spouse relief.  What happened to upset Katherine’s apple cart?  Well, in March 2010 Robert contacted Appeals and informed them that he had been unaware of Katherine’s appeal.  Appeals reopened the case because Robert had not had an opportunity to participate in the initial Appeals process.

In the reopened Appeals proceedings Katherine argued she was co-owner only by virtue of California’s community property laws while Robert asserted that she as a real participating co-owner in her own right.  Appeals agreed with Robert and reasoned that even had Katherine filed separate returns she would have been liable for tax on ½ of the business’s income.  Appeals offered her relief for 50% of the tax on the business income (very little non-business income was reported).  Katherine rejected the offer and timely petitioned the Tax Court.

TAX COURT DECISION    

Katherine should have taken the deal.  The Tax Court reviewed the request de novo that is, on the merits, taking into account all evidence, and not just for abuse of discretion based soled on the Appeals conference record.  Notwithstanding that IRS in court argued that Katherine met the threshold requirements for equitable relief under Rev. Proc. 2003-61, the court found that Katherine did not meet threshold condition Seven and was not entitled to equitable relief under Section 6015(f).  The Seventh threshold requirement of Rev. Proc. 2003-61 requires that the income tax liability from which the requesting spouse seeks relief be attributable to an item of the non-requesting spouse unless one of four exceptions applies. The court found that none of the exceptions applied to Katherine because:

  • Katherine co-owned the business in her own right not solely as a result of California’s community property laws. As such ½ of the income was attributed to her and not to Robert.
  • She was not a nominal owner of the business but an active participant.
  • There was no misappropriation of funds intended for payment of the tax liability.  In fact, Katherine knew that estimated tax payments had not been made when she’d signed the returns.
  • There was no evidence of abuse amounting to duress that influenced Katherine’s signing the returns.

 As such, the court found that Katherine not eligible for equitable relief and thus Katherine will remain liable jointly and severally for the full amount of tax, penalty and interest owning for all of the years in question.

 LESSONS FROM THIS CASE

  • The Marital Settlement Agreement should have dealt with tax liabilities. Agreement as to these matters would have averted needless additional litigation
  • In this case Katherine was an active participant in the business.  The parties could have negotiated a MSA in which she’d agreed not to assert an innocent spouse claim.  Such an agreement would influence but not bind the Tax Court.  If Katherine then sought innocent spouse relief, Robert could go back into state court to seek damages and attorney fees for her violation of the MSA provision.  This avenue of relief would be open to him even if the MSA only stated that the spouses are equally responsible for taxes owed on business income.
  • The parties could also have agreed that Robert or Katherine would be solely responsible for all tax debts.  That would likewise influence but not bind the tax court but the non-responsible spouse could then seek damages and attorney fees in state court, if the responsible spouse did not pay IRS.  Note that these agreements are between the spouses and do not force IRS to collect from one spouse or the other.  It can pursue either or both for the full liability. 
  • An indemnification agreement was not involved in this case.  But, if used, the agreement should provide for a process for dealing with IRS notices and assessments, not just indemnification from loss.
  • Katherine could have filed a separate return for 2002, the year of separation, and would then have been liable for the tax on only ½ of the business income.
  • Katherine should have taken the Appeals offer of relief from one-half of the tax obligation.  Big, big mistake!

© 2012 by Robert S. Steinberg, Esquire
All rights reserved

This entry was posted in DIVORCE, EQUITABLE RELIEF, INNOCENT SPOUSE, IRS COLLECTIONS, JOINT RETURNS, TAX, TAX LITIGATION, Uncategorized and tagged , , , , , . Bookmark the permalink.

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